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CP

G.R. No. 182770 September 17, 2014

WPM INTERNATIONAL TRADING, INC. and WARLITO P. MANLAPAZ, Petitioners,


vs.
FE CORAZON LABAYEN, Respondent.

DECISION

BRION, J.:

We review in this petition for review on certiorari1 the decision2 dated September 28, 2007 and the resolution3 dated April 28, 2008 of
the Court of Appeals (CA) in CA-G.R. CV No. 68289 that affirmed with modification the decision4 of the Regional Trial Court (RTC),
Branch 77, Quezon City.

The Factual Background

The respondent, Fe Corazon Labayen, is the owner of H.B.O. Systems Consultants, a management and consultant firm. The petitioner,
WPM International Trading, Inc. (WPM), is a domestic corporation engaged in the restaurant business, while Warlito P. Manlapaz
(Manlapaz) is its president.

Sometime in 1990, WPM entered into a management agreement with the respondent, by virtue of which the respondent was authorized
to operate, manage and rehabilitate Quickbite, a restaurant owned and operated by WPM. As part of her tasks, the respondent looked
for a contractor who would renovate the two existing Quickbite outlets in Divisoria, Manila and Lepanto St., University Belt, Manila.
Pursuant to the agreement, the respondent engaged the services of CLN Engineering Services (CLN) to renovate Quickbite-Divisoria at
the cost of ₱432,876.02.

On June 13, 1990, Quickbite-Divisoria’s renovation was finally completed, and its possession was delivered to the respondent.
However, out of the ₱432,876.02 renovation cost, only the amount of ₱320,000.00 was paid to CLN, leaving a balance of ₱112,876.02.

Complaint for Sum of Money (Civil Case No. Q-90-7013)

On October 19, 1990, CLN filed a complaint for sum of money and damages before the RTC against the respondent and Manlapaz,
which was docketed as Civil Case No. Q-90-7013. CLN later amended the complaint to exclude Manlapaz as defendant. The
respondent was declared in default for her failure to file a responsive pleading.

The RTC, in its January 28, 1991 decision, found the respondent liable to pay CLN actual damages inthe amount of ₱112,876.02 with
12% interest per annum from June 18,1990 (the date of first demand) and 20% of the amount recoverable as attorney’s fees.

Complaint for Damages (Civil Case No. Q-92-13446)

Thereafter, the respondent instituted a complaint for damages against the petitioners, WPM and Manlapaz. The respondent alleged that
in Civil Case No. Q-90-7013, she was adjudged liable for a contract that she entered into for and in behalf of the petitioners, to which
she should be entitled to reimbursement; that her participation in the management agreement was limited only to introducing Manlapaz
to Engineer Carmelo Neri (Neri), CLN’s general manager; that it was actually Manlapaz and Neri who agreed on the terms and
conditions of the agreement; that when the complaint for damages was filed against her, she was abroad; and that she did not know of
the case until she returned to the Philippines and received a copy of the decision of the RTC.

In her prayer, the respondent sought indemnification in the amount of ₱112,876.60 plus interest at 12%per annum from June 18, 1990
until fully paid; and 20% of the award as attorney’s fees. She likewise prayed that an award of ₱100,000.00 as moral damages and
₱20,000.00 as attorney’s fees be paid to her.

In his defense, Manlapaz claims that it was his fellow incorporator/director Edgar Alcansajewho was in-charge with the daily operations
of the Quickbite outlets; that when Alcansaje left WPM, the remaining directors were compelled to hire the respondent as manager; that
the respondent had entered intothe renovation agreement with CLN in her own personal capacity; that when he found the amount
quoted by CLN too high, he instructed the respondent to either renegotiate for a lower price or to look for another contractor; that since
the respondent had exceeded her authority as agent of WPM, the renovation agreement should only bind her; and that since WPM has
a separate and distinct personality, Manlapaz cannot be made liable for the respondent’s claim.

Manlapaz prayed for the dismissal of the complaint for lack of cause of action, and by way of counterclaim, for the award of
₱350,000.00 as moral and exemplary damages and ₱50,000.00 attorney’s fees.
The RTC, through an order dated March 2, 1993 declared WPM in default for its failure to file a responsive pleading.

The Decision of the RTC

In its decision, the RTC held that the respondent is entitled to indemnity from Manlapaz. The RTC found that based on the records,
there is a clear indication that WPM is a mere instrumentality or business conduit of Manlapaz and as such, WPM and Manlapaz are
considered one and the same. The RTC also found that Manlapaz had complete control over WPM considering that he is its chairman,
president and treasurer at the same time. The RTC thus concluded that Manlapaz is liable in his personal capacity to reimburse the
respondent the amount she paid to CLN inconnection with the renovation agreement.

The petitioners appealed the RTC decision with the CA. There, they argued that in view of the respondent’s act of entering into a
renovation agreement with CLN in excess of her authority as WPM’s agent, she is not entitled to indemnity for the amount she paid.
Manlapaz also contended that by virtue ofWPM’s separate and distinct personality, he cannot be madesolidarily liable with WPM.

The Ruling of the Court of Appeals

On September 28, 2007, the CA affirmed, with modification on the award of attorney’s fees, the decision of the RTC.The CA held that
the petitioners are barred from raising as a defense the respondent’s alleged lack of authority to enter into the renovation agreement in
view of their tacit ratification of the contract.

The CA likewise affirmed the RTC ruling that WPM and Manlapaz are one and the same based on the following: (1) Manlapaz is the
principal stockholder of WPM; (2) Manlapaz had complete control over WPM because he concurrently held the positions of president,
chairman of the board and treasurer, in violation of the Corporation Code; (3) two of the four other stockholders of WPM are employed
by Manlapaz either directly or indirectly; (4) Manlapaz’s residence is the registered principal office of WPM; and (5) the acronym "WPM"
was derived from Manlapaz’s initials. The CA applied the principle of piercing the veil of corporate fiction and agreed with the RTC that
Manlapaz cannot evade his liability by simply invoking WPM’s separate and distinct personality.

After the CA's denial of their motion for reconsideration, the petitioners filed the present petition for review on certiorari under Rule 45 of
the Rules of Court.

The Petition

The petitioners submit that the CA gravely erred in sustaining the RTC’s application of the principle of piercing the veil of corporate
fiction. They argue that the legal fiction of corporate personality could only be discarded upon clear and convincing proof that the
corporation is being used as a shield to avoid liability or to commit a fraud. Since the respondent failed to establish that any of the
circumstances that would warrant the piercing is present, Manlapaz claims that he cannot be made solidarily liable with WPM to
answerfor damages allegedly incurred by the respondent.

The petitioners further argue that, assuming they may be held liable to reimburse to the respondentthe amount she paid in Civil Case
No. Q-90-7013, such liability is only limited to the amount of ₱112,876.02, representing the balance of the obligation to CLN, and
should not include the twelve 12% percent interest, damages and attorney’s fees.

The Issues

The core issues are: (1) whether WPM is a mere instrumentality, alter-ego, and business conduit of Manlapaz; and (2) whether
Manlapaz is jointly and severally liable with WPM to the respondent for reimbursement, damages and interest.

Our Ruling

We find merit in the petition.

We note, at the outset, that the question of whether a corporation is a mere instrumentality or alter-ego of another is purely one of
fact.5 This is also true with respect to the question of whether the totality of the evidence adduced by the respondentwarrants the
application of the piercing the veil of corporate fiction doctrine. 6

Generally, factual findings of the lower courts are accorded the highest degree of respect, if not finality. When adopted and confirmed
by the CA, these findings are final and conclusive and may not be reviewed on appeal, 7save in some recognized exceptions8 among
others, when the judgment is based on misapprehension of facts.

We have reviewed the records and found that the application of the principle of piercing the veil of corporate fiction is unwarranted in
the present case.

On the Application ofthe Principle of Piercing the Veil of Corporate Fiction


The rule is settled that a corporation has a personality separate and distinct from the persons acting for and in its behalf and, in general,
from the people comprising it.9 Following this principle, the obligations incurred by the corporate officers, orother persons acting as
corporate agents, are the direct accountabilities ofthe corporation they represent, and not theirs. Thus, a director, officer or employee of
a corporation is generally not held personally liable for obligations incurred by the corporation; 10 it is only in exceptional circumstances
that solidary liability will attach to them.

Incidentally, the doctrine of piercing the corporate veil applies only in three (3) basic instances, namely: a) when the separate and
distinct corporate personality defeats public convenience, as when the corporate fiction is used as a vehicle for the evasion of an
existing obligation; b) in fraud cases, or when the corporate entity is used to justify a wrong, protect a fraud, or defend a crime; or c) is
used in alter ego cases, i.e., where a corporation is essentially a farce, since it is a mere alter ego or business conduit of a person, or
where the corporation is so organized and controlled and its affairs so conducted as to make it merely aninstrumentality, agency,
conduit or adjunct of another corporation.11

Piercing the corporate veil based on the alter ego theory requires the concurrence of three elements, namely:

(1) Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and
business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no
separate mind, will or existence of its own;

(2) Such control must have beenused by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or
other positive legal duty, or dishonest and unjust act in contravention of plaintiff’s legal right; and

(3) The aforesaid control and breach of duty must have proximately caused the injury or unjust loss complained of.

The absence of any ofthese elements prevents piercing the corporate veil.12

In the present case, the attendantcircumstances do not establish that WPM is a mere alter ego of Manlapaz.

Aside from the fact that Manlapaz was the principal stockholder of WPM, records do not show that WPM was organized and controlled,
and its affairs conducted in a manner that made it merely an instrumentality, agency, conduit or adjunct ofManlapaz. As held in
Martinez v. Court of Appeals,13 the mere ownership by a singlestockholder of even all or nearly all of the capital stocks ofa corporation
is not by itself a sufficient ground to disregard the separate corporate personality. To disregard the separate juridical personality of a
corporation, the wrongdoing must be clearly and convincingly established. 14

Likewise, the records of the case do not support the lower courts’ finding that Manlapaz had control or domination over WPM or its
finances. That Manlapaz concurrentlyheld the positions of president, chairman and treasurer, or that the Manlapaz’s residence is the
registered principal office of WPM, are insufficient considerations to prove that he had exercised absolutecontrol over WPM.

In this connection, we stress thatthe control necessary to invoke the instrumentality or alter ego rule is not majority or even complete
stock control but such domination of finances, policies and practices that the controlled corporation has, so tospeak, no separate mind,
will or existence of its own, and is but a conduit for its principal. The control must be shown to have been exercised at the time the acts
complained of took place. Moreover, the control and breach of duty must proximately cause the injury or unjust loss for which the
complaint is made.

Here, the respondent failed to prove that Manlapaz, acting as president, had absolute control over WPM.1âwphi1 Even granting that he
exercised a certain degree of control over the finances, policies and practices of WPM, in view of his position as president, chairman
and treasurer of the corporation, such control does not necessarily warrant piercing the veil of corporate fiction since there was not a
single proof that WPM was formed to defraud CLN or the respondent, or that Manlapaz was guilty of bad faith or fraud.

On the contrary, the evidence establishes that CLN and the respondent knew and acted on the knowledgethat they were dealing with
WPM for the renovation of the latter’s restaurant, and not with Manlapaz. That WPM later reneged on its monetary obligation to CLN,
resulting to the filing of a civil case for sum of money against the respondent, does not automatically indicate fraud, in the absence of
any proof to support it.

This Court also observed that the CA failed to demonstrate how the separate and distinct personalityof WPM was used by Manlapaz to
defeat the respondent’s right for reimbursement. Neither was there any showing that WPM attempted to avoid liability or had no
property against which to proceed.

Since no harm could be said to have been proximately caused by Manlapaz for which the latter could be held solidarily liable with
WPM, and considering that there was no proof that WPM had insufficient funds, there was no sufficient justification for the RTC and the
CA to have ruled that Manlapaz should be held jointly and severally liable to the respondent for the amount she paid to CLN. Hence,
only WPM is liable to indemnify the respondent.
Finally, we emphasize that the piercing of the veil of corporate fiction is frowned upon and thus, must be done with caution. 15 It can only
be done if it has been clearly established that the separate and distinct personality of the corporation is used to justify a wrong, protect
fraud, or perpetrate a deception. The court must be certain that the corporate fiction was misused to such an extent that injustice, fraud,
or crime was committed against another, in disregard of its rights; it cannot be presumed.

On the Award of Moral Damages

On the award of moral damages, we find the same in order in view of WPM's unjustified refusal to pay a just debt. Under Article 2220 of
the New Civil Code,16 moral damages may be awarded in cases of a breach of contract where the defendant acted fraudulently or in
bad faith or was guilty of gross negligence amounting to bad faith.

In the present case, when payment for the balance of the renovation cost was demanded, WPM, instead of complying with its
obligation, denied having authorized the respondent to contract in its behalf and accordingly refused to pay. Such cold refusal to pay a
just debt amounts to a breach of contract in bad faith, as contemplated by Article 2220. Hence, the CA's order to pay moral damages
was in order.

WHEREFORE, in light of the foregoing, the decision dated September 28, 2007 of the Court of Appeals in CA-G.R. CV No. 68289 is
MODIFIED and.that petitioner Warlito P. Manlapaz is ABSOLVED from any liability under the renovation agreement.

SO ORDERED.

G.R. No. 186433 November 27, 2013

NUCCIO SAVERIO and NS INTERNATIONAL INC., Petitioners,


vs.
ALFONSO G. PUYAT, Respondnt.

DECISION

BRION, J.:

We resolve the petition for review on certiorari,1 filed by petitioners Nuccio Saverio and NS International, Inc. (NS) against respondent
Alfonso G. Puyat, challenging the October 27, 2008 decision2 and the February 10, 2009 resolution3 of the Court of Appeals (CA) in
CA-G.R. CV. No. 87879. The CA decision affirmed the December 15, 2004 decision 4 of the Regional Trial Court RTC) of Makati City,
Branch 136, in Civil Case No. 00-594. The CA subsequently denied the petitioners motion for reconsideration.

The Factual Antecedents

On July 22, 1996, the respondent granted a loan to NSI. The loan was made pursuant to the Memorandum of Agreement and
Promissory Note (MOA)5 between the respondent and NSI, represented by Nuccio. It was agreed that the respondent would extend a
credit line with a limit of ₱500,000.00 to NSI, to be paid within thirty (30) days from the time of the signing of the document. The loan
carried an interest rate of 17% per annum, or at an adjusted rate of 25% per annum if payment is beyond the stipulated period. The
petitioners received a total amount of ₱300,000.00 and certain machineries intended for their fertilizer processing plant business
(business). The proposed business, however, failed to materialize.

On several occasions, Nuccio made personal payments amounting to ₱600,000.00. However, as of December 16, 1999, the petitioners
allegedly had an outstanding balance of ₱460,505.86. When the petitioners defaulted in the payment of the loan, the respondent filed a
collection suit with the RTC, alleging mainly that the petitioners still owe him the value of the machineries as shown by the Breakdown
of Account6 he presented.

The petitioners refuted the respondent’s allegation and insisted that they have already paid the loan, evidenced by the respondent’s
receipt for the amount of ₱600,000.00. They submitted that their remaining obligation to pay the machineries’ value, if any, had long
been extinguished by their business’ failure to materialize. They posited that, even assuming without conceding that they are liable, the
amount being claimed is inaccurate, the penalty and the interest imposed are unconscionable, and an independent accounting is
needed to determine the exact amount of their liability.

The RTC Ruling

In its decision dated December 15, 2004, the RTC found that aside from the cash loan, the petitioners’ obligation to the respondent also
covered the payment of the machineries’ value. The RTC also brushed aside the petitioners’ claim of partnership. The RTC thus ruled
that the payment of ₱600,000.00 did not completely extinguish the petitioners’ obligation.
The RTC also found merit in the respondent’s contention that the petitioners are one and the same. Based on Nuccio’s act of entering a
loan with the respondent for purposes of financing NSI’s proposed business and his own admission during cross-examination that the
word "NS" in NSI’s name stands for "Nuccio Saverio," the RTC found that the application of the doctrine of piercing the veil of corporate
fiction was proper.

The RTC, moreover, concluded that the interest rates stipulated in the MOA were not usurious and that the respondent is entitled to
attorney’s fees on account of the petitioners’ willful breach of the loan obligation. Thus, principally relying on the submitted Breakdown
of Account, the RTC ordered the petitioners, jointly and severally, to pay the balance of ₱460,505.86, at 12% interest, and attorney’s
fees equivalent to 25% of the total amount due.

The CA Ruling

The petitioners appealed the RTC ruling to the CA. There, they argued that in view of the lack of proper accounting and the
respondent’s failure to substantiate his claims, the exact amount of their indebtedness had not been proven. Nuccio also argued that by
virtue of NSI’s separate and distinct personality, he cannot be made solidarily liable with NSI.

On October 27, 2008, the CA rendered a decision7 declaring the petitioners jointly and severally liable for the amount that the
respondent sought. The appellate court likewise held that since the petitioners neither questioned the delivery of the machineries nor
their valuation, their obligation to pay the amount of ₱460,505.86 under the Breakdown of Account remained unrefuted.

The CA also affirmed the RTC ruling that petitioners are one and the same for the following reasons: (1) Nuccio owned forty percent
(40%) of NSI; (2) Nuccio personally entered into the loan contract with the respondent because there was no board resolution from NSI;
(3) the petitioners were represented by the same counsel; (4) the failure of NSI to object to Nuccio’s acts shows the latter’s control over
the corporation; and (5) Nuccio’s control over NSI was used to commit a wrong or fraud. It further adopted the RTC’s findings of bad
faith and willful breach of obligation on the petitioners’ part, and affirmed its award of attorney’s fees.

The Petition

The petitioners submit that the CA gravely erred in ruling that a proper accounting was not necessary. They argue that the Breakdown
of Account - which the RTC used as a basis in awarding the claim, as affirmed by the CA - is hearsay since the person who prepared it,
Ramoncito P. Puyat, was not presented in court to authenticate it. They also point to the absence of the award’s computation in the
RTC ruling, arguing that assuming they are still indebted to the respondent, the specific amount of their indebtedness remains
undetermined, thus the need for an accounting to determine their exact liability.

They further question the CA’s findings of solidary liability. They submit that in the absence of any showing that corporate fiction was
used to defeat public convenience, justify a wrong, protect fraud or defend a crime, or where the corporation is a mere alter ego or
business conduit of a person, Nuccio’s mere ownership of forty percent (40%) does not justify the piercing of the separate and distinct
personality of NSI.

The Case for the Respondent

The respondent counters that the issues raised by the petitioners in the present petition – pertaining to the correctness of the calibration
of the documentary and testimonial evidence by the RTC, as affirmed by the CA, in awarding the money claims – are essentially
factual, not legal. These issues, therefore, cannot, as a general rule, be reviewed by the Supreme Court in an appeal by certiorari. In
other words, the resolution of the assigned errors is beyond the ambit of a Rule 45 petition.

The Issue

The case presents to us the issue of whether the CA committed a reversible error in affirming the RTC’s decision holding the petitioners
jointly and severally liable for the amount claimed.

Our Ruling

After a review of the parties’ contentions, we hold that a remand of the case to the court of origin for a complete accounting and
determination of the actual amount of the petitioners’ indebtedness is called for.

The determination of questions of fact is improper in a Rule 45 proceeding; Exceptions.

The respondent questions the present petition’s propriety, and contends that in a petition for review on certiorari under Rule 45 of the
Rules of Court, only questions of law may be raised. He argues that the petitioners are raising factual issues that are not permissible
under the present petition and these issues have already been extensively passed upon by the RTC and the CA. The petitioners, on the
other hand, assert that the exact amount of their indebtedness has not been determined with certainty. They insist that the amount of
₱460,505.86 awarded in favor of the respondent has no basis because the latter failed to substantiate his claim. They also maintain
that the Breakdown of Account used by the lower courts in arriving at the collectible amount is unreliable for the respondent’s failure to
adduce supporting documents for the alleged additional expenses charged against them. With no independent determination of the
actual amount of their indebtedness, the petitioners submit that an order for a proper accounting is imperative.

We agree with the petitioners. While we find the fact of indebtedness to be undisputed, the determination of the extent of the adjudged
money award is not, because of the lack of any supporting documentary and testimonial evidence. These evidentiary issues, of course,
are necessarily factual, but as we held in The Insular Life Assurance Company, Ltd. v. Court of Appeals, 8 this Court may take
cognizance even of factual issues under exceptional circumstances. In this cited case, we held:

It is a settled rule that in the exercise of the Supreme Court's power of review, the Court is not a trier of facts and does not normally
undertake the re-examination of the evidence presented by the contending parties during the trial of the case considering that the
findings of facts of the CA are conclusive and binding on the Court. However, the Court had recognized several exceptions to this rule,
to wit: (1) when the findings are grounded entirely on speculation, surmises or conjectures; (2) when the inference made is manifestly
mistaken, absurd or impossible; (3) when there is grave abuse of discretion; (4) when the judgment is based on a misapprehension of
facts; (5) when the findings of facts are conflicting; (6) when in making its findings the Court of Appeals went beyond the issues of the
case, or its findings are contrary to the admissions of both the appellant and the appellee; (7) when the findings are contrary to the trial
court; (8) when the findings are conclusions without citation of specific evidence on which they are based; (9) when the facts set forth in
the petition as well as in the petitioner's main and reply briefs are not disputed by the respondent; (10) when the findings of fact are
premised on the supposed absence of evidence and contradicted by the evidence on record; and (11) when the Court of Appeals
manifestly overlooked certain relevant facts not disputed by the parties, which, if properly considered, would justify a different
conclusion.

We note in this regard that the RTC, in awarding the amount of ₱460,505.86 in favor of the respondent, principally relied on the
Breakdown of Account. Under this document, numerous entries, including the cash loan, were enumerated and identified with their
corresponding amounts. It included the items of expenses allegedly chargeable to the petitioners, the value of the machineries, the
amount credited as paid, and the interest and penalty allegedly incurred.

A careful perusal of the records, however, reveals that the entries in the Breakdown of Account and their corresponding amounts are
not supported by the respondent’s presented evidence. The itemized expenses, as repeatedly pointed out by the petitioners, were not
proven, and the remaining indebtedness, after the partial payment of ₱600,000.00, was merely derived by the RTC from the Breakdown
of Account.

Significantly, the RTC ruling neither showed how the award was computed nor how the interest and penalty were calculated. In fact, it
merely declared the petitioners liable for the amount claimed by the respondent and adopted the breakdown of liability in the
Breakdown of Account. This irregularity is even aggravated by the RTC’s explicit refusal to explain why the payment of ₱600,000.00 did
not extinguish the debt. While it may be true that the petitioners’ indebtedness, aside from the cash loan of ₱300,000.00, undoubtedly
covered the value of the machineries, the RTC decision was far from clear and instructive on the actual remaining indebtedness
(inclusive of the machineries’ value, penalties and interests) after the partial payment was made and how these were all computed.

We, thus, find it unacceptable for the RTC to simply come up with a conclusion that the payment of ₱600,000.00 did not extinguish the
debt, or, assuming it really did not, that the remaining amount of indebtedness amounts exactly to ₱460,505.86, without any showing of
how this balance was arrived at. To our mind, the RTC’s ruling, in so far as the determination of the actual indebtedness is concerned,
is incomplete.

What happened at the RTC likewise transpired at the CA when the latter affirmed the appealed decision; the CA merely glossed over
the contention of the petitioners, and adopted the RTC’s findings without giving any enlightenment. To reiterate, nowhere in the
decisions of the RTC and the CA did they specify how the award, including the penalty and interest, was determined. The petitioners
were left in the dark as to how their indebtedness of ₱300,000.00, after making a payment of ₱600,000.00, ballooned to ₱460,505.86.
Worse, unsubstantiated expenses, appearing in the Breakdown of Account, were charged to them.

We, therefore, hold it inescapable that the prayer for proper accounting to determine the petitioners’ actual remaining indebtedness
should be granted. As this requires presentation of additional evidence, a remand of the case is only proper and in order.

Piercing the veil of corporate fiction is not justified. The petitioners are not one and the same.

At the outset, we note that the question of whether NSI is an alter ego of Nuccio is a factual one. This is also true with respect to the
question of whether the totality of the evidence adduced by the respondent warrants the application of the piercing the veil of corporate
fiction doctrine. As we did in the issue of accounting, we hold that the Court may properly wade into the piercing the veil issue although
purely factual questions are involved.

After a careful study of the records and the findings of both the RTC and the CA, we hold that their conclusions, based on the given
findings, are not supported by the evidence on record.

The rule is settled that a corporation is vested by law with a personality separate and distinct from the persons composing it. Following
this principle, a stockholder, generally, is not answerable for the acts or liabilities of the corporation, and vice versa. The obligations
incurred by the corporate officers, or other persons acting as corporate agents, are the direct accountabilities of the corporation they
represent, and not theirs. A director, officer or employee of a corporation is generally not held personally liable for obligations incurred
by the corporation9 and while there may be instances where solidary liabilities may arise, these circumstances are exceptional.10

Incidentally, we have ruled that mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stocks
of the corporation is not, by itself, a sufficient ground for disregarding the separate corporate personality. Other than mere ownership of
capital stocks, circumstances showing that the corporation is being used to commit fraud or proof of existence of absolute control over
the corporation have to be proven. In short, before the corporate fiction can be disregarded, alter-ego elements must first be sufficiently
established.

In Hi-Cement Corporation v. Insular Bank of Asia and America (later PCI-Bank, now Equitable PCI-Bank),11 we refused to apply the
piercing the veil doctrine on the ground that the corporation was a mere alter ego because mere ownership by a stockholder of all or
nearly all of the capital stocks of a corporation does not, by itself, justify the disregard of the separate corporate personality. In this cited
case, we ruled that in order for the ground of corporate ownership to stand, the following circumstances should also be established: (1)
that the stockholders had control or complete domination of the corporation’s finances and that the latter had no separate existence
with respect to the act complained of; (2) that they used such control to commit a wrong or fraud; and (3) the control was the proximate
cause of the loss or injury.

Applying these principles to the present case, we opine and so hold that the attendant circumstances do not warrant the piercing of the
veil of NSI’s corporate fiction.

Aside from the undisputed fact of Nuccio’s 40% shareholdings with NSI, the RTC applied the piercing the veil doctrine based on the
following reasons. First, there was no board resolution authorizing Nuccio to enter into a contract of loan. Second, the petitioners were
represented by one and the same counsel. Third, NSI did not object to Nuccio’s act of contracting the loan.

Fourth, the control over NSI was used to commit a wrong or fraud. Fifth, Nuccio’s admission that "NS" in the corporate name "NSI"
means "Nuccio Saverio."

We are not convinced of the sufficiency of these cited reasons. In our view, the RTC failed to provide a clear and convincing
explanation why the doctrine was applied. It merely declared that its application of the doctrine of piercing the veil of corporate fiction
has a basis, specifying for this purpose the act of Nuccio’s entering into a contract of loan with the respondent and the reasons stated
above.

The records of the case, however, do not show that Nuccio had control or domination over NSI’s finances.1âwphi1 The mere fact that it
was Nuccio who, in behalf of the corporation, signed the MOA is not sufficient to prove that he exercised control over the corporation’s
finances. Neither the absence of a board resolution authorizing him to contract the loan nor NSI’s failure to object thereto supports this
conclusion. These may be indicators that, among others, may point the proof required to justify the piercing the veil of corporate fiction,
but by themselves, they do not rise to the level of proof required to support the desired conclusion. It should be noted in this regard that
while Nuccio was the signatory of the loan and the money was delivered to him, the proceeds of the loan were unquestionably intended
for NSI’s proposed business plan. That the business did not materialize is not also sufficient proof to justify a piercing, in the absence of
proof that the business plan was a fraudulent scheme geared to secure funds from the respondent for the petitioners’ undisclosed
goals.

Considering that the basis for holding Nuccio liable for the payment of the loan has been proven to be insufficient, we find no
justification for the RTC to hold him jointly and solidarily liable for NSI’s unpaid loan. Similarly, we find that the CA ruling is wanting in
sufficient explanation to justify the doctrine’s application and affirmation of the RTC’s ruling. With these points firmly in mind, we hold
that NSI’s liability should not attach to Nuccio.

On the final issue of the award of attorney’s fees, Article 1229 of the New Civil Code provides:

Article 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by
the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable.

Under the circumstances of the case, we find the respondent’s entitlement to attorney’s fees to be justified. There is no doubt that he
was forced to litigate to protect his interest, i.e., to recover his money. We find, however, that in view of the partial payment of
₱600,000.00, the award of attorney’s fees equivalent to 25% should be reduced to 10% of the total amount due. The award of
appearance fee of ₱3,000.00 and litigation cost of ₱10,000.00 should, however, stand as these are costs necessarily attendant to
litigation.

WHEREFORE, the petition is GRANTED. The October 27, 2008 decision and the February 10, 2009 resolution of the Court of Appeals
in CA-G.R. CV. No. 87879 are REVERSED AND SET ASIDE. The case is REMANDED to the Regional Trial Court of Makati City,
Branch 136, for proper accounting and reception of such evidence as may be needed to determine the actual amount of petitioner NS
International, Inc.’s indebtedness, and to adjudicate respondent Alfonso G. Puyat’s claims as such evidence may warrant.
SO ORDERED.

G.R. No. 152347 June 21, 2006

UNION BANK OF THE PHILIPPINES, Petitioner,


vs.
SPS. ALFREDO ONG AND SUSANA ONG and JACKSON LEE, Respondents.

DECISION

GARCIA, J.:

By this petition for review under Rule 45 of the Rules of Court, petitioner Union Bank of the Philippines (Union Bank) seeks to set aside
the decision1 dated December 5, 2001 of the Court of Appeals (CA) in CA-G.R. No. 66030 reversing an earlier decision of the Regional
Trial Court (RTC) of Pasig City in Civil Case No. 61601, a suit thereat commenced by the petitioner against the herein respondents for
annulment or rescission of sale in fraud of creditors.

The facts:

Herein respondents, the spouses Alfredo Ong and Susana Ong, own the majority capital stock of Baliwag Mahogany Corporation
(BMC). On October 10, 1990, the spouses executed a Continuing Surety Agreement in favor of Union Bank to secure
a P40,000,000.00-credit line facility made available to BMC. The agreement expressly stipulated a solidary liability undertaking.

On October 22, 1991, or about a year after the execution of the surety agreement, the spouses Ong, for P12,500,000.00, sold their
974-square meter lot located in Greenhills, San Juan, Metro Manila, together with the house and other improvements standing thereon,
to their co-respondent, Jackson Lee (Lee, for short). The following day, Lee registered the sale and was then issued Transfer Certificate
of Title (TCT) No. 4746-R. At about this time, BMC had already availed itself of the credit facilities, and had in fact executed a total of
twenty-two (22) promissory notes in favor of Union Bank.

On November 22, 1991, BMC filed a Petition for Rehabilitation and for Declaration of Suspension of Payments with the Securities and
Exchange Commission (SEC). To protect its interest, Union Bank lost no time in filing with the RTC of Pasig City an action for
rescission of the sale between the spouses Ong and Jackson Lee for purportedly being in fraud of creditors.

In its complaint, docketed as Civil Case No. 61601 and eventually raffled to Branch 157 of the court, Union Bank assailed the validity of
the sale, alleging that the spouses Ong and Lee entered into the transaction in question for the lone purpose of fraudulently removing
the property from the reach of Union Bank and other creditors. The fraudulent design, according to Union Bank, is evidenced by the
following circumstances: (1) insufficiency of consideration, the purchase price of P12,500,000.00 being below the fair market value of
the subject property at that time; (2) lack of financial capacity on the part of Lee to buy the property at that time since his gross income
for the year 1990, per the credit investigation conducted by the bank, amounted to only P346,571.73; and (3) Lee did not assert
absolute ownership over the property as he allowed the spouses Ong to retain possession thereof under a purported Contract of Lease
dated October 29, 1991.

Answering, herein respondents, as defendants a quo, maintained, in the main, that both contracts of sale and lease over the Greenhills
property were founded on good and valid consideration and executed in good faith. They also scored Union Bank for forum shopping,
alleging that the latter is one of the participating creditors in BMC’s petition for rehabilitation.

Issues having been joined, trial followed. On September 27, 1999, the trial court, applying Article 1381 of the Civil Code and noting that
the evidence on record "present[s] a holistic combination of circumstances distinctly characterized by badges of fraud," rendered
judgment for Union Bank, the Deed of Sale executed on October 22, 1991 by the spouses Ong in favor of Lee being declared null and
void.

Foremost of the circumstances adverted to relates to the execution of the sale against the backdrop of the spouses Ong, as owners of
70% of BMC's stocks, knowing of the company’s insolvency. This knowledge was the reason why, according to the court, the spouses
Ong disposed of the subject property leaving the bank without recourse to recover BMC's indebtedness. The trial court also made
reference to the circumstances which Union Bank mentioned in its complaint as indicia of conveyance in fraud of creditors.

Therefrom, herein respondents interposed an appeal to the CA which docketed their recourse as CA-G.R. No. 66030.

In its Decision dated December 5, 2001, the CA reversed and set aside the trial court's ruling, observing that the contract of sale
executed by the spouses Ong and Lee, being complete and regular on its face, is clothed with the prima facie presumption of regularity
and legality. Plodding on, the appellate court said:
In order that rescission of a contract made in fraud of creditors may be decreed, it is necessary that the complaining creditors must
prove that they cannot recover in any other manner what is due them. xxx.

There is no gainsaying that the basis of liability of the appellant spouses in their personal capacity to Union Bank is the Continuing
Surety Agreement they have signed … on October 10, 1990. However, the real debtor of Union Bank is BMC, which has a separate
juridical personality from appellants Ong. Granting that BMC was already insolvent at the time of the sale, still, there was no showing
that at the time BMC filed a petition for suspension of payment that appellants Ong were themselves bankrupt. In the case at bench, no
attempt was made by Union Bank, not even a feeble or half-hearted one, to establish that appellants spouses have no other property
from which Union Bank, as creditor of BMC, could obtain payment. While appellants Ong may be independently liable directly to Union
Bank under the Continuing Surety Agreement, all that Union Bank tried to prove was that BMC was insolvent at the time of the
questioned sale. No competent evidence was adduced showing that appellants Ong had no leviable assets other than the subject
property that would justify challenge to the transaction.2

Petitioner moved for a reconsideration of the above decision but its motion was denied by the appellate court in its resolution of
February 21, 2002.3

Hence, petitioner’s present recourse on its submission that the appellate court erred:

I. xxx WHEN IT CONSIDERED THAT THE SALE TRANSACTION BETWEEN [ RESPONDENTS SPOUSES ONG AND LEE] ENJOYS
THE PRESUMPTION OF REGULARITY AND LEGALITY AS THERE EXISTS ALSO A PRESUMPTION THAT THE SAID SALE WAS
ENTERED IN FRAUD OF CREDITORS. PETITIONER THEREFORE NEED NOT PROVE THAT RESPONDENTS SPOUSES ONG
DID NOT LEAVE SUFFICIENT ASSETS TO PAY THEIR CREDITORS. BUT EVEN THEN, PETITIONER HAS PROVEN THAT THE
SPOUSES HAVE NO OTHER ASSETS.

II. IN CONCLUDING, ASSUMING EX-GRATIA ARGUMENTI THAT THE SALE BETWEEN DEFENDANT-APPELLANTS ENJOY THE
PRESUMPTION OF REGULARITY AND LEGALITY, THAT THE EVIDENCE ADDUCED BY THE PETITIONER … WAS NOT
SUFFICIENT TO OVERCOME THE PRESUMPTION.

III. xxx IN FINDING THAT IT WAS [RESPONDENT] LEE WHO HAS SUFFICIENTLY PROVEN THAT THERE WAS A VALID AND
SUFFICIENT CONSIDERATION FOR THE SALE.

IV. xxx IN NOT FINDING THAT JACKSON LEE WAS IN BAD FAITH WHEN HE PURCHASED THE PROPERTY.4

Petitioner maintains, citing China Banking Corporation vs. Court of Appeals,5 that the sale in question, having been entered in fraud of
creditor, is rescissible. In the same breath, however, petitioner would fault the CA for failing to consider that the sale between the Ongs
and Lee is presumed fraudulent under Section 70 of Act No. 1956, as amended, or the Insolvency Law. Elaborating on this point,
petitioner states that the subject sale occurred thirty (30) days prior to the filing by BMC of a petition for suspension of payment before
the SEC, thus rendering the sale not merely rescissible but absolutely void.

We resolve to deny the petition.

In effect, the determinative issue tendered in this case resolves itself into the question of whether or not the Ong-Lee contract of sale
partakes of a conveyance to defraud Union Bank. Obviously, this necessitates an inquiry into the facts and this Court eschews factual
examination in a petition for review under Rule 45 of the Rules of Court, save when, as in the instant case, a clash between the factual
findings of the trial court and that of the appellate court exists, 6 among other exceptions.

As between the contrasting positions of the trial court and the CA, that of the latter commends itself for adoption, being more in accord
with the evidence on hand and the laws applicable thereto.

Essentially, petitioner anchors its case on Article 1381 of the Civil Code which lists as among the rescissible contracts "[T]hose
undertaken in fraud of creditors when the latter cannot in any other manner collect the claim due them."

Contracts in fraud of creditors are those executed with the intention to prejudice the rights of creditors. They should not be confused
with those entered into without such mal-intent, even if, as a direct consequence thereof, the creditor may suffer some damage. In
determining whether or not a certain conveying contract is fraudulent, what comes to mind first is the question of whether the
conveyance was a bona fide transaction or a trick and contrivance to defeat creditors. 7 To creditors seeking contract rescission on the
ground of fraudulent conveyance rest the onus of proving by competent evidence the existence of such fraudulent intent on the part of
the debtor, albeit they may fall back on the disputable presumptions, if proper, established under Article 1387 of the Code. 8

In the present case, respondent spouses Ong, as the CA had determined, had sufficiently established the validity and legitimacy of the
sale in question. The conveying deed, a duly notarized document, carries with it the presumption of validity and regularity. Too, the sale
was duly recorded and annotated on the title of the property owners, the spouses Ong. As the transferee of said property, respondent
Lee caused the transfer of title to his name.
There can be no quibbling about the transaction being supported by a valid and sufficient consideration. Respondent Lee’s account,
while on the witness box, about this angle of the sale was categorical and straightforward. An excerpt of his testimony:

Atty. De Jesus :

Before you prepared the consideration of this formal offer, as standard operating procedure of buy and sell, what documents were
prepared?

xxx xxx xxx

Jackson Lee:

A. There is a downpayment.

Q. And how much was the downpayment?

A. P2,500,000.00.

Q. Was that downpayment covered by a receipt signed by the seller?

A. Yes, Sir, P500,000.00 and P2,000,000.00

xxx xxx xxx

Q. Are you referring to the receipt dated October 19, 1991, how about the other receipt dated October 21, 1991?

A. Yes, Sir, this is the same receipt.

xxx xxx xxx

Q. Considering that the consideration of this document is for P12,000,000.00 and you made mention only of P2,500,000.00, covered by
the receipts, do you have evidence to show that, finally, Susana Ong received the balance of P10,000,000.00?

A. Yes, Sir.

Q. Showing to you a receipt denominated as Acknowledgement Receipt, dated October 25, 1991, are you referring to this receipt to
cover the balance of P10,000,000.00?

A. Yes, sir.9

The foregoing testimony readily proves that money indeed changed hands in connection with the sale of the subject property.
Respondent Lee, as purchaser, paid the stipulated contract price to the spouses Ong, as vendors. Receipts presented in evidence
covered and proved such payment. Accordingly, any suggestion negating payment and receipt of valuable consideration for the subject
conveyance, or worse, that the sale was fictitious must simply be rejected.

In a bid to attach a badge of fraud on the transaction, petitioner raises the issue of inadequate consideration, alleging in this regard that
only P12,500,000.00 was paid for property having, during the period material, a fair market value of P14,500,000.00.

We do not agree.

The existence of fraud or the intent to defraud creditors cannot plausibly be presumed from the fact that the price paid for a piece of real
estate is perceived to be slightly lower, if that really be the case, than its market value. To be sure, it is logical, even expected, for
contracting minds, each having an interest to protect, to negotiate on the price and other conditions before closing a sale of a valuable
piece of land. The negotiating areas could cover various items. The purchase price, while undeniably an important consideration, is
doubtless only one of them. Thus, a scenario where the price actually stipulated may, as a matter of fact, be lower than the original
asking price of the vendor or the fair market value of the property, as what perhaps happened in the instant case, is not out of the
ordinary, let alone indicative of fraudulent intention. That the spouses Ong acquiesced to the price of P12,500,000.00, which may be
lower than the market value of the house and lot at the time of alienation, is certainly not an unusual business phenomenon.

Lest it be overlooked, the disparity between the price appearing in the conveying deed and what the petitioner regarded as the real
value of the property is not as gross to support a conclusion of fraud. What is more, one Oliver Morales, a licensed real estate appraiser
and broker, virtually made short shrift of petitioner’s claim of gross inadequacy of the purchase price. Mr. Morales declared that there
exists no gross disparity between the market value of the subject property and the price mentioned in the deed as consideration. He
explained why:

ATTY. EUFEMIO:

Q. I am showing to you the said two (2) exhibits Mr. Morales and I would like you to go over the terms and conditions stated therein and
as an expert in real estate appraiser (sic) and also as a real estate broker, can you give this Honorable Court your considered opinion
whether the consideration stated therein P12,500,000.00 in the light of all terms and conditions of the said Deed of Absolute Sale and
Offer to Purchase could be deemed fair and reasonable?

xxx xxx xxx

MR. MORALES:

A. My opinion generally a Deed of Absolute Sale indicated prescribed not only the amount of the consideration. There are also other
expenses involved in the sales. I do not see here other payment of who takes care of capital gains stocks (sic) in this Deed of Sale
neither who shouldered the documentary stamps or even transfer tax. That is my comment regarding this.

Q. Precisely Mr. Witness we have also shown to you the Offer to Purchase which has been marked as Exhibit "9" as to the terms which
we are asking?

xxx xxx xxx

A. Well, it says here in item C of the conditions the Capital Gains Stocks (sic), documentary stamps, transfer tax registration and
broker’s fee for the buyer’s account. I do not know how much is this worth. If at all in condition (sic) to the 12.5 million which is the
selling price, may I, therefore aside (sic) how much is the total cost pertaining to this. The capital gains tax on (sic), documentary
stamps, transfer tax are all computed on the basis of the consideration which is P12.5 M, the capital gain stocks (sic) is 5%, 5% of 12.5
M.

xxx xxx xxx

Yes sir if the 5% capital gains tax and documentary stamps respectively shall be added to the 12.5 Million before the inclusion of the
transfer tax, the amount will be already in the vicinity of P13,250.000.

Q. With such consideration Mr. Witness and in the light of the terms and conditions in the said Offer to Purchase and Deed of Absolute
Sale could you give your opinion as to whether the consideration is fair and reasonable.

xxx xxx xxx

A. With our proposal of P14.5 M as compared now to P13,250,000.00 may I give my opinion that generally there will be two appraisers.
In fairness to the situation, they should not vary by as much as 7% down so we are playing at a variance actually of about 15%. In my
experience in this profession for the last 27 years as I have said in fairness if there is another appraisal done by another person, that
kind of difference is very marginal should at least indicate the fairness of the property and so therefore the only way to find out is to
determine the difference between the P14.5 M and the P13,250,000.00. My computation indicates that it is close to 10% something like
that difference. What is the question again?

Q. Whether it is fair and reasonable under the circumstances.

A. I have answered already the question and I said maximum of 15%.

Q. So based on your computation this is about 10% which is fair and reasonable.

A That is right sir.10

Withal, the consideration of the sale is fair and reasonable as would justify the conclusion that the sale is undoubtedly a true and
genuine conveyance to which the parties thereto are irrevocably and undeniably bound.

It may be stressed that, when the validity of sales contract is in issue, two veritable presumptions are relevant: first, that there was
sufficient consideration of the contract11 ; and, second, that it was the result of a fair and regular private transaction. 12 If shown to hold,
these presumptions infer prima facie the transaction's validity, except that it must yield to the evidence adduced 13 which the party
disputing such presumptive validity has the burden of overcoming. Unfortunately for the petitioner, it failed to discharge this burden. Its
bare allegation respecting the sale having been executed in fraud of creditors and without adequate consideration cannot, without
more, prevail over the respondents' evidence which more than sufficiently supports a conclusion as to the legitimacy of the transaction
and the bona fides of the parties.

Parenthetically, the rescissory action to set aside contracts in fraud of creditors is accion pauliana, essentially a subsidiary remedy
accorded under Article 1383 of the Civil Code which the party suffering damage can avail of only when he has no other legal means to
obtain reparation for the same.14 In net effect, the provision applies only when the creditor cannot recover in any other manner what is
due him.

It is true that respondent spouses, as surety for BMC, bound themselves to answer for the latter’s debt. Nonetheless, for purposes of
recovering what the eventually insolvent BMC owed the bank, it behooved the petitioner to show that it had exhausted all the properties
of the spouses Ong. It does not appear in this case that the petitioner sought other properties of the spouses other than the subject
Greenhills property. The CA categorically said so. Absent proof, therefore, that the spouses Ong had no other property except their
Greenhills home, the sale thereof to respondent Lee cannot simplistically be considered as one in fraud of creditors.

Neither was evidence adduced to show that the sale in question peremptorily deprived the petitioner of means to collect its claim
against the Ongs. Where a creditor fails to show that he has no other legal recourse to obtain satisfaction for his claim, then he is not
entitled to the rescission asked.15

For a contract to be rescinded for being in fraud of creditors, both contracting parties must be shown to have acted maliciously so as to
prejudice the creditors who were prevented from collecting their claims.16 Again, in this case, there is no evidence tending to prove that
the spouses Ong and Lee were conniving cheats. In fact, the petitioner did not even attempt to prove the existence of personal
closeness or business and professional interdependence between the spouses Ong and Lee as to cast doubt on their true intent in
executing the contract of sale. With the view we take of the evidence on record, their relationship vis-à-vis the subject Greenhills
property was no more than one between vendor and vendee dealing with each other for the first time. Any insinuation that the two
colluded to gyp petitioner bank is to read in a relationship something which, from all indications, appears to be purely business.

It cannot be overemphasized that rescission is generally unavailing should a third person, acting in good faith, is in lawful possession of
the property,17 that is to say, he is protected by law against a suit for rescission by the registration of the transfer to him in the registry.

As recited earlier, Lee was - and may still be - in lawful possession of the subject property as the transfer to him was by virtue of a
presumptively valid onerous contract of sale. His possession is evidenced by no less than a certificate of title issued him by the Registry
of Deeds of San Juan, Metro Manila, after the usual registration of the corresponding conveying deed of sale. On the other hand, the
bona fides of his acquisition can be deduced from his conduct and outward acts previous to the sale. As testified to by him and duly
noted by the CA, respondent Lee undertook what amounts to due diligence on the possible defects in the title of the Ongs before
proceeding with the sale. As it were, Lee decided to buy the property only after being satisfied of the absence of such defects.18

Time and again, the Court has held that one dealing with a registered parcel of land need not go beyond the certificate of title as he is
charged with notice only of burdens which are noted on the face of the register or on the certificate of title. 19 The Continuing Surety
Agreement, it ought to be particularly pointed out, was never recorded nor annotated on the title of spouses Ong. There is no evidence
extant in the records to show that Lee had knowledge, prior to the subject sale, of the surety agreement adverted to. In fine, there is
nothing to remotely suggest that the purchase of the subject property was characterized by anything other than good faith.

Petitioner has made much of respondent Lee not taking immediate possession of the property after the sale, stating that such failure is
an indication of his participation in the fraudulent scheme to prejudice petitioner bank.

We are not persuaded.

Lee, it is true, allowed the respondent spouses to continue occupying the premises even after the sale. This development, however, is
not without basis or practical reason. The spouses' continuous possession of the property was by virtue of a one-year lease20 they
executed with respondent Lee six days after the sale. As explained by the respondent spouses, they insisted on the lease arrangement
as a condition for the sale in question. And pursuant to the lease contract aforementioned, the respondent Ongs paid and Lee collected
rentals at the rate of P25,000.00 a month. Contrary thus to the petitioner’s asseveration, respondent Lee, after the sale, exercised acts
of dominion over the said property and asserted his rights as the new owner. So, when the respondent spouses continued to occupy
the property after its sale, they did so as mere tenants. While the failure of the vendee to take exclusive possession of the property is
generally recognized as a badge of fraud, the same cannot be said here in the light of the existence of what appears to be a genuine
lessor-lessee relationship between the spouses Ong and Lee. To borrow from Reyes vs. Court of Appeals, 21 possession may be
exercised in one’s own name or in the name of another; an owner of a piece of land has possession, either when he himself physically
occupies the same or when another person who recognizes his right as owner is in such occupancy.

Petitioner’s assertion regarding respondent Lee’s lack of financial capacity to acquire the property in question since his income in 1990
was only P346,571.73 is clearly untenable. Assuming for argument that petitioner got its figure right, it is clearly incorrect to measure
one’s purchasing capacity with one’s income at a given period. But the more important consideration in this regard is the
uncontroverted fact that respondent Lee paid the purchase price of said property. Where he sourced the needed cash is, for the nonce,
really of no moment.
The cited case of China Banking22 cannot plausibly provide petitioner with a winning card. In that case, the Court, applying Article 1381
(3) of the Civil Code, rescinded an Assignment of Rights to Redeem owing to the failure of the assignee to overthrow the presumption
that the said conveyance/assignment is fraudulent. In turn, the presumption was culled from Article 1387, par. 2, of the Code pertinently
providing that "[A]lienation by onerous title are also presumed fraudulent when made by persons against whom some judgment has
been rendered in any instance or some writ of attachment has been issued."

Indeed, when the deed of assignment was executed in China Banking, the assignor therein already faced at that time an adverse
judgment. In the same case, moreover, the Court took stock of other signs of fraud which tainted the transaction therein and which are,
significantly, not obtaining in the instant case. We refer, firstly, to the element of kinship, the assignor, Alfonso Roxas Chua, being the
father of the assignee, Paulino. Secondly, Paulino admitted knowing his father to be insolvent. Hence, the Court, rationalizing the
rescission of the assignment of rights, made the following remarks:

The mere fact that the conveyance was founded on valuable consideration does not necessarily negate the presumption of fraud under
Article 1387 of the Civil Code. There has to be valuable consideration and the transaction must have been made bona fide.23

There lies the glaring difference with the instant case.

Here, the existence of fraud cannot be presumed, or, at the very least, what were perceived to be badges of fraud have been proven to
be otherwise. And, unlike Alfonso Roxas Chua in China Banking, a judgment has not been rendered against respondent spouses Ong
or that a writ of attachment has been issued against them at the time of the disputed sale.

In a last-ditch attempt to resuscitate a feeble cause, petitioner cites Section 70 of the Insolvency Law which, unlike the invoked Article
1381 of the Civil Code that deals with a valid but rescissible contract, treats of a contractual infirmity resulting in nullity no less of the
transaction in question. Insofar as pertinent, Section 70 of the Insolvency Law provides:

Sec. 70. If any debtor, being insolvent, or in contemplation of insolvency, within thirty days before the filing of a petition by or against
him, with a view to giving a preference to any creditor or person having a claim against him xxx makes any xxx sale or conveyance of
any part of his property, xxx such xxx sale, assignment or conveyance is void, and the assignee, or the receiver, may recover the
property or the value thereof, as assets of such insolvent debtor. xxx. Any payment, pledge, mortgage, conveyance, sale, assignment,
or transfer of property of whatever character made by the insolvent within one (1) month before the filing of a petition in insolvency by or
against him, except for a valuable pecuniary consideration made in good faith shall be void. xxx. (Emphasis added)

Petitioner avers that the Ong-Lee sales contract partakes of a fraudulent transfer and is null and void in contemplation of the
aforequoted provision, the sale having occurred on October 22, 1991 or within thirty (30) days before BMC filed a petition for
suspension of payments on November 22, 1991.

Petitioner's reliance on the afore-quoted provision is misplaced for the following reasons:

First, Section 70, supra, of the Insolvency Law specifically makes reference to conveyance of properties made by a "debtor" or
by an "insolvent" who filed a petition, or against whom a petition for insolvency has been filed. Respondent spouses Ong have
doubtlessly not filed a petition for a declaration of their own insolvency. Neither has one been filed against them. And as the
CA aptly observed, it was never proven that respondent spouses are likewise insolvent, petitioner having failed to show that
they were down to their Greenhills property as their only asset.

It may be that BMC had filed a petition for rehabilitation and suspension of payments with the SEC. The nagging fact, however
is that BMC is a different juridical person from the respondent spouses. Their seventy percent (70%) ownership of BMC’s
capital stock does not change the legal situation. Accordingly, the alleged insolvency of BMC cannot, as petitioner postulates,
extend to the respondent spouses such that transaction of the latter comes within the purview of Section 70 of the Insolvency
Law.

Second, the real debtor of petitioner bank in this case is BMC. The fact that the respondent spouses bound themselves to
answer for BMC’s indebtedness under the surety agreement referred to at the outset is not reason enough to conclude that the
spouses are themselves debtors of petitioner bank. We have already passed upon the simple reason for this proposition. We
refer to the basic precept in this jurisdiction that a corporation, upon coming into existence, is invested by law with a
personality separate and distinct from those of the persons composing it. 24 Mere ownership by a single or small group of
stockholders of nearly all of the capital stock of the corporation is not, without more, sufficient to disregard the fiction of
separate corporate personality.25

Third, Section 70 of the Insolvency Law considers transfers made within a month after the date of cleavage void, except those
made in good faith and for valuable pecuniary consideration. The twin elements of good faith and valuable and sufficient
consideration have been duly established. Given the validity and the basic legitimacy of the sale in question, there is simply no
occasion to apply Section 70 of the Insolvency Law to nullify the transaction subject of the instant case.
All told, we are far from convinced by petitioner’s argumentation that the circumstances surrounding the sale of the subject property
may be considered badges of fraud. Consequently, its failure to show actual fraudulent intent on the part of the spouses Ong defeats its
own cause.

WHEREFORE, the instant petition is DENIED and the assailed decision of the Court of Appeals is AFFIRMED.

Costs against petitioner.

SO ORDERED.

G.R. No. 144805 June 8, 2006

EDUARDO V. LINTONJUA, JR. and ANTONIO K. LITONJUA, Petitioners,


vs.
ETERNIT CORPORATION (now ETERTON MULTI-RESOURCES CORPORATION), ETEROUTREMER, S.A. and FAR EAST BANK
& TRUST COMPANY, Respondents.

DECISION

CALLEJO, SR., J.:

On appeal via a Petition for Review on Certiorari is the Decision 1 of the Court of Appeals (CA) in CA-G.R. CV No. 51022, which
affirmed the Decision of the Regional Trial Court (RTC), Pasig City, Branch 165, in Civil Case No. 54887, as well as the Resolution2 of
the CA denying the motion for reconsideration thereof.

The Eternit Corporation (EC) is a corporation duly organized and registered under Philippine laws. Since 1950, it had been engaged in
the manufacture of roofing materials and pipe products. Its manufacturing operations were conducted on eight parcels of land with a
total area of 47,233 square meters. The properties, located in Mandaluyong City, Metro Manila, were covered by Transfer Certificates
of Title Nos. 451117, 451118, 451119, 451120, 451121, 451122, 451124 and 451125 under the name of Far East Bank & Trust
Company, as trustee. Ninety (90%) percent of the shares of stocks of EC were owned by Eteroutremer S.A. Corporation (ESAC), a
corporation organized and registered under the laws of Belgium. 3 Jack Glanville, an Australian citizen, was the General Manager and
President of EC, while Claude Frederick Delsaux was the Regional Director for Asia of ESAC. Both had their offices in Belgium.

In 1986, the management of ESAC grew concerned about the political situation in the Philippines and wanted to stop its operations in
the country. The Committee for Asia of ESAC instructed Michael Adams, a member of EC’s Board of Directors, to dispose of the eight
parcels of land. Adams engaged the services of realtor/broker Lauro G. Marquez so that the properties could be offered for sale to
prospective buyers. Glanville later showed the properties to Marquez.

Marquez thereafter offered the parcels of land and the improvements thereon to Eduardo B. Litonjua, Jr. of the Litonjua & Company,
Inc. In a Letter dated September 12, 1986, Marquez declared that he was authorized to sell the properties for P27,000,000.00 and that
the terms of the sale were subject to negotiation. 4

Eduardo Litonjua, Jr. responded to the offer. Marquez showed the property to Eduardo Litonjua, Jr., and his brother Antonio K. Litonjua.
The Litonjua siblings offered to buy the property for P20,000,000.00 cash. Marquez apprised Glanville of the Litonjua siblings’ offer and
relayed the same to Delsaux in Belgium, but the latter did not respond. On October 28, 1986, Glanville telexed Delsaux in Belgium,
inquiring on his position/ counterproposal to the offer of the Litonjua siblings. It was only on February 12, 1987 that Delsaux sent a telex
to Glanville stating that, based on the "Belgian/Swiss decision," the final offer was "US$1,000,000.00 and P2,500,000.00 to cover all
existing obligations prior to final liquidation." 5

Marquez furnished Eduardo Litonjua, Jr. with a copy of the telex sent by Delsaux. Litonjua, Jr. accepted the counterproposal of
Delsaux. Marquez conferred with Glanville, and in a Letter dated February 26, 1987, confirmed that the Litonjua siblings had accepted
the counter-proposal of Delsaux. He also stated that the Litonjua siblings would confirm full payment within 90 days after execution and
preparation of all documents of sale, together with the necessary governmental clearances.6

The Litonjua brothers deposited the amount of US$1,000,000.00 with the Security Bank & Trust Company, Ermita Branch, and drafted
an Escrow Agreement to expedite the sale.7

Sometime later, Marquez and the Litonjua brothers inquired from Glanville when the sale would be implemented. In a telex dated April
22, 1987, Glanville informed Delsaux that he had met with the buyer, which had given him the impression that "he is prepared to press
for a satisfactory conclusion to the sale."8 He also emphasized to Delsaux that the buyers were concerned because they would incur
expenses in bank commitment fees as a consequence of prolonged period of inaction. 9
Meanwhile, with the assumption of Corazon C. Aquino as President of the Republic of the Philippines, the political situation in the
Philippines had improved. Marquez received a telephone call from Glanville, advising that the sale would no longer proceed. Glanville
followed it up with a Letter dated May 7, 1987, confirming that he had been instructed by his principal to inform Marquez that "the
decision has been taken at a Board Meeting not to sell the properties on which Eternit Corporation is situated." 10

Delsaux himself later sent a letter dated May 22, 1987, confirming that the ESAC Regional Office had decided not to proceed with the
sale of the subject land, to wit:

May 22, 1987

Mr. L.G. Marquez


L.G. Marquez, Inc.
334 Makati Stock Exchange Bldg.
6767 Ayala Avenue
Makati, Metro Manila
Philippines

Dear Sir:

Re: Land of Eternit Corporation

I would like to confirm officially that our Group has decided not to proceed with the sale of the land which was proposed to you.

The Committee for Asia of our Group met recently (meeting every six months) and examined the position as far as the Philippines are
(sic) concerned. Considering [the] new political situation since the departure of MR. MARCOS and a certain stabilization in the
Philippines, the Committee has decided not to stop our operations in Manila. In fact, production has started again last week, and (sic) to
recognize the participation in the Corporation.

We regret that we could not make a deal with you this time, but in case the policy would change at a later state, we would consult you
again.

xxx

Yours sincerely,

(Sgd.)
C.F. DELSAUX

cc. To: J. GLANVILLE (Eternit Corp.)11

When apprised of this development, the Litonjuas, through counsel, wrote EC, demanding payment for damages they had suffered on
account of the aborted sale. EC, however, rejected their demand.

The Litonjuas then filed a complaint for specific performance and damages against EC (now the Eterton Multi-Resources Corporation)
and the Far East Bank & Trust Company, and ESAC in the RTC of Pasig City. An amended complaint was filed, in which defendant EC
was substituted by Eterton Multi-Resources Corporation; Benito C. Tan, Ruperto V. Tan, Stock Ha T. Tan and Deogracias G. Eufemio
were impleaded as additional defendants on account of their purchase of ESAC shares of stocks and were the controlling stockholders
of EC.

In their answer to the complaint, EC and ESAC alleged that since Eteroutremer was not doing business in the Philippines, it cannot be
subject to the jurisdiction of Philippine courts; the Board and stockholders of EC never approved any resolution to sell subject properties
nor authorized Marquez to sell the same; and the telex dated October 28, 1986 of Jack Glanville was his own personal making which
did not bind EC.

On July 3, 1995, the trial court rendered judgment in favor of defendants and dismissed the amended complaint. 12The fallo of the
decision reads:

WHEREFORE, the complaint against Eternit Corporation now Eterton Multi-Resources Corporation and Eteroutremer, S.A. is
dismissed on the ground that there is no valid and binding sale between the plaintiffs and said defendants.

The complaint as against Far East Bank and Trust Company is likewise dismissed for lack of cause of action.
The counterclaim of Eternit Corporation now Eterton Multi-Resources Corporation and Eteroutremer, S.A. is also dismissed for lack of
merit.13

The trial court declared that since the authority of the agents/realtors was not in writing, the sale is void and not merely unenforceable,
and as such, could not have been ratified by the principal. In any event, such ratification cannot be given any retroactive effect. Plaintiffs
could not assume that defendants had agreed to sell the property without a clear authorization from the corporation concerned, that is,
through resolutions of the Board of Directors and stockholders. The trial court also pointed out that the supposed sale involves
substantially all the assets of defendant EC which would result in the eventual total cessation of its operation. 14

The Litonjuas appealed the decision to the CA, alleging that "(1) the lower court erred in concluding that the real estate broker in the
instant case needed a written authority from appellee corporation and/or that said broker had no such written authority; and (2) the
lower court committed grave error of law in holding that appellee corporation is not legally bound for specific performance and/or
damages in the absence of an enabling resolution of the board of directors."15 They averred that Marquez acted merely as a broker or
go-between and not as agent of the corporation; hence, it was not necessary for him to be empowered as such by any written authority.
They further claimed that an agency by estoppel was created when the corporation clothed Marquez with apparent authority to
negotiate for the sale of the properties. However, since it was a bilateral contract to buy and sell, it was equivalent to a perfected
contract of sale, which the corporation was obliged to consummate.

In reply, EC alleged that Marquez had no written authority from the Board of Directors to bind it; neither were Glanville and Delsaux
authorized by its board of directors to offer the property for sale. Since the sale involved substantially all of the corporation’s assets, it
would necessarily need the authority from the stockholders.

On June 16, 2000, the CA rendered judgment affirming the decision of the RTC. 16 The Litonjuas filed a motion for reconsideration,
which was also denied by the appellate court.

The CA ruled that Marquez, who was a real estate broker, was a special agent within the purview of Article 1874 of the New Civil Code.
Under Section 23 of the Corporation Code, he needed a special authority from EC’s board of directors to bind such corporation to the
sale of its properties. Delsaux, who was merely the representative of ESAC (the majority stockholder of EC) had no authority to bind the
latter. The CA pointed out that Delsaux was not even a member of the board of directors of EC. Moreover, the Litonjuas failed to prove
that an agency by estoppel had been created between the parties.

In the instant petition for review, petitioners aver that

THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO PERFECTED CONTRACT OF SALE.

II

THE APPELLATE COURT COMMITTED GRAVE ERROR OF LAW IN HOLDING THAT MARQUEZ NEEDED A WRITTEN
AUTHORITY FROM RESPONDENT ETERNIT BEFORE THE SALE CAN BE PERFECTED.

III

THE COURT OF APPEALS ERRED IN NOT HOLDING THAT GLANVILLE AND DELSAUX HAVE THE NECESSARY AUTHORITY
TO SELL THE SUBJECT PROPERTIES, OR AT THE VERY LEAST, WERE KNOWINGLY PERMITTED BY RESPONDENT ETERNIT
TO DO ACTS WITHIN THE SCOPE OF AN APPARENT AUTHORITY, AND THUS HELD THEM OUT TO THE PUBLIC AS
POSSESSING POWER TO SELL THE SAID PROPERTIES.17

Petitioners maintain that, based on the facts of the case, there was a perfected contract of sale of the parcels of land and the
improvements thereon for "US$1,000,000.00 plus P2,500,000.00 to cover obligations prior to final liquidation." Petitioners insist that
they had accepted the counter-offer of respondent EC and that before the counter-offer was withdrawn by respondents, the acceptance
was made known to them through real estate broker Marquez.

Petitioners assert that there was no need for a written authority from the Board of Directors of EC for Marquez to validly act as
broker/middleman/intermediary. As broker, Marquez was not an ordinary agent because his authority was of a special and limited
character in most respects. His only job as a broker was to look for a buyer and to bring together the parties to the transaction. He was
not authorized to sell the properties or to make a binding contract to respondent EC; hence, petitioners argue, Article 1874 of the New
Civil Code does not apply.

In any event, petitioners aver, what is important and decisive was that Marquez was able to communicate both the offer and counter-
offer and their acceptance of respondent EC’s counter-offer, resulting in a perfected contract of sale.
Petitioners posit that the testimonial and documentary evidence on record amply shows that Glanville, who was the President and
General Manager of respondent EC, and Delsaux, who was the Managing Director for ESAC Asia, had the necessary authority to sell
the subject property or, at least, had been allowed by respondent EC to hold themselves out in the public as having the power to sell
the subject properties. Petitioners identified such evidence, thus:

1. The testimony of Marquez that he was chosen by Glanville as the then President and General Manager of Eternit, to sell the
properties of said corporation to any interested party, which authority, as hereinabove discussed, need not be in writing.

2. The fact that the NEGOTIATIONS for the sale of the subject properties spanned SEVERAL MONTHS, from 1986 to 1987;

3. The COUNTER-OFFER made by Eternit through GLANVILLE to sell its properties to the Petitioners;

4. The GOOD FAITH of Petitioners in believing Eternit’s offer to sell the properties as evidenced by the Petitioners’
ACCEPTANCE of the counter-offer;

5. The fact that Petitioners DEPOSITED the price of [US]$1,000,000.00 with the Security Bank and that an ESCROW
agreement was drafted over the subject properties;

6. Glanville’s telex to Delsaux inquiring "WHEN WE (Respondents) WILL IMPLEMENT ACTION TO BUY AND SELL";

7. More importantly, Exhibits "G" and "H" of the Respondents, which evidenced the fact that Petitioners’ offer was
allegedly REJECTED by both Glanville and Delsaux.18

Petitioners insist that it is incongruous for Glanville and Delsaux to make a counter-offer to petitioners’ offer and thereafter reject such
offer unless they were authorized to do so by respondent EC. Petitioners insist that Delsaux confirmed his authority to sell the
properties in his letter to Marquez, to wit:

Dear Sir,

Re: Land of Eternit Corporation

I would like to confirm officially that our Group has decided not to proceed with the sale of the land which was proposed to you.

The Committee for Asia of our Group met recently (meeting every six months) and examined the position as far as the Philippines are
(sic) concerned. Considering the new political situation since the departure of MR. MARCOS and a certain stabilization in the
Philippines, the Committee has decided not to stop our operations in Manila[.] [I]n fact production started again last week, and (sic) to
reorganize the participation in the Corporation.

We regret that we could not make a deal with you this time, but in case the policy would change at a later stage we would consult you
again.

In the meantime, I remain

Yours sincerely,

C.F. DELSAUX19

Petitioners further emphasize that they acted in good faith when Glanville and Delsaux were knowingly permitted by respondent EC to
sell the properties within the scope of an apparent authority. Petitioners insist that respondents held themselves to the public as
possessing power to sell the subject properties.

By way of comment, respondents aver that the issues raised by the petitioners are factual, hence, are proscribed by Rule 45 of the
Rules of Court. On the merits of the petition, respondents EC (now EMC) and ESAC reiterate their submissions in the CA. They
maintain that Glanville, Delsaux and Marquez had no authority from the stockholders of respondent EC and its Board of Directors to
offer the properties for sale to the petitioners, or to any other person or entity for that matter. They assert that the decision and
resolution of the CA are in accord with law and the evidence on record, and should be affirmed in toto.

Petitioners aver in their subsequent pleadings that respondent EC, through Glanville and Delsaux, conformed to the written authority of
Marquez to sell the properties. The authority of Glanville and Delsaux to bind respondent EC is evidenced by the fact that Glanville and
Delsaux negotiated for the sale of 90% of stocks of respondent EC to Ruperto Tan on June 1, 1997. Given the significance of their
positions and their duties in respondent EC at the time of the transaction, and the fact that respondent ESAC owns 90% of the shares
of stock of respondent EC, a formal resolution of the Board of Directors would be a mere ceremonial formality. What is important,
petitioners maintain, is that Marquez was able to communicate the offer of respondent EC and the petitioners’ acceptance thereof.
There was no time that they acted without the knowledge of respondents. In fact, respondent EC never repudiated the acts of Glanville,
Marquez and Delsaux.

The petition has no merit.

Anent the first issue, we agree with the contention of respondents that the issues raised by petitioner in this case are factual. Whether
or not Marquez, Glanville, and Delsaux were authorized by respondent EC to act as its agents relative to the sale of the properties of
respondent EC, and if so, the boundaries of their authority as agents, is a question of fact. In the absence of express written terms
creating the relationship of an agency, the existence of an agency is a fact question. 20 Whether an agency by estoppel was created or
whether a person acted within the bounds of his apparent authority, and whether the principal is estopped to deny the apparent
authority of its agent are, likewise, questions of fact to be resolved on the basis of the evidence on record. 21 The findings of the trial
court on such issues, as affirmed by the CA, are conclusive on the Court, absent evidence that the trial and appellate courts ignored,
misconstrued, or misapplied facts and circumstances of substance which, if considered, would warrant a modification or reversal of the
outcome of the case.22

It must be stressed that issues of facts may not be raised in the Court under Rule 45 of the Rules of Court because the Court is not a
trier of facts. It is not to re-examine and assess the evidence on record, whether testimonial and documentary. There are, however,
recognized exceptions where the Court may delve into and resolve factual issues, namely:

(1) When the conclusion is a finding grounded entirely on speculations, surmises, or conjectures; (2) when the inference made is
manifestly mistaken, absurd, or impossible; (3) when there is grave abuse of discretion; (4) when the judgment is based on a
misapprehension of facts; (5) when the findings of fact are conflicting; (6) when the Court of Appeals, in making its findings, went
beyond the issues of the case and the same is contrary to the admissions of both appellant and appellee; (7) when the findings of the
Court of Appeals are contrary to those of the trial court; (8) when the findings of fact are conclusions without citation of specific
evidence on which they are based; (9) when the Court of Appeals manifestly overlooked certain relevant facts not disputed by the
parties, which, if properly considered, would justify a different conclusion; and (10) when the findings of fact of the Court of Appeals are
premised on the absence of evidence and are contradicted by the evidence on record. 23

We have reviewed the records thoroughly and find that the petitioners failed to establish that the instant case falls under any of the
foregoing exceptions. Indeed, the assailed decision of the Court of Appeals is supported by the evidence on record and the law.

It was the duty of the petitioners to prove that respondent EC had decided to sell its properties and that it had empowered Adams,
Glanville and Delsaux or Marquez to offer the properties for sale to prospective buyers and to accept any counter-offer. Petitioners
likewise failed to prove that their counter-offer had been accepted by respondent EC, through Glanville and Delsaux. It must be
stressed that when specific performance is sought of a contract made with an agent, the agency must be established by clear, certain
and specific proof.24

Section 23 of Batas Pambansa Bilang 68, otherwise known as the Corporation Code of the Philippines, provides:

SEC. 23. The Board of Directors or Trustees. – Unless otherwise provided in this Code, the corporate powers of all corporations formed
under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of
directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the
corporation, who shall hold office for one (1) year and until their successors are elected and qualified.

Indeed, a corporation is a juridical person separate and distinct from its members or stockholders and is not affected by the personal
rights,

obligations and transactions of the latter.25 It may act only through its board of directors or, when authorized either by its by-laws or by
its board resolution, through its officers or agents in the normal course of business. The general principles of agency govern the relation
between the corporation and its officers or agents, subject to the articles of incorporation, by-laws, or relevant provisions of law.26

Under Section 36 of the Corporation Code, a corporation may sell or convey its real properties, subject to the limitations prescribed by
law and the Constitution, as follows:

SEC. 36. Corporate powers and capacity. – Every corporation incorporated under this Code has the power and capacity:

xxxx

7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal
property, including securities and bonds of other corporations, as the transaction of a lawful business of the corporation may reasonably
and necessarily require, subject to the limitations prescribed by the law and the Constitution.
The property of a corporation, however, is not the property of the stockholders or members, and as such, may not be sold without
express authority from the board of directors.27 Physical acts, like the offering of the properties of the corporation for sale, or the
acceptance of a counter-offer of prospective buyers of such properties and the execution of the deed of sale covering such property,
can be performed by the corporation only by officers or agents duly authorized for the purpose by corporate by-laws or by specific acts
of the board of directors.28 Absent such valid delegation/authorization, the rule is that the declarations of an individual director relating to
the affairs of the corporation, but not in the course of, or connected with, the performance of authorized duties of such director, are not
binding on the corporation.29

While a corporation may appoint agents to negotiate for the sale of its real properties, the final say will have to be with the board of
directors through its officers and agents as authorized by a board resolution or by its by-laws.30 An unauthorized act of an officer of the
corporation is not binding on it unless the latter ratifies the same expressly or impliedly by its board of directors. Any sale of real
property of a corporation by a person purporting to be an agent thereof but without written authority from the corporation is null and
void. The declarations of the agent alone are generally insufficient to establish the fact or extent of his/her authority. 31

By the contract of agency, a person binds himself to render some service or to do something in representation on behalf of another,
with the consent or authority of the latter.32 Consent of both principal and agent is necessary to create an agency. The principal must
intend that the agent shall act for him; the agent must intend to accept the authority and act on it, and the intention of the parties must
find expression either in words or conduct between them. 33

An agency may be expressed or implied from the act of the principal, from his silence or lack of action, or his failure to repudiate the
agency knowing that another person is acting on his behalf without authority. Acceptance by the agent may be expressed, or implied
from his acts which carry out the agency, or from his silence or inaction according to the circumstances.34 Agency may be oral unless
the law requires a specific form.35 However, to create or convey real rights over immovable property, a special power of attorney is
necessary.36 Thus, when a sale of a piece of land or any portion thereof is through an agent, the authority of the latter shall be in
writing, otherwise, the sale shall be void.37

In this case, the petitioners as plaintiffs below, failed to adduce in evidence any resolution of the Board of Directors of respondent EC
empowering Marquez, Glanville or Delsaux as its agents, to sell, let alone offer for sale, for and in its behalf, the eight parcels of land
owned by respondent EC including the improvements thereon. The bare fact that Delsaux may have been authorized to sell to Ruperto
Tan the shares of stock of respondent ESAC, on June 1, 1997, cannot be used as basis for petitioners’ claim that he had likewise been
authorized by respondent EC to sell the parcels of land.

Moreover, the evidence of petitioners shows that Adams and Glanville acted on the authority of Delsaux, who, in turn, acted on the
authority of respondent ESAC, through its Committee for Asia,38 the Board of Directors of respondent ESAC,39 and the Belgian/Swiss
component of the management of respondent ESAC.40 As such, Adams and Glanville engaged the services of Marquez to offer to sell
the properties to prospective buyers. Thus, on September 12, 1986, Marquez wrote the petitioner that he was authorized to offer for
sale the property for P27,000,000.00 and the other terms of the sale subject to negotiations. When petitioners offered to purchase the
property for P20,000,000.00, through Marquez, the latter relayed petitioners’ offer to Glanville; Glanville had to send a telex to Delsaux
to inquire the position of respondent ESAC to petitioners’ offer. However, as admitted by petitioners in their Memorandum, Delsaux was
unable to reply immediately to the telex of Glanville because Delsaux had to wait for confirmation from respondent ESAC. 41 When
Delsaux finally responded to Glanville on February 12, 1987, he made it clear that, based on the "Belgian/Swiss decision" the final offer
of respondent ESAC was US$1,000,000.00 plus P2,500,000.00 to cover all existing obligations prior to final liquidation. 42 The offer of
Delsaux emanated only from the "Belgian/Swiss decision," and not the entire management or Board of Directors of respondent ESAC.
While it is true that petitioners accepted the counter-offer of respondent ESAC, respondent EC was not a party to the transaction
between them; hence, EC was not bound by such acceptance.

While Glanville was the President and General Manager of respondent EC, and Adams and Delsaux were members of its Board of
Directors, the three acted for and in behalf of respondent ESAC, and not as duly authorized agents of respondent EC; a board
resolution evincing the grant of such authority is needed to bind EC to any agreement regarding the sale of the subject properties. Such
board resolution is not a mere formality but is a condition sine qua non to bind respondent EC. Admittedly, respondent ESAC owned
90% of the shares of stocks of respondent EC; however, the mere fact that a corporation owns a majority of the shares of stocks of
another, or even all of such shares of stocks, taken alone, will not justify their being treated as one corporation. 43

It bears stressing that in an agent-principal relationship, the personality of the principal is extended through the facility of the agent. In
so doing, the agent, by legal fiction, becomes the principal, authorized to perform all acts which the latter would have him do. Such a
relationship can only be effected with the consent of the principal, which must not, in any way, be compelled by law or by any court.44

The petitioners cannot feign ignorance of the absence of any regular and valid authority of respondent EC empowering Adams,
Glanville or Delsaux to offer the properties for sale and to sell the said properties to the petitioners. A person dealing with a known
agent is not authorized, under any circumstances, blindly to trust the agents; statements as to the extent of his powers; such person
must not act negligently but must use reasonable diligence and prudence to ascertain whether the agent acts within the scope of his
authority.45 The settled rule is that, persons dealing with an assumed agent are bound at their peril, and 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 prove it.46 In this case, the petitioners failed to discharge their burden; hence, petitioners are not entitled to
damages from respondent EC.
It appears that Marquez acted not only as real estate broker for the petitioners but also as their agent. As gleaned from the letter of
Marquez to Glanville, on February 26, 1987, he confirmed, for and in behalf of the petitioners, that the latter had accepted such offer to
sell the land and the improvements thereon. However, we agree with the ruling of the appellate court that Marquez had no authority to
bind respondent EC to sell the subject properties. A real estate broker is one who negotiates the sale of real properties. His business,
generally speaking, is only to find a purchaser who is willing to buy the land upon terms fixed by the owner. He has no authority to bind
the principal by signing a contract of sale. Indeed, an authority to find a purchaser of real property does not include an authority to sell.47

Equally barren of merit is petitioners’ contention that respondent EC is estopped to deny the existence of a principal-agency relationship
between it and Glanville or Delsaux. For an agency by estoppel to exist, the following must be established: (1) the principal manifested
a representation of the agent’s authority or knowlingly allowed the agent to assume such authority; (2) the third person, in good faith,
relied upon such representation; (3) relying upon such representation, such third person has changed his position to his detriment. 48 An
agency by estoppel, which is similar to the doctrine of apparent authority, requires proof of reliance upon the representations, and that,
in turn, needs proof that the representations predated the action taken in reliance. 49 Such proof is lacking in this case. In their
communications to the petitioners, Glanville and Delsaux positively and unequivocally declared that they were acting for and in behalf of
respondent ESAC.

Neither may respondent EC be deemed to have ratified the transactions between the petitioners and respondent ESAC, through
Glanville, Delsaux and Marquez. The transactions and the various communications inter se were never submitted to the Board of
Directors of respondent EC for ratification.

IN LIGHT OF ALL THE FOREGOING, the petition is DENIED for lack of merit. Costs against the petitioners.

SO ORDERED.

G.R. No. 174462, February 10, 2016

PHILIPPINE OVERSEAS TELECOMMUNICATIONS CORPORATION (POTC), PHILIPPINE COMMUNICATIONS


SATELLITE CORPORATION (PHILCOMSAT), Petitioners, v. SANDIGANBAYAN (3rd DIVISION), REPUBLIC OF
THE PHILIPPINES REPRESENTED BY PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT
(PCGG), Respondents.

DECISION

PEREZ, J.:

Before this Court is a Petition for Certiorari filed under Rule 65 of the Rules of Court, seeking to nullify the
Resolution1 of public respondent Sandiganbayan dated 20 October 2005 in Civil Case No. 0009, entitled "Republic of
the Philippines v. Jose L. Africa, Manuel H. Nieto, Jr., Ferdinand E. Marcos, Imelda R. Marcos, Ferdinand R. Marcos,
Jr., Roberto S. Benedicto, Juan Ponce Enrile, Potenciano Ilusorio" The assailed Resolution denied petitioners' Omnibus
Motion, which sought the lifting of the sequestration order issued by the Presidential Commission on Good
Government (PCGG) on Philippine Overseas Telecommunications Corporation (POTC) and Philippine Communications
Satellite Corporation (PHILCOMSAT).

The antecedent facts are as follows:

However whoever reads recent Philippine history, the EDSA People Power Revolution in February 1986 is a singular
political phenomenon. Unprecedented, unique, unnatural even, the revolution was unarmed. But it succeeded. The
unnatural means yielded results natural to a revolution. The vanquished and its acts had to yield to the victors and its
reactions. The new President Corazon Cojuangco Aquino, exercising revolutionary government powers issued
Executive Order Nos. 1 and 2, creating the PCGG to recover properties amassed by the unseated President Ferdinand
Edralin Marcos, Sr., his immediate family, relatives, and cronies, "by taking undue advantage of their public office
and/or using their powers, authority, influence, connections or relationship,"2 and to sequester and take over such
properties. The present litigation is one of the many offsprings of the revolutionary orders.

Pursuant to Executive Order Nos. 1 and 2, on 14 March 1986, then PCGG Commissioner Ramon A. Diaz issued a
letter3 directing Officer-In-Charge Carlos M. Ferrales to:

a. Sequester and immediately take over POTC and PHILCOMSAT among others, and

b. To freeze all withdrawals, transfers and/or remittances under any type of deposit accounts, trust
accounts or placements.
POTC is a private corporation, which is a main stockholder of PHILCOMSAT, a government-owned and controlled
corporation, which was established in 1966 and was granted a legislative telecommunications franchise by virtue of
Republic Act No. 5514, as amended by Republic Act No. 7949, to establish and operate international satellite
communication in the Philippines.

On 22 July 1987, the Office of the Solicitor General (OSG), on behalf of the Republic of the Philippines, filed a
Complaint for Reconveyance, Reversion, Accounting and Restitution, and Damages, docketed as Civil Case No. 0009,
against Jose L. Africa, Manuel H. Nieto, Jr., Ferdinand E. Marcos, Imelda R. Marcos, Ferdinand R. Marcos, Jr., Roberto
S. Benedicto, Juan Ponce Enrile, and Potenciano Ilusorio (collectively hereinafter referred to as "defendants"). The
Complaint averred the following:

(a) xxx through manipulations and dubious arrangements with officers and members of the Board of the National
Development Corporation (NDC), xxx purchased NDC's shareholdings in the Philippine Communications Satellite
Corporation (PHILCOMSAT), xxx under highly unconscionable terms and conditions manifestly disadvantageous
to Plaintiff and the Filipino people[;]

(b) xxx

(c) illegally manipulated, under the guise of expanding the operations of PHILCOMSAT, the purchase of major
shareholdings of Cable and Wireless Limited, a London-based telecommunication company, in Eastern
Telecommunications Philippines, Incorporated (ETPI), which shareholdings Defendants Roberto S. Benedicto,
Jose L. Africa and Manuel H. Nieto, Jr., by themselves and through corporations namely Polygon Investors and
Managers, Inc., Aeroco[m] Investors and Managers Inc. and Universal Molasses Corporation organized by them,
were beneficially held for themselves and for Defendants Ferdinand E. Marcos and Imelda R. Marcos;

(d) illegally effected, xxx contracts involving corporations which they owned and/or controlled, such as: The contract
between ETPI and Polygon Investors and Managers, Inc., thereby ensuring effective control of ETPI and
advancing Defendants' scheme to monopolize the telecommunications industry;

(e) acted in collaboration with each other as dummies, nominees and/or agents of Defendants Ferdinand E. Marcos,
Imelda R. Marcos and Ferdinand R. Marcos, Jr. in several corporations, such as, the Mid-Pasig Land Development
Corporation and Independent Realty Corporation which, through manipulations by said Defendants, appropriated
a substantial portion of the shareholdings in POTC-PHILCOMSAT held by the late Honorio Poblador, Jr., Jose
Valdez and Francisco Reyes, thereby further advancing Defendants' scheme to monopolize the
telecommunications industry;

(f) received improper payments such as bribes, kickbacks or commissions from an overprice in the purchase of
equipment for DOMSAT[.] [4

As alleged in the Complaint, through clever schemes, the wealth that should go to the coffers of the government,
which should be deemed acquired for the benefit of the Republic, went to the defendants in their own individual
accounts — some, however, through conduits or corporations. The property supposedly acquired illegally was
specifically set out in a list appended to the Complaint as Annex A. For instance, Jose L. Africa, one of the defendants,
allegedly channelled the ill-gotten wealth in shares of stock in twenty (20) corporations, to wit:

1. Security Bank and Trust Company


2. SBTC Trust, Class A, Account No. 2016
3. SBTC Trust, Class A, Account No. 2017
4. SBTC Trust, Class A, Account No. 2018
5. Oceanic Wireless Network, Inc.
6. Bukidnon Sugar [Milling] Co., Inc.
7. Domestic Satellite Phils., Inc.
8. Northern Lines, Inc.
9. Philippine Communications Satellite Corp.
10. Far East Managers and Investors, Inc.
11. Traders Royal Bank
12. Philippine Overseas Telecommunications Corp.
13. Eastern Telecommunications Philippines, Inc.
14. Polygon Investors & Managers, Inc.
15. Universal Molasses Corp.
16. Silangan Investors and Managers, Inc.
17. Masters Assets Corp., Class B
18. Gainful Assets Corp., Class B
19. Aerocom Investors and Managers, Inc.
20. Luzon Stevedoring Corp.
21. Amalgamated Motors (Philippines), Inc.
22. Philippine National Construction Corp.
23. Consolidated Tobacco Industries of the Philippines.5

Another defendant, Manuel H. Nieto, Jr., allegedly channelled ill-gotten wealth into shares of stock in fifteen (15)
corporations, namely:

1. Ozamis Agricultural Development, Inc.


2. Eastern Telecommunications Philippines, Inc.
3. Rang'ay Farms
4. Hacienda San Martin, Inc.
5. Domestic Satellite
6. Bukidnon Sugar Milling Co., Inc.
7. Sunnyday Farms Company Inc.
8. Silangan Investors & Managers, Inc.
9. Phil. Communications Satellite Corp.
10. Oceanic Wireless Network, Inc.
11. Integral Factors Corp.
12. Phil. Overseas Telecommunication[s] Corp.
13. Aerocom Investors and Managers, Inc.
14. Del Carmen Investments, Inc.
15. Polygon Ventures & Land Development Corp.6

As borne by the records,7 the following are the stockholdings in POTC of the defendants in Civil Case No. 0009:

1. (Estate of) Jose L. Africa 1

2. Manuel-H. Nieto, Jr. 107

3. Ferdinand and Imelda Marcos 08

4. Ferdinand Marcos, Jr. 09

5. (Estate of) Roberto Benedicto 464 (reverted to the Republic)

6. Juan Ponce Enrile 010

7. (Estate of) Potenciano Ilusorio 16 (reverted to the Republic)

Pursuant to its power to sequester and to avoid further dissipation of the sequestered properties, the PCGG appointed
a comptroller, who controlled the disbursement of funds of POTC and PHILCOMSAT. At the same time, in a
Memorandum11 by the PCGG dated 24 October 2000 to the Bangko Sentral ng Pilipinas (BSP), the PCGG informed the
BSP that in all cash withdrawals, transfer of funds, money market placements and disbursements of POTC and
PHILCOMSAT, the approval of the PCGG appointed comptroller is required. The Memorandum was to be disseminated
to all commercial banks and other non-bank financial institutions performing quasi-banking functions.

From Civil Case No. 0009 sprung other cases: (1) Injunction; (2) Mandamus; and (3) Approval of the Compromise
Agreement.

On 1 March 1991, POTC and PHILCOMSAT filed separate complaints for Injunction with the Sandiganbayan against the
Republic to nullify and lift the sequestration order issued against them for failure to file the necessary judicial action
against them within the period prescribed by the Constitution and to enjoin the PCGG from interfering with their
management and operation, which the Sandiganbayan granted on 4 December 1991 through a Resolution. 12

On 23 January 1995, however, this Court, in Republic v. Sandiganbayan (First Division), G.R. No. 96073, 240 SCRA
376, January 23, 1995, reversed the Sandiganbayan Resolution and ruled that the filing of Complaint for
Reconveyance, Reversion, Accounting and Restitution, and Damages, docketed as Civil Case No. 0009, was filed
within the required 6-month period.
Besides the complaint for Injunction, POTC also filed a complaint for Mandamus against the Republic before the
Sandiganbayan to compel the PCGG to return POTC's Stock and Transfer Book and Stock Certificate Booklets. The
case was docketed as Civil Case No. 0148.

On 13 May 1993, the Sandiganbayan granted the Mandamus, and the Decision became final and executory.

On 28 June 1996, Atty. Potenciano Ilusorio (Ilusorio), one of the defendants in the Civil Case No. 0009, entered into a
Compromise Agreement with the Republic. Out of 5,400 or 40% of the shares of stock of POTC in the names of Mid-
Pasig Land Development Corporation (MLDC) and Independent Realty Corporation (IRC), the government recovered
4,727 shares or 34.9% of the shares of stock. Ilusorio, on the other hand, retained 673 shares or 5% of the shares of
stock.

The Compromise Agreement was approved by the Sandiganbayan in an Order13 dated 8 June 1998.

In opposition to the Compromise Agreement, MLDC and IRC filed a Motion to Vacate the Compromise Agreement on
16 August and 2 October 1998, respectively, which was denied by the Sandiganbayan in a Resolution 14 dated 20
December 1999. In the same Resolution, the Sandiganbayan directed the Corporate Secretary of POTC to issue within
ten (10) days from receipt thereof, the corresponding Stock Certificate of the government. Pursuant to the Order,
4,727 or 34.9% shares of stock of POTC were transferred in the name of the Republic of the Philippines.

Aggrieved, the PCGG, MLDC, and IRC filed separate petitions before this Court to nullify the Order of the
Sandiganbayan approving the Compromise Agreement, which this Court, on 15 June 2005, declared valid in Republic
of the Phils. v. Sandiganbayan, G.R. No. 141796 and 141804. The Decision of the Court has long become final and
executory. The dispositive portion of the Decision reads:

Having been sealed with court approval, the Compromise Agreement has the force of res judicata between the parties
and should be complied with in accordance with its terms. Pursuant thereto, Victoria C. de los Reyes, Corporate
Secretary of the POTC, transmitted to Mr. Magdangal B. Elma, then Chief Presidential Legal Counsel and Chairman of
PCGG, Stock Certificate No. 131 dated January 10, 2000, issued in the name of the Republic of the Philippines, for
4,727 POTC shares. Thus, the Compromise Agreement was partly implemented.chanrobleslaw

WHEREFORE, the instant petitions are hereby DISMISSED.

SO ORDERED.15 (Citations omitted)

By virtue of the aforesaid Decision in Republic of the Phils, v. Sandiganbayan, POTC and PHILCOMSAT filed an
Omnibus Motion16 dated 28 February 2005, which sought to nullify and/or discharge the continued sequestration of
POTC and PHILCOMSAT and to declare null and void the PCGG Memorandum to the BSP dated 24 October 2000.

On 20 October 2005, the Sandiganbayan denied POTC and PHILCOMSAT's Omnibus Motion in the assailed
Resolution.17 The Motion for Reconsideration was likewise denied in a Resolution18 dated 2 August 2006.

Hence, the present Petition, which raises the following assignment of errors.

ASSIGNMENT OF ERRORS

(A)

The public respondent Sandiganbayan erred, and in fact, gravely abused its discretion amounting to lack or excess of
jurisdiction, when it ruled that the sequestration of POTC and PHILCOMSAT is still necessary under the present
circumstances.

(B)

The public respondent Sandiganbayan erred, and in fact, gravely abused its discretion amounting to lack or excess of
jurisdiction, when it ruled that the appointment of a PCGG fiscal agent in POTC and PHILCOMSAT is justified under the
present circumstances.

(C)

The public respondent Sandiganbayan erred, and in fact, [gravely] abused its discretion amounting to lack or excess
of jurisdiction, when it ruled that the sequestration order against the petitioners is valid despite clear fatal legal
infirmities thereto.19
Arguments of POTC and PHILCOMSAT

POTC and PHILCOMSAT aver that the Sandiganbayan committed grave abuse of discretion amounting to lack or in
excess of jurisdiction by affirming the continued sequestration of the shares, disregarding the final and executory
Decision and Resolution of the Sandiganbayan dated 15 June 2005 and 7 September 2005 in Republic of the Phils, v.
Sandiganbayan, which already ruled on the pwnership of the subject shares. In the aforesaid case, the Court upheld
the Compromise Agreement between the government and Ilusorio. As a consequence, the government is now the
undisputed owner of 34.9% of the shares of stock of the sequestered corporations. Pursuant to the final and
executory Decision of the Court, there is no longer need for the continued sequestration of POTC and PHILCOMSAT.
POTC and PHILCOMSAT cited the pronouncement of this Court in Bataan Shipyard and Engineering Co.,
Inc. (BASECO) v. PCGG, which held that, as the writ of sequestration is merely a conservatory measure, thus,
provisional and temporary in character, the final adjudication of the Court, which finally disposed the sequestered
shares, rendered the writ unnecessary.

The POTC and PHILCOMSAT aver that while the PCGG has the power to sequester, such power is merely provisional.
The POTC and PHILCOMSAT cite Executive Order No. 1, Section 3, which grants the PCGG the power to take over
sequestered properties provisionally, such that, after the sequestered properties have been finally disposed of by the
proper authorities, the writ shall be lifted.

Ruling of the Sandiganbayan

On the other hand, as it held, the Sandiganbayan posits that the sequestration of POTC and PHILCOMSAT should not
be lifted. The Sandiganbayan ruled in this wise:

Executive Order No. 1 declares that the sequestration of property the acquisition if which is suspect shall last until
the transactions leading to such acquisition can be disposed of by the appropriate authorities.xxx.

Also, this Court had already ruled in the Resolution dated April 1 2003 that there was prima facie evidence that the
herein defendants have ill-gotten wealth consisting of funds and properties and that POTC and PHILCOMSAT, among
others, were used in acquiring and concealing their ill-gotten wealth.20 (Emphasis supplied)

Hence, the main issue of whether or not the continued sequestration is necessary.

Our Ruling

We rule in favor of POTC and PHILCOMSAT.

First, the threshold issue of whether or not the failure to properly implead POTC and PHILCOMSAT as defendants in
Civil Case No. 0009 is a fatal jurisdictional error.

Section 26, Article XVIII of the Constitution mandates that if no judicial action has been filed within six (6) months
after the ratification of the 1987 Constitution,21 the writ of sequestration shall automatically be lifted. In the case at
bar, there was no judicial action filed against POTC and PHILCOMSAT. There has never been any appropriate judicial
action for reconveyance or recovery ever instituted by the Republic against POTC and PHILCOMSAT.

A perusal of the instant Complaint, docketed as Civil Case No. 0009 dated 22 July 1987, reveals that it was filed
against private individuals, namely, Jose L. Africa, Manuel H. Nieto, Jr., Ferdinand E. Marcos, Imelda R. Marcos,
Ferdinand R. Marcos, Jr., Roberto S. Benedicto, Juan Ponce Enrile, Potenciano Ilusorio. 22 Nowhere was POTC and
PHILCOMSAT impleaded in the Complaint.

The facts surrounding the present case square with those in PCGG v. Sandiganbayan (PCGG).23 In PCGG,the
complaint was filed against private individuals, Nieto and Africa, who are shareholders in Aerocom. The Court ruled
that the failure to implead Aerocom, the corporation, violated the fundamental principle that a corporation's legal
personality is distinct and separate from its stockholders, and that mere annexation to the list of corporations does
not suffice. In the same manner as PCGG, in the case at bar, the Complaint was filed only against POTC and
PHILCOMSAT's stockholders, who are private individuals. Similarly, POTC and PHILCOMSAT were also merely annexed
to the list of corporations and were not properly impleaded in the case. The suit was against its individual
shareholders, herein respondents, Jose L. Africa, Manuel H. Nieto, Jr., Ferdinand E. Marcos, Imelda R. Marcos,
Ferdinand R. Marcos, Jr., Roberto S. Benedicto, Juan Ponce Enrile, and Potenciano Ilusorio.

Failure to implead POTC and PHILCOMSAT is a violation of the fundamental principle that a corporation has a legal
personality distinct and separate from its stockholders;24 that, the filing of a complaint against a stockholder is
not ipso facto a complaint against the corporation. Our pronouncement in Aerocom is apt:

There is no existing sequestration to talk about in this case, as the writ issued against Aerocom, to repeat, is invalid
for reasons hereinbefore stated. Ergo, the suit in Civil Case No. 0009 against Mr. Nieto and Mr. Africa as
shareholders in Aerocom is not and cannot ipso facto be a suit against the unimpleaded Aerocom itself
without violating the fundamental principle that a corporation has a legal personality distinct and
separate from its stockholders. Such is the ruling laid down in PCGG v. Interco reiterated anew in a case of more
recent vintage - Republic v. Sandiganbayan, Sipalay Trading Corp. and Allied Banking Corp. where this Court,
speaking through Mr. Justice Ricardo J. Francisco, hewed to the lone dissent of Mr. Justice Teodoro R. Padilla in the
very same Republic v. Sandiganbayan case herein invoked by the PCGG, to wit:

xxxx. (Emphasis supplied, citations omitted)

The basic tenets of fair play and principles of justice dictate that a corporation, as a legal entity distinct and separate
from its stockholders, must be impleaded as defendants, giving it the opportunity to be heard. The failure to properly
implead POTC and PHILCOMSAT not only violates the latters' legal personality, but is repugnant on POTC's and
PHILCOMSAT's right to due process. "[F]ailure to implead these corporations as defendants and merely annexing a list
of such corporations to the complaints is a violation of their right to due process for it would in effect be disregarding
their distinct and separate personality without a hearing."25 As already settled, a suit against individual stockholders is
not a suit against the corporation.

Proceeding from the foregoing, as POTC and PHILCOMSAT were not impleaded, there is no longer any existing
sequestration on POTC and PHILCOMSAT.26 The sequestration order over POTC and PHILCOMSAT was automatically
lifted six (6) months after the ratification of the 1987 Constitution on 2 February 1987 for failure to implead POTC and
PHILCOMSAT in Civil Case No. 0009 before the Sandiganbayan or before any court for that matter.27 To recite Section
26, Article XVIII of the Constitution, if no judicial action has been filed within six (6) months after the ratification of
the 1987 Constitution, the writ of sequestration shall automatically be lifted. Note must be made of the fact that we
do not here touch our previous holding that Civil Case No. 0009 was filed within the 6-month period. We now say that
such notwithstanding, and as shown by the facts on record, the POTC and PHILCOMSAT were not impleaded in the
Civil Case.

II

For one more reason should this Petition be granted. This concerns the shares in petitioner corporations of Potenciano
Ilusorio covered by the Compromise Agreement entered into between Ilusorio and PCGG, which was upheld by the
Court in Republic of the Phils, v. Sandiganbayan, the decision in which is now final and executory.

a. Sequestration is merely provisional

To effectively recover all ill-gotten wealth amassed by former President Marcos and his cronies, the President granted
the PCGG, among others, power and authority to sequester, provisionally take over or freeze suspected ill-gotten
wealth. The subject of the present case is the extent of PCGG's power to sequester.

Sequestration is- the means to place or cause to be placed under the PCGG's possession or control properties, building
or office, including business enterprises and entities, for the purpose of preventing the destruction, concealment or
dissipation of, and otherwise conserving and preserving the same until it can be determined through appropriate
judicial proceedings, whether the property was in truth "ill-gotten."28

However, the power of the PCGG to sequester is merely provisional.29 None other than Executive Order No. 1, Section
3(c) expressly provides for the provisional nature of sequestration, to wit:

c) To provisionally take over in the public interest or to prevent its disposal or dissipation, business enterprises and
properties taken over by the government of the Marcos Administration or by entities or persons close to former
President Marcos, until the transactions leading to such acquisition by the latter can be disposed of by the appropriate
authorities.30 (Emphasis supplied).

In the notable case of Bataan Shipyard & Engineering Co., Inc. (BASECO) v. PCGG,31 the Court clearly pronounced
that sequestration is provisional, that such sequestration shall last "until the transactions leading to such acquisition
xxx can be disposed of by the appropriate authorities."32

Sequestration is akin to the provisional remedy of preliminary attachment, or receivership.33 Similarly, in attachment,
the property of the defendant is seized as a security for the satisfaction of any judgment that may be obtained, and
not disposed of, or dissipated, or lost intentionally or otherwise, pending litigation.34 In a receivership, the property is
placed in the possession and control of a receiver appointed by the court, who shall conserve the property pending
final determination of ownership or right of possession of the parties.35 In sequestration, the same principle holds
true. The sequestered properties are placed under the control of the PCGG, subject to the final determination of
whether the property was in truth ill-gotten. We reiterate the disquisition of this Court in BASECO:

By the clear terms of the law, the power of the PCGG to sequester property claimed to be "ill-gotten" means to place
or cause to be placed under its possession or control said property, or any building or office wherein any such
property and any records pertaining thereto may be found, including "business enterprises and entities," — for the
purpose of preventing the destruction, concealment or dissipation of, and otherwise conserving and preserving, the
same — until it can be determined, through appropriate judicial proceedings, whether the property was in
truth "ill- gotten," i.e., acquired through or as a result of improper or illegal use of or the conversion of funds
belonging to the Government or any of its branches, instrumentalities, enterprises, banks or financial institutions, or
by taking undue advantage of official position, authority relationship, connection or influence, resulting in unjust
enrichment of the ostensible owner and grave damage and prejudice to the State, xxx.36 (Emphasis supplied, citations
omitted)

Sequestration is a conservatory writ,37 which purpose is to preserve properties in custodia legis, lest the dissipation
and concealment of the "ill-gotten" wealth the former President Marcos and his allies may resort to, pending the final
disposition of the properties.38 It is to prevent the disappearance or dissipation pending adjudgment of whether the
acquisition thereof by the apparent owner was attended by some vitiating anomaly or attended by some illegal
means.39 Thus by no means is it permanent in character. Upon the final disposition of the sequestered properties, the
sequestration is rendered functus officio.

b. Ownership of the sequestered properties


have already been finally adjudged

As sequestration is a provisional remedy, a transitional state of affairs, in order to prevent the disappearance or
dissipation of the property pending the final disposition of the property, the ultimate purpose of sequestration is to
bring an intended permanent effect while the PCGG investigates in pursuit of a judicial proceeding — to dispose of the
sequestered properties. Tersely put, the ultimate purpose of sequestration is to recover the sequestered properties in
favor of the government in case they turn out to be ill-gotten. This function to dispose of the property is reserved to
the Sandiganbayan. Until the Sandiganbayan determines whether the property was in truth and in fact "ill- gotten",
the sequestration shall subsist. In case of a finding that the sequestered properties are ill-gotten, the property shall be
returned to the lawful owner, to the people, through the government; otherwise, the sequestered property shall be
returned to the previous owner.

Clearly, the purpose of sequestration is to take control until the property is finally disposed of by the proper
authorities. However, when such property has already been disposed of, such that the owner has already been
adjudged by the Court, must the sequestration still subsist?

In the case at bar, the 34.9% ownership of the sequestered property has been finally adjudged; the ultimate purpose
of sequestration was already accomplished when the ownership thereof was adjudged to the government by this Court
in Republic of the Phils. v. Sandiganbayan. Moreover, the said shares in the ownership of the sequestered properties
have reverted to the Government. The government now owns 4,727 shares or 34.9% of the sequestered corporations.

As the sequestered property has already been disposed, the ultimate purpose of sequestration has already been
attained; the evil sought to be prevented is no longer present. Evidently, the sequestered property which was already
returned to the government cannot anymore be dissipated or concealed. Otherwise stated, the sequestered properties
need no longer be subject of reversion proceedings because they have already reverted back to the government.
Thus, as the sequestration is rendered functus officio, it is merely ministerial upon the Sandiganbayan to lift the same.

In fact, on 4 November 2010, the Department of Justice (DOJ), which has supervision over the PCGG, acknowledged
the need to lift the writ of sequestration in the DOJ Memorandum LML-M-4K10-368.40 The pertinent portion of the DOJ
Memorandum reads:

It bears stressing that the PCGG, which is now under the administrative supervision of this Department pursuant to
Executive Order No. 643 s. 2007, has lost "authority" over the shares of the Republic in POTC. This is due to the fact
that in PCGG Resolution No. 2007-024 dated 4 September 2007, it was resolved that the 4,727 shares of stock of
POTC, which is under the name of the Republic of the Philippines, be now transferred to the Department of Finance
(DOF) for disposition, xxx. (Boldface omitted)

xxxx

In view of the foregoing, you are hereby directed to immediately implement PCGG 'Resolution No. 2007-024 by
immediately transferring to the DOF, for its proper disposition, POTC Stock Certificate No. 131. Corollary to this is
the lifting of the sequestration orders, if any, that covers the 4,727 shares of stock of the Republic in
POTC.xxx41. (Emphasis supplied)

Quite telling is this Court's unequivocal pronouncement in a rather recent case of Palm Avenue Holding Co., Inc. v.
Sandiganbayan,42 which involved very similar factual antecedents to those pertaining to petitioners POTC and
PHILCOMSAT.

"Section 26, Article XVIII of the 1987 Constitution provides: xxxx

A sequestration or freeze order shall be issued only upon showing of a prima facie case. The order and the list of the
sequestered of frozen properties shall forthwith be registered with the proper court. For orders issued before the
ratification of this Constitution, the corresponding judicial action or proceeding shall be filed within six months from its
ratification. For those issued after such ratification, the judicial action or proceeding shall be commenced within six
months from the issuance thereof.

The sequestration or freeze order is deemed automatically lifted if no judicial action or proceeding is commenced as
herein provided.

The aforesaid provision mandates the Republic to file the corresponding judicial action or proceedings within a six-
month period (from its ratification on February 2, 1987) in order to maintain sequestration, non-compliance with
which would result in the automatic lifting of the sequestration order. The Court's ruling in Presidential Commission on
Good Government v. Sandiganbayan, which remains good law, reiterates the necessity of the Republic to actually
implead corporations as defendants in the complaint, out of recognition for their distinct and separate personalities,
failure to do so would necessarily be denying such entities their right to due process. Here, the writ of sequestration
issued against the assets of the Palm Companies is not valid because the suit in Civil Case No. 0035 against Benjamin
Romualdez as shareholder in the Palm Companies is not a suit against the latter. The Court has held, contrary to the
assailed Sandiganbayan Resolution in G.R. No. 173082, that failure to implead these corporations as defendants and
merely annexing a list of such corporations to the complaints is a violation of their right to due process for it would be,
in effect, disregarding their distinct and separate personality without a hearing. Here, the Palm Companies were
merely mentioned as Item Nos. 47 and 48, Annex A of the Complaint, as among the corporations where defendant
Romualdez owns shares of stocks. Furthermore, while the writ of sequestration was issued on October 27, 1986, the
Palm Companies were impleaded in the case only in 1997, or already a decade from the ratification of the Constitution
in 1987, way beyond the prescribed period.

The argument that the beneficial owner of these corporations was, anyway, impleaded as party-defendant can only be
interpreted as a tacit admission of the failure to file the corresponding judicial action against said corporations
pursuant to the constitutional mandate. Whether or not the impleaded defendant in Civil Case No. 0035 is indeed the
beneficial owner of the Palm Companies is a matter which the PCGG merely assumes and still has to prove in said
case.

The sequestration order issued against the Palm Companies is therefore deemed automatically lifted due
to the failure of the Republic to commence the proper judicial action or to implead them therein within the
period under the Constitution. However, the lifting of the writ of sequestration will not necessarily be fatal to the
main case since the same does not ipso facto mean that the sequestered properties are, in fact, not illgotten. The
effect of the lifting of the sequestration will merely be the termination of the government's role as conservator. In
other words, the PCGG may no longer exercise administrative or housekeeping powers, and its nominees may no
longer vote the sequestered shares to enable them to sit in the corporate board of the subject company. 43 (Emphasis
supplied, citations omitted)

The glaring similarity in the circumstances attendant in the case involving Palm Companies with the situation of
petitioners POTC and PHILCOMSAT compels us to rule in this case as we did in Palm case.

On a final note, while sequestration is the means to revert the amassed ill-gotten wealth back to the coffers of our
government, we must still safeguard the protection of property rights from overzealousness. Sequestration as
statutorily and constitutionally recognized is not permanent. It must be lifted when the law and proven facts warrant,
or when the purpose has been accomplished.chanrobleslaw

WHEREFORE, the Petition is GRANTED. The assailed Resolution issued by the Sandiganbayan dated 20 October
2005 and 2 August 2006 are REVERSED. The writ of sequestration issued against petitioner POTC and PHILCOMSAT
is hereby declared LIFTED six (6) months after the ratification of the 1987 Constitution on 2 February 1987.

SO ORDERED.cralawlawlibr
GENERAL CREDIT CORPORATION (now PENTA CAPITAL FINANCE CORPORATION), Petitioner,
vs.
ALSONS DEVELOPMENT and INVESTMENT CORPORATION and CCC EQUITY CORPORATION,Respondents.

DECISION

GARCIA, J.:

In this petition for review on certiorari under Rule 45 of the Rules of Court, petitioner General Credit Corporation, now known as Penta
Capital Finance Corporation, seeks to annul and set aside the Decision 1 and Resolution2dated April 11, 2002 and August 20, 2002,
respectively, of the Court of Appeals (CA) in CA-G.R. CV No. 31801,affirming the November 8, 1990 decision of the Regional Trial
Court (RTC) of Makati City in its Civil Case No. 12707, an action for a sum of money thereat instituted by the herein respondent Alsons
Development and Investment Corporation against the petitioner and respondent CCC Equity Corporation.

The facts:

Shortly after its incorporation in 1957 as a finance and investment company, petitioner General Credit Corporation (GCC, for short),
then known as Commercial Credit Corporation (CCC), established CCC franchise companies in different urban centers of the
country.3 In furtherance of its business, GCC had, as early as 1974, applied for and was able to secure license from the then Central
Bank (CB) of the Philippines and the Securities and Exchange Commission (SEC) to engage also in quasi-banking activities.4 On the
other hand, respondent CCC Equity Corporation (EQUITY, for brevity) was organized in November 1994 by GCC for the purpose of,
among other things, taking over the operations and management of the various franchise companies. At a time material hereto,
respondent Alsons Development and Investment Corporation (ALSONS, hereinafter) and Conrado, Nicasio, Editha and Ladislawa, all
surnamed Alcantara, and Alfredo de Borja (hereinafter the Alcantara family, for convenience), each owned, just like GCC, shares in the
aforesaid GCC franchise companies, e.g., CCC Davao and CCC Cebu.

In December 1980, ALSONS and the Alcantara family, for a consideration of Two Million (P2,000,000.00) Pesos, sold their
shareholdings – a total of 101,953 shares, more or less – in the CCC franchise companies to EQUITY.[5]On January 2, 1981, EQUITY
issued ALSONS et al., a "bearer" promissory note for P2,000,000.00 with a one-year maturity date, at 18% interest per annum, with
provisions for damages and litigation costs in case of default.6

Some four years later, the Alcantara family assigned its rights and interests over the bearer note to ALSONS which thenceforth became
the holder thereof.7 But even before the execution of the assignment deal aforestated, letters of demand for interest payment were
already sent to EQUITY, through its President, Wilfredo Labayen, who pleaded inability to pay the stipulated interest, EQUITY no longer
then having assets or property to settle its obligation nor being extended financial support by GCC.

What happened next, as narrated in the assailed Decision of the CA, may be summarized, as follows:

1. On January 14, 1986, before the RTC of Makati, ALSONS, having failed to collect on the bearer note aforementioned, filed
a complaint for a sum of money8 against EQUITY and GCC. The case, docketed as Civil Case No. 12707, was eventually
raffled to Branch 58 of the court. As stated in par. 4 of the complaint, GCC is being impleaded as party-defendant for any
judgment ALSONS might secure against EQUITY and, under the doctrine of piercing the veil of corporate fiction, against GCC,
EQUITY having been organized as a tool and mere conduit of GCC.

2. Answering with a cross-claim against GCC, EQUITY stated by way of special and affirmative defenses that it (EQUITY):

a) was purposely organized by GCC for the latter to avoid CB Rules and Regulations on DOSRI (Directors, Officers,
Stockholders and Related Interest) limitations, and that it acted merely as intermediary or bridge for loan transactions
and other dealings of GCC to its franchises and the investing public; and

b) is solely dependent upon GCC for its funding requirements, to settle, among others, equity purchases made by
investors on the franchises; hence, GCC is solely and directly liable to ALSONS, the former having failed to provide
…EQUITY the necessary funds to meet its obligations to ALSONS.

3. GCC filed its ANSWER to Cross-claim, stressing that it is a distinct and separate entity from EQUITY and alleging, in
essence that the business relationships with each other were always at arm’s length. And following the denial of its motion to
dismiss ALSONS’ complaint, on the ground of lack of jurisdiction and want of cause of action, GCC filed its Answer thereto
and set up affirmative defenses with counterclaim for exemplary damages and attorney’s fees.

Issues having been joined, trial ensued. Presented by ALSONS, but testifying as adverse witnesses, were CB and GCC officers.
Among other things, ALSONS’ evidence, which included the EQUITY-issued "bearer" promissory note marked as Exhibit "K" and over
sixty (60) other marked and subsequently admitted documents, 9 were to the effect that five (5) incorporators, each
contributing P100,000.00 as the initial paid up capital of the company, organized EQUITY to manage, as it did manage, various GCC
franchises through management contracts. Before EQUITY’s incorporation, however, GCC was already into the financing business as it
was in fact managing and operating various CCC franchises. Presented in evidence, too, was the September 29, 1982 letter-reply of
one G. Villanueva, then GCC President, to EQUITY President Wilfredo Labayen, bearing on the sale of EQUITY shares to third parties,
part of the proceeds of which the Alcantaras wanted applied to liquidate the promissory note in question. In said letter, Mr. Villanueva
explained that the GCC Board denied the Alcantaras’ request to be paid out of such proceeds, but nonetheless authorized EQUITY to
pay them interest out of EQUITY’s operation income, in preference over what was due GCC. 10

Albeit EQUITY presented its president, it opted to adopt the testimony of some of ALSONS’ witnesses, inclusive of the documentary
exhibits testified to by each of them, as its evidence.

For its part, GCC called only Wilfredo Labayen to testify. It stuck to its underlying defense of separateness and presented documentary
evidence detailing the organizational structures of both GCC and EQUITY. And in a bid to negate the notion that it was conducting its
business illegally, GCC presented CB and SEC-issued licenses authoring it to engage in financing and quasi-banking activities. It also
adduced evidence to prove that it was never a party to any of the actionable documents ALSONS and its predecessors-in-interest had
in their possession and that the November 27, 1985 deed of assignment of rights over the promissory note was unenforceable.

Eventually, the trial court, on its finding that EQUITY was but an instrumentality or adjunct of GCC and considering the legal
consequences and implications of such relationship, came out with its decision on November 8, 1990, rendering judgment for ALSONS,
to wit:

WHEREFORE, the foregoing premises considered, judgment is hereby rendered in favor of plaintiff [ALSONS] and against the
defendants [EQUITY and GCC] who are hereby ordered, jointly and severally, to pay plaintiff:

1. the principal sum of Two Million Pesos (P2,000,000.00) together with the interest due thereon at the rate of eighteen
percent (18%) annually computed from Jan. 2, 1981 until the obligation is fully paid;

2. liquidated damages due thereon equivalent to three percent (3%) monthly computed from January 2, 1982 until the
obligation is fully paid;

3. attorney’s fees in an amount equivalent to twenty four percent (24%) of the total obligation due; and

4. the costs of suit.

IT IS SO ORDERED. (Words in brackets added.)

Therefrom, GCC went on appeal to the CA where its appellate recourse was docketed as CA-G.R. CV No. 31801, ascribing to the trial
court the commission of the following errors:

1. In holding that there is a "Parent-Subsidiary" corporate relationship between EQUITY and GCC;

2. In not holding that EQUITY and GCC are distinct and separate corporate entities;

3. In applying the doctrine of "Piercing the Veil of Corporate Fiction" in the case at bar; and

4. In not holding ALSONS in estoppel to question the corporate personality of EQUITY.

On April 11, 2002, the appellate court rendered the herein assailed Decision, 11 affirming that of the trial court, thus:

WHEREFORE, premises considered, the Decision of the Regional Trial Court, Branch 58, Makati in Civil Case No. 12707 is hereby
AFFIRMED.

SO ORDERED.

In time, GCC moved for reconsideration followed by a motion for oral argument, but both motions were denied by the CA in its equally
assailed Resolution of August 20, 2002.12

Hence, GCC’s present recourse anchored on the following arguments, issues and/or submissions:

1. The motion for oral argument with motion for reconsideration and its supplement were perfunctorily denied by the CA
without justifiable basis;

2. There is absolutely no basis for piercing the veil of corporate fiction;


3. Respondent Alsons is not a real party-in-interest as the promissory note payable to bearer subject of the collection suit is
but a simulated document and/or refers to another party. Moreover, the subject promissory note is not admissible in evidence
because it has not been duly authenticated and it is an altered document;

4. The fact of full payment stated in the ten (10) deeds of sale of the shares of stock is conclusive on the sellers, and by the
patrol evidence rule, the alleged fact of its non-payment cannot be introduced in evidenced; and

5. The counter-claim filed by GCC against Alsons should be granted in the interest of justice.

The petition and the arguments and/or issues holding it together are without merit. The desired reversal of the assailed decision and
resolution of the appellate court is accordingly DENIED.

Instead of raising distinctly formulated questions of law, as is expected of one seeking a review under Rule 45 of the Rules of Court of a
final CA judgment,13 petitioner GCC starts off by voicing disappointment over the "perfunctory" denial by the CA of its twin motions for
reconsideration and oral argument. Petitioner, to be sure, cannot plausibly expect a reversal action premised on the cursory way its
motions were denied, if such indeed were the case. Such manner of denial, while perhaps far from ideal, is not even a recognized
ground for appeal by certiorari, unless a denial of due process ensues, which is not the case here. And lest it be overlooked, the CA
prefaced its assailed denial resolution with the clause: "[F]inding no reversible error committed to warrant the modification and/or
reversal of the April 11, 2002 Decision," suggesting that the appellate court gave the petitioner’s motion for reconsideration the attention
it deserved. At the very least, the petitioner was duly apprised of the reasons why reconsideration could not be favorably considered.
An extended resolution was not really necessary to dispose of the motion for reconsideration in question.

Petitioner’s lament about being deprived of procedural due process owing to the denial of its motion for oral argument is simply
specious. Under the CA Internal Rules, the appellate court may tap any of the three (3) alternatives therein provided to aid the court in
resolving appealed cases before it. It may rely on available records alone, require the submission of memoranda or set the case for oral
argument. The option the Internal Rules thus gives the CA necessarily suggests that the appellate court may, at its sound discretion,
dispense with a tedious oral argument exercise. Rule VI, Section 6 of the 2002 Internal Rules of the CA, provides:

SEC. 6 Judicial Action on Certain Petitions.- (a) In petitions for review, after the receipt of the respondent’s comment on the petition, …
the Court [of Appeals] may dismiss the petition if it finds the same to be patently without merit …, otherwise, it shall give due course to
it.

xxx xxx xxx

If the petition is given due course, the Court may consider the case submitted for decision or require the parties to submit their
memorandum or set the case for oral argument. xxx. After the oral argument or upon submission of the memoranda … the case shall
be deemed submitted for decision.

In the case at bench, records reveal that the appellate court, in line with the prescription of its own rules, required the parties to just
submit, as they did, their respective memoranda to properly ventilate their separate causes. Under this scenario, the petitioner cannot
be validly heard, having been deprived of due process.

Just like the first, the last three (3) arguments set forth in the petition will not carry the day for the petitioner. In relation therewith, the
Court notes that these arguments and the issues behind them were not raised before the trial court. This appellate maneuver cannot be
allowed. For, well-settled is the rule that issues or grounds not raised below cannot be resolved on review in higher courts. 14 Springing
surprises on the opposing party is antithetical to the sporting idea of fair play, justice and due process; hence, the proscription against a
party shifting from one theory at the trial court to a new and different theory in the appellate level. On the same rationale, points of law,
theories, issues not brought to the attention of the lower court or, in fine, not interposed during the trial cannot be raised for the first time
on appeal.15

There are, to be sure, exceptions to the rule respecting what may be raised for the first time on appeal. Lack of jurisdiction over when
the issues raised present a matter of public policy16 comes immediately to mind. None of the well-recognized exceptions obtain in this
case, however.

Lest it be overlooked vis-à-vis the same last three arguments thus pressed, both the trial court and the CA, based on the evidence
adduced, adjudged the petitioner and respondent EQUITY jointly and severally liable to pay what respondent ALSONS is entitled to
under the "bearer" promissory note. The judgment argues against the notion of the note being simulated or altered or that respondent
ALSONS has no standing to sue on the note, not being the payee of the "bearer" note. For, the declaration of liability not only
presupposes the duly established authenticity and due execution of the promissory note over which ALSONS, as the holder in due
course thereof, has interest, but also the untenability of the petitioner’s counterclaim for attorney’s fees and exemplary damages against
ALSONS. At bottom, the petitioner predicated such counter-claim on the postulate that respondent ALSONS had no cause of action,
the supposed promissory note being, according to the petitioner, either a simulated or an altered document.
In net effect, the definitive conclusion of the appellate court – affirmatory of that of the trial court – was that the bearer promissory note
(Exh. "K") was a genuine and authentic instrument payable to the holder thereof. This factual determination, as a matter of long and
sound appellate practice, deserves great weight and shall not be disturbed on appeal, save for the most compelling reasons, 17 such as
when that determination is clearly without evidentiary support or when grave abuse of discretion has been committed. 18 This is as it
should be since the Court, in petitions for review of CA decisions under Rule 45 of the Rules of Court, usually limits its inquiry only to
questions of law. Stated otherwise, it is not the function of the Court to analyze and weigh all over again the evidence or premises
supportive of the factual holdings of lower courts.19

As nothing in the record indicates any of the exceptions adverted to above, the factual conclusion of the CA that the P2 Million
promissory note in question was authentic and was issued at the first instance to respondent ALSONS and the Alcantara family for the
amount stated on its face, must be affirmed. It should be stressed in this regard that even the issuing entity, i.e., respondent EQUITY,
never challenged the genuineness and due execution of the note.

This brings us to the remaining but core issue tendered in this case and aptly raised by the petitioner, to wit: whether there is absolutely
no basis for piercing GCC’s veil of corporate identity.

A corporation is an artificial being vested by law with a personality distinct and separate from those of the persons composing it20 as
well as from that of any other entity to which it may be related. 21 The first consequence of the doctrine of legal entity of the separate
personality of the corporation is that a corporation may not be made to answer for acts and liabilities of its stockholders or those of legal
entities to which it may be connected or vice versa. 22

The notion of separate personality, however, may be disregarded under the doctrine – "piercing the veil of corporate fiction" – as in fact
the court will often look at the corporation as a mere collection of individuals or an aggregation of persons undertaking business as a
group, disregarding the separate juridical personality of the corporation unifying the group. Another formulation of this doctrine is that
when two (2) business enterprises are owned, conducted and controlled by the same parties, both law and equity will, when necessary
to protect the rights of third parties, disregard the legal fiction that two corporations are distinct entities and treat them as identical or
one and the same.23

Whether the separate personality of the corporation should be pierced hinges on obtaining facts, appropriately pleaded or proved.
However, any piercing of the corporate veil has to be done with caution, albeit the Court will not hesitate to disregard the corporate veil
when it is misused or when necessary in the interest of justice. 24 After all, the concept of corporate entity was not meant to promote
unfair objectives.

Authorities are agreed on at least three (3) basic areas where piercing the veil, with which the law covers and isolates the corporation
from any other legal entity to which it may be related, is allowed.25 These are: 1) defeat of public convenience,26 as when the corporate
fiction is used as vehicle for the evasion of an existing obligation; 27 2) fraud cases or when the corporate entity is used to justify a
wrong, protect fraud, or defend a crime;28 or 3) alter ego cases, where a corporation is merely a farce since it is a mere alter ego or
business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it
merely an instrumentality, agency, conduit or adjunct of another corporation. 29

The CA found valid grounds to pierce the corporate veil of petitioner GCC, there being justifiable basis for such action. When the
appellate court spoke of a justifying factor, the reference was to what the trial court said in its decision, namely: the existence of "certain
circumstances [which], taken together, gave rise to the ineluctable conclusion that … [respondent] EQUITY is but an instrumentality or
adjunct of [petitioner] GCC."

The Court agrees with the disposition of the appellate court on the application of the piercing doctrine to the transaction subject of this
case. Per the Court’s count, the trial court enumerated no less than 20 documented circumstances and transactions, which, taken as a
package, indeed strongly supported the conclusion that respondent EQUITY was but an adjunct, an instrumentality or business conduit
of petitioner GCC. This relation, in turn, provides a justifying ground to pierce petitioner’s corporate existence as to ALSONS’ claim in
question. Foremost of what the trial court referred to as "certain circumstances" are the commonality of directors, officers and
stockholders and even sharing of office between petitioner GCC and respondent EQUITY; certain financing and management
arrangements between the two, allowing the petitioner to handle the funds of the latter; the virtual domination if not control wielded by
the petitioner over the finances, business policies and practices of respondent EQUITY; and the establishment of respondent EQUITY
by the petitioner to circumvent CB rules. For a perspective, the following are some relevant excerpts from the trial court’s decision
setting forth in some detail the tipping circumstances adverted to therein:

It must be noted that as characterized by their business relationship, [respondent] EQUITY and [petitioner] GCC had common directors
and/or officers as well as stockholders. This is revealed by the proceedings recorded in SEC Case No. 25-81 entitled "Avelina Ramoso,
et al., vs. GCC, et al., where it was established, thru the testimony of EQUITY’s own President … that more than 90% of the
stockholders of … EQUITY were also stockholders of … GCC ….. Disclosed likewise is the fact that when [EQUITY’s President]
Labayen sold the shareholdings of EQUITY in said franchise companies, practically the entire proceeds thereof were surrendered to
GCC, and not received by EQUITY (EXHIBIT "RR") xxx.

It was likewise shown by a preponderance of evidence that not only had …GCC financed … EQUITY and that the latter was heavily
indebted to the former but EQUITY was, in fact, a wholly owned subsidiary of …GCC. Thus, as affirmed by EQUITY’s President, … the
funds invested by EQUITY in the CCC franchise companies actually came from CCC Phils. or GCC (Exhibit "Y-5")…. that, as disclosed
by the Auditor’s report for 1982, past due receivables alone of GCC exceeded P101,000,000.00 mostly to GCC affiliates especially
CCC EQUITY. …; that [CB’s] Report of Examination dated July 14, 1977 shows that … EQUITY which has a paid-up capital of only
P500,000.00 was the biggest borrower of GCC with a total loan of P6.70 Million ….

xxx xxx xxx

It has likewise been amply substantiated by [respondent ALSONS’] evidence that not only did … GCC cause the incorporation of …
EQUITY, but, the latter had grossly inadequate capital for the pursuit of its line of business to the extent that its business affairs were
considered as GCC’s own business endeavors. xxx.

xxx xxx xxx

ALSONS has likewise shown …that the bonuses of the officers and directors of … EQUITY was based on its total financial
performance together with all its affiliates… both firms were sharing one and the same office when both were still operational … and
that the directors and executives of … EQUITY never acted independently … but took their orders from … GCC….

The evidence has also indubitably established that … EQUITY was organized by … GCC for the purpose of circumventing [CB] rules
and regulations and the Anti-Usury Law. Thus, as disclosed by the Advance Report … on the result of Central Bank’s Operations
Examination conducted on … GCC as of March 31, 1977 (EXHIBITS "FFF" etc.), the latter violated [CB] rules and regulations by : (a)
using as a conduit its non-quasi bank affiliates …. (b) issuing without recourse facilities to enable GCC to extend credit to affiliates like
… EQUITY which go beyond the single borrower’s limit without the need of showing outstanding balance in the book of accounts.
(Emphasis over words in brackets added.)

It bears to stress at this point that the facts and the inferences drawn therefrom, upon which the two (2) courts below applied the
piercing doctrine, stand, for the most part, undisputed. Among these is, to reiterate, the matter of EQUITY having been incorporated to
serve, as it did serve, as an instrumentality or adjunct of GCC. With the view we take of this case, GCC did not adduce any evidence,
let alone rebut the testimonies and documents presented by ALSONS, to establish the prevailing circumstances adverted to that
provided the justifying occasion to pierce the veil of corporate fiction between GCC and EQUITY. We quote the trial court:

Verily, indeed, as the relationships binding herein [respondent EQUITY and petitioner GCC] have been that of "parent-subsidiary
corporations" the foregoing principles and doctrines find suitable applicability in the case at bar; and, it having been satisfactorily and
indubitably shown that the said relationships had been used to perform certain functions not characterized with legitimacy, this Court …
feels amply justified to "pierce the veil of corporate entity" and disregard the separate existence of the percent (sic) and subsidiary the
latter having been so controlled by the parent that its separate identity is hardly discernible thus becoming a mere instrumentality or
alter ego of the former. Consequently, as the parent corporation, [petitioner] GCC maybe (sic) held responsible for the acts and
contracts of its subsidiary – [respondent] EQUITY - most especially if the latter (who had anyhow acknowledged its liability to ALSONS)
maybe (sic) without sufficient property with which to settle its obligations. For, after all, GCC was the entity which initiated and benefited
immensely from the fraudulent scheme perpetrated in violation of the law. (Words in parenthesis in the original; emphasis and
bracketed words added).

Given the foregoing considerations, it behooves the petitioner, as a matter of law and equity, to assume the legitimate financial
obligation of a cash-strapped subsidiary corporation which it virtually controlled to such a degree that the latter became its instrument or
agent. The facts, as found by the courts a quo, and the applicable law call for this kind of disposition. Or else, the Court would be
allowing the wrong use of the fiction of corporate veil.

WHEREFORE, the instant petition is DENIED and the appealed Decision and Resolution of the Court of Appeals are accordingly
AFFIRMED.

Costs against the petitioner.

SO ORDERED.

LIDDELL & CO., INC., Petitioner-Appellant, v. THE COLLECTOR OF INTERNAL REVENUE, Respondent-
Appellee.

Ozaeta, Lichauco & Picazo for Petitioner-Appellant.

Solicitor General for Respondent-Appellee.

SYLLABUS
1. JUDGES; DISQUALIFICATION; PARTICIPATION IN PRIOR PROCEEDINGS AS ADMINISTRATIVE OFFICIAL. — The
mere participation of a judge in prior proceeding relating to the subject in the capacity of an administrative official
does not disqualify him from acting as judge.

2. COURT OF TAX APPEALS; DECISION SIGNED AFTER 30 DAYS FROM SUBMISSION OF CASE, VALID. — The
requirement that cases brought before the Tax Court shall be decided within 30 days after the submission thereof for
decision is merely directory. Hence, decisions signed after the lapse of said period are valid.

3. CORPORATION LAW; WHEN CORPORATE FORM MAY BE IGNORED. — Where a corporation is a dummy and serves
no business purpose and is intended only as a blind, the corporate form may be ignored.

4. TAXATION; SALES TAX; WHEN TAXPAYER MAY NOT DENY TAX LIABILITY. — A taxpayer may not deny tax liability
on the ground that the sales were made through another and distinct corporation when it is proved that the latter is
virtually owned by the former or that they are practically one and the same corporation.

5. ID.; ID.; SURCHARGE WHEN NOT IMPOSABLE. — Where, as in the case at bar, the sales made by the taxpayer to
the corporation had been embodied in proper documents subject to inspection by the tax authorities, the return filed
on the basis of such sales and not on those to the public, cannot be said a false return and subject the taxpayer to a
surcharge. But penalty for late payment should be imposed.

6. ID.; ID.; DEFICIENCY SALES TAX, HOW COMPUTED. — Deficiency sales tax should be based on the selling price to
the public after deducting the tax paid on the original sales.

DECISION

BENGZON, C.J. :

Statement. This is an appeal from the decision of the Court of Tax Appeals imposing a tax deficiency liability of
P1,317,629.61 on Liddell & Co., Inc.

Said company lists down several issues which may be boiled to the following:chanrob1es virtual 1aw library

(a) Whether or not Judge Umali of the Tax Court below could validly participate in the making of the decision;

(b) Whether or not Liddell & Co. Inc., and the Liddell Motors Inc. are (practically) identical corporations, the latter
being merely the alter ego of the former;

(c) Whether or not, granting the identical nature of the corporations, the assessment of tax liability, including the
surcharge thereon, by the Court of Tax Appeals, is correct.

Undisputed Facts. The parties submitted a partial stipulation of facts, each reserving the right to present additional
evidence.

Said undisputed facts are substantially as follows:chanrob1es virtual 1aw library

The petitioner, Liddell & Co. Inc., (Liddell & Co. for short) is a domestic corporation established in the Philippines on
February 1, 1946, with an authorized capital of P100,000 divided into 1000 shares at P100 each. Of this authorized
capital, 196 shares valued at P19,600 were subscribed and paid by Frank Liddell while the other four shares were in
the name of Charles Kurz, E. J. Darras, Angel Manzano and Julian Serrano at one share each. Its purpose was to
engage in the business of importing and retailing Oldsmobile and Chevrolet passenger cars and GMC and Chevrolet
trucks.

On January 31, 1947, with the limited paid-in capital of P20,000, Liddell & Co. was able to declare a 90% stock
dividend after which declaration, Frank Liddell’s holdings in the company increased to 1,960 shares and the
employees, Charles Kurz, E.J. Darras, Angel Manzano and Julian Serrano at 10 shares each. The declaration of stock
dividend was followed by a resolution increasing the authorized capital of the company to P1,000,000 which the
Securities & Exchange Commission approved on March 3, 1947. Upon such approval, Frank Liddell subscribed to 3,000
additional shares, for which he paid into the corporation P300,000 so that he had in his own name 4,960 shares.

On May 24, 1947, Frank Liddell, on one hand and Messrs. Kurz, Darras, Manzano and Serrano on the other, executed
an agreement (Exhibit A) which was further supplemented by two other agreements (Exhibits B and C) dated May 24,
1947 and June 3, 1948, wherein Frank Liddell transferred (On June 7, 1948) to various employees of Liddell & Co.
shares of stock.

At the annual meeting of stockholders of Liddell & Co. held on March 9, 1948, a 100% stock dividend was declared,
thereby increasing the issued capital stock of said corporation to P1,000,000. The stockholders also approved a
resolution increasing the authorized capital stock from P1,000,000 to P3,000,000 which increase was duly approved
by the Securities and Exchange Commission on June 7, 1948. Frank Liddell subscribed to and paid 20% of the
increase of P400,000. He paid 25% thereof in the amount of P100,000 and the balance of P300,000 was merely
debited to Frank Liddell-Drawing Account and credited to Subscribed Capital Stock on December 31, 1948.

On March 8, 1949, stock dividends were again issued by Liddell & Co. and in accordance with the agreements,
Exhibits A, B, and C, the stocks of said company stood as follows:chanrob1es virtual 1aw library

Name No. of Shares Amount Percent

Frank Liddell 13,688 P1,368,800 72.00%

Irene Liddell 1 100 .01%

Mercedes Vecin 1 100 .01%

Charles Kurz 1,225 122,500 6.45%

E J. Darras 1,225 122,500 6.45%

Angel Manzano 1,150 115,000 6.06%

Julian Serrano 710 71,000 3.74%

E. Hasim 500 50,000 2.64%

G. W. Kernot 500 50,000 2.64%

——— ————— ————

19,000 P1,900,000 100.00%

===== ========= =======

On November 15, 1948, in accordance with a resolution of a special meeting of the Board of Directors of Liddell & Co.
stock dividends were again declared. As a result or said declaration and in accordance with the agreements, Exhibits,
A, B, and C, the stockholdings in the company appeared to be:chanrob1es virtual 1aw library

Name No. of Shares Amount Percent

Frank Liddell 19,738 P1,973,800 65.791%

Irene Liddell 1 100 .003%

Mercedes Vecin 1 100 .003%

Charles Kurz 2,215 221,500 7.381%

E.J. Darras 2,215 221,500 7.381%

Angel Manzano 1,810 181,000 6.031%

Julian Serrano 1,700 170,000 5.670%

E. Hasim 830 83,000 2.770%

Kernot 1,490 149,000 4.970%

—— ——— ———

30,000 P3,000,000 100.00%


===== ======== ======

On the basis of the agreement Exhibit A, (May, 1947) 55% of the earnings available for dividends accrued to Frank
Liddell although at the time of the execution of said instrument, Frank Liddell owned all of the shares in said
corporation. 45% accrued to the employees, parties thereto: Kurz 12-1/2%; Darras 12-1/2%; A. Manzano 12-1/2%
and Julian Serrano 7-1/2%. The agreement Exhibit A was also made retroactive to 1946. Frank Liddell reserved the
right to reapportion the 45% dividends pertaining to the employees in the future for the purpose of including such
other faithful and efficient employees as he may subsequently designate. (As a matter of fact, Frank Liddell did so
designate, two additional employees namely: E. Hasim and G. W. Kernot). It was for such inclusion of future faithful
employees that Exhibits B-1 and C were executed. As per Exhibit C, dated May 13, 1948, the 45% given by Frank
Liddell to his employees was reapportioned as follows: C. Kurz — 12 %; E. J. Darras — 12%; A. Manzano — 12%; J.
Serrano — 3-1/2%; G. W. Kernot — 2%.

Exhibit B contains the employees’ definition in detail of the manner by which they sought to prevent their
shareholdings from being transferred to others who may be complete strangers to the business of Liddell & Co.

From 1946 until November 22, 1948 when the purpose clause of the Articles of Incorporation of Liddell & Co. Inc.,
was amended so as to limit its business activities to importations of automobiles and trucks, Liddell & Co. was
engaged in business as an importer and at the same time retailer of Oldsmobile and Chevrolet passenger cars and
GMC and Chevrolet trucks.

On December 20, 1948, the Liddell Motors, Inc. was organized and registered with the Securities and Exchange
Commission with an authorized capital stock of P100,000 of which P20,000 was subscribed and paid for as follows:
Irene Liddell, wife of Frank Liddell, 19,996 shares and Messrs, Marcial P. Lichauco, E. K. Bromwell, V. E. del Rosario
and Esmenia Silva, 1 share each.

At about the end of the year 1948, Messrs. Manzano, Kurz and Kernot resigned from their respective positions in the
Retail Dept. of Liddell & Co. and they were taken in and employed by Liddell Motors, Inc., Kurz as Manager-Treasurer,
Manzano as General Sales Manager for cars and Kernot as General Sales Manager for trucks.

Beginning January, 1949, Liddell & Co. stopped retailing cars and trucks; it conveyed them instead to Liddell Motors,
Inc. which in turn sold the vehicles to the public with a steep mark-up. Since then, Liddell & Co. paid sales taxes on
the basis of its sales to Liddell Motors, Inc. considering said sales as its original sales.

Upon review of the transactions between Liddell & Co. and Liddell Motors Inc., the Collector of Internal Revenue
determined that the latter was but an alter ego of Liddell & Co. Wherefore, he concluded, that for sales tax purposes,
those sales made by Liddell Motors, Inc. to the public were considered as the original sales of Liddell & Co.
Accordingly, the Collector of Internal Revenue assessed against Liddell & Co. a sales tax deficiency, including
surcharges, in the amount of P1,317,629.61. In the computation, the gross selling price of Liddell Motors, Inc. to the
general public from January 1, 1949 to September 15, 1950, was made the basis without deducting from the selling
price, the taxes already paid by Liddell & Co. in its sales to the Liddell Motors, Inc.

The Court of Tax Appeals upheld the position taken by the Collector of Internal Revenue.

A. Judge Umali: Appellant urges the disqualification of Judge Roman M. Umali to participate in the decision of the
instant case because he was Chief of the Law Division, then Acting Deputy Collector and later Chief Counsel of the
Bureau of Internal Revenue during the time when the assessment in question was made. 1 In refusing to disqualify
himself despite admission that he had held the aforementioned offices, Judge Umali stated that he had not in any way
participated, nor expressed any definite opinion, on any question raised by the parties when this case was presented
for resolution before the said bureau. Furthermore, after careful inspection of the records of the Bureau, he (Judge
Umali as well as the other members of the Court below), had not found any indication that he had expressed any
opinion or made any decision that would tend to disqualify him from participating in the consideration of the case in
the Tax Court.

At this juncture, it is well to consider that petitioner did not question the truth of Judge Umali’s statements. In view
thereof, this Tribunal is not inclined to disqualify said judge. Moreover, in furtherance of the presumption of a judge’s
moral sense of responsibility this Court has adopted, and now here repeats, the ruling that the mere participation of a
judge in prior proceedings relating to the subject in the capacity of an administrative official does not necessarily
disqualify him from acting as judge. 2

Appellant also contends that Judge Umali signed the said decision contrary to the provision of Section 13, Republic Act
No. 1125, 3 that whereas the case was submitted for decision of the Court of Tax Appeals on July 12, 1955, and the
decision of Associate Judge Luciano and Judge Nable were both signed on August 11, 1955 (that is, on the last day of
the 30-day period provided for in Section 13, Republic Act No. 1125). Judge Umali signed the decision August 31,
1955 or 20 days after the lapse of the 30-day period allotted by law.

By analogy it may be said that inasmuch as in Republic Act No. 1125 (law creating the Court of Tax Appeals) like the
law governing the procedure in the Court of Industrial Relations, there is no provision invalidating decisions rendered
after the lapse of 30 days, the requirement of Section 13, Republic Act No. 1125 should be construed as directory. 4

Besides as pointed out by appellee, the third paragraph of Section 13 of Republic Act No. 1125 (quoted in the margin)
5 confirms this view, because in providing for two thirty-day periods, the law means that decisions may still be
rendered within the second period of thirty days (Judge Umali signed his decision within that period).

B. Identity of the two corporations: On the question whether or not Liddell Motors, Inc. is the alter ego of Liddell & Co.
Inc., we are fully convinced that Liddell & Co. is wholly owned by Frank Liddell. As of the time of its organization, 98%
of the capital stock belonged to Frank Liddell. The 20% paid-up subscription with which the company began its
business was paid by him. The subsequent subscriptions to the capital stock were made by him and paid with his own
money.

These stipulations and conditions appear in Exhibit A: (1) that Frank Liddell had the authority to designate in the
future the employee who could receive earnings of the corporation; to apportion among the stockholders the share in
the profits; (2) that all certificates of stock in the names of the employees should be deposited with Frank Liddell duly
endorsed in blank by the employees concerned; (3) that each employee was required to sign an agreement with the
corporation to the effect that, upon his death or upon his retirement or separation for any cause whatsoever from the
corporation, the said corporation should, within a period of sixty days therefor, have the absolute and exclusive option
to purchase and acquire the whole of the stock interest of the employees so dying, resigning, retiring or separating.

These stipulations in our opinion attest to the fact that Frank Liddell owned Liddell & Co. Inc. They guarantee his
complete control over the corporation.

As to Liddell Motors Inc. we are fully persuaded that Frank Liddell also owned it. He supplied the original capital funds.
6 It is not proven that his wife Irene, ostensibly the sole incorporator of Liddell Motors, Inc. had money of her own to
pay for her P20,000 initial subscription. 7 Her income in the United States in the years 1943 and 1944 and the savings
therefrom could not be enough to cover the amount of subscription, much less to operate an expensive trade like the
retail of motor vehicles. The alleged sale of her property in Oregon might have been true, but the money received
therefrom was never shown to have been saved or deposited so as to be still available at the time of the organization
of the Liddell Motors, Inc.

The evidence at hand also shows that Irene Liddell had scant participation in the affairs of Liddell Motors, Inc. She
could hardly be said to possess business experience. The income tax forms record no independent income of her own.
As a matter of fact, the checks that represented her salary and bonus from Liddell Motors, Inc. found their way into
the personal account of Frank Liddell. Her frequent absences from the country negate any active participation in the
affairs of the Motors company.

There are quite a series of conspicuous circumstances that militate against the separate and distinct personality of
Liddell Motors, Inc. from Liddell & Co. 8 We notice that the bulk of the business of Liddell & Co. was channelled
through Liddell Motors, Inc. On the other hand, Liddell Motors, Inc. pursued no activities except to secure cars, trucks,
and spare parts from Liddell & Co. Inc. and then sell them to the general public. These sales of vehicles by Liddell &
Co. to Liddell Motors, Inc. for the most part were shown to have taken place on the same day that Liddell Motors, Inc.
sold such vehicles to the public. We may even say that the cars and trucks merely touched the hands of Liddell
Motors, Inc. as a matter of formality.

During the first six months of 1949, Liddell & Co. issued ten (10) checks payable to Frank Liddell which were
deposited by Frank Liddell in his personal account with the Philippine National Bank. During this time also, he issued in
favor of Liddell Motors, Inc. six (6) checks drawn against his personal account with the same bank. The checks issued
by Frank Liddell to the Liddell Motors, Inc. were significantly for the most part issued on the same day when Liddell &
Co., Inc. issued the checks for Frank Liddell 9 and for the same amounts.

It is of course accepted that the mere fact that one or more corporations are owned and controlled by a single
stockholder is not of itself sufficient ground for disregarding separate corporate entities. Authorities 10 support the
rule that it is lawful to obtain a corporation charter, even with a single substantial stockholder, to engage in a specific
activity, and such activity may co-exist with other private activities of the stockholder. If the corporation is a
substantial one, conducted lawfully and without fraud on another, its separate identity is to be respected.

Accordingly, the mere fact that Liddell & Co. and Liddell Motors, Inc. are corporations owned and controlled by Frank
Liddell directly or indirectly is not by itself sufficient to justify the disregard of the separate corporate identity of one
from the other. There is however, in this instant case, a peculiar consequence of the organization and activities of
Liddell Motors, Inc.
Under the law in force at the time of its incorporation the sales tax on original sales of cars (sections 184, 185 and
186 of the National Internal Revenue Code), was progressive, i.e. 10% of the selling price of the car if it did not
exceed P5,000, and 15% of the price if more than P5,000 but not more than P7,000, etc. This progressive rate of the
sales tax naturally would tempt the taxpayer to employ a way of reducing the price of the first sale. And Liddell
Motors, Inc. was the medium created by Liddell & Co. to reduce the price and the tax liability.

Let us illustrate: a car with engine motor No. 212381 was sold by Liddell & Co., Inc. to Liddell Motors, Inc. on January
17, 1948 for P4,546,000.00 including tax; the price of the car was P4,133,000.23, the tax paid being P413.22, at
10%. And when this car was later sold (on the same day) by Liddell Motors, Inc. to P.V. Luistro for P5,500, no more
sales tax was paid. 11 In this price of P5,500 was included the P413.32 representing taxes paid by Liddell & Co. Inc.
in the sale to Liddell Motors, Inc. Deducting P413.32 representing taxes paid by Liddell & Co., Inc. the price of P5,500,
the balance of P5,087.68 would have been the net selling price of Liddell & Co., Inc. to the general public (had Liddell
Motors, Inc. not participated and intervened in the sale), and 15% sales tax would have been due. In this transaction,
P349.68 in the form of taxes was evaded. All the other transactions (numerous) examined in this light will inevitably
reveal that the Government coffers had been deprived of a sizeable amount of taxes.

As opined in the case of Gregory v. Helvering, 12 "the legal right of a taxpayer to decrease the amount of what
otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted." But, as
held in another case, 13 "where a corporation is a dummy, is unreal or a sham and serves no business purpose and is
intended only as a blind, the corporate form may be ignored for the law cannot countenance a form that is bald and
mischievous fiction."cralaw virtua1aw library

Consistently with this view, the United States Supreme Court 14 held that "a taxpayer may gain advantage of doing
business thru a corporation if he pleases, but the revenue officers in proper cases, may disregard the separate
corporate entity where it serves but as a shield for tax evasion and treat the person who actually may take the
benefits of the transactions as the person accordingly taxable."cralaw virtua1aw library

Thus we repeat: to allow a taxpayer to deny tax liability on the ground that the sales were made through another and
distinct corporation when it is proved that the latter is virtually owned by the former or that they are practically one
and the same is to sanction a circumvention of our tax laws. 15

C. Tax liability computation: In the Yutivo case:16 the same question involving the computation of the alleged
deficiency sales tax has been raised. In accordance with our ruling in said case we hold as correctly stated by Judge
Nable in his concurring and dissenting opinion on this case, that the deficiency sales tax should be based on the
selling price obtained by Liddell Motors, Inc. to the public AFTER DEDUCTING THE TAX ALREADY PAID BY LIDDELL &
CO., INC. in its sales to Liddell Motors, Inc.

On the imposition of the 50% surcharge by reason of fraud, we see that the transactions between Liddell Motors, Inc.
and Liddell & Co., Inc. have always been embodied in proper documents, constantly subject to inspection by the tax
authorities. Liddell & Co., Inc. have always made a full report of its income and receipts in its income tax returns.

Paraphrasing our decision in the Yutivo case, we may now say, in filing its return on the basis of its sales to Liddell
Motors, Inc. and not on those by the latter to the public, it cannot be held that the Liddell & Co., deliberately made a
false return for the purpose of defrauding the government of its revenue, and should suffer a 50% surcharge. But
penalty for late payment (25%) should be imposed.

In view of the foregoing, the decision appealed from is hereby modified: Liddell & Co., Inc. is declared liable only for
the amount of P426,811.67 with 25% surcharge for late payment and 6% interest thereon from the time the
judgment becomes final.

As it appears, that, during the pendency of this litigation, appellant paid under protest to the Government the total
amount assessed by the Collector, the latter is hereby required to return the excess to the petitioner. No costs.

Padilla, Labrador, Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon, De Leon and Natividad, JJ., concur
FRANCISCO MOTORS CORPORATION, Petitioner, v. COURT OF APPEALS and SPOUSES GREGORIO and
LIBRADA MANUEL, Respondents.

DECISION

QUISUMBING, J.:
This petition for review on certiorari, under Rule 45 of the Rules of Court, seeks to annul the decision 1 of the Court of
Appeals in C.A. G.R. CV No. 10014 affirming the decision rendered by Branch 135, Regional Trial Court of Makati,
Metro Manila. The procedural antecedents of this petition are as follows:chanrob1es virtual 1aw library

On January 23, 1985, petitioner filed a complaint 2 against private respondents to recover three thousand four
hundred twelve and six centavos (P3,412.06), representing the balance of the jeep body purchased by the Manuels
from petitioner; an additional sum of twenty thousand four hundred fifty-four and eighty centavos (P20,454.80)
representing the unpaid balance on the cost of repair of the vehicle; and six thousand pesos (P6,000.00) for cost of
suit and attorney’s fees. 3 To the original balance on the price of jeep body were added the costs of repair. 4 In their
answer, private respondents interposed a counterclaim for unpaid legal services by Gregorio Manuel in the amount of
fifty thousand pesos (P50,000) which was not paid by the incorporators, directors and officers of the petitioner. The
trial court decided the case on June 26, 1985, in favor of petitioner in regard to the petitioner’s claim for money, but
also allowed the counter-claim of private respondents. Both parties appealed. On April 15, 1991, the Court of Appeals
sustained the trial court’s decision. 5 Hence, the present petition.chanrobles virtual lawlibrary

For our review in particular is the propriety of the permissive counterclaim which private respondents filed together
with their answer to petitioner’s complaint for a sum of money. Private respondent Gregorio Manuel alleged as an
affirmative defense that, while he was petitioner’s Assistant Legal Officer, he represented members of the Francisco
family in the intestate estate proceedings of the late Benita Trinidad. However, even after the termination of the
proceedings, his services were not paid. Said family members, he said, were also incorporators, directors and officers
of petitioner. Hence to counter petitioner’s collection suit, he filed a permissive counterclaim for the unpaid attorney’s
fees. 6

For failure of petitioner to answer the counterclaim, the trial court declared petitioner in default on this score, and
evidence ex-parte was presented on the counterclaim. The trial court ruled in favor of private respondents and found
that Gregorio Manuel indeed rendered legal services to the Francisco family in Special Proceedings Number 7803- "In
the Matter of Intestate Estate of Benita Trinidad." Said court also found that his legal services were not compensated
despite repeated demands, and thus ordered petitioner to pay him the amount of fifty thousand (P50,000.00) pesos.
7

Dissatisfied with the trial court’s order, petitioner elevated the matter to the Court of Appeals, posing the following
issues:chanrobles virtual lawlibrary

"I.

WHETHER OR NOT THE DECISION RENDERED BY THE LOWER COURT IS NULL AND VOID AS IT NEVER ACQUIRED
JURISDICTION OVER THE PERSON OF THE DEFENDANT.

II.

WHETHER OR NOT PLAINTIFF-APPELLANT NOT BEING A REAL PARTY IN THE ALLEGED PERMISSIVE COUNTERCLAIM
SHOULD BE HELD LIABLE TO THE CLAIM OF DEFENDANT-APPELLEES.

III.

WHETHER OR NOT THERE IS FAILURE ON THE PART OF PLAINTIFF-APPELLANT TO ANSWER THE ALLEGED
PERMISSIVE COUNTERCLAIM." 8

Petitioner contended that the trial court did not acquire jurisdiction over it because no summons was validly served on
it together with the copy of the answer containing the permissive counterclaim. Further, petitioner questions the
propriety of its being made party to the case because it was not the real party in interest but the individual members
of the Francisco family concerned with the intestate case.

In its assailed decision now before us for review, respondent Court of Appeals held that a counterclaim must be
answered in ten (10) days, pursuant to Section 4, Rule 11, of the Rules of Court; and nowhere does it state in the
Rules that a party still needed to be summoned anew if a counterclaim was set up against him. Failure to serve
summons, said respondent court, did not effectively negate trial court’s jurisdiction over petitioner in the matter of the
counterclaim. It likewise pointed out that there was no reason for petitioner to be excused from answering the
counterclaim. Court records showed that its former counsel, Nicanor G. Alvarez, received the copy of the answer with
counterclaim two (2) days prior to his withdrawal as counsel for petitioner. Moreover when petitioner’s new counsel,
Jose N. Aquino, entered his appearance, three (3) days still remained within the period to file an answer to the
counterclaim. Having failed to answer, petitioner was correctly considered in default by the trial court. 9 Even
assuming that the trial court acquired no jurisdiction over petitioner, respondent court also said, but having filed a
motion for reconsideration seeking relief from the said order of default, petitioner was estopped from further
questioning the trial court’s jurisdiction. 10

On the question of its liability for attorney’s fees owing to private respondent Gregorio Manuel, petitioner argued that
being a corporation, it should not be held liable therefor because these fees were owed by the incorporators, directors
and officers of the corporation in their personal capacity as heirs of Benita Trinidad. Petitioner stressed that the
personality of the corporation, vis-à-vis the individual persons who hired the services of private respondent, is
separate and distinct, 11 hence, the liability of said individuals did not become an obligation chargeable against
petitioner.chanroblesvirtual|awlibrary

Nevertheless, on the foregoing issue, the Court of Appeals ruled as follows:jgc:chanrobles.com.ph

"However, this distinct and separate personality is merely a fiction created by law for convenience and to promote
justice. Accordingly, this separate personality of the corporation may be disregarded, or the veil of corporate fiction
pierced, in cases where it is used as a cloak or cover for found (sic) illegality, or to work an injustice, or where
necessary to achieve equity or when necessary for the protection of creditors. (Sulo ng Bayan, Inc. v. Araneta, Inc.,
72 SCRA 347) Corporations are composed of natural persons and the legal fiction of a separate corporate personality
is not a shield for the commission of injustice and inequity. (Chemplex Philippines, Inc. v. Pamatian, 57 SCRA 408)

"In the instant case, evidence shows that the plaintiff-appellant Francisco Motors Corporation is composed of the heirs
of the late Benita Trinidad as directors and incorporators for whom defendant Gregorio Manuel rendered legal services
in the intestate estate case of their deceased mother. Considering the aforestated principles and circumstances
established in this case, equity and justice demands plaintiff-appellant’s veil of corporate identity should be pierced
and the defendant be compensated for legal services rendered to the heirs, who are directors of the plaintiff-appellant
corporation." 12

Now before us, petitioner assigns the following errors:chanrob1es virtual 1aw library

"I.

THE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE OF PIERCING THE VEIL OF CORPORATE
ENTITY.chanrobles virtual lawlibrary

II.

THE COURT OF APPEALS ERRED IN AFFIRMING THAT THERE WAS JURISDICTION OVER PETITIONER WITH RESPECT
TO THE COUNTERCLAIM." 13

Petitioner submits that respondent court should not have resorted to piercing the veil of corporate fiction because the
transaction concerned only respondent Gregorio Manuel and the heirs of the late Benita Trinidad. According to
petitioner, there was no cause of action by said respondent against petitioner; personal concerns of the heirs should
be distinguished from those involving corporate affairs. Petitioner further contends that the present case does not fall
among the instances wherein the courts may look beyond the distinct personality of a corporation. According to
petitioner, the services for which respondent Gregorio Manuel seeks to collect fees from petitioner are personal in
nature. Hence, it avers the heirs should have been sued in their personal capacity, and not involve the corporation.
14

With regard to the permissive counterclaim, petitioner also insists that there was no proper service of the answer
containing the permissive counterclaim. It claims that the counterclaim is a separate case which can only be properly
served upon the opposing party through summons. Further petitioner states that by nature, a permissive counterclaim
is one which does not arise out of nor is necessarily connected with the subject of the opposing party’s claim.
Petitioner avers that since there was no service of summons upon it with regard to the counterclaim, then the court
did not acquire jurisdiction over petitioner. Since a counterclaim is considered an action independent from the answer,
according to petitioner, then in effect there should be two simultaneous actions between the same parties: each party
is at the same time both plaintiff and defendant with respect to the other, 15 requiring in each case separate
summonses.

In their Comment, private respondents focus on the two questions raised by petitioner. They defend the propriety of
piercing the veil of corporate fiction, but deny the necessity of serving separate summonses on petitioner in regard to
their permissive counterclaim contained in the answer.

Private respondents maintain both trial and appellate courts found that respondent Gregorio Manuel was employed as
assistant legal officer of petitioner corporation, and that his services were solicited by the incorporators, directors and
members to handle and represent them in Special Proceedings No. 7803, concerning the Intestate Estate of the late
Benita Trinidad. They assert that the members of petitioner corporation took advantage of their positions by not
compensating respondent Gregorio Manuel after the termination of the estate proceedings despite his repeated
demands for payment of his services. They cite findings of the appellate court that support piercing the veil of
corporate identity in this particular case. They assert that the corporate veil may be disregarded when it is used to
defeat public convenience, justify wrong, protect fraud, and defend crime. It may also be pierced, according to them,
where the corporate entity is being used as an alter ego, adjunct, or business conduit for the sole benefit of the
stockholders or of another corporate entity. In these instances, they aver, the corporation should be treated merely as
an association of individual persons. 16chanrobles law library : red

Private respondents dispute petitioner’s claim that its right to due process was violated when respondents’
counterclaim was granted due course, although no summons was served upon it. They claim that no provision in the
Rules of Court requires service of summons upon a defendant in a counterclaim. Private respondents argue that when
the petitioner filed its complaint before the trial court it voluntarily submitted itself to the jurisdiction of the court. As a
consequence, the issuance of summons on it was no longer necessary. Private respondents say they served a copy of
their answer with affirmative defenses and counterclaim on petitioner’s former counsel, Nicanor G. Alvarez. While
petitioner would have the Court believe that respondents served said copy upon Alvarez after he had withdrawn his
appearance as counsel for the petitioner, private respondents assert that this contention is utterly baseless. Records
disclose that the answer was received two (2) days before the former counsel for petitioner withdrew his appearance,
according to private respondents. They maintain that the present petition is but a form of dilatory appeal, to set off
petitioner’s obligations to the respondents by running up more interest it could recover from them. Private
respondents therefore claim damages against petitioner. 17

To resolve the issues in this case, we must first determine the propriety of piercing the veil of corporate fiction.

Basic in corporation law is the principle that a corporation has a separate personality distinct from its stockholders and
from other corporations to which it may be connected. 18 However, under the doctrine of piercing the veil of
corporate entity, the corporation’s separate juridical personality may be disregarded, for example, when the corporate
identity is used to defeat public convenience, justify wrong, protect fraud, or defend crime. Also, where the
corporation is a mere alter ego or business conduit of a person, or where the corporation is so organized and
controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of
another corporation, then its distinct personality may be ignored. 19 In these circumstances, the courts will treat the
corporation as a mere aggrupation of persons and the liability will directly attach to them. The legal fiction of a
separate corporate personality in those cited instances, for reasons of public policy and in the interest of justice, will
be justifiably set aside.

In our view, however, given the facts and circumstances of this case, the doctrine of piercing the corporate veil has no
relevant application here. Respondent court erred in permitting the trial court’s resort to this doctrine. The rationale
behind piercing a corporation’s identity in a given case is to remove the barrier between the corporation from the
persons comprising it to thwart the fraudulent and illegal schemes of those who use the corporate personality as a
shield for undertaking certain proscribed activities. However, in the case at bar, instead of holding certain individuals
or persons responsible for an alleged corporate act, the situation has been reversed. It is the petitioner as a
corporation which is being ordered to answer for the personal liability of certain individual directors, officers and
incorporators concerned. Hence, it appears to us that the doctrine has been turned upside down because of its
erroneous invocation. Note that according to private respondent Gregorio Manuel his services were solicited as counsel
for members of the Francisco family to represent them in the intestate proceedings over Benita Trinidad’s estate.
These estate proceedings did not involve any business of petitioner.

Note also that he sought to collect legal fees not just from certain Francisco family members but also from petitioner
corporation on the claims that its management had requested his services and he acceded thereto as an employee of
petitioner from whom it could be deduced he was also receiving a salary. His move to recover unpaid legal fees
through a counterclaim against Francisco Motors Corporation, to offset the unpaid balance of the purchase and repair
of a jeep body could only result from an obvious misapprehension that petitioner’s corporate assets could be used to
answer for the liabilities of its individual directors, officers, and incorporators. Such result if permitted could easily
prejudice the corporation, its own creditors, and even other stockholders; hence, clearly iniquitous to petitioner.

Furthermore, considering the nature of the legal services involved, whatever obligation said incorporators, directors
and officers of the corporation had incurred, it was incurred in their personal capacity. When directors and officers of a
corporation are unable to compensate a party for a personal obligation, it is far-fetched to allege that the corporation
is perpetuating fraud or promoting injustice, and be thereby held liable therefor by piercing its corporate veil. While
there are no hard and fast rules on disregarding separate corporate identity, we must always be mindful of its function
and purpose. A court should be careful in assessing the milieu where the doctrine of piercing the corporate veil may
be applied. Otherwise an injustice, although unintended, may result from its erroneous
application.chanroblesvirtualawlibrary
The personality of the corporation and those of its incorporators, directors and officers in their personal capacities
ought to be kept separate in this case. The claim for legal fees against the concerned individual incorporators, officers
and directors could not be properly directed against the corporation without violating basic principles governing
corporations. Moreover, every action — including a counterclaim — must be prosecuted or defended in the name of
the real party in interest. 20 It is plainly an error to lay the claim for legal fees of private respondent Gregorio Manuel
at the door of petitioner (FMC) rather than individual members of the Francisco family.

However, with regard to the procedural issue raised by petitioner’s allegation, that it needed to be summoned anew in
order for the court to acquire jurisdiction over it, we agree with respondent court’s view to the contrary. Section 4,
Rule 11 of the Rules of Court provides that a counterclaim or cross-claim must be answered within ten (10) days from
service. Nothing in the Rules of Court says that summons should first be served on the defendant before an answer to
counterclaim must be made. The purpose of a summons is to enable the court to acquire jurisdiction over the person
of the defendant. Although a counterclaim is treated as an entirely distinct and independent action, the defendant in
the counterclaim, being the plaintiff in the original complaint, has already submitted to the jurisdiction of the court.
Following Rule 9, Section 3 of the 1997 Rules of Civil Procedure, 21 if a defendant (herein petitioner) fails to answer
the counterclaim, then upon motion of plaintiff, the defendant may be declared in default. This is what happened to
petitioner in this case, and this Court finds no procedural error in the disposition of the appellate court on this
particular issue. Moreover, as noted by the respondent court, when petitioner filed its motion seeking to set aside the
order of default, in effect it submitted itself to the jurisdiction of the court. As well said by respondent
court:jgc:chanrobles.com.ph

"Further on the lack of jurisdiction as raised by plaintiff-appellant[,] [t]he records show that upon its request, plaintiff-
appellant was granted time to file a motion for reconsideration of the disputed decision. Plaintiff-appellant did file its
motion for reconsideration to set aside the order of default and the judgment rendered on the counterclaim.

"Thus, even if the court acquired no jurisdiction over plaintiff-appellant on the counterclaim, as it vigorously insists,
plaintiff-appellant is considered to have submitted to the court’s jurisdiction when it filed the motion for
reconsideration seeking relief from the court. (Soriano v. Palacio, 12 SCRA 447). A party is estopped from assailing
the jurisdiction of a court after voluntarily submitting himself to its jurisdiction. (Tejones v. Gironella, 159 SCRA 100).
Estoppel is a bar against any claims of lack of jurisdiction. (Balais v. Balais, 159 SCRA 37)." 22chanrobles virtual
lawlibrary

WHEREFORE, the petition is hereby GRANTED and the assailed decision is hereby REVERSED insofar only as it held
Francisco Motors Corporation liable for the legal obligation owing to private respondent Gregorio Manuel; but this
decision is without prejudice to his filing the proper suit against the concerned members of the Francisco family in
their personal capacity. No pronouncement as to costs.

G.R. No. 191525

INTERNATIONAL ACADEMY OF MANAGEMENT AND ECONOMICS (I/AME), Petitioner


vs.
LITTON AND COMPANY, INC., Respondent

DECISION

SERENO, CJ.:

Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court assailing the Court of Appeals (CA) Decision 1 and
Resolution2 in CA-G.R. SP No. 107727.

The CA affirmed the Judgment3 and Order4 of the Regional Trial Court (RTC) of Manila in Special Civil Action No. 06-115547
reinstating the Order5 of the Metropolitan Trial Court (Me TC) of Manila in favor of Litton and Company, Inc. (Litton).

THE FACTS

The facts, as culled from the records, are as follows:

Atty. Emmanuel T. Santos (Santos), a lessee to two (2) buildings owned by Litton, owed the latter rental arrears as well as his share of
the payment of realty taxes.6
Consequently, Litton filed a complaint for unlawful detainer against Santos before the MeTC of Manila. The MeTC ruled in Litton’s favor
and ordered Santos to vacate A.I.D. Building and Litton Apartments and to pay various sums of money representing unpaid arrears,
realty taxes, penalty, andattorney’s fees.7

It appears however that the judgment was not executed. Litton subsequently filed an action for revival of judgment, which was granted
by the RTC.8 Santos then appealed the RTC decision to the CA, which nevertheless affirmed the RTC. 9 The said CA decision became
final and executory on 22 March 1994.10

On l 1 November 1996, the sheriff of the MeTC of Manila levied on a piece of real property covered by Transfer Certificate of Title
(TCT) No. 187565 and registered in the name of International Academy of Management and Economics Incorporated (I/AME), in order
to execute the judgment against Santos.11 The annotations on TCT No. 187565 indicated that such was "only up to the extent of the
share of Emmanuel T. Santos."12

I/AME filed with Me TC a "Motion to Lift or Remove Annotations Inscribed in TCT No. 187565 of the Register of Deeds of Makati
City."13 I/AME claimed that it has a separate and distinct personality from Santos; hence, its properties should not be made to answer
for the latter's liabilities. The motion was denied in an Order dated 29 October 2004.

Upon motion for reconsideration of I/AME, the Me TC reversed its earlier ruling and ordered the cancellation of the annotations of levy
as well as the writ of execution. Litton then elevated the case to the RTC, which in turn reversed the Order granting I/AME’s motion for
reconsideration and reinstated the original Order dated 29 October 2004.

I/AME then filed a petition with the CA to contest the judgment of the RTC, which was eventually denied by the appellate court.

THE CA RULING

The CA upheld the Judgment and Order of the RTC and held that no grave abuse of discretion was committed when the trial court
pierced the corporate veil of I/AME.14

It took note of how Santos had utilized I/ AME to insulate the Makati real property covered by TCT No. 187565 from the execution of the
judgment rendered against him, for the following reasons:

First, the Deed of Absolute Sale dated 31 August 1979 indicated that Santos, being the .President, was representing I/AME as the
vendee.15 However, records show that it was only in 1985 that I/AME was organized as a juridical entity. 16 Obviously, Santos could not
have been President of a non-existent corporation at that time.17

Second, the CA noted that the subject real property was transferred to I/AME during the pendency of the appeal for the revival of the
judgment in the ejectment case in the CA.18

Finally, the CA observed that the Register of Deeds of Makati City issued TCT No. 187565 only on 17 November 1993, fourteen (14)
years after the execution of the Deed of Absolute Sale and more than eight (8) years after I/AME was incorporated.19

Thus, the CA concluded that Santos merely used I/ AME as a shield to protect his property from the coverage of the writ of execution;
therefore, piercing the veil of corporate fiction is proper.20

THE ISSUES

The issues boil down to the alleged denial of due process when the court pierced the corporate veil of I/ AME and its property was
made to answer for the liability of Santos.

OUR RULING

We deny the petition.

There was no violation of due


process against I/AME

Petitioner avers that its right to due process was violated when it was dragged into the case and its real property made an object of a
writ of execution in a judgment against Santos. It argues that since it was not impleaded in the main case, the court a quo never
acquired jurisdiction over it. Indeed, compliance with the recognized modes of acquisition ofjurisdiction cannot be dispensed with even
in piercing the veil of corporation.21
In a petition for review on certiorari under Rule 45, only questions of law shall be entertained. This Court considers the determination of
the existence of any of the circumstances that would warrant the piercing of the veil of corporate fiction as a question of fact which
ordinarily cannot be the subject of a petition for review on certiorariunder Rule 45. We will only take cognizance of factual issues if the
findings of the lower court are not supported by the evidence on record or are based on a misapprehension of facts. 22 Once the CA
affirms the factual findings of the trial court, such findings are deemed final and conclusive and thus, may not be reviewed on appeal,
unless the judgment of the CA depends on a misapprehension of facts, which if properly considered, would justify a different
conclusion.23 Such exception however, is not applicable in this case.

The 29 October 2004 MeTC judgment, the RTC judgment, and the CA decision are one in accord on the matters presented before this
Court.

In general, corporations, whether stock or non-stock, are treated as separate and distinct legal entities from the natural persons
composing them. The privilege of being considered a distinct and separate entity is confined to legitimate uses, and is subject to
equitable limitations to prevent its being exercised for fraudulent, unfair or illegal purposes. 24 However, once equitable limitations are
breached using the coverture of the corporate veil, courts may step in to pierce the same.

As we held in Lanuza, Jr. v. BF Corporation:25

Piercing the corporate veil is warranted when "[the separate personality of a corporation] is used as a means to perpetrate fraud or an
illegal act, or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, or to confuse legitimate issues." It is
also warranted in alter ego cases "where a corporation is merely a farce since it is a mere alter ego or business conduit of a person, or
where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency,
conduit or adjunct of another corporation."

When [the] corporate veil is pierced, the corporation and persons who are normally treated as distinct from the corporation are treated
as one person, such that when the corporation is adjudged liable, these persons, too, become liable as if they were the corporation.

The piercing of the corporate veil is premised on the fact that the corporation concerned must have been properly served with summons
or properly subjected to the jurisdiction of the court a quo. Corollary thereto, it cannot be subjected to a writ of execution meant for
another in violation of its right to due process.26

There exists, however, an exception to this rule: if it is shown "by clear and convincing proof that the separate and distinct personality of
the corporation was purposefully employed to evade a legitimate and binding commitment and perpetuate a fraud or like wrongdoings.
"27

The resistance of the Court to offend the right to due process of a corporation that is a nonparty in a main case, may disintegrate not
only when its director, officer, shareholder, trustee or member is a party to the main case, but when it finds facts which show that
piercing of the corporate veil is merited.28

Thus, as the Court has already ruled, a party whose corporation is vulnerable to piercing of its corporate veil cannot argue violation of
due process.29

In this case, the Court confirms the lower courts' findings that Santos had an existing obligation based on a court judgment that he
owed monthly rentals and unpaid realty taxes under a lease contract he entered into as lessee with the Littons as lessor. He was not
able to comply with this particular obligation, and in fact, refused to comply therewith.

This Court agrees with the CA that Santos used I/AME as a means to defeat judicial processes and to evade his obligation to
Litton.30 Thus, even while I/AME was not imp leaded in the main case and yet was so named in a writ of execution to satisfy a court
judgment against Santos, it is vulnerable to the piercing of its corporate veil. We will further expound on this matter.

Piercing the Corporate Veil may


Apply to Non-stock Corporations

Petitioner I/AME argues that the doctrine of piercing the corporate veil applies only to stock corporations, and not to non-stock, nonprofit
corporations such as I/AME since there are no stockholders to hold liable in such a situation but instead only members. Hence, they do
not have investments or shares of stock or assets to answer for possible liabilities.

Thus, no one in a non-stock corporation can be held liable in case the corporate veil is disregarded or pierced. 31

The CA disagreed. It ruled that since the law does not make a distinction between a stock and non-stock corporation, neither should
there be a distinction in case the doctrine of piercing the veil of corporate fiction has to be applied. While I/AME is an educational
institution, the CA further ruled, it still is a registered corporation conducting its affairs as such. 32
This Court agrees with the CA.

In determining the propriety of applicability of piercing the veil of corporate fiction, this Court, in a number of cases, did not put in issue
whether a corporation is a stock or non-stock corporation. In Sula ng Bayan, Inc. v. Gregorio Araneta, Inc. ,33 we considered but
ultimately refused to pierce the corporate veil of a non-stock non-profit corporation which sought to institute an action for reconveyance
of real property on behalf of its members. This Court held that the non-stock corporation had no personality to institute a class suit on
behalf of its members, considering that the non-stock corporation was not an assignee or transferee of the real property in question,
and did not have an identity that was one and the same as its members.

In another case, this Court did not put in issue whether the corporation is a non-stock, non-profit, non-governmental corporation in
considering the application of the doctrine of piercing of corporate veil. In Republic of the Philippines v. Institute for Social
Concern,34 while we did not allow the piercing of the corporate veil, this Court affirmed the finding of the CA that the Chairman of the
Institute for Social Concern cannot be held jointly and severally liable with the aforesaid non-governmental organization (NGO) at the
time the Memorandum of Agreement was entered into with the Philippine Government. We found no fraud in that case committed by
the Chairman that would have justified the piercing of the corporate veil of the NG0. 35

In the United States, from which we have adopted our law on corporations, non-profit corporations are not immune from the doctrine of
piercing the corporate veil.1âwphi1 Their courts view piercing of the corporation asan equitable remedy, which justifies said courts to
scrutm1ze any organization however organized and in whatever manner it operates. Moreover, control of ownership does not hinge on
stock ownership.

As held in Barineau v. Barineau:36

[t]he mere fact that the corporation involved is a nonprofit corporation does not by itself preclude a court from applying the equitable
remedy of piercing the corporate veil. The equitable character of the remedy permits a court to look to the substance of the
organization, and its decision is not controlled by the statutory framework under which the corporation was formed and operated. While
it may appear to be impossible for a person to exercise ownership control over a non-stock, not-for-profit corporation, a person can be
held personally liable under the alter ego theory if the evidence shows that the person controlling the corporation did in fact exercise
control, even though there was no stock ownership.

In another U.S. case, Public Interest Bounty Hunters v. Board of Governors of Federal Reserve System, 37 the U.S. Court allowed the
piercing of the corporate veil of the Foundation headed by the plaintiff, in order to avoid inequitable results. Plaintiff was found to be the
sole trustee, the sole member of the board, and the sole financial contributor to the Foundation. In the end, the Court found that the
plaintiff used the Foundation to avoid paying attorneys’ fees.

The concept of equitable ownership, for stock or non-stock corporations, in piercing of the corporate veil scenarios, may also be
considered. An equitable owner is an individual who is a non-shareholder defendant, who exercises sufficient control or considerable
authority over the corporation to the point of completely disregarding the corporate form and acting as though its assets are his or her
alone to manage and distribute.38

Given the foregoing, this Court sees no reason why a non-stock corporation such as I/AME, may not be scrutinized for purposes of
piercing the corporate veil or fiction.

Piercing the Corporate Veil may


Apply to Natural Persons

The petitioner also insists that the piercing of the corporate veil cannot be applied to a natural person - in this case, Santos - simply
because as a human being, he has no corporate veil shrouding or covering his person. 39

a) When the Corporation is the Alter Ego of a Natural Person

As cited in Sula ng Bayan, Inc. v. Araneta, Inc. ,40 "[t]he doctrine of alter ego is based upon the misuse of a corporation by an
individual for wrongful or inequitable purposes, and in such case the court merely disregards the corporate entity and holds the
individual responsible for acts knowingly and intentionally done in the name of the corporation." This, Santos has done in this case.
Santos formed I/AME, using the non-stock corporation, to evade paying his judgment creditor, Litton.

The piercing of the corporate veil may apply to corporations as well as natural persons involved with corporations. This Court has held
that the "corporate mask may be lifted and the corporate veil may be pierced when a corporation is just but the alter ego of a person or
of another corporation."41

We have considered a deceased natural person as one and the same with his corporaticc to protect the succession rights of his legal
heirs to his estate. In Cease v. Court of Appeals, 42 the predecessor-in-interest organized a close corporation which acquired properties
during its existence. When he died intestate, trouble ensued amongst his children on whether or not to consider his company one and
the same with his person. The Court agreed with the trial court when it pierced the corporate veil of the decedent's corporation. It found
that said corporation was his business conduit and alter ego. Thus, the acquired properties were actually properties of the decedent
and as such, should be divided among the decedent's legitimate children in the partition of his estate.43

In another instance, this Court allowed the piercing of the corporate veil against another natural person, in Arcilla v. Court of
Appeals. 44 The case stemmed from a complaint for sum of money against Arcilla for his failure to pay his loan from the private
respondent. Arcilla, in his defense, alleged that the loan was in the name of his family corporation, CSAR Marine Resources, Inc. He
further argued that the CA erred in holding CSAR Marine Resources liable to the private respondent since the latter was not impleaded
as a party in the case. This Court allowed the piercing of the corporate veil and held that Arcilla used "his capacity as President, x x x
[as] a sanctuary for a defense x x x to avoid complying with the liability adjudged against him x x x. " 45 We held that his liability
remained attached even if he was impleaded as a party, and not the corporation, to thecollection case and even if he ceased to be
corporate president.46 Indeed, even if Arcilla had ceased to be corporate president, he remained personally liable for the judgment debt
to pay his personal loan, for we treated him and the corporation as one and the same. CSAR Marine was deemed his alter ego.

We find similarities with Arcilla and the instant case. Like Arcilla, Santos: (1) was adjudged liable to pay on a judgment against him; (2)
he became President of a corporation; (3) he formed a corporation to conceal assets which were supposed to pay for the judgment
against his favor; (4) the corporation which has Santos as its President, is being asked by the court to pay on the judgment; and (5) he
may not use as a defense that he is no longer President of I/AME (although a visit to the website of the school shows he is the current
President).47

This Court agrees with the CA that I/AME is the alter ego of Santos and Santos - the natural person - is the alter ego of I/AME. Santos
falsely represented himself as President of I/AME in the Deed of Absolute Sale when he bought the Makati real property, at a time
when I/ AME had not yet existed. Uncontroverted facts in this case also reveal the findings of Me TC showing Santos and I/ AME as
being one and the same person:

(1) Santos is the conceptualizer and implementor of I/AME;

(2) Santos’ contribution is ₱1,200,000.00 (One Million Two Hundred Thousand Pesos) out of the ₱1,500,000.00 (One Million
Five Hundred Thousand Pesos), making him the majority contributor of I/AME; and,

(3) The building being occupied by I/AME is named after Santos using his known nickname (to date it is called, the "Noli
Santos Inte1national Tower").48

This Court deems I/AME and Santos as alter egos of each other based on the former’s own admission in its pleadings before the trial
court. In its Answer (to Amended Petition) with the RTC entitled Litton and Company, Inc. v. Hon. Hernandez-Calledo, Civil Case No.
06-115547, I/AME admitted the allegations found in paragraphs 2, 4 and 5 of the amended petition of Litton, particularly paragraph
number 4 which states:

4. Respondent, International Academy of Management and Economics Inc. (hereinafter referred to as Respondent I/ AME), is a
corporation organized and existing under Philippine laws with address at 1061 Metropolitan Avenue, San Antonie Village, Makati City,
where it may be served with summons and other judicial processes. It is the corporate entity used by Respondent Santos as his
alter ego for the purpose of shielding his assets from the reach of his creditors, one of which is herein Petitioner.49 (Emphases
ours)

Hence, I/AME is the alter ego of the natural person, Santos, which the latter used to evade the execution on the Makati property, thus
frustrating the satisfaction of the judgment won by Litton.

b) Reverse Piercing of the Corporate Veil

This Court in Arcilla pierced the corporate veil of CSAR Marine Resources to satisfy a money judgment against its erstwhile President,
Arcilla.

We borrow from American parlance what is called reverse piercing or reverse corporate piercing or piercing the corporate veil "in
reverse."

As held in the U.S. Case, C.F. Trust, Inc., v. First Flight Limited Partnership, 50 "in a traditional veil-piercing action, a court disregards
the existence of the corporate entity so a claimant can reach the assets of a corporate insider. In a reverse piercing action, however,
the plaintiff seeks to reach the assets of a corporation to satisfy claims against a corporate insider."

"Reverse-piercing flows in the opposite direction (of traditional corporate veil-piercing) and makes the corporation liable for the debt of
the shareholders."51

It has two (2) types: outsider reverse piercing and insider reverse piercing. Outsider reverse piercing occurs when a party with a claim
against an individual or corporation attempts to be repaid with assets of a corporation owned or substantially controlled by the
defendant.52 In contrast, in insider reverse piercing, the controlling members will attempt to ignore the corporate fiction in order to take
advantage of a benefit available to the corporation, such as an interest in a lawsuit or protection of personal assets. 53

Outsider reverse veil-piercing is applicable in the instant case. Litton, as judgment creditor, seeks the Court's intervention to pierce the
corporate veil of I/AME in order to make its Makati real property answer for a judgment against Santos, who formerly owned and still
substantially controls I/AME.

In the U.S. case Acree v. McMahan, 54 the American court held that "[ o ]utsider reverse veil-piercing extends the traditional veil-
piercing doctrine to permit a third-party creditor to pierce the veil to satisfy the debts of an individual out of the corporation's assets."

The Court has pierced the corporate veil in a reverse manner in the instances when the scheme was to avoid corporate assets to be
included in the estate of a decedent as in the Cease case and when the corporation was used to escape a judgment to pay a debt as in
the Arcilla case.

In a 1962 Philippine case, this Court also employed what we now call reverse-piercing of the corporate veil. In Palacio v. Fely
Transportation Co., 55 we found that the president and general manager of the private respondent company formed the corporation to
evade his subsidiary civil liability resulting from the conviction of his driver who ran over the child of the petitioner, causing injuries and
medical expenses. The Court agreed with the plaintiffs that the president and general manager, and Fely Transportation, may be
regarded as one and the same person. Thus, even if the president and general manager was not a party to the case, we reversed the
lower court and declared both him and the private respondent company, jointly and severally liable to the plaintiffs. Thus, this Court
allowed the outsider-plaintiffs to pierce the corporate veil of Fely Transportation to run after its corporate assets and pay the subsidiary
civil liability of the company's president and general manager.

This notwithstanding, the equitable remedy of reverse corporate piercing or reverse piercing was not meant to encourage a creditor’s
failure to undertake such remedies that could have otherwise been available, to the detriment of other creditors. 56

Reverse corporate piercing is an equitable remedy which if utilized cavalierly, may lead to disastrous consequences for both stock and
non-stock corporations. We are aware that ordinary judgment collection procedures or other legal remedies are preferred over that
which would risk damage to third parties (for instance, innocent stockholders or voluntary creditors) with unprotected interests in the
assets of the beleaguered corporation.57

Thus, this Court would recommend the application of the current 1997 Rules on Civil Procedure on Enforcement of Judgments. Under
the current Rules of Court on Civil Procedure, when it comes to satisfaction by levy, a judgment obligor is given the option to
immediately choose which property or part thereof may be levied upon to satisfy the judgment. If the judgmentobligor does not exercise
the option, personal properties, if any, shall be first levied and then on real properties if the personal properties are deemed insufficient
to answer for the judgment.58

In the instant case, it may be possible for this Court to recommend that Litton run after the other properties of Santos that could satisfy
the money judgment - first personal, then other real properties other than that of the school. However, if we allow this, we frustrate the
decades-old yet valid MeTC judgment which levied on the real property now titled under the name of the school. Moreover, this Court
will unwittingly condone the action of Santos in hiding all these years behind the corporate form to evade paying his obligation under the
judgment in the court a quo. This we cannot countenance without being a party to the injustice.

Thus, the reverse piercing of the corporate veil of I/AME to enforce the levy on execution of the Makati real property where the school
now stands is applied.

WHEREFORE, in view of the foregoing, the instant petition is DENIED. The CA Decision in CA-G.R. SP No. 107727 dated 30 October
2009 and its Resolution on 12 March 2010 are hereby AFFIRMED. The MeTC Order dated 29 October 2004 is hereby REINSTATED.

Accordingly, the MeTC of Manila, Branch 2, is hereby DIRECTED to execute with dispatch the MeTC Order dated 29 October 2004
against Santos.

SO ORDERED.

TAN BOON BEE & CO., INC., Petitioner, v. THE HONORABLE HILARION U. JARENCIO, PRESIDING JUDGE OF
BRANCH XXIII of the Court of First Instance of Manila, GRAPHIC PUBLISHING, INC., and PHILIPPINE
AMERICAN DRUG COMPANY, Respondents.

De Santos, Balgos & Perez Law Office for Petitioner.

Araneta, Mendoza & Papa Law Office for respondent Phil. American Drug Company.

DECISION
PARAS, J.:

This is a petition for certiorari, with prayer for preliminary injunction, to annul and set aside the March 26, 1975 Order
of the then Court of First Instance of Manila, Branch XXIII, setting aside the sale of "Heidelberg" cylinder press
executed by the sheriff in favor of the herein petitioner, as well as the levy on the said property, and ordering the
sheriff to return the said machinery to its owner, herein private respondent Philippine American Drug Company.

Petitioner herein, doing business under the name and style of Anchor Supply Co., sold on credit to herein private
respondent Graphic Publishing, Inc. (GRAPHIC for short) paper products amounting to P55,214.73. On December 20,
1972, GRAPHIC made partial payment by check to petitioner in the total amount of P24,848.74; and on December 21,
1972, a promissory note was executed to cover the balance of P30,365.99. In the said promissory note, it was
stipulated that the amount will be paid on monthly installments and that failure to pay any installment would make
the amount immediately demandable with an interest of 12% per annum. On September 6, 1973, for failure of
GRAPHIC to pay any installment, petitioner filed with the then Court of First Instance of Manila, Branch XXIII,
presided over by herein respondent judge, Civil Case No. 91857 for a Sum of Money (Rollo, pp. 36-38). Respondent
judge declared GRAPHIC in default for failure to file its answer within the reglementary period and plaintiff (petitioner
herein) was allowed to present its evidence ex parte. In a Decision dated January 18, 1974 (Ibid., pp. 39-40), the trial
court ordered GRAPHIC to pay the petitioner the sum of P30,365.99 with 12% interest from March 30, 1973 until fully
paid, plus the costs of suit. On motion of petitioner, a writ of execution was issued by respondent judge; but the
aforestated writ having expired without the sheriff finding any property of GRAPHIC, an alias writ of execution was
issued on July 2, 1974.

Pursuant to the said issued alias writ of execution, the executing sheriff levied upon one (1) unit printing machine
identified as "Original Heidelberg Cylinder Press" Type H 222, NR 78048, found in the premises of GRAPHIC. In a
Notice of Sale of Execution of Personal Property dated July 29, 1974, said printing machine was scheduled for auction
sale on July 26, 1974 at 10:00 o’clock at 14th St., Cor. Atlanta St., Port Area, Manila (Ibid., p. 45); but in a letter
dated July 19, 1974, herein private respondent, Philippine American Drug Company (PADCO for short) had informed
the sheriff that the printing machine is its property and not that of GRAPHIC, and accordingly, advised the sheriff to
cease and desist from carrying out the scheduled auction sale on July 26, 1974. Notwithstanding the said letter, the
sheriff proceeded with the scheduled auction sale, sold the property to the petitioner, it being the highest bidder, and
issued a Certificate of Sale in favor of petitioner (Rollo, p. 48). More than five (5) hours after the auction sale and the
issuance of the certificate of sale, PADCO filed an "Affidavit of Third Party Claim" with the Office of the City Sheriff
(ibid., p. 47). Thereafter, on July 30, 1974, PADCO filed with the Court of First Instance of Manila, Branch XXIII, a
Motion to Nullify Sale on Execution (With Injunction) (Ibid., pp. 49-55), which was opposed by the petitioner (Ibid.,
pp. 56-68). Respondent judge, in an Order dated March 26, 1975 (Ibid., pp. 64-69), ruled in favor of PADCO. The
decretal portion of the said order, reads:chanrobles virtual lawlibrary

"WHEREFORE, the sale of the `Heidelberg’ cylinder press executed by the Sheriff in favor of the plaintiff as well as the
levy on the said property is hereby set aside and declared to be without any force and effect. The Sheriff is ordered to
return the said machinery to its owner, the Philippine American Drug Co."cralaw virtua1aw library

Petitioner filed a Motion For Reconsideration (Ibid., pp. 70-93) and an Addendum to Motion for Reconsideration (Ibid.,
pp. 94-108), but in an Order dated August 13, 1975, the same was denied for lack of merit (Ibid., p. 109). Hence, the
instant petition.

In a Resolution dated September 12, 1975, the Second Division of this Court resolved to require the respondents to
comment, and to issue a temporary restraining order (Rollo, p. 111). After submission of the parties’ Memoranda, the
case was submitted for decision in the Resolution of November 28, 1975 (Ibid., p. 275).

Petitioner, to support its stand, raised two (2) issues, to wit:chanrob1es virtual 1aw library

THE RESPONDENT JUDGE GRAVELY EXCEEDED, IF NOT ACTED WITHOUT JURISDICTION WHEN HE ACTED UPON THE
MOTION OF PADCO, NOT ONLY BECAUSE SECTION 17, RULE 39 OF THE RULES OF COURT WAS NOT COMPLIED
WITH, BUT ALSO BECAUSE THE CLAIMS OF PADCO WHICH WAS NOT A PARTY TO THE CASE COULD NOT BE
VENTILATED IN THE CASE BEFORE HIM BUT IN INDEPENDENT PROCEEDING.

II
THE RESPONDENT JUDGE GRAVELY ABUSED HIS DISCRETION WHEN HE REFUSED TO PIERCE THE PADCO’S
(IDENTITY) AND DESPITE THE ABUNDANCE OF EVIDENCE CLEARLY SHOWING THAT PADCO WAS CONVENIENTLY
SHIELDING UNDER THE THEORY OF CORPORATE FICTION.

Petitioner contends that respondent judge gravely exceeded, if not, acted without jurisdiction, in nullifying the sheriff’s
sale not only because Section 17, Rule 39 of the Rules of Court was not complied with, but more importantly because
PADCO could not have litigated its claim in the same case, but in an independent civil proceeding.

This contention is well-taken.

In the case of Bayer Philippines, Inc. v. Agana (63 SCRA 355, 366-367 [1975]), this Court categorically ruled as
follows:jgc:chanrobles.com.ph

"In other words, construing Section 17 of Rule 39 of the Revised Rules of Court, the rights of third-party claimants
over certain properties levied upon by the sheriff to satisfy the judgment should not be decided in the action where
the third-party claims have been presented, but in the separate action instituted by the claimants.

". . . Otherwise stated. the court issuing a writ of execution is supposed to enforce the authority only over properties
of the judgment debtor, and should a third party appear to claim the property levied upon by the sheriff, the
procedure laid down by the Rules is that such claim should be the subject of a separate and independent action.

x x x

". . . This rule is dictated by reasons of convenience as `intervention is more likely to inject confusion into the issues
between the parties in the case . . . with which the third-party claimant has nothing to do and thereby retard instead
of facilitate the prompt dispatch of the controversy which is the underlying objective of the rules of pleading and
practice.’ Besides, intervention may not be permitted after trial has been concluded and a final judgment rendered in
the case."cralaw virtua1aw library

However, the fact that petitioner questioned the jurisdiction of the court during the initial hearing of the case but
nevertheless actively participated in the trial, bars it from questioning now the court’s jurisdiction. A party who
voluntarily participated in the trial, like the herein petitioner, cannot later on raise the issue of the court’s lack of
jurisdiction (Philippine National Bank v. Intermediate Appellate Court, 143 SCRA [1986]).chanroblesvirtualawlibrary

As to the second issue (the non-piercing of PADCO’s corporate identity) the decision of respondent judge is as
follows:jgc:chanrobles.com.ph

"The plaintiff, however, contends that the controlling stockholders of the Philippine American Drug Co. are also the
same controlling stockholders of the Graphic Publishing, Inc. and, therefore, the levy upon the said machinery which
was found in the premises occupied by the Graphic Publishing, Inc. should be upheld. This contention cannot be
sustained because the two corporations were duly incorporated under the Corporation Law and each of them has a
juridical personality distinct and separate from the other and the properties of one cannot be levied upon to satisfy the
obligation of the other. This legal preposition is elementary and fundamental."cralaw virtua1aw library

It is true that a corporation, upon coming into being, is invested by law with a personality separate and distinct from
that of the persons composing it as well as from any other legal entity to which it may be related (Yutivo & Sons
Hardware Company v. Court of Tax Appeals, 1 SCRA 160 [1961]; and Emilio Cano Enterprises, Inc. v. CIR, 13 SCRA
290 [1965]). As a matter of fact, the doctrine that a corporation is a legal entity distinct and separate from the
members and stockholders who compose it is recognized and respected in all cases which are within reason and the
law (Villa Rey Transit, Inc. v. Ferrer, 25 SCRA 845 [1968]). However, this separate and distinct personality is merely a
fiction created by law for convenience and to promote justice (Laguna Transportation Company v. SSS, 107 Phil. 833
{[1960]). Accordingly, this separate personality of the corporation may be disregarded, or the veil of corporate fiction
pierced, in cases where it is used as a cloak or cover for fraud or illegality, or to work an injustice, or where necessary
to achieve equity or when necessary for the protection of creditors (Sulo ng Bayan, Inc. v. Araneta, Inc., 72 SCRA 347
[1976]). Corporations are composed of natural persons and the legal fiction of a separate corporate personality is not
a shield for the commission of injustice and inequity (Chenplex, Philippines, Inc., Et. Al. v. Hon. Pamatian, Et Al., 57
SCRA 408 [1974]). Likewise, this is true when the corporation is merely an adjunct, business conduit or alter ego of
another corporation. In such case, the fiction of separate and distinct corporation entities should be disregarded
(Commissioner of Internal Revenue v. Norton & Harrison, 11 SCRA 714 [1964]).

In the instant case, petitioner’s evidence established that PADCO was never engaged in the printing business; that the
board of directors and the officers of GRAPHIC and PADCO were the same; and that PADCO holds 50% share of stock
of GRAPHIC. Petitioner likewise stressed that PADCO’s own evidence shows that the printing machine in question had
been in the premises of GRAPHIC since May, 1965, long before PADCO even acquired its alleged title on July 11, 1966
from Capitol Publishing. That the said machine was allegedly leased by PADCO to GRAPHIC on January 24, 1966, even
before PADCO purchased it from Capital Publishing on July 11, 1966, only serves to show that PADCO’s claim of
ownership over the printing machine is not only farce and sham but also unbelievable.

Considering the aforestated principles and the circumstances established in this case, respondent judge should have
pierced PADCO’s veil of corporate identity.

Respondent PADCO argues that if respondent judge erred in not piercing the veil of its corporate fiction, the error is
merely an error of judgment and not an error of jurisdiction correctable by appeal and not by certiorari.

To this argument of respondent, suffice it to say that the same is a mere technicality. In the case of Rubio v. Mariano
(52 SCRA 338, 343 [1973]), this Court ruled:jgc:chanrobles.com.ph

"While We recognize the fact that these movants — the MBTC, the Phillips spouses, the Phillips corporation and the
Hacienda Benito, Inc. — did raise in their respective answers the issue as to the propriety of the instant petition
for certiorari on the ground that the remedy should have been appeal within the reglementary period, We considered
such issue as a mere technicality which would have accomplished nothing substantial except to deny to the petitioner
the right to litigate the matters he raised . . ."cralaw virtua1aw library

Litigations should, as much as possible, be decided on their merits and not on technicality (De las Alas v. Court of
Appeals, 83 SCRA 200, 216 [1978]). Every party-litigant must be afforded the amplest opportunity for the proper and
just determination of his cause, free from the unacceptable plea of technicalities (Heirs of Ceferino Morales v. Court of
Appeals, 67 SCRA 304, 310 [1975]).cralawnad

PREMISES CONSIDERED, the March 26, 1975 Order of the then Court of First Instance of Manila, is ANNULLED and
SET ASIDE, and the Temporary Restraining Order issued is hereby made permanent.

SO ORDERED.

G.R. No. 182729 September 29, 2010

KUKAN INTERNATIONAL CORPORATION, Petitioner,


vs.
HON. AMOR REYES, in her capacity as Presiding Judge of the Regional Trial Court of Manila, Branch 21, and ROMEO M.
MORALES, doing business under the name and style "RM Morales Trophies and Plaques,"Respondents.

DECISION

VELASCO, JR., J.:

The Case

This Petition for Review on Certiorari under Rule 45 seeks to nullify and reverse the January 23, 2008 Decision 1and the April 16, 2008
Resolution2 rendered by the Court of Appeals (CA) in CA-G.R. SP No. 100152.

The assailed CA decision affirmed the March 12, 2007 3 and June 7, 20074 Orders of the Regional Trial Court (RTC) of Manila, Branch
21, in Civil Case No. 99-93173, entitled Romeo M. Morales, doing business under the name and style RM Morales Trophies and
Plaques v. Kukan, Inc. In the said orders, the RTC disregarded the separate corporate identities of Kukan, Inc. and Kukan International
Corporation and declared them to be one and the same entity. Accordingly, the RTC held Kukan International Corporation, albeit not
impleaded in the underlying complaint of Romeo M. Morales, liable for the judgment award decreed in a Decision dated November 28,
20025 in favor of Morales and against Kukan, Inc.

The Facts

Sometime in March 1998, Kukan, Inc. conducted a bidding for the supply and installation of signages in a building being constructed in
Makati City. Morales tendered the winning bid and was awarded the PhP 5 million contract. Some of the items in the project award
were later excluded resulting in the corresponding reduction of the contract price to PhP 3,388,502. Despite his compliance with his
contractual undertakings, Morales was only paid the amount of PhP 1,976,371.07, leaving a balance of PhP 1,412,130.93, which
Kukan, Inc. refused to pay despite demands. Shortchanged, Morales filed a Complaint 6 with the RTC against Kukan, Inc. for a sum of
money, the case docketed as Civil Case No. 99-93173 and eventually raffled to Branch 17 of the court.

Following the joinder of issues after Kukan, Inc. filed an answer with counterclaim, trial ensued. However, starting November 2000,
Kukan, Inc. no longer appeared and participated in the proceedings before the trial court, prompting the RTC to declare Kukan, Inc. in
default and paving the way for Morales to present his evidence ex parte.
On November 28, 2002, the RTC rendered a Decision finding for Morales and against Kukan, Inc., disposing as follows:

WHEREFORE, consistent with Section 5, Rule 18 of the 1997 Rules of Civil Procedure, and by preponderance of evidence, judgment is
hereby rendered in favor of the plaintiff, ordering Kukan, Inc.:

1. to pay the sum of ONE MILLION TWO HUNDRED ONE THOUSAND SEVEN HUNDRED TWENTY FOUR PESOS
(P1,201,724.00) with legal interest at 12% per annum from February 17, 1999 until full payment;

2. to pay the sum of FIFTY THOUSAND PESOS (P50,000.00) as moral damages;

3. to pay the sum of TWENTY THOUSAND PESOS, (P20,000.00) as reasonable attorney’s fees; and

4. to pay the sum of SEVEN THOUSAND NINE HUNDRED SIXTY PESOS and SIX CENTAVOS (P7,960.06) as litigation
expenses.

For lack of factual foundation, the counterclaim is DISMISSED.

IT IS SO ORDERED.7

After the above decision became final and executory, Morales moved for and secured a writ of execution 8 against Kukan, Inc. The
sheriff then levied upon various personal properties found at what was supposed to be Kukan, Inc.’s office at Unit 2205, 88 Corporate
Center, Salcedo Village, Makati City. Alleging that it owned the properties thus levied and that it was a different corporation from Kukan,
Inc., Kukan International Corporation (KIC) filed an Affidavit of Third-Party Claim. Notably, KIC was incorporated in August 2000, or
shortly after Kukan, Inc. had stopped participating in Civil Case No. 99-93173.

In reaction to the third party claim, Morales interposed an Omnibus Motion dated April 30, 2003. In it, Morales prayed, applying the
principle of piercing the veil of corporate fiction, that an order be issued for the satisfaction of the judgment debt of Kukan, Inc. with the
properties under the name or in the possession of KIC, it being alleged that both corporations are but one and the same entity. KIC
opposed Morales’ motion. By Order of May 29, 2003 9as reiterated in a subsequent order, the court denied the omnibus motion.

In a bid to establish the link between KIC and Kukan, Inc., and thus determine the true relationship between the two, Morales filed a
Motion for Examination of Judgment Debtors dated May 4, 2005. In this motion Morales sought that subponae be issued against the
primary stockholders of Kukan, Inc., among them Michael Chan, a.k.a. Chan Kai Kit. This too was denied by the trial court in an Order
dated May 24, 2005.10

Morales then sought the inhibition of the presiding judge, Eduardo B. Peralta, Jr., who eventually granted the motion. The case was re-
raffled to Branch 21, presided by public respondent Judge Amor Reyes.

Before the Manila RTC, Branch 21, Morales filed a Motion to Pierce the Veil of Corporate Fiction to declare KIC as having no existence
separate from Kukan, Inc. This time around, the RTC, by Order dated March 12, 2007, granted the motion, the dispositive portion of
which reads:

WHEREFORE, premises considered, the motion is hereby GRANTED. The Court hereby declares as follows:

1. defendant Kukan, Inc. and newly created Kukan International Corp. as one and the same corporation;

2. the levy made on the properties of Kukan International Corp. is hereby valid;

3. Kukan International Corp. and Michael Chan are jointly and severally liable to pay the amount awarded to plaintiff pursuant
to the decision of November [28], 2002 which has long been final and executory.

SO ORDERED.

From the above order, KIC moved but was denied reconsideration in another Order dated June 7, 2007.

KIC went to the CA on a petition for certiorari to nullify the aforesaid March 12 and June 7, 2007 RTC Orders.

On January 23, 2008, the CA rendered the assailed decision, the dispositive portion of which states:

WHEREFORE, premises considered, the petition is hereby DENIED and the assailed Orders dated March 12, 2007 and June 7, 2007
of the court a quo are both AFFIRMED. No costs.
SO ORDERED.11

The CA later denied KIC’s motion for reconsideration in the assailed resolution.

Hence, the instant petition for review, with the following issues KIC raises for the Court’s consideration:

1. There is no legal basis for the [CA] to resolve and declare that petitioner’s Constitutional Right to Due Process was not
violated by the public respondent in rendering the Orders dated March 12, 2007 and June 7, 2007 and in declaring petitioner
to be liable for the judgment obligations of the corporation "Kukan, Inc." to private respondent – as petitioner is a stranger to
the case and was never made a party in the case before the trial court nor was it ever served a summons and a copy of the
complaint.

2. There is no legal basis for the [CA] to resolve and declare that the Orders dated March 12, 2007 and June 7, 2007 rendered
by public respondent declaring the petitioner liable to the judgment obligations of the corporation "Kukan, Inc." to private
respondent are valid as said orders of the public respondent modify and/or amend the trial court’s final and executory decision
rendered on November 28, 2002.

3. There is no legal basis for the [CA] to resolve and declare that the Orders dated March 12, 2007 and June 7, 2007 rendered
by public respondent declaring the petitioner [KIC] and the corporation "Kukan, Inc." as one and the same, and, therefore, the
Veil of Corporate Fiction between them be pierced – as the procedure undertaken by public respondent which the [CA] upheld
is not sanctioned by the Rules of Court and/or established jurisprudence enunciated by this Honorable Supreme Court. 12

In gist, the issues to be resolved boil down to the question of, first, whether the trial court can, after the judgment against Kukan, Inc.
has attained finality, execute it against the property of KIC; second, whether the trial court acquired jurisdiction over KIC; and third,
whether the trial and appellate courts correctly applied, under the premises, the principle of piercing the veil of corporate fiction.

The Ruling of the Court

The petition is meritorious.

First Issue: Against Whom Can a Final and


Executory Judgment Be Executed

The preliminary question that must be answered is whether or not the trial court can, after adjudging Kukan, Inc. liable for a sum of
money in a final and executory judgment, execute such judgment debt against the property of KIC.

The poser must be answered in the negative.

In Carpio v. Doroja,13 the Court ruled that the deciding court has supervisory control over the execution of its judgment:

A case in which an execution has been issued is regarded as still pending so that all proceedings on the execution are proceedings in
the suit. There is no question that the court which rendered the judgment has a general supervisory control over its process of
execution, and this power carries with it the right to determine every question of fact and law which may be involved in the execution.

We reiterated the above holding in Javier v. Court of Appeals14 in this wise: "The said branch has a general supervisory control over its
processes in the execution of its judgment with a right to determine every question of fact and law which may be involved in the
execution."

The court’s supervisory control does not, however, extend as to authorize the alteration or amendment of a final and executory
decision, save for certain recognized exceptions, among which is the correction of clerical errors. Else, the court violates the principle of
finality of judgment and its immutability, concepts which the Court, in Tan v. Timbal, 15 defined:

As we held in Industrial Management International Development Corporation vs. NLRC:

It is an elementary principle of procedure that the resolution of the court in a given issue as embodied in the dispositive part of a
decision or order is the controlling factor as to settlement of rights of the parties. Once a decision or order becomes final and executory,
it is removed from the power or jurisdiction of the court which rendered it to further alter or amend it. It thereby becomes immutable and
unalterable and any amendment or alteration which substantially affects a final and executory judgment is null and void for lack of
jurisdiction, including the entire proceedings held for that purpose. An order of execution which varies the tenor of the judgment or
exceeds the terms thereof is a nullity. (Emphasis supplied.)

Republic v. Tango16 expounded on the same principle and its exceptions:


Deeply ingrained in our jurisprudence is the principle that a decision that has acquired finality becomes immutable and
unalterable. As such, it may no longer be modified in any respect even if the modification is meant to correct erroneous conclusions
of fact or law and whether it will be made by the court that rendered it or by the highest court of the land. x x x

The doctrine of finality of judgment is grounded on the fundamental principle of public policy and sound practice that, at the risk of
occasional error, the judgment of courts and the award of quasi-judicial agencies must become final on some definite date fixed by
law. The only exceptions to the general rule are the correction of clerical errors, the so-called nunc pro tunc entries which cause no
prejudice to any party, void judgments, and whenever circumstances transpire after the finality of the decision which render its
execution unjust and inequitable. None of the exceptions obtains here to merit the review sought. (Emphasis added.)

So, did the RTC, in breach of the doctrine of immutability and inalterability of judgment, order the execution of its final decision in a
manner as would amount to its prohibited alteration or modification?

We repair to the dispositive portion of the final and executory RTC decision. Pertinently, it provides:

WHEREFORE, consistent with Section 5, Rule 18 of the 1997 Rules of Civil Procedure, and by preponderance of evidence, judgment is
hereby rendered in favor of the plaintiff, ordering Kukan, Inc.:

1. to pay the sum of ONE MILLION TWO HUNDRED ONE THOUSAND SEVEN HUNDRED TWENTY FOUR PESOS
(P1,201,724.00) with legal interest at 12% per annum from February 17, 1999 until full payment;

2. to pay the sum of FIFTY THOUSAND PESOS (P50,000.00) as moral damages;

3. to pay the sum of TWENTY THOUSAND PESOS (P20,000.00) as reasonable attorney’s fees; and

4. to pay the sum of SEVEN THOUSAND NINE HUNDRED SIXTY PESOS and SIX CENTAVOS (P7,960.06) as litigation
expenses.

x x x x (Emphasis supplied.)

As may be noted, the above decision, in unequivocal terms, directed Kukan, Inc. to pay the aforementioned awards to Morales. Thus,
making KIC, thru the medium of a writ of execution, answerable for the above judgment liability is a clear case of altering a decision, an
instance of granting relief not contemplated in the decision sought to be executed. And the change does not fall under any of the
recognized exceptions to the doctrine of finality and immutability of judgment. It is a settled rule that a writ of execution must conform to
the fallo of the judgment; as an inevitable corollary, a writ beyond the terms of the judgment is a nullity. 17

Thus, on this ground alone, the instant petition can already be granted. Nonetheless, an examination of the other issues raised by KIC
would be proper.

Second Issue: Propriety of the RTC


Assuming Jurisdiction over KIC

The next issue turns on the validity of the execution the trial court authorized against KIC and its property, given that it was neither
made a party nor impleaded in Civil Case No. 99-93173, let alone served with summons. In other words, did the trial court acquire
jurisdiction over KIC?

In the assailed decision, the appellate court deemed KIC to have voluntarily submitted itself to the jurisdiction of the trial court owing to
its filing of four (4) pleadings adverted to earlier, namely: (a) the Affidavit of Third-Party Claim;18(b) the Comment and Opposition to
Plaintiff’s Omnibus Motion;19 (c) the Motion for Reconsideration of the RTC Order dated March 12, 2007;20 and (d) the Motion for Leave
to Admit Reply.21 The CA, citing Section 20, Rule 14 of the Rules of Court, stated that "the procedural rule on service of summons can
be waived by voluntary submission to the court’s jurisdiction through any form of appearance by the party or its counsel." 22

We cannot give imprimatur to the appellate court’s appreciation of the thrust of Sec. 20, Rule 14 of the Rules in concluding that the trial
court acquired jurisdiction over KIC.

Orion Security Corporation v. Kalfam Enterprises, Inc.23 explains how courts acquire jurisdiction over the parties in a civil case:

Courts acquire jurisdiction over the plaintiffs upon the filing of the complaint. On the other hand, jurisdiction over the defendants in a
civil case is acquired either through the service of summons upon them or through their voluntary appearance in court and their
submission to its authority. (Emphasis supplied.)
In the fairly recent Palma v. Galvez,24 the Court reiterated its holding in Orion Security Corporation, stating: "[I]n civil cases, the trial
court acquires jurisdiction over the person of the defendant either by the service of summons or by the latter’s voluntary appearance
and submission to the authority of the former."

The court’s jurisdiction over a party-defendant resulting from his voluntary submission to its authority is provided under Sec. 20, Rule 14
of the Rules, which states:

Section 20. Voluntary appearance. – The defendant’s voluntary appearance in the actions shall be equivalent to service of summons.
The inclusion in a motion to dismiss of other grounds aside from lack of jurisdiction over the person of the defendant shall not be
deemed a voluntary appearance.

To be sure, the CA’s ruling that any form of appearance by the party or its counsel is deemed as voluntary appearance finds support in
the kindred Republic v. Ker & Co., Ltd.25 and De Midgely v. Ferandos.26

Republic and De Midgely, however, have already been modified if not altogether superseded 27 by La Naval Drug Corporation v. Court
of Appeals,28 wherein the Court essentially ruled and elucidated on the current view in our jurisdiction, to wit: "[A] special appearance
before the court––challenging its jurisdiction over the person through a motion to dismiss even if the movant invokes other grounds––is
not tantamount to estoppel or a waiver by the movant of his objection to jurisdiction over his person; and such is not constitutive of a
voluntary submission to the jurisdiction of the court."29

In the instant case, KIC was not made a party-defendant in Civil Case No. 99-93173. Even if it is conceded that it raised affirmative
defenses through its aforementioned pleadings, KIC never abandoned its challenge, however implicit, to the RTC’s jurisdiction over its
person. The challenge was subsumed in KIC’s primary assertion that it was not the same entity as Kukan, Inc. Pertinently, in its
Comment and Opposition to Plaintiff’s Omnibus Motion dated May 20, 2003, KIC entered its "special but not voluntary appearance"
alleging therein that it was a different entity and has a separate legal personality from Kukan, Inc. And KIC would consistently reiterate
this assertion in all its pleadings, thus effectively resisting all along the RTC’s jurisdiction of its person. It cannot be overemphasized
that KIC could not file before the RTC a motion to dismiss and its attachments in Civil Case No. 99-93173, precisely because KIC was
neither impleaded nor served with summons. Consequently, KIC could only assert and claim through its affidavits, comments, and
motions filed by special appearance before the RTC that it is separate and distinct from Kukan, Inc.

Following La Naval Drug Corporation,30 KIC cannot be deemed to have waived its objection to the court’s lack of jurisdiction over its
person. It would defy logic to say that KIC unequivocally submitted itself to the jurisdiction of the RTC when it strongly asserted that it
and Kukan, Inc. are different entities. In the scheme of things obtaining, KIC had no other option but to insist on its separate identity and
plead for relief consistent with that position.

Third Issue: Piercing the


Veil of Corporate Fiction

The third and main issue in this case is whether or not the trial and appellate courts correctly applied the principle of piercing the veil of
corporate entity––called also as disregarding the fiction of a separate juridical personality of a corporation––to support a conclusion that
Kukan, Inc. and KIC are but one and the same corporation with respect to the contract award referred to at the outset. This principle
finds its context on the postulate that a corporation is an artificial being invested with a personality separate and distinct from those of
the stockholders and from other corporations to which it may be connected or related. 31

In Pantranco Employees Association (PEA-PTGWO) v. National Labor Relations Commission,32 the Court revisited the subject principle
of piercing the veil of corporate fiction and wrote:

Under the doctrine of "piercing the veil of corporate fiction," the court looks at the corporation as a mere collection of individuals or an
aggregation of persons undertaking business as a group, disregarding the separate juridical personality of the corporation unifying the
group. Another formulation of this doctrine is that when two business enterprises are owned, conducted and controlled by the same
parties, both law and equity will, when necessary to protect the rights of third parties, disregard the legal fiction that two corporations
are distinct entities and treat them as identical or as one and the same.

Whether the separate personality of the corporation should be pierced hinges on obtaining facts appropriately pleaded or
proved. However, any piercing of the corporate veil has to be done with caution, albeit the Court will not hesitate to disregard the
corporate veil when it is misused or when necessary in the interest of justice. x x x (Emphasis supplied.)

The same principle was the subject and discussed in Rivera v. United Laboratories, Inc.:

While a corporation may exist for any lawful purpose, the law will regard it as an association of persons or, in case of two corporations,
merge them into one, when its corporate legal entity is used as a cloak for fraud or illegality. This is the doctrine of piercing the veil of
corporate fiction. The doctrine applies only when such corporate fiction is used to defeat public convenience, justify wrong, protect
fraud, or defend crime, or when it is made as a shield to confuse the legitimate issues, or where a corporation is the mere alter ego or
business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it
merely an instrumentality, agency, conduit or adjunct of another corporation.

To disregard the separate juridical personality of a corporation, the wrongdoing must be established clearly and convincingly. It cannot
be presumed.33 (Emphasis supplied.)

Now, as before the appellate court, petitioner KIC maintains that the RTC violated its right to due process when, in the execution of its
November 28, 2002 Decision, the court authorized the issuance of the writ against KIC for Kukan, Inc.’s judgment debt, albeit KIC has
never been a party to the underlying suit. As a counterpoint, Morales argues that KIC’s specific concern on due process and on the
validity of the writ to execute the RTC’s November 28, 2002 Decision would be mooted if it were established that KIC and Kukan, Inc.
are indeed one and the same corporation.

Morales’ contention is untenable.

The principle of piercing the veil of corporate fiction, and the resulting treatment of two related corporations as one and the same
juridical person with respect to a given transaction, is basically applied only to determine established liability; 34 it is not available to
confer on the court a jurisdiction it has not acquired, in the first place, over a party not impleaded in a case. Elsewise put, a corporation
not impleaded in a suit cannot be subject to the court’s process of piercing the veil of its corporate fiction. In that situation, the court has
not acquired jurisdiction over the corporation and, hence, any proceedings taken against that corporation and its property would infringe
on its right to due process. Aguedo Agbayani, a recognized authority on Commercial Law, stated as much:

23. Piercing the veil of corporate entity applies to determination of liability not of jurisdiction. x x x

This is so because the doctrine of piercing the veil of corporate fiction comes to play only during the trial of the case after the court has
already acquired jurisdiction over the corporation. Hence, before this doctrine can be applied, based on the evidence presented, it is
imperative that the court must first have jurisdiction over the corporation. 35 x x x (Emphasis supplied.)

The implication of the above comment is twofold: (1) the court must first acquire jurisdiction over the corporation or corporations
involved before its or their separate personalities are disregarded; and (2) the doctrine of piercing the veil of corporate entity can only
be raised during a full-blown trial over a cause of action duly commenced involving parties duly brought under the authority of the court
by way of service of summons or what passes as such service.

The issue of jurisdiction or the lack of it over KIC has already been discussed. Anent the matter of the time and manner of raising the
principle in question, it is undisputed that no full-blown trial involving KIC was had when the RTC disregarded the corporate veil of KIC.
The reason for this actuality is simple and undisputed: KIC was not impleaded in Civil Case No. 99-93173 and that the RTC did not
acquire jurisdiction over it. It was dragged to the case after it reacted to the improper execution of its properties and veritably hauled to
court, not thru the usual process of service of summons, but by mere motion of a party with whom it has no privity of contract and after
the decision in the main case had already become final and executory. As to the propriety of a plea for the application of the principle by
mere motion, the following excerpts are instructive:

Generally, a motion is appropriate only in the absence of remedies by regular pleadings, and is not available to settle important
questions of law, or to dispose of the merits of the case. A motion is usually a proceeding incidental to an action, but it may be a wholly
distinct or independent proceeding. A motion in this sense is not within this discussion even though the relief demanded is denominated
an "order."

A motion generally relates to procedure and is often resorted to in order to correct errors which have crept in along the line of the
principal action’s progress. Generally, where there is a procedural defect in a proceeding and no method under statute or rule of court
by which it may be called to the attention of the court, a motion is an appropriate remedy. In many jurisdictions, the motion has replaced
the common-law pleas testing the sufficiency of the pleadings, and various common-law writs, such as writ of error coram nobis and
audita querela. In some cases, a motion may be one of several remedies available. For example, in some jurisdictions, a motion to
vacate an order is a remedy alternative to an appeal therefrom.

Statutes governing motions are given a liberal construction. 36 (Emphasis supplied.)

The bottom line issue of whether Morales can proceed against KIC for the judgment debt of Kukan, Inc.––assuming hypothetically that
he can, applying the piercing the corporate veil principle––resolves itself into the question of whether a mere motion is the appropriate
vehicle for such purpose.

Verily, Morales espouses the application of the principle of piercing the corporate veil to hold KIC liable on theory that Kukan, Inc. was
out to defraud him through the use of the separate and distinct personality of another corporation, KIC. In net effect, Morales’ adverted
motion to pierce the veil of corporate fiction dated January 3, 2007 stated a new cause of action, i.e., for the liability of judgment debtor
Kukan, Inc. to be borne by KIC on the alleged identity of the two corporations. This new cause of action should be properly ventilated in
another complaint and subsequent trial where the doctrine of piercing the corporate veil can, if appropriate, be applied, based on the
evidence adduced. Establishing the claim of Morales and the corresponding liability of KIC for Kukan Inc.’s indebtedness could hardly
be the subject, under the premises, of a mere motion interposed after the principal action against Kukan, Inc. alone had peremptorily
been terminated. After all, a complaint is one where the plaintiff alleges causes of action.

In any event, the principle of piercing the veil of corporate fiction finds no application to the instant case.

As a general rule, courts should be wary of lifting the corporate veil between corporations, however related. Philippine National Bank v.
Andrada Electric Engineering Company37 explains why:

A corporation is an artificial being created by operation of law. x x x 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. This is basic.

Equally well-settled is the principle that the corporate mask may be removed or the corporate veil pierced when the corporation is just
an alter ego of a person or of another corporation. For reasons of public policy and in the interest of justice, the corporate veil will
justifiably be impaled only when it becomes a shield for fraud, illegality or inequity committed against third persons.

Hence, any application of the doctrine of piercing the corporate veil should be done with caution. A court should be mindful of the milieu
where it is to be applied. It must be certain that the corporate fiction was misused to such an extent that injustice, fraud, or crime was
committed against another, in disregard of its rights. The wrongdoing must be clearly and convincingly established; it cannot be
presumed. Otherwise, an injustice that was never unintended may result from an erroneous application.

This Court has pierced the corporate veil to ward off a judgment credit, to avoid inclusion of corporate assets as part of the estate of the
decedent, to escape liability arising from a debt, or to perpetuate fraud and/or confuse legitimate issues either to promote or to shield
unfair objectives or to cover up an otherwise blatant violation of the prohibition against forum-shopping. Only in these and similar
instances may the veil be pierced and disregarded. (Emphasis supplied.)

In fine, to justify the piercing of the veil of corporate fiction, it must be shown by clear and convincing proof that the separate and distinct
personality of the corporation was purposefully employed to evade a legitimate and binding commitment and perpetuate a fraud or like
wrongdoings. To be sure, the Court has, on numerous occasions, 38applied the principle where a corporation is dissolved and its assets
are transferred to another to avoid a financial liability of the first corporation with the result that the second corporation should be
considered a continuation and successor of the first entity.

In those instances when the Court pierced the veil of corporate fiction of two corporations, there was a confluence of the following
factors:

1. A first corporation is dissolved;

2. The assets of the first corporation is transferred to a second corporation to avoid a financial liability of the first corporation;
and

3. Both corporations are owned and controlled by the same persons such that the second corporation should be considered as
a continuation and successor of the first corporation.

In the instant case, however, the second and third factors are conspicuously absent. There is, therefore, no compelling justification for
disregarding the fiction of corporate entity separating Kukan, Inc. from KIC. In applying the principle, both the RTC and the CA
miserably failed to identify the presence of the abovementioned factors. Consider:

The RTC disregarded the separate corporate personalities of Kukan, Inc. and KIC based on the following premises and arguments:

While it is true that a corporation has a separate and distinct personality from its stockholder, director and officers, the law expressly
provides for an exception. When Michael Chan, the Managing Director of defendant Kukan, Inc. (majority stockholder of the newly
formed corporation [KIC]) confirmed the award to plaintiff to supply and install interior signages in the Enterprise Center he (Michael
Chan, Managing Director of defendant Kukan, Inc.) knew that there was no sufficient corporate funds to pay its obligation/account, thus
implying bad faith on his part and fraud in contracting the obligation. Michael Chan neither returned the interior signages nor tendered
payment to the plaintiff. This circumstance may warrant the piercing of the veil of corporation fiction. Having been guilty of bad faith in
the management of corporate matters the corporate trustee, director or officer may be held personally liable. x x x

Since fraud is a state of mind, it need not be proved by direct evidence but may be inferred from the circumstances of the case. x x x
[A]nd the circumstances are: the signature of Michael Chan, Managing Director of Kukan, Inc. appearing in the confirmation of the
award sent to the plaintiff; signature of Chan Kai Kit, a British National appearing in the Articles of Incorporation and signature of
Michael Chan also a British National appearing in the Articles of Incorporation [of] Kukan International Corp. give the impression that
they are one and the same person, that Michael Chan and Chan Kai Kit are both majority stockholders of Kukan International Corp. and
Kukan, Inc. holding 40% of the stocks; that Kukan International Corp. is practically doing the same kind of business as that of Kukan,
Inc.39 (Emphasis supplied.)
As is apparent from its disquisition, the RTC brushed aside the separate corporate existence of Kukan, Inc. and KIC on the main
argument that Michael Chan owns 40% of the common shares of both corporations, obviously oblivious that overlapping stock
ownership is a common business phenomenon. It must be remembered, however, that KIC’s properties were the ones seized upon levy
on execution and not that of Kukan, Inc. or of Michael Chan for that matter. Mere ownership by a single stockholder or by another
corporation of a substantial block of shares of a corporation does not, standing alone, provide sufficient justification for disregarding the
separate corporate personality.40 For this ground to hold sway in this case, there must be proof that Chan had control or complete
dominion of Kukan and KIC’s finances, policies, and business practices; he used such control to commit fraud; and the control was the
proximate cause of the financial loss complained of by Morales. The absence of any of the elements prevents the piercing of the
corporate veil.41 And indeed, the records do not show the presence of these elements.

On the other hand, the CA held:

In the present case, the facts disclose that Kukan, Inc. entered into a contractual obligation x x x worth more than three million pesos
although it had only Php5,000.00 paid-up capital; [KIC] was incorporated shortly before Kukan, Inc. suddenly ceased to appear and
participate in the trial; [KIC’s] purpose is related and somewhat akin to that of Kukan, Inc.; and in [KIC] Michael Chan, a.k.a., Chan Kai
Kit, holds forty percent of the outstanding stocks, while he formerly held the same amount of stocks in Kukan Inc. These would lead to
the inescapable conclusion that Kukan, Inc. committed fraudulent representation by awarding to the private respondent the contract
with full knowledge that it was not in a position to comply with the obligation it had assumed because of inadequate paid-up capital. It
bears stressing that shareholders should in good faith put at the risk of the business, unencumbered capital reasonably adequate for its
prospective liabilities. The capital should not be illusory or trifling compared with the business to be done and the risk of loss.

Further, it is clear that [KIC] is a continuation and successor of Kukan, Inc. Michael Chan, a.k.a. Chan Kai Kit has the largest block of
shares in both business enterprises. The emergence of the former was cleverly timed with the hasty withdrawal of the latter during the
trial to avoid the financial liability that was eventually suffered by the latter. The two companies have a related business purpose.
Considering these circumstances, the obvious conclusion is that the creation of Kukan International Corporation served as a device to
evade the obligation incurred by Kukan, Inc. and yet profit from the goodwill attained by the name "Kukan" by continuing to engage in
the same line of business with the same list of clients. 42 (Emphasis supplied.)

Evidently, the CA found the meager paid-up capitalization of Kukan, Inc. and the similarity of the business activities in which both
corporations are engaged as a jumping board to its conclusion that the creation of KIC "served as a device to evade the obligation
incurred by Kukan, Inc." The appellate court, however, left a gaping hole by failing to demonstrate that Kukan, Inc. and its stockholders
defrauded Morales. In fine, there is no showing that the incorporation, and the separate and distinct personality, of KIC was used to
defeat Morales’ right to recover from Kukan, Inc. Judging from the records, no serious attempt was made to levy on the properties of
Kukan, Inc. Morales could not, thus, validly argue that Kukan, Inc. tried to avoid liability or had no property against which to proceed.

Morales further contends that Kukan, Inc.’s closure is evidenced by its failure to file its 2001 General Information Sheet (GIS) with the
Securities and Exchange Commission. However, such fact does not necessarily mean that Kukan, Inc. had altogether ceased
operations, as Morales would have this Court believe, for it is stated on the face of the GIS that it is only upon a failure to file the
corporate GIS for five (5) consecutive years that non-operation shall be presumed.

The fact that Kukan, Inc. entered into a PhP 3.3 million contract when it only had a paid-up capital of PhP 5,000 is not an indication of
the intent on the part of its management to defraud creditors. Paid-up capital is merely seed money to start a corporation or a business
entity. As in this case, it merely represented the capitalization upon incorporation in 1997 of Kukan, Inc. Paid-up capitalization of PhP
5,000 is not and should not be taken as a reflection of the firm’s capacity to meet its recurrent and long-term obligations. It must be
borne in mind that the equity portion cannot be equated to the viability of a business concern, for the best test is the working capital
which consists of the liquid assets of a given business relating to the nature of the business concern.lawphil

Neither should the level of paid-up capital of Kukan, Inc. upon its incorporation be viewed as a badge of fraud, for it is in compliance
with Sec. 13 of the Corporation Code,43 which only requires a minimum paid-up capital of PhP 5,000.1avvphi1

The suggestion that KIC is but a continuation and successor of Kukan, Inc., owned and controlled as they are by the same
stockholders, stands without factual basis. It is true that Michael Chan, a.k.a. Chan Kai Kit, owns 40% of the outstanding capital stock of
both corporations. But such circumstance, standing alone, is insufficient to establish identity. There must be at least a substantial
identity of stockholders for both corporations in order to consider this factor to be constitutive of corporate identity.

It would not avail Morales any to rely44 on General Credit Corporation v. Alsons Development and Investment Corporation. 45 General
Credit Corporation is factually not on all fours with the instant case. There, the common stockholders of the corporations represented
90% of the outstanding capital stock of the companies, unlike here where Michael Chan merely represents 40% of the outstanding
capital stock of both KIC and Kukan, Inc., not even a majority of it. In that case, moreover, evidence was adduced to support the finding
that the funds of the second corporation came from the first. Finally, there was proof in General Credit Corporation of complete control,
such that one corporation was a mere dummy or alter ego of the other, which is absent in the instant case.

Evidently, the aforementioned case relied upon by Morales cannot justify the application of the principle of piercing the veil of corporate
fiction to the instant case. As shown by the records, the name Michael Chan, the similarity of business activities engaged in, and
incidentally the word "Kukan" appearing in the corporate names provide the nexus between Kukan, Inc. and KIC. As illustrated, these
circumstances are insufficient to establish the identity of KIC as the alter ego or successor of Kukan, Inc.
It bears reiterating that piercing the veil of corporate fiction is frowned upon. Accordingly, those who seek to pierce the veil must clearly
establish that the separate and distinct personalities of the corporations are set up to justify a wrong, protect fraud, or perpetrate a
deception. In the concrete and on the assumption that the RTC has validly acquired jurisdiction over the party concerned, Morales
ought to have proved by convincing evidence that Kukan, Inc. was collapsed and thereafter KIC purposely formed and operated to
defraud him. Morales has not to us discharged his burden.

WHEREFORE, the petition is hereby GRANTED. The CA’s January 23, 2008 Decision and April 16, 2008 Resolution in CA-G.R. SP
No. 100152 are hereby REVERSED and SET ASIDE. The levy placed upon the personal properties of Kukan International Corporation
is hereby ordered lifted and the personal properties ordered returned to Kukan International Corporation. The RTC of Manila, Branch 21
is hereby directed to execute the RTC Decision dated November 28, 2002 against Kukan, Inc. with reasonable dispatch.

No costs.

SO ORDERED.

G.R. No. 195580 January 28, 2015

NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND DEVELOPMENT, INC., and McARTHUR MINING,
INC., Petitioners,
vs.
REDMONT CONSOLIDATED MINES CORP., Respondent.

RESOLUTION

VELASCO, JR., J.:

Before the Court is the Motion for Reconsideration of its April 21, 2014 Decision, which denied the Petition for Review on Certiorari
under Rule 45 jointly interposed by petitioners Narra Nickel and Mining Development Corp. (Narra), Tesoro Mining and Development,
Inc. (Tesoro), and McArthur Mining Inc. (McArthur), and affirmed the October 1, 2010 Decision and February 15, 2011 Resolution of the
Court of Appeals (CA) in CA-G.R. SP No. 109703.

Very simply, the challenged Decision sustained the appellate court's ruling that petitioners, being foreign corporations, are not entitled
to Mineral Production Sharing Agreements (MPSAs). In reaching its conclusion, this Court upheld with approval the appellate court's
finding that there was doubt as to petitioners' nationality since a 100% Canadian-owned firm, MBMI Resources, Inc. (MBMI), effectively
owns 60% of the common stocks of the petitioners by owning equity interest of petitioners' other majority corporate shareholders.

In a strongly worded Motion for Reconsideration dated June 5, 2014, petitioners-movants argued, in the main, that the Court's Decision
was not in accord with law and logic. In its September 2, 2014 Comment, on the other hand, respondent Redmont Consolidated Mines
Corp. (Redmont) countered that petitioners’ motion for reconsideration is nothing but a rehash of their arguments and should, thus, be
denied outright for being pro-forma. Petitioners have interposed on September 30, 2014 their Reply to the respondent’s Comment.

After considering the parties’ positions, as articulated in their respective submissions, We resolve to deny the motion for
reconsideration.

I.

The case has not been rendered moot and academic

Petitioners have first off criticized the Court for resolving in its Decision a substantive issue, which,as argued, has supposedly been
rendered moot by the fact that petitioners’ applications for MPSAs had already been converted to an application for a Financial
Technical Assistance Agreement (FTAA), as petitioners have in fact been granted an FTAA. Further, the nationality issue, so petitioners
presently claim, had been rendered moribund by the fact that MBMI had already divested itself and sold all its shareholdings in the
petitioners, as well as in their corporate stockholders, to a Filipino corporation—DMCI Mining Corporation (DMCI).

As a counterpoint, respondent Redmontavers that the present case has not been rendered moot by the supposed issuance of an FTAA
in petitioners’ favor as this FTAA was subsequently revoked by the Office of the President (OP) and is currently a subject of a petition
pending in the Court’s First Division. Redmont likewise contends that the supposed sale of MBMI’s interest in the petitioners and in their
"holding companies" is a question of fact that is outside the Court’s province to verify in a Rule 45 certiorari proceedings. In any case,
assuming that the controversy has been rendered moot, Redmont claims that its resolution on the merits is still justified by the fact that
petitioners have violated a constitutional provision, the violation is capable of repetition yet evading review, and the present case
involves a matter of public concern.
Indeed, as the Court clarified in its Decision, the conversion of the MPSA application to one for FTAAs and the issuance by the OP of
an FTAA in petitioners’ favor are irrelevant. The OP itself has already cancelled and revoked the FTAA thusissued to petitioners.
Petitioners curiously have omitted this critical factin their motion for reconsideration. Furthermore, the supposed sale by MBMI of its
shares in the petition ercorporations and in their holding companies is not only a question of fact that this Court is without authority
toverify, it also does not negate any violation of the Constitutional provisions previously committed before any such sale.

We can assume for the nonce that the controversy had indeed been rendered moot by these two events. Asthis Court has time and
again declared, the "moot and academic" principle is not a magical formula that automatically dissuades courts in resolving a
case.1 The Court may still take cognizance of an otherwise moot and academic case, if it finds that (a) there is a grave violation of the
Constitution;(b) the situation is of exceptional character and paramount public interest is involved; (c) the constitutional issue raised
requires formulation of controlling principles to guide the bench, the bar, and the public; and (d) the case is capable of repetition yet
evading review.2 The Court’s April 21, 2014 Decision explained in some detail that all four (4) of the foregoing circumstances are
present in the case. If only to stress a point, we will do so again. First, allowing the issuance of MPSAs to applicants that are owned and
controlled by a 100% foreign-owned corporation, albeit through an intricate web of corporate layering involving alleged Filipino
corporations, is tantamount to permitting a blatant violation of Section 2, Article XII of the Constitution. The Court simply cannot allow
this breach and inhibit itself from resolving the controversy on the facile pretext that the case had already been rendered academic.

Second, the elaborate corporate layering resorted to by petitioners so as to make it appear that there is compliance with the minimum
Filipino ownership in the Constitution is deftly exceptional in character. More importantly, the case is of paramount public interest, as
the corporate layering employed by petitioners was evidently designed to circumvent the constitutional caveat allowing only Filipino
citizens and corporations 60%-owned by Filipino citizens to explore, develop, and use the country’s natural resources.

Third, the facts of the case, involving as they do a web of corporate layering intended to go around the Filipino ownership requirement
in the Constitution and pertinent laws, requirethe establishment of a definite principle that will ensure that the Constitutional provision
reserving to Filipino citizens or "corporations at least sixty per centum of whose capital is owned by such citizens" be effectively
enforced and complied with. The case, therefore, is an opportunity to establish a controlling principle that will "guide the bench, the bar,
and the public."

Lastly, the petitioners’ actions during the lifetime and existence of the instant case that gave rise to the present controversy are capable
of repetition yet evading review because, as shown by petitioners’ actions, foreign corporations can easily utilize dummy Filipino
corporations through various schemes and stratagems to skirt the constitutional prohibition against foreign mining in Philippine soil.

II.

The application of the Grandfather Ruleis justified by the circumstances of the case to determine the nationality of petitioners.

To petitioners, the Court’s application of the Grandfather Rule to determine their nationality is erroneous and allegedly without basis in
the Constitution, the Foreign Investments Act of 1991 (FIA), the Philippine Mining Act of 1995,3 and the Rules issued by the Securities
and Exchange Commission (SEC). These laws and rules supposedly espouse the application of the Control Test in verifying the
Philippine nationality of corporate entities for purposes of determining compliance withSec. 2, Art. XII of the Constitution that only
"corporations or associations at least sixty per centum of whose capital is owned by such [Filipino] citizens" may enjoy certain rights
and privileges, like the exploration and development of natural resources.

The application of the Grandfather Rule in the present case does not eschew the Control Test.

Clearly, petitioners have misread, and failed to appreciate the clear import of, the Court’s April 21, 2014 Decision. Nowhere in that
disposition did the Court foreclose the application of the Control Test in determining which corporations may be considered as
Philippine nationals. Instead, to borrow Justice Leonen’s term, the Court used the Grandfather Rule as a "supplement" to the Control
Test so that the intent underlying the averted Sec. 2, Art. XII of the Constitution be given effect. The following excerpts of the April 21,
2014 Decision cannot be clearer:

In ending, the "control test" is still the prevailing mode of determining whether or not a corporation is a Filipino corporation, within the
ambit of Sec. 2, Art. XII of the 1987 Constitution, entitled to undertake the exploration, development and utilization of the natural
resources of the Philippines. When in the mind of the Court, there is doubt, based on the attendant facts and circumstances of the case,
in the 60-40 Filipino equity ownership in the corporation, then it may apply the "grandfather rule." (emphasis supplied)

With that, the use of the Grandfather Rule as a "supplement" to the Control Test is not proscribed by the Constitution or the Philippine
Mining Act of 1995.

The Grandfather Rule implements the intent of the Filipinization provisions of the Constitution.

To reiterate, Sec. 2, Art. XII of the Constitution reserves the exploration, development, and utilization of natural resources to Filipino
citizens and "corporations or associations at least sixty per centum of whose capital is owned by such citizens." Similarly, Section 3(aq)
of the Philippine Mining Act of 1995 considers a "corporation x x x registered in accordance with law at least sixty per cent of the capital
of which is owned by citizens of the Philippines" as a person qualified to undertake a mining operation. Consistent with this objective,
the Grandfather Rulewas originally conceived to look into the citizenshipof the individuals who ultimately own and control the shares of
stock of a corporation for purposes of determining compliance with the constitutional requirement of Filipino ownership. It cannot,
therefore, be denied that the framers of the Constitution have not foreclosed the Grandfather Rule as a tool in verifying the nationality of
corporations for purposes of ascertaining their right to participate in nationalized or partly nationalized activities. The following excerpts
from the Record of the 1986 Constitutional Commission suggest as much:

MR. NOLLEDO: In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign equity; namely, 60-40 in Section 3,
60-40 in Section 9, and 2/3-1/3 in Section 15.

MR. VILLEGAS: That is right.

xxxx

MR. NOLLEDO: Thank you.

With respect to an investment by one corporation in another corporation, say, a corporation with 60-40 percent equity invests in another
corporation which is permitted by the Corporation Code, does the Committee adopt the grandfather rule?

MR. VILLEGAS: Yes, that is the understanding of the Committee.

As further defined by Dean Cesar Villanueva, the Grandfather Rule is "the method by which the percentage of Filipino equity in a
corporation engaged in nationalized and/or partly nationalized areas of activities, provided for under the Constitution and other
nationalization laws, is computed, in cases where corporate shareholders are present, by attributing the nationality of the second or
even subsequent tier of ownership to determine the nationality of the corporate shareholder."4 Thus, to arrive at the actual Filipino
ownership and control in a corporation, both the direct and indirect shareholdings in the corporation are determined.

This concept of stock attribution inherent in the Grandfather Rule to determine the ultimate ownership in a corporation is observed by
the Bureau of Internal Revenue (BIR) in applying Section 127 (B) 5 of the National Internal Revenue Code on taxes imposed on closely
held corporations, in relation to Section 96 of the Corporation Code 6 on close corporations. Thus, in BIR Ruling No. 148-10,
Commissioner Kim Henares held:

In the case of a multi-tiered corporation, the stock attribution rule must be allowed to run continuously along the chain of ownership until
it finally reaches the individual stockholders. This is in consonance with the "grandfather rule" adopted in the Philippines under Section
96 of the Corporation Code(Batas Pambansa Blg. 68) which provides that notwithstanding the fact that all the issued stock of a
corporation are held by not more than twenty persons, among others, a corporation is nonetheless not to be deemed a close
corporation when at least two thirds of its voting stock or voting rights is owned or controlled by another corporation which is not a close
corporation.7

In SEC-OGC Opinion No. 10-31 dated December 9, 2010 (SEC Opinion 10-31), the SEC applied the Grandfather Rule even if the
corporation engaged in mining operation passes the 60-40 requirement of the Control Test, viz:

You allege that the structure of MML’s ownership in PHILSAGA is as follows: (1) MML owns 40% equity in MEDC, while the 60% is
ostensibly owned by Philippine individual citizens who are actually MML’s controlled nominees; (2) MEDC, in turn, owns 60% equity in
MOHC, while MML owns the remaining 40%; (3) Lastly, MOHC owns 60% of PHILSAGA, while MML owns the remaining 40%. You
provide the following figure to illustrate this structure:

xxxx

We note that the Constitution and the statute use the concept "Philippine citizens." Article III, Section 1 of the Constitution provides who
are Philippine citizens: x x x This enumeration is exhaustive. In other words, there can be no other Philippine citizens other than those
falling within the enumeration provided by the Constitution. Obviously, only natural persons are susceptible of citizenship. Thus, for
purposes of the Constitutional and statutory restrictions on foreign participation in the exploitation of mineral resources, a corporation
investing in a mining joint venture can never be considered as a Philippine citizen.

The Supreme Court En Banc confirms this [in]… Pedro R. Palting, vs. San Jose Petroleum [Inc.]. The Court held that a corporation
investing in another corporation engaged ina nationalized activity cannot be considered as a citizen for purposes of the Constitutional
provision restricting foreign exploitation of natural resources:

xxxx

Accordingly, we opine that we must look into the citizenship of the individual stockholders, i.e. natural persons, of that investor-
corporation in order to determine if the Constitutional and statutory restrictions are complied with. If the shares of stock of the immediate
investor corporation is in turn held and controlled by another corporation, then we must look into the citizenship of the individual
stockholders of the latter corporation. In other words, if there are layers of intervening corporations investing in a mining joint venture,
we must delve into the citizenship of the individual stockholders of each corporation. This is the strict application of the grandfather rule,
which the Commission has been consistently applying prior to the 1990s. Indeed, the framers of the Constitution intended for the
"grandfather rule" to apply in case a 60%-40% Filipino-Foreign equity corporation invests in another corporation engaging in an activity
where the Constitution restricts foreign participation.

xxxx

Accordingly, under the structure you represented, the joint mining venture is 87.04 % foreign owned, while it is only 12.96% owned by
Philippine citizens. Thus, the constitutional requirement of 60% ownership by Philippine citizens isviolated. (emphasis supplied)

Similarly, in the eponymous Redmont Consolidated Mines Corporation v. McArthur Mining Inc., et al., 8 the SEC en bancapplied the
Grandfather Rule despite the fact that the subject corporations ostensibly have satisfied the 60-40 Filipino equity requirement. The SEC
en bancheld that to attain the Constitutional objective of reserving to Filipinos the utilization of natural resources, one should not stop
where the percentage of the capital stock is 60%.Thus:

[D]oubt, we believe, exists in the instant case because the foreign investor, MBMI, provided practically all the funds of the remaining
appellee-corporations. The records disclose that: (1) Olympic Mines and Development Corporation ("OMDC"), a domestic corporation,
and MBMI subscribed to 6,663 and 3,331 shares, respectively, out of the authorized capital stock of Madridejos; however, OMDC paid
nothing for this subscription while MBMI paid ₱2,803,900.00 out of its total subscription cost of ₱3,331,000.00; (2) Palawan Alpha
South Resource Development Corp. ("Palawan Alpha"), also a domestic corporation, and MBMI subscribed to 6,596 and 3,996 shares,
respectively, out of the authorized capital stock of PatriciaLouise; however, Palawan Alpha paid nothing for this subscription while
MBMI paid ₱2,796,000.00 out of its total subscription cost of ₱3,996,000.00; (3) OMDC and MBMI subscribed to 6,663 and 3,331
shares, respectively, out of the authorized capital stock of Sara Marie; however, OMDC paid nothing for this subscription while MBMI
paid ₱2,794,000.00 out of its total subscription cost of ₱3,331,000.00; and (4) Falcon Ridge Resources Management Corp. ("Falcon
Ridge"), another domestic corporation, and MBMI subscribed to 5,997 and 3,998 shares, respectively, out of the authorized capital
stock of San Juanico; however, Falcon Ridge paid nothing for this subscription while MBMI paid ₱2,500,000.00 out of its total
subscription cost of ₱3,998,000.00. Thus, pursuant to the afore-quoted DOJ Opinion, the Grandfather Rule must be used.

xxxx

The avowed purpose of the Constitution is to place in the hands of Filipinos the exploitation of our natural resources. Necessarily,
therefore, the Rule interpreting the constitutional provision should not diminish that right through the legal fiction of corporate ownership
and control. But the constitutional provision, as interpreted and practicedvia the 1967 SEC Rules, has favored foreigners contrary to the
command of the Constitution. Hence, the Grandfather Rule must be applied to accurately determine the actual participation, both direct
and indirect, of foreigners in a corporation engaged in a nationalized activity or business.

The method employed in the Grandfather Rule of attributing the shareholdings of a given corporate shareholder to the second or even
the subsequent tier of ownership hews with the rule that the "beneficial ownership" of corporations engaged in nationalized activities
must reside in the hands of Filipino citizens. Thus, even if the 60-40 Filipino equity requirement appears to have been satisfied, the
Department of Justice (DOJ), in its Opinion No. 144, S. of 1977, stated that an agreement that may distort the actual economic or
beneficial ownership of a mining corporation may be struck down as violative of the constitutional requirement, viz:

In this connection, you raise the following specific questions:

1. Can a Philippine corporation with 30% equity owned by foreigners enter into a mining service contract with a foreign company
granting the latter a share of not morethan 40% from the proceeds of the operations?

xxxx

By law, a mining lease may be granted only to a Filipino citizen, or to a corporation or partnership registered with the [SEC] at least
60% of the capital of which is owned by Filipino citizens and possessing x x x.The sixty percent Philippine equity requirement in mineral
resource exploitation x x xis intended to insure, among other purposes, the conservation of indigenous natural resources, for Filipino
posterityx x x. I think it is implicit in this provision, even if it refers merely to ownership of stock in the corporation holding the mining
concession, that beneficial ownership of the right to dispose, exploit, utilize, and develop natural resources shall pertain to Filipino
citizens, and that the nationality requirementis not satisfied unless Filipinos are the principal beneficiaries in the exploitation of the
country’s natural resources. This criterion of beneficial ownership is tacitly adopted in Section 44 of P.D. No. 463, above-quoted, which
limits the service fee in service contracts to 40% of the proceeds of the operation, thereby implying that the 60-40 benefit-sharing ration
is derived from the 60-40 equity requirement in the Constitution.

xxxx
It is obvious that while payments to a service contractor may be justified as a service fee, and therefore, properly deductible from gross
proceeds, the service contract could be employed as a means of going about or circumventing the constitutional limit on foreign equity
participation and the obvious constitutional policy to insure that Filipinos retain beneficial ownership of our mineral resources. Thus,
every service contract scheme has to be evaluated in its entirety, on a case to case basis, to determine reasonableness of the total
"service fee" x x x like the options available tothe contractor to become equity participant in the Philippine entity holding the concession,
or to acquire rights in the processing and marketing stages. x x x (emphasis supplied)

The "beneficial ownership" requirement was subsequently used in tandem with the "situs of control" todetermine the nationality of a
corporation in DOJ Opinion No. 84, S.of 1988, through the Grandfather Rule, despite the fact that both the investee and investor
corporations purportedly satisfy the 60-40 Filipino equity requirement:9

This refers to your request for opinion on whether or not there may be an investment in real estate by a domestic corporation (the
investing corporation) seventy percent (70%) of the capital stock of which is owned by another domestic corporation withat least 60%-
40% Filipino-Foreign Equity, while the remaining thirty percent (30%) of the capital stock is owned by a foreign corporation.

xxxx

This Department has had the occasion to rule in several opinions that it is implicit in the constitutional provisions, even if it refers merely
to ownership of stock in the corporation holding the land or natural resource concession, that the nationality requirement is not satisfied
unless it meets the criterion of beneficial ownership, i.e. Filipinos are the principal beneficiaries in the exploration of natural
resources(Op. No. 144, s. 1977; Op. No. 130, s. 1985), and that in applying the same "the primordial consideration is situs of control,
whether in a stock or nonstock corporation"(Op. No. 178, s. 1974). As stated in the Register of Deeds vs. Ung Sui Si Temple (97 Phil.
58), obviously toinsure that corporations and associations allowed to acquire agricultural land or to exploit natural resources "shall be
controlled by Filipinos." Accordingly, any arrangement which attempts to defeat the constitutional purpose should be eschewed (Op. No
130, s. 1985).

We are informed that in the registration of corporations with the [SEC], compliance with the sixty per centum requirement is being
monitored by SEC under the "Grandfather Rule" a method by which the percentage of Filipino equity in corporations engaged in
nationalized and/or partly nationalized areas of activities provided for under the Constitution and other national laws is accurately
computed, and the diminution if said equity prevented (SEC Memo, S. 1976). The "Grandfather Rule" is applied specifically in cases
where the corporation has corporate stockholders with alien stockholdings, otherwise, if the rule is not applied, the presence of such
corporate stockholders could diminish the effective control of Filipinos.

Applying the "Grandfather Rule" in the instant case, the result is as follows: x x x the total foreign equity in the investing corporation is
58% while the Filipino equity is only 42%, in the investing corporation, subject of your query, is disqualified from investing in real estate,
which is a nationalized activity, as it does not meet the 60%-40% Filipino-Foreign equity requirement under the Constitution.

This pairing of the concepts "beneficial ownership" and the "situs of control" in determining what constitutes"capital" has been adopted
by this Court in Heirs of Gamboa v. Teves.10 In its October 9, 2012 Resolution, the Court clarified, thus:

This is consistent with Section 3 of the FIA which provides that where 100% of the capital stock is heldby "a trustee of funds for pension
or other employee retirement or separation benefits," the trustee is a Philippine national if "at least sixty percent (60%) of the fund will
accrue to the benefit of Philippine nationals." Likewise, Section 1(b) of the Implementing Rules of the FIA provides that "for stocks to be
deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not enough to meet the required Filipino equity.
Full beneficial ownership of the stocks, coupled with appropriate voting rights, is essential." (emphasis supplied)

In emphasizing the twin requirements of "beneficial ownership" and "control" in determining compliance with the required Filipino equity
in Gamboa, the en bancCourt explicitly cited with approval the SEC en banc’s application in Redmont Consolidated Mines, Corp. v.
McArthur Mining, Inc., et al. of the Grandfather Rule, to wit:

Significantly, the SEC en banc, which is the collegial body statutorily empowered to issue rules and opinions on behalf of SEC, has
adopted the Grandfather Rulein determining compliance with the 60-40 ownership requirement in favor of Filipino citizens mandated by
the Constitution for certain economic activities. This prevailing SEC ruling, which the SEC correctly adopted to thwart any circumvention
of the required Filipino "ownership and control," is laid down in the 25 March 2010 SEC en banc ruling in Redmont Consolidated Mines,
Corp. v. McArthur Mining, Inc., et al. x x x (emphasis supplied)

Applying Gamboa, the Court, in Express Investments III Private Ltd. v. Bayantel Communications, Inc., 11 denied the foreign creditors’
proposal to convert part of Bayantel’s debts to common shares of the company at a rate of 77.7%. Supposedly, the conversion of the
debts to common shares by the foreign creditors would be done, both directly and indirectly, in order to meet the control test principle
under the FIA.Under the proposed structure, the foreign creditors would own 40% of the outstanding capital stock of the
telecommunications company on a direct basis, while the remaining 40% of shares would be registered to a holding company that shall
retain, on a direct basis, the other 60% equity reserved for Filipino citizens. Nonetheless, the Court found the proposal non-compliant
with the Constitutional requirement of Filipino ownership as the proposed structure would give more than 60% of the ownership of the
common shares of Bayantel to the foreign corporations, viz:
In its Rehabilitation Plan, among the material financial commitments made by respondent Bayantelis that its shareholders shall
relinquish the agreed-upon amount of common stock[s] as payment to Unsecured Creditors as per the Term Sheet. Evidently, the
parties intend to convert the unsustainable portion of respondent’s debt into common stocks, which have voting rights. If we indulge
petitioners on their proposal, the Omnibus Creditors which are foreign corporations, shall have control over 77.7% of Bayantel, a public
utility company. This is precisely the scenario proscribed by the Filipinization provision of the Constitution.Therefore, the Court of
Appeals acted correctly in sustaining the 40% debt-to-equity ceiling on conversion. (emphasis supplied) As shown by the quoted
legislative enactments, administrative rulings, opinions, and this Court’s decisions, the Grandfather Rule not only finds basis, but more
importantly, it implements the Filipino equity requirement, in the Constitution.

Application of the Grandfather

Rule with the Control Test.

Admittedly, an ongoing quandary obtains as to the role of the Grandfather Rule in determining compliance with the minimum Filipino
equity requirement vis-à-vis the Control Test. This confusion springs from the erroneous assumption that the use of one method
forecloses the use of the other.

As exemplified by the above rulings, opinions, decisions and this Court’s April 21, 2014 Decision, the Control Test can be, as it has
been, applied jointly withthe Grandfather Rule to determine the observance of foreign ownership restriction in nationalized economic
activities. The Control Test and the Grandfather Rule are not, as it were, incompatible ownership-determinant methods that canonly be
applied alternative to each other. Rather, these methodscan, if appropriate, be used cumulatively in the determination of the ownership
and control of corporations engaged in fully or partly nationalized activities, as the mining operation involved in this case or the
operation of public utilities as in Gamboa or Bayantel.

The Grandfather Rule, standing alone, should not be used to determine the Filipino ownership and control in a corporation, as it could
result in an otherwise foreign corporation rendered qualified to perform nationalized or partly nationalized activities. Hence, it is only
when the Control Test is first complied with that the Grandfather Rule may be applied. Put in another manner, if the subject
corporation’s Filipino equity falls below the threshold 60%, the corporation is immediately considered foreign-owned, in which case, the
needto resort to the Grandfather Rule disappears.

On the other hand, a corporation that complies with the 60-40 Filipino to foreign equity requirement can be considered a Filipino
corporation if there is no doubtas to who has the "beneficial ownership" and "control" of the corporation. In that instance, there is no
need fora dissection or further inquiry on the ownership of the corporate shareholders in both the investing and investee corporation or
the application of the Grandfather Rule.12 As a corollary rule, even if the 60-40 Filipino to foreign equity ratio is apparently met by the
subject or investee corporation, a resort to the Grandfather Rule is necessary if doubt existsas to the locusof the "beneficial ownership"
and "control." In this case, a further investigation as to the nationality of the personalities with the beneficial ownership and control of
the corporate shareholders in both the investing and investee corporations is necessary.

As explained in the April 21,2012 Decision, the "doubt" that demands the application of the Grandfather Rule in addition to or in tandem
with the Control Test is not confined to, or more bluntly, does not refer to the fact that the apparent Filipino ownership of the
corporation’s equity falls below the 60% threshold. Rather, "doubt" refers to various indicia that the "beneficial ownership" and "control"
of the corporation do not in fact reside in Filipino shareholders but in foreign stakeholders. As provided in DOJ Opinion No. 165, Series
of 1984, which applied the pertinent provisions of the Anti-DummyLaw in relation to the minimum Filipino equity requirement in the
Constitution, "significant indicators of the dummy status" have been recognized in view of reports "that some Filipino investors or
businessmen are being utilized or [are] allowing themselves to be used as dummies by foreign investors" specifically in joint ventures
for national resource exploitation. These indicators are:

1. That the foreign investors provide practically all the funds for the joint investment undertaken by these Filipino businessmen
and their foreign partner;

2. That the foreign investors undertake to provide practically all the technological support for the joint venture;

3. That the foreign investors, while being minority stockholders, manage the company and prepare all economic viability
studies.

Thus, In the Matter of the Petition for Revocation of the Certificate of Registration of Linear Works Realty Development
Corporation,13 the SEC held that when foreigners contribute more capital to an enterprise, doubt exists as to the actual control and
ownership of the subject corporation even if the 60% Filipino equity threshold is met. Hence, the SEC in that one ordered a further
investigation, viz:

x x x The [SEC Enforcement and Prosecution Department (EPD)] maintained that the basis for determining the level of foreign
participation is the number of shares subscribed, regardless of the par value. Applying such an interpretation, the EPD rules that the
foreign equity participation in Linear works Realty Development Corporation amounts to 26.41% of the corporation’s capital stock since
the amount of shares subscribed by foreign nationals is 1,795 only out of the 6,795 shares. Thus, the subject corporation is compliant
with the 40% limit on foreign equity participation. Accordingly, the EPD dismissed the complaint, and did not pursue any investigation
against the subject corporation.

xxxx

x x x [I]n this respect we find no error in the assailed order made by the EPD. The EPD did not err when it did not take into account the
par value of shares in determining compliance with the constitutional and statutory restrictionson foreign equity.

However, we are aware that some unscrupulous individuals employ schemes to circumvent the constitutional and statutory restrictions
on foreign equity. In the present case, the fact that the shares of the Japanese nationals have a greater par value but only have similar
rights to those held by Philippine citizens having much lower par value, is highly suspicious. This is because a reasonable investor
would expect to have greater control and economic rights than other investors who invested less capital than him. Thus, it is reasonable
to suspectthat there may be secret arrangements between the corporation and the stockholders wherein the Japanese nationals who
subscribed to the shares with greater par value actually have greater control and economic rights contrary to the equality of shares
based on the articles of incorporation.

With this in mind, we find it proper for the EPD to investigate the subject corporation. The EPD is advised to avail of the Commission’s
subpoena powers in order to gather sufficient evidence, and file the necessary complaint.

As will be discussed, even if atfirst glance the petitioners comply with the 60-40 Filipino to foreign equity ratio, doubt exists in the
present case that gives rise to a reasonable suspicion that the Filipino shareholders do not actually have the requisite number of control
and beneficial ownership in petitioners Narra, Tesoro, and McArthur. Hence, a further investigation and dissection of the extent of the
ownership of the corporate shareholders through the Grandfather Rule is justified.

Parenthetically, it is advanced that the application of the Grandfather Rule is impractical as tracing the shareholdings to the point when
natural persons hold rights to the stocks may very well lead to an investigation ad infinitum. Suffice it to say in this regard that, while the
Grandfather Rule was originally intended to trace the shareholdings to the point where natural persons hold the shares, the SEC had
already set up a limit as to the number of corporate layers the attribution of the nationality of the corporate shareholders may be
applied.

In a 1977 internal memorandum, the SEC suggested applying the Grandfather Rule on two (2) levels of corporate relations for publicly-
held corporations or where the shares are traded in the stock exchanges, and to three (3) levels for closely held corporations or the
shares of which are not traded in the stock exchanges. 14 These limits comply with the requirement in Palting v. San Jose Petroleum,
Inc.15 that the application of the Grandfather Rule cannot go beyond the level of what is reasonable.

A doubt exists as to the extent of control and beneficial ownership of MBMI over the petitioners and their investing corporate
stockholders.

In the Decision subject of this recourse, the Court applied the Grandfather Rule to determine the matter of true ownership and control
over the petitioners as doubt exists as to the actual extent of the participation of MBMI in the equity of the petitioners and their investing
corporations.

We considered the following membership and control structures and like nuances:

Tesoro

Supposedly Filipino corporation Sara Marie Mining, Inc. (Sara Marie) holds 59.97% of the 10,000 commonshares of petitioner Tesoro
while the Canadian-owned company, MBMI, holds 39.98% of its shares.

Name Nationality Number of Shares Amount Subscribed Amount Paid


Sara Marie Mining, Filipino 5,997 ₱5,997,000.00 ₱825,000.00
Inc.
MBMI Resources, Canadian 3,998 ₱3,998,000.00 ₱1,878,174.60
Inc.16
Lauro L. Salazar Filipino 1 ₱1,000.00 ₱1,000.00
Fernando B. Filipino 1 ₱1,000.00 ₱1,000.00
Esguerra
Manuel A. Agcaoili Filipino 1 ₱1,000.00 ₱1,000.00
Michael T. Mason American 1 ₱1,000.00 ₱1,000.00
Kenneth Cawkel Canadian 1 ₱1,000.00 ₱1,000.00
Total 10,000 ₱10,000,000.00 ₱2,708,174.60

In turn, the Filipino corporation Olympic Mines & Development Corp. (Olympic) holds 66.63% of Sara Marie’s shares while the same
Canadian company MBMI holds 33.31% of Sara Marie’s shares. Nonetheless, it is admitted that Olympic did not pay a single peso for
its shares. On the contrary, MBMI paid for 99% of the paid-up capital of Sara Marie.

Name Nationality Number of Shares Amount Subscribed Amount Paid


Olympic Mines & Filipino 6,663 ₱6,663,000.00 P0.00
Development
Corp.17
MBMI Resources, Canadian 3,331 ₱3,331,000.00 ₱2,794,000.00
Inc.
Amanti Limson Filipino 1 ₱1,000.00 ₱1,000.00
Fernando B. Filipino 1 ₱1,000.00 ₱1,000.00
Esguerra
Lauro Salazar Filipino 1 ₱1,000.00 ₱1,000.00
Emmanuel G. Filipino 1 ₱1,000.00 ₱1,000.00

Hernando

Michael T. Mason American 1 ₱1,000.00 ₱1,000.00


Kenneth Cawkel Canadian 1 ₱1,000.00 ₱1,000.00
Total 10,000 ₱10,000,000.00 ₱2,800,000.00

The fact that MBMI had practically provided all the funds in Sara Marie and Tesoro creates serious doubt as to the true extent
of its (MBMI) control and ownership over both Sara Marie and Tesoro since, as observed by the SEC, "a reasonable investor
would expect to have greater control and economic rights than other investors who invested less capital than him." The application of
the Grandfather Rule is clearly called for, and as shown below, the Filipinos’ control and economic benefits in petitioner Tesoro (through
Sara Marie) fallbelow the threshold 60%, viz:

Filipino participation in petitioner Tesoro: 40.01%

66.67
(Filipino equity in Sara Marie) x 59.97 (Sara Marie’s share in Tesoro) = 39.98%
100

39.98% + .03% (shares of individual Filipino shareholders [SHs] in Tesoro)


=40.01%

Foreign participation in petitioner Tesoro: 59.99%

33.33
(Foreign equity in Sara Marie) x 59.97 (Sara Marie’s share in Tesoro) = 19.99%
100

19.99% + 39.98% (MBMI’s direct participation in Tesoro) + .02% (shares of foreign individual SHs in Tesoro)
= 59.99%

With only 40.01% Filipino ownership in petitioner Tesoro, as compared to 59.99% foreign ownership of its shares, it is clear that
petitioner Tesoro does not comply with the minimum Filipino equity requirement imposed in Sec. 2, Art. XII of the Constitution. Hence,
the appellate court’s observation that Tesoro is a foreign corporation not entitled to an MPSA is apt.

McArthur
Petitioner McArthur follows the corporate layering structure of Tesoro, as 59.97% of its 10, 000 common shares is owned by
supposedly Filipino Madridejos Mining Corporation (Madridejos), while 39.98% belonged to the Canadian MBMI.

Name Nationality Number of Shares Amount Subscribed Amount Paid


Madridejos Mining Filipino 5,997 ₱5,997,000.00 ₱825,000.00
Corporation
MBMI Resources, Canadian 3,998 ₱3,998,000.0 ₱1,878,174.60
Inc.18
Lauro L. Salazar Filipino 1 ₱1,000.00 ₱1,000.00
Fernando B. Filipino 1 ₱1,000.00 ₱1,000.00
Manuel A. Agcaoili Filipino 1 ₱1,000.00 ₱1,000.00
Michael T. Mason American 1 ₱1,000.00 ₱1,000.00
Kenneth Cawkel Canadian 1 ₱1,000.00 ₱1,000.00
Total 10,000 ₱10,000,000.00 ₱2,708,174.60

In turn, 66.63% of Madridejos’ shares were held by Olympic while 33.31% of its shares belonged to MBMI. Yet again, Olympic did not
contribute to the paid-up capital of Madridejos and it was MBMI that provided 99.79% of the paid-up capital of Madridejos.

Name Nationality Number of Shares Amount Subscribed Amount Paid


Olympic Mines & Filipino 6,663 ₱6,663,000.00 P0.00
Development
Corp.19
MBMI Resources, Canadian 3,331 ₱3,331,000.00 ₱2,803,900.00
Inc.
Amanti Limson Filipino 1 ₱1,000.00 ₱1,000.00
Fernando B. Filipino 1 ₱1,000.00 ₱1,000.00
Esguerra
Lauro Salazar Filipino 1 ₱1,000.00 ₱1,000.00
Emmanuel G. Filipino 1 ₱1,000.00 ₱1,000.00
Hernando
Michael T. Mason American 1 ₱1,000.00 ₱1,000.00
Kenneth Cawkel Canadian 1 ₱1,000.00 ₱1,000.00
Total 10,000 ₱10,000,000.00 ₱2,809,900.00

Again, the fact that MBMI had practically provided all the funds in Madridejos and McArthur creates serious doubt as to the true extent
of its control and ownership of MBMI over both Madridejos and McArthur. The application of the Grandfather Rule is clearly called for,
and as will be shown below, MBMI, along with the other foreign shareholders, breached the maximum limit of 40% ownership in
petitioner McArthur, rendering the petitioner disqualified to an MPSA:

Filipino participation in petitioner McArthur: 40.01%

66.67
(Filipino equity in Madridejos) x 59.97 (Madridejos’ share in McArthur) = 39.98%
100

39.98% + .03% (shares of individual Filipino SHs in McArthur)


=40.01%

Foreign participation in petitioner McArthur: 59.99%

33.33 (Foreign equity in Madridejos) x 59.97 (Madridejos’ share in McArthur) = 19.99%


19.99% + 39.98% (MBMI’s direct participation inMcArthur) + .02% (shares of foreign individual SHs in McArthur)
= 59.99%

As with petitioner Tesoro, with only 40.01% Filipino ownership in petitioner McArthur, as compared to 59.99% foreign ownership of its
shares, it is clear that petitioner McArthur does not comply with the minimum Filipino equity requirement imposed in Sec. 2, Art. XII of
the Constitution. Thus, the appellate court did not err in holding that petitioner McArthur is a foreign corporation not entitled to an
MPSA.

Narra

As for petitioner Narra, 59.97% of its shares belonged to Patricia Louise Mining & Development Corporation (PLMDC), while Canadian
MBMI held 39.98% of its shares.

Name Nationality Number of Shares Amount Subscribed Amount Paid


Patricia Lousie Filipino 5,997 ₱5,997,000.00 ₱1,677,000.00
Mining and
Development Corp.
MBMI Resources, Canadian 3,996 ₱3,996,000.00 ₱1,116,000.00
Inc.20
Higinio C. Mendoza, Filipino 1 ₱1,000.00 ₱1,000.00
Henry E. Fernandez Filipino 1 ₱1,000.00 ₱1,000.00
Ma. Elena A. Filipino 1 ₱1,000.00 ₱1,000.00
Bocalan
Michael T. Mason American 1 ₱1,000.00 ₱1,000.00
Robert L. McCurdy Canadian 1 ₱1,000.00 ₱1,000.00
Manuel A. Agcaoili Filipino 1 ₱1,000.00 ₱1,000.00
Bayani H. Agabin Filipino 1 ₱1,000.00 ₱1,000.00
Total 10,000 ₱10,000,000.00 ₱2,800,000.00

PLMDC’s shares, in turn, were held by Palawan Alpha South Resources Development Corporation (PASRDC), which subscribed to
65.96% of PLMDC’s shares, and the Canadian MBMI, which subscribed to 33.96% of PLMDC’s shares.

Name Nationality Number of Shares Amount Subscribed Amount Paid


Palawan Alpha Filipino 6,596 ₱6,596,000.00 P0
South Resource
Development Corp.
MBMI Resources, Canadian 3,396 ₱3,396,000.00 ₱2,796,000.00
Inc.21
Higinio C. Mendoza, Filipino 1 ₱1,000.00 ₱1,000.00
Jr.
Fernando B. Filipino 1 ₱1,000.00 ₱1,000.00
Esguerra
Henry E. Fernandez Filipino 1 ₱1,000.00 ₱1,000.00
Ma. Elena A. Filipino 1 ₱1,000.00 ₱1,000.00
Bocalan
Michael T. Mason American 1 ₱1,000.00 ₱1,000.00
Robert L. McCurdy Canadian 1 ₱1,000.00 ₱1,000.00
Manuel A. Agcaoili Filipino 1 ₱1,000.00 ₱1,000.00
Bayani H, Agabin Filipino 1 ₱1,000.00 ₱1,000.00
Total 10,000 ₱10,000,000.00 ₱2,804,000.00

Yet again, PASRDC did not pay for any of its subscribed shares, while MBMI contributed 99.75% of PLMDC’s paid-up capital. This fact
creates serious doubt as to the true extent of MBMI’s control and ownership over both PLMDC and Narra since "a reasonable investor
would expect to have greater control and economic rights than other investors who invested less capital than him." Thus, the application
of the Grandfather Rule is justified. And as will be shown, it is clear that the Filipino ownership in petitioner Narra falls below the limit
prescribed in both the Constitution and the Philippine Mining Act of 1995.

Filipino participation in petitioner Narra: 39.64%

66.02
(Filipino equity in PLMDC) x 59.97 (PLMDC’s share in Narra) = 39.59%
100

39.59% + .05% (shares of individual Filipino SHs in McArthur)


=39.64%

Foreign participation in petitioner Narra: 60.36%

33.98
(Foreign equity in PLMDC) x 59.97 (PLMDC’s share in Narra) = 20.38%
100

20.38% + 39.96% (MBMI’s direct participation in Narra) + .02% (shares of foreign individual SHs in McArthur)
= 60.36%

With 60.36% foreign ownership in petitioner Narra, as compared to only 39.64% Filipino ownership of its shares, it is clear that
petitioner Narra does not comply with the minimum Filipino equity requirement imposed in Section 2, Article XII of the Constitution.
Hence, the appellate court did not err in holding that petitioner McArthur is a foreign corporation not entitled to an MPSA.

It must be noted that the foregoing determination and computation of petitioners’ Filipino equity composition was based on their
common shareholdings, not preferred or redeemable shares. Section 6 of the Corporation Code of the Philippines explicitly provides
that "no share may be deprived of voting rights except those classified as ‘preferred’ or ‘redeemable’ shares." Further, as Justice
Leonen puts it, there is "no indication that any of the shares x x x do not have voting rights, [thus] it must be assumed that all such
shares have voting rights."22 It cannot therefore be gain said that the foregoing computation hewed with the pronouncements of
Gamboa, as implemented by SEC Memorandum Circular No. 8, Series of 2013, (SEC Memo No. 8) 23 Section 2 of which states:

Section 2. All covered corporations shall, at all times, observe the constitutional or statutory requirement.1âwphi1 For purposes of
determining compliance therewith, the required percentage of Filipino ownership shall be applied to BOTH (a) the total outstanding
shares of stock entitled to vote in the election of directors; AND (b) the total number of outstanding shares of stock, whether or not
entitled to vote in the election of directors.

In fact, there is no indication that herein petitioners issued any other class of shares besides the 10,000 common shares. Neither is it
suggested that the common shares were further divided into voting or non-voting common shares. Hence, for purposes of this case,
items a) and b) in SEC Memo No. 8 both refer to the 10,000 common shares of each of the petitioners, and there is no need to
separately apply the 60-40 ratio to any segment or part of the said common shares.

III.

In mining disputes, the POA has jurisdiction to pass upon the nationality of applications for MPSAs

Petitioners also scoffed at this Court’s decision to uphold the jurisdiction of the Panel of Arbitrators (POA) of the Department of
Environment and Natural Resources (DENR) since the POA’s determination of petitioners’ nationalities is supposedly beyond its limited
jurisdiction, as defined in Gonzales v. Climax Mining Ltd.24 and Philex Mining Corp. v. Zaldivia.25

The April 21, 2014 Decision did not dilute, much less overturn, this Court’s pronouncements in either Gonzales or Philex Mining that
POA’s jurisdiction "is limited only to mining disputes which raise questions of fact," and not judicial questions cognizable by regular
courts of justice. However, to properly recognize and give effect to the jurisdiction vested in the POA by Section 77 of the Philippine
Mining Act of 1995,26 and in parallel with this Court’s ruling in Celestial Nickel Mining Exploration Corporation v. Macroasia Corp., 27 the
Court has recognized in its Decision that in resolving disputes "involving rights to mining areas" and "involving mineral agreements or
permits," the POA has jurisdiction to make a preliminary finding of the required nationality of the corporate applicant in order to
determine its right to a mining area or a mineral agreement.

There is certainly nothing novel or aberrant in this approach. In ejectment and unlawful detainer cases, where the subject of inquiry is
possession de facto, the jurisdiction of the municipal trial courts to make a preliminary adjudication regarding ownership of the real
property involved is allowed, but only for purposes of ruling on the determinative issue of material possession.

The present case arose from petitioners' MPSA applications, in which they asserted their respective rights to the mining areas each
applied for. Since respondent Redmont, itself an applicant for exploration permits over the same mining areas, filed petitions for the
denial of petitioners' applications, it should be clear that there exists a controversy between the parties and it is POA's jurisdiction to
resolve the said dispute. POA's ruling on Redmont's assertion that petitioners are foreign corporations not entitled to MPSA is but a
necessary incident of its disposition of the mining dispute presented before it, which is whether the petitioners are entitled to MPSAs.

Indeed, as the POA has jurisdiction to entertain "disputes involving rights to mining areas," it necessarily follows that the POA likewise
wields the authority to pass upon the nationality issue involving petitioners, since the resolution of this issue is essential and
indispensable in the resolution of the main issue, i.e., the determination of the petitioners' right to the mining areas through MPSAs.

WHEREFORE, We DENY the motion for reconsideration WITH FINALITY. No further pleadings shall be entertained. Let entry of
judgment be made in due course.

SO ORDERED.

G.R. No. 155650 July 20, 2006

MANILA INTERNATIONAL AIRPORT AUTHORITY, petitioner,


vs.
COURT OF APPEALS, CITY OF PARAÑAQUE, CITY MAYOR OF PARAÑAQUE, SANGGUNIANG PANGLUNGSOD NG
PARAÑAQUE, CITY ASSESSOR OF PARAÑAQUE, and CITY TREASURER OF PARAÑAQUE, respondents.

DECISION

CARPIO, J.:

The Antecedents

Petitioner Manila International Airport Authority (MIAA) operates the Ninoy Aquino International Airport (NAIA) Complex in Parañaque
City under Executive Order No. 903, otherwise known as the Revised Charter of the Manila International Airport Authority ("MIAA
Charter"). Executive Order No. 903 was issued on 21 July 1983 by then President Ferdinand E. Marcos. Subsequently, Executive
Order Nos. 9091 and 2982 amended the MIAA Charter.

As operator of the international airport, MIAA administers the land, improvements and equipment within the NAIA Complex. The MIAA
Charter transferred to MIAA approximately 600 hectares of land,3 including the runways and buildings ("Airport Lands and Buildings")
then under the Bureau of Air Transportation.4 The MIAA Charter further provides that no portion of the land transferred to MIAA shall be
disposed of through sale or any other mode unless specifically approved by the President of the Philippines.5

On 21 March 1997, the Office of the Government Corporate Counsel (OGCC) issued Opinion No. 061. The OGCC opined that the
Local Government Code of 1991 withdrew the exemption from real estate tax granted to MIAA under Section 21 of the MIAA Charter.
Thus, MIAA negotiated with respondent City of Parañaque to pay the real estate tax imposed by the City. MIAA then paid some of the
real estate tax already due.

On 28 June 2001, MIAA received Final Notices of Real Estate Tax Delinquency from the City of Parañaque for the taxable years 1992
to 2001. MIAA's real estate tax delinquency is broken down as follows:

TAX
TAXABLE YEAR TAX DUE PENALTY TOTAL
DECLARATION
E-016-01370 1992-2001 19,558,160.00 11,201,083.20 30,789,243.20
E-016-01374 1992-2001 111,689,424.90 68,149,479.59 179,838,904.49
E-016-01375 1992-2001 20,276,058.00 12,371,832.00 32,647,890.00
E-016-01376 1992-2001 58,144,028.00 35,477,712.00 93,621,740.00
E-016-01377 1992-2001 18,134,614.65 11,065,188.59 29,199,803.24
E-016-01378 1992-2001 111,107,950.40 67,794,681.59 178,902,631.99
E-016-01379 1992-2001 4,322,340.00 2,637,360.00 6,959,700.00
E-016-01380 1992-2001 7,776,436.00 4,744,944.00 12,521,380.00
*E-016-013-85 1998-2001 6,444,810.00 2,900,164.50 9,344,974.50
*E-016-01387 1998-2001 34,876,800.00 5,694,560.00 50,571,360.00
*E-016-01396 1998-2001 75,240.00 33,858.00 109,098.00
GRAND TOTAL P392,435,861.95 P232,070,863.47 P 624,506,725.42

1992-1997 RPT was paid on Dec. 24, 1997 as per O.R.#9476102 for P4,207,028.75

#9476101 for P28,676,480.00

#9476103 for P49,115.006

On 17 July 2001, the City of Parañaque, through its City Treasurer, issued notices of levy and warrants of levy on the Airport Lands and
Buildings. The Mayor of the City of Parañaque threatened to sell at public auction the Airport Lands and Buildings should MIAA fail to
pay the real estate tax delinquency. MIAA thus sought a clarification of OGCC Opinion No. 061.

On 9 August 2001, the OGCC issued Opinion No. 147 clarifying OGCC Opinion No. 061. The OGCC pointed out that Section 206 of
the Local Government Code requires persons exempt from real estate tax to show proof of exemption. The OGCC opined that Section
21 of the MIAA Charter is the proof that MIAA is exempt from real estate tax.

On 1 October 2001, MIAA filed with the Court of Appeals an original petition for prohibition and injunction, with prayer for preliminary
injunction or temporary restraining order. The petition sought to restrain the City of Parañaque from imposing real estate tax on, levying
against, and auctioning for public sale the Airport Lands and Buildings. The petition was docketed as CA-G.R. SP No. 66878.

On 5 October 2001, the Court of Appeals dismissed the petition because MIAA filed it beyond the 60-day reglementary period. The
Court of Appeals also denied on 27 September 2002 MIAA's motion for reconsideration and supplemental motion for reconsideration.
Hence, MIAA filed on 5 December 2002 the present petition for review. 7

Meanwhile, in January 2003, the City of Parañaque posted notices of auction sale at the Barangay Halls of Barangays Vitalez, Sto.
Niño, and Tambo, Parañaque City; in the public market of Barangay La Huerta; and in the main lobby of the Parañaque City Hall. The
City of Parañaque published the notices in the 3 and 10 January 2003 issues of the Philippine Daily Inquirer, a newspaper of general
circulation in the Philippines. The notices announced the public auction sale of the Airport Lands and Buildings to the highest bidder on
7 February 2003, 10:00 a.m., at the Legislative Session Hall Building of Parañaque City.

A day before the public auction, or on 6 February 2003, at 5:10 p.m., MIAA filed before this Court an Urgent Ex-Parte and Reiteratory
Motion for the Issuance of a Temporary Restraining Order. The motion sought to restrain respondents — the City of Parañaque, City
Mayor of Parañaque, Sangguniang Panglungsod ng Parañaque, City Treasurer of Parañaque, and the City Assessor of Parañaque
("respondents") — from auctioning the Airport Lands and Buildings.

On 7 February 2003, this Court issued a temporary restraining order (TRO) effective immediately. The Court ordered respondents to
cease and desist from selling at public auction the Airport Lands and Buildings. Respondents received the TRO on the same day that
the Court issued it. However, respondents received the TRO only at 1:25 p.m. or three hours after the conclusion of the public auction.

On 10 February 2003, this Court issued a Resolution confirming nunc pro tunc the TRO.

On 29 March 2005, the Court heard the parties in oral arguments. In compliance with the directive issued during the hearing, MIAA,
respondent City of Parañaque, and the Solicitor General subsequently submitted their respective Memoranda.

MIAA admits that the MIAA Charter has placed the title to the Airport Lands and Buildings in the name of MIAA. However, MIAA points
out that it cannot claim ownership over these properties since the real owner of the Airport Lands and Buildings is the Republic of the
Philippines. The MIAA Charter mandates MIAA to devote the Airport Lands and Buildings for the benefit of the general public. Since the
Airport Lands and Buildings are devoted to public use and public service, the ownership of these properties remains with the State. The
Airport Lands and Buildings are thus inalienable and are not subject to real estate tax by local governments.

MIAA also points out that Section 21 of the MIAA Charter specifically exempts MIAA from the payment of real estate tax. MIAA insists
that it is also exempt from real estate tax under Section 234 of the Local Government Code because the Airport Lands and Buildings
are owned by the Republic. To justify the exemption, MIAA invokes the principle that the government cannot tax itself. MIAA points out
that the reason for tax exemption of public property is that its taxation would not inure to any public advantage, since in such a case the
tax debtor is also the tax creditor.
Respondents invoke Section 193 of the Local Government Code, which expressly withdrew the tax exemption privileges of
"government-owned and-controlled corporations" upon the effectivity of the Local Government Code. Respondents also argue that
a basic rule of statutory construction is that the express mention of one person, thing, or act excludes all others. An international airport
is not among the exceptions mentioned in Section 193 of the Local Government Code. Thus, respondents assert that MIAA cannot
claim that the Airport Lands and Buildings are exempt from real estate tax.

Respondents also cite the ruling of this Court in Mactan International Airport v. Marcos8 where we held that the Local Government
Code has withdrawn the exemption from real estate tax granted to international airports. Respondents further argue that since MIAA
has already paid some of the real estate tax assessments, it is now estopped from claiming that the Airport Lands and Buildings are
exempt from real estate tax.

The Issue

This petition raises the threshold issue of whether the Airport Lands and Buildings of MIAA are exempt from real estate tax under
existing laws. If so exempt, then the real estate tax assessments issued by the City of Parañaque, and all proceedings taken pursuant
to such assessments, are void. In such event, the other issues raised in this petition become moot.

The Court's Ruling

We rule that MIAA's Airport Lands and Buildings are exempt from real estate tax imposed by local governments.

First, MIAA is not a government-owned or controlled corporation but an instrumentality of the National Government and thus exempt
from local taxation. Second, the real properties of MIAA are owned by the Republic of the Philippines and thus exempt from real
estate tax.

1. MIAA is Not a Government-Owned or Controlled Corporation

Respondents argue that MIAA, being a government-owned or controlled corporation, is not exempt from real estate tax. Respondents
claim that the deletion of the phrase "any government-owned or controlled so exempt by its charter" in Section 234(e) of the Local
Government Code withdrew the real estate tax exemption of government-owned or controlled corporations. The deleted phrase
appeared in Section 40(a) of the 1974 Real Property Tax Code enumerating the entities exempt from real estate tax.

There is no dispute that a government-owned or controlled corporation is not exempt from real estate tax. However, MIAA is not a
government-owned or controlled corporation. Section 2(13) of the Introductory Provisions of the Administrative Code of 1987 defines a
government-owned or controlled corporation as follows:

SEC. 2. General Terms Defined. – x x x x

(13) Government-owned or controlled corporation refers to any agency organized as a stock or non-stock corporation,
vested with functions relating to public needs whether governmental or proprietary in nature, and owned by the Government
directly or through its instrumentalities either wholly, or, where applicable as in the case of stock corporations, to the extent of
at least fifty-one (51) percent of its capital stock: x x x. (Emphasis supplied)

A government-owned or controlled corporation must be "organized as a stock or non-stock corporation." MIAA is not organized as a
stock or non-stock corporation. MIAA is not a stock corporation because it has no capital stock divided into shares. MIAA has no
stockholders or voting shares. Section 10 of the MIAA Charter9 provides:

SECTION 10. Capital. — The capital of the Authority to be contributed by the National Government shall be increased from
Two and One-half Billion (P2,500,000,000.00) Pesos to Ten Billion (P10,000,000,000.00) Pesos to consist of:

(a) The value of fixed assets including airport facilities, runways and equipment and such other properties, movable and
immovable[,] which may be contributed by the National Government or transferred by it from any of its agencies, the valuation
of which shall be determined jointly with the Department of Budget and Management and the Commission on Audit on the date
of such contribution or transfer after making due allowances for depreciation and other deductions taking into account the
loans and other liabilities of the Authority at the time of the takeover of the assets and other properties;

(b) That the amount of P605 million as of December 31, 1986 representing about seventy percentum (70%) of the unremitted
share of the National Government from 1983 to 1986 to be remitted to the National Treasury as provided for in Section 11 of
E. O. No. 903 as amended, shall be converted into the equity of the National Government in the Authority. Thereafter, the
Government contribution to the capital of the Authority shall be provided in the General Appropriations Act.

Clearly, under its Charter, MIAA does not have capital stock that is divided into shares.
Section 3 of the Corporation Code10 defines a stock corporation as one whose "capital stock is divided into shares and x x x
authorized to distribute to the holders of such shares dividends x x x." MIAA has capital but it is not divided into shares of stock.
MIAA has no stockholders or voting shares. Hence, MIAA is not a stock corporation.

MIAA is also not a non-stock corporation because it has no members. Section 87 of the Corporation Code defines a non-stock
corporation as "one where no part of its income is distributable as dividends to its members, trustees or officers." A non-stock
corporation must have members. Even if we assume that the Government is considered as the sole member of MIAA, this will not make
MIAA a non-stock corporation. Non-stock corporations cannot distribute any part of their income to their members. Section 11 of the
MIAA Charter mandates MIAA to remit 20% of its annual gross operating income to the National Treasury. 11 This prevents MIAA from
qualifying as a non-stock corporation.

Section 88 of the Corporation Code provides that non-stock corporations are "organized for charitable, religious, educational,
professional, cultural, recreational, fraternal, literary, scientific, social, civil service, or similar purposes, like trade, industry, agriculture
and like chambers." MIAA is not organized for any of these purposes. MIAA, a public utility, is organized to operate an international and
domestic airport for public use.

Since MIAA is neither a stock nor a non-stock corporation, MIAA does not qualify as a government-owned or controlled corporation.
What then is the legal status of MIAA within the National Government?

MIAA is a government instrumentality vested with corporate powers to perform efficiently its governmental functions. MIAA is like any
other government instrumentality, the only difference is that MIAA is vested with corporate powers. Section 2(10) of the Introductory
Provisions of the Administrative Code defines a government "instrumentality" as follows:

SEC. 2. General Terms Defined. –– x x x x

(10) Instrumentality refers to any agency of the National Government, not integrated within the department framework, vested
with special functions or jurisdiction by law, endowed with some if not all corporate powers, administering special funds,
and enjoying operational autonomy, usually through a charter. x x x (Emphasis supplied)

When the law vests in a government instrumentality corporate powers, the instrumentality does not become a corporation. Unless the
government instrumentality is organized as a stock or non-stock corporation, it remains a government instrumentality exercising not
only governmental but also corporate powers. Thus, MIAA exercises the governmental powers of eminent domain, 12 police
authority13 and the levying of fees and charges.14 At the same time, MIAA exercises "all the powers of a corporation under the
Corporation Law, insofar as these powers are not inconsistent with the provisions of this Executive Order." 15

Likewise, when the law makes a government instrumentality operationally autonomous, the instrumentality remains part of the
National Government machinery although not integrated with the department framework. The MIAA Charter expressly states that
transforming MIAA into a "separate and autonomous body" 16 will make its operation more "financially viable." 17

Many government instrumentalities are vested with corporate powers but they do not become stock or non-stock corporations, which is
a necessary condition before an agency or instrumentality is deemed a government-owned or controlled corporation. Examples are the
Mactan International Airport Authority, the Philippine Ports Authority, the University of the Philippines and Bangko Sentral ng Pilipinas.
All these government instrumentalities exercise corporate powers but they are not organized as stock or non-stock corporations as
required by Section 2(13) of the Introductory Provisions of the Administrative Code. These government instrumentalities are sometimes
loosely called government corporate entities. However, they are not government-owned or controlled corporations in the strict sense as
understood under the Administrative Code, which is the governing law defining the legal relationship and status of government entities.

A government instrumentality like MIAA falls under Section 133(o) of the Local Government Code, which states:

SEC. 133. Common Limitations on the Taxing Powers of Local Government Units. – Unless otherwise provided herein, the
exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the levy of the
following:

xxxx

(o) Taxes, fees or charges of any kind on the National Government, its agencies and instrumentalitiesand local
government units.(Emphasis and underscoring supplied)

Section 133(o) recognizes the basic principle that local governments cannot tax the national government, which historically merely
delegated to local governments the power to tax. While the 1987 Constitution now includes taxation as one of the powers of local
governments, local governments may only exercise such power "subject to such guidelines and limitations as the Congress may
provide."18
When local governments invoke the power to tax on national government instrumentalities, such power is construed strictly against
local governments. The rule is that a tax is never presumed and there must be clear language in the law imposing the tax. Any doubt
whether a person, article or activity is taxable is resolved against taxation. This rule applies with greater force when local governments
seek to tax national government instrumentalities.

Another rule is that a tax exemption is strictly construed against the taxpayer claiming the exemption. However, when Congress grants
an exemption to a national government instrumentality from local taxation, such exemption is construed liberally in favor of the national
government instrumentality. As this Court declared in Maceda v. Macaraig, Jr.:

The reason for the rule does not apply in the case of exemptions running to the benefit of the government itself or its agencies.
In such case the practical effect of an exemption is merely to reduce the amount of money that has to be handled by
government in the course of its operations. For these reasons, provisions granting exemptions to government agencies may
be construed liberally, in favor of non tax-liability of such agencies.19

There is, moreover, no point in national and local governments taxing each other, unless a sound and compelling policy requires such
transfer of public funds from one government pocket to another.

There is also no reason for local governments to tax national government instrumentalities for rendering essential public services to
inhabitants of local governments. The only exception is when the legislature clearly intended to tax government
instrumentalities for the delivery of essential public services for sound and compelling policy considerations. There must be
express language in the law empowering local governments to tax national government instrumentalities. Any doubt whether such
power exists is resolved against local governments.

Thus, Section 133 of the Local Government Code states that "unless otherwise provided" in the Code, local governments cannot tax
national government instrumentalities. As this Court held in Basco v. Philippine Amusements and Gaming Corporation:

The states have no power by taxation or otherwise, to retard, impede, burden or in any manner control the operation
of constitutional laws enacted by Congress to carry into execution the powers vested in the federal government. (MC
Culloch v. Maryland, 4 Wheat 316, 4 L Ed. 579)

This doctrine emanates from the "supremacy" of the National Government over local governments.

"Justice Holmes, speaking for the Supreme Court, made reference to the entire absence of power on the part of the
States to touch, in that way (taxation) at least, the instrumentalities of the United States (Johnson v. Maryland, 254
US 51) and it can be agreed that no state or political subdivision can regulate a federal instrumentality in such a way
as to prevent it from consummating its federal responsibilities, or even to seriously burden it in the accomplishment of
them." (Antieau, Modern Constitutional Law, Vol. 2, p. 140, emphasis supplied)

Otherwise, mere creatures of the State can defeat National policies thru extermination of what local authorities may perceive
to be undesirable activities or enterprise using the power to tax as "a tool for regulation" (U.S. v. Sanchez, 340 US 42).

The power to tax which was called by Justice Marshall as the "power to destroy" (Mc Culloch v. Maryland, supra) cannot be
allowed to defeat an instrumentality or creation of the very entity which has the inherent power to wield it. 20

2. Airport Lands and Buildings of MIAA are Owned by the Republic

a. Airport Lands and Buildings are of Public Dominion

The Airport Lands and Buildings of MIAA are property of public dominion and therefore owned by the State or the Republic of the
Philippines. The Civil Code provides:

ARTICLE 419. Property is either of public dominion or of private ownership.

ARTICLE 420. The following things are property of public dominion:

(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and bridges constructed by the State,
banks, shores, roadsteads, and others of similar character;

(2) Those which belong to the State, without being for public use, and are intended for some public service or for the
development of the national wealth. (Emphasis supplied)

ARTICLE 421. All other property of the State, which is not of the character stated in the preceding article, is patrimonial
property.
ARTICLE 422. Property of public dominion, when no longer intended for public use or for public service, shall form part of the
patrimonial property of the State.

No one can dispute that properties of public dominion mentioned in Article 420 of the Civil Code, like "roads, canals, rivers, torrents,
ports and bridges constructed by the State," are owned by the State. The term "ports" includes seaports and airports. The MIAA
Airport Lands and Buildings constitute a "port" constructed by the State. Under Article 420 of the Civil Code, the MIAA Airport Lands
and Buildings are properties of public dominion and thus owned by the State or the Republic of the Philippines.

The Airport Lands and Buildings are devoted to public use because they are used by the public for international and domestic
travel and transportation. The fact that the MIAA collects terminal fees and other charges from the public does not remove the
character of the Airport Lands and Buildings as properties for public use. The operation by the government of a tollway does not change
the character of the road as one for public use. Someone must pay for the maintenance of the road, either the public indirectly through
the taxes they pay the government, or only those among the public who actually use the road through the toll fees they pay upon using
the road. The tollway system is even a more efficient and equitable manner of taxing the public for the maintenance of public roads.

The charging of fees to the public does not determine the character of the property whether it is of public dominion or not. Article 420 of
the Civil Code defines property of public dominion as one "intended for public use." Even if the government collects toll fees, the road is
still "intended for public use" if anyone can use the road under the same terms and conditions as the rest of the public. The charging of
fees, the limitation on the kind of vehicles that can use the road, the speed restrictions and other conditions for the use of the road do
not affect the public character of the road.

The terminal fees MIAA charges to passengers, as well as the landing fees MIAA charges to airlines, constitute the bulk of the income
that maintains the operations of MIAA. The collection of such fees does not change the character of MIAA as an airport for public use.
Such fees are often termed user's tax. This means taxing those among the public who actually use a public facility instead of taxing all
the public including those who never use the particular public facility. A user's tax is more equitable — a principle of taxation mandated
in the 1987 Constitution.21

The Airport Lands and Buildings of MIAA, which its Charter calls the "principal airport of the Philippines for both international and
domestic air traffic,"22 are properties of public dominion because they are intended for public use. As properties of public dominion,
they indisputably belong to the State or the Republic of the Philippines.

b. Airport Lands and Buildings are Outside the Commerce of Man

The Airport Lands and Buildings of MIAA are devoted to public use and thus are properties of public dominion. As properties of public
dominion, the Airport Lands and Buildings are outside the commerce of man. The Court has ruled repeatedly that properties of
public dominion are outside the commerce of man. As early as 1915, this Court already ruled in Municipality of Cavite v. Rojas that
properties devoted to public use are outside the commerce of man, thus:

According to article 344 of the Civil Code: "Property for public use in provinces and in towns comprises the provincial and town
roads, the squares, streets, fountains, and public waters, the promenades, and public works of general service supported by
said towns or provinces."

The said Plaza Soledad being a promenade for public use, the municipal council of Cavite could not in 1907 withdraw or
exclude from public use a portion thereof in order to lease it for the sole benefit of the defendant Hilaria Rojas. In leasing a
portion of said plaza or public place to the defendant for private use the plaintiff municipality exceeded its authority in the
exercise of its powers by executing a contract over a thing of which it could not dispose, nor is it empowered so to do.

The Civil Code, article 1271, prescribes that everything which is not outside the commerce of man may be the object of a
contract, and plazas and streets are outside of this commerce, as was decided by the supreme court of Spain in its decision
of February 12, 1895, which says: "Communal things that cannot be sold because they are by their very nature outside
of commerce are those for public use, such as the plazas, streets, common lands, rivers, fountains, etc." (Emphasis
supplied) 23

Again in Espiritu v. Municipal Council, the Court declared that properties of public dominion are outside the commerce of man:

xxx Town plazas are properties of public dominion, to be devoted to public use and to be made available to the public in
general. They are outside the commerce of man and cannot be disposed of or even leased by the municipality to private
parties. While in case of war or during an emergency, town plazas may be occupied temporarily by private individuals, as was
done and as was tolerated by the Municipality of Pozorrubio, when the emergency has ceased, said temporary occupation or
use must also cease, and the town officials should see to it that the town plazas should ever be kept open to the public and
free from encumbrances or illegal private constructions.24 (Emphasis supplied)

The Court has also ruled that property of public dominion, being outside the commerce of man, cannot be the subject of an auction
sale.25
Properties of public dominion, being for public use, are not subject to levy, encumbrance or disposition through public or private sale.
Any encumbrance, levy on execution or auction sale of any property of public dominion is void for being contrary to public policy.
Essential public services will stop if properties of public dominion are subject to encumbrances, foreclosures and auction sale. This will
happen if the City of Parañaque can foreclose and compel the auction sale of the 600-hectare runway of the MIAA for non-payment of
real estate tax.

Before MIAA can encumber26 the Airport Lands and Buildings, the President must first withdraw from public usethe Airport Lands and
Buildings. Sections 83 and 88 of the Public Land Law or Commonwealth Act No. 141, which "remains to this day the existing general
law governing the classification and disposition of lands of the public domain other than timber and mineral lands," 27 provide:

SECTION 83. Upon the recommendation of the Secretary of Agriculture and Natural Resources, the President may designate
by proclamation any tract or tracts of land of the public domain as reservations for the use of the Republic of the Philippines or
of any of its branches, or of the inhabitants thereof, in accordance with regulations prescribed for this purposes, or for quasi-
public uses or purposes when the public interest requires it, including reservations for highways, rights of way for railroads,
hydraulic power sites, irrigation systems, communal pastures or lequas communales, public parks, public quarries, public
fishponds, working men's village and other improvements for the public benefit.

SECTION 88. The tract or tracts of land reserved under the provisions of Section eighty-three shall be non-
alienable and shall not be subject to occupation, entry, sale, lease, or other disposition until again declared alienable
under the provisions of this Act or by proclamation of the President. (Emphasis and underscoring supplied)

Thus, unless the President issues a proclamation withdrawing the Airport Lands and Buildings from public use, these properties remain
properties of public dominion and are inalienable. Since the Airport Lands and Buildings are inalienable in their present status as
properties of public dominion, they are not subject to levy on execution or foreclosure sale. As long as the Airport Lands and Buildings
are reserved for public use, their ownership remains with the State or the Republic of the Philippines.

The authority of the President to reserve lands of the public domain for public use, and to withdraw such public use, is reiterated in
Section 14, Chapter 4, Title I, Book III of the Administrative Code of 1987, which states:

SEC. 14. Power to Reserve Lands of the Public and Private Domain of the Government. — (1) The President shall have the
power to reserve for settlement or public use, and for specific public purposes, any of the lands of the public domain,
the use of which is not otherwise directed by law. The reserved land shall thereafter remain subject to the specific
public purpose indicated until otherwise provided by law or proclamation;

x x x x. (Emphasis supplied)

There is no question, therefore, that unless the Airport Lands and Buildings are withdrawn by law or presidential proclamation from
public use, they are properties of public dominion, owned by the Republic and outside the commerce of man.

c. MIAA is a Mere Trustee of the Republic

MIAA is merely holding title to the Airport Lands and Buildings in trust for the Republic. Section 48, Chapter 12, Book I of the
Administrative Code allows instrumentalities like MIAA to hold title to real properties owned by the Republic, thus:

SEC. 48. Official Authorized to Convey Real Property. — Whenever real property of the Government is authorized by law to be
conveyed, the deed of conveyance shall be executed in behalf of the government by the following:

(1) For property belonging to and titled in the name of the Republic of the Philippines, by the President, unless the authority
therefor is expressly vested by law in another officer.

(2) For property belonging to the Republic of the Philippines but titled in the name of any political subdivision or of
any corporate agency or instrumentality, by the executive head of the agency or instrumentality. (Emphasis supplied)

In MIAA's case, its status as a mere trustee of the Airport Lands and Buildings is clearer because even its executive head cannot sign
the deed of conveyance on behalf of the Republic. Only the President of the Republic can sign such deed of conveyance.28

d. Transfer to MIAA was Meant to Implement a Reorganization

The MIAA Charter, which is a law, transferred to MIAA the title to the Airport Lands and Buildings from the Bureau of Air Transportation
of the Department of Transportation and Communications. The MIAA Charter provides:

SECTION 3. Creation of the Manila International Airport Authority. — x x x x


The land where the Airport is presently located as well as the surrounding land area of approximately six hundred
hectares, are hereby transferred, conveyed and assigned to the ownership and administration of the Authority,
subject to existing rights, if any. The Bureau of Lands and other appropriate government agencies shall undertake an actual
survey of the area transferred within one year from the promulgation of this Executive Order and the corresponding title to be
issued in the name of the Authority. Any portion thereof shall not be disposed through sale or through any other mode
unless specifically approved by the President of the Philippines. (Emphasis supplied)

SECTION 22. Transfer of Existing Facilities and Intangible Assets. — All existing public airport facilities, runways, lands,
buildings and other property, movable or immovable, belonging to the Airport, and all assets, powers, rights, interests and
privileges belonging to the Bureau of Air Transportation relating to airport works or air operations, including all equipment
which are necessary for the operation of crash fire and rescue facilities, are hereby transferred to the Authority. (Emphasis
supplied)

SECTION 25. Abolition of the Manila International Airport as a Division in the Bureau of Air Transportation and Transitory
Provisions. — The Manila International Airport including the Manila Domestic Airport as a division under the Bureau of Air
Transportation is hereby abolished.

x x x x.

The MIAA Charter transferred the Airport Lands and Buildings to MIAA without the Republic receiving cash, promissory notes or even
stock since MIAA is not a stock corporation.

The whereas clauses of the MIAA Charter explain the rationale for the transfer of the Airport Lands and Buildings to MIAA, thus:

WHEREAS, the Manila International Airport as the principal airport of the Philippines for both international and domestic air
traffic, is required to provide standards of airport accommodation and service comparable with the best airports in the world;

WHEREAS, domestic and other terminals, general aviation and other facilities, have to be upgraded to meet the current and
future air traffic and other demands of aviation in Metro Manila;

WHEREAS, a management and organization study has indicated that the objectives of providing high standards of
accommodation and service within the context of a financially viable operation, will best be achieved by a separate
and autonomous body; and

WHEREAS, under Presidential Decree No. 1416, as amended by Presidential Decree No. 1772, the President of the
Philippines is given continuing authority to reorganize the National Government, which authority includes the creation of
new entities, agencies and instrumentalities of the Government[.] (Emphasis supplied)

The transfer of the Airport Lands and Buildings from the Bureau of Air Transportation to MIAA was not meant to transfer beneficial
ownership of these assets from the Republic to MIAA. The purpose was merely to reorganize a division in the Bureau of Air
Transportation into a separate and autonomous body. The Republic remains the beneficial owner of the Airport Lands and
Buildings. MIAA itself is owned solely by the Republic. No party claims any ownership rights over MIAA's assets adverse to the
Republic.

The MIAA Charter expressly provides that the Airport Lands and Buildings "shall not be disposed through sale or through any other
mode unless specifically approved by the President of the Philippines." This only means that the Republic retained the beneficial
ownership of the Airport Lands and Buildings because under Article 428 of the Civil Code, only the "owner has the right to x x x dispose
of a thing." Since MIAA cannot dispose of the Airport Lands and Buildings, MIAA does not own the Airport Lands and Buildings.

At any time, the President can transfer back to the Republic title to the Airport Lands and Buildings without the Republic paying MIAA
any consideration. Under Section 3 of the MIAA Charter, the President is the only one who can authorize the sale or disposition of the
Airport Lands and Buildings. This only confirms that the Airport Lands and Buildings belong to the Republic.

e. Real Property Owned by the Republic is Not Taxable

Section 234(a) of the Local Government Code exempts from real estate tax any "[r]eal property owned by the Republic of the
Philippines." Section 234(a) provides:

SEC. 234. Exemptions from Real Property Tax. — The following are exempted from payment of the real property tax:

(a) Real property owned by the Republic of the Philippines or any of its political subdivisions except when the
beneficial use thereof has been granted, for consideration or otherwise, to a taxable person;
x x x. (Emphasis supplied)

This exemption should be read in relation with Section 133(o) of the same Code, which prohibits local governments from imposing
"[t]axes, fees or charges of any kind on the National Government, its agencies and instrumentalitiesx x x." The real properties owned
by the Republic are titled either in the name of the Republic itself or in the name of agencies or instrumentalities of the National
Government. The Administrative Code allows real property owned by the Republic to be titled in the name of agencies or
instrumentalities of the national government. Such real properties remain owned by the Republic and continue to be exempt from real
estate tax.

The Republic may grant the beneficial use of its real property to an agency or instrumentality of the national government. This happens
when title of the real property is transferred to an agency or instrumentality even as the Republic remains the owner of the real property.
Such arrangement does not result in the loss of the tax exemption. Section 234(a) of the Local Government Code states that real
property owned by the Republic loses its tax exemption only if the "beneficial use thereof has been granted, for consideration or
otherwise, to a taxable person." MIAA, as a government instrumentality, is not a taxable person under Section 133(o) of the Local
Government Code. Thus, even if we assume that the Republic has granted to MIAA the beneficial use of the Airport Lands and
Buildings, such fact does not make these real properties subject to real estate tax.

However, portions of the Airport Lands and Buildings that MIAA leases to private entities are not exempt from real estate tax. For
example, the land area occupied by hangars that MIAA leases to private corporations is subject to real estate tax. In such a case, MIAA
has granted the beneficial use of such land area for a consideration to a taxable person and therefore such land area is subject to real
estate tax. In Lung Center of the Philippines v. Quezon City, the Court ruled:

Accordingly, we hold that the portions of the land leased to private entities as well as those parts of the hospital leased to
private individuals are not exempt from such taxes. On the other hand, the portions of the land occupied by the hospital and
portions of the hospital used for its patients, whether paying or non-paying, are exempt from real property taxes.29

3. Refutation of Arguments of Minority

The minority asserts that the MIAA is not exempt from real estate tax because Section 193 of the Local Government Code of 1991
withdrew the tax exemption of "all persons, whether natural or juridical" upon the effectivity of the Code. Section 193 provides:

SEC. 193. Withdrawal of Tax Exemption Privileges – Unless otherwise provided in this Code, tax exemptions or incentives
granted to, or presently enjoyed by all persons, whether natural or juridical, including government-owned or controlled
corporations, except local water districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-profit hospitals
and educational institutions are hereby withdrawn upon effectivity of this Code. (Emphasis supplied)

The minority states that MIAA is indisputably a juridical person. The minority argues that since the Local Government Code withdrew
the tax exemption of all juridical persons, then MIAA is not exempt from real estate tax. Thus, the minority declares:

It is evident from the quoted provisions of the Local Government Code that the withdrawn exemptions from realty tax
cover not just GOCCs, but all persons. To repeat, the provisions lay down the explicit proposition that the withdrawal of
realty tax exemption applies to all persons. The reference to or the inclusion of GOCCs is only clarificatory or illustrative of the
explicit provision.

The term "All persons" encompasses the two classes of persons recognized under our laws, natural and juridical
persons. Obviously, MIAA is not a natural person. Thus, the determinative test is not just whether MIAA is a GOCC,
but whether MIAA is a juridical person at all. (Emphasis and underscoring in the original)

The minority posits that the "determinative test" whether MIAA is exempt from local taxation is its status — whether MIAA is a juridical
person or not. The minority also insists that "Sections 193 and 234 may be examined in isolation from Section 133(o) to ascertain
MIAA's claim of exemption."

The argument of the minority is fatally flawed. Section 193 of the Local Government Code expressly withdrew the tax exemption of all
juridical persons "[u]nless otherwise provided in this Code." Now, Section 133(o) of the Local Government Code expressly
provides otherwise, specifically prohibiting local governments from imposing any kind of tax on national government
instrumentalities. Section 133(o) states:

SEC. 133. Common Limitations on the Taxing Powers of Local Government Units. – Unless otherwise provided herein, the
exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the levy of the following:

xxxx

(o) Taxes, fees or charges of any kinds on the National Government, its agencies and instrumentalities, and local government
units. (Emphasis and underscoring supplied)
By express mandate of the Local Government Code, local governments cannot impose any kind of tax on national government
instrumentalities like the MIAA. Local governments are devoid of power to tax the national government, its agencies and
instrumentalities. The taxing powers of local governments do not extend to the national government, its agencies and instrumentalities,
"[u]nless otherwise provided in this Code" as stated in the saving clause of Section 133. The saving clause refers to Section 234(a) on
the exception to the exemption from real estate tax of real property owned by the Republic.

The minority, however, theorizes that unless exempted in Section 193 itself, all juridical persons are subject to tax by local
governments. The minority insists that the juridical persons exempt from local taxation are limited to the three classes of entities
specifically enumerated as exempt in Section 193. Thus, the minority states:

x x x Under Section 193, the exemption is limited to (a) local water districts; (b) cooperatives duly registered under Republic
Act No. 6938; and (c) non-stock and non-profit hospitals and educational institutions. It would be belaboring the obvious why
the MIAA does not fall within any of the exempt entities under Section 193. (Emphasis supplied)

The minority's theory directly contradicts and completely negates Section 133(o) of the Local Government Code. This theory will result
in gross absurdities. It will make the national government, which itself is a juridical person, subject to tax by local governments since the
national government is not included in the enumeration of exempt entities in Section 193. Under this theory, local governments can
impose any kind of local tax, and not only real estate tax, on the national government.

Under the minority's theory, many national government instrumentalities with juridical personalities will also be subject to any kind of
local tax, and not only real estate tax. Some of the national government instrumentalities vested by law with juridical personalities are:
Bangko Sentral ng Pilipinas,30 Philippine Rice Research Institute,31Laguna Lake

Development Authority,32 Fisheries Development Authority,33 Bases Conversion Development Authority,34Philippine Ports
Authority,35 Cagayan de Oro Port Authority,36 San Fernando Port Authority,37 Cebu Port Authority,38 and Philippine National Railways.39

The minority's theory violates Section 133(o) of the Local Government Code which expressly prohibits local governments from imposing
any kind of tax on national government instrumentalities. Section 133(o) does not distinguish between national government
instrumentalities with or without juridical personalities. Where the law does not distinguish, courts should not distinguish. Thus, Section
133(o) applies to all national government instrumentalities, with or without juridical personalities. The determinative test whether MIAA
is exempt from local taxation is not whether MIAA is a juridical person, but whether it is a national government instrumentality under
Section 133(o) of the Local Government Code. Section 133(o) is the specific provision of law prohibiting local governments from
imposing any kind of tax on the national government, its agencies and instrumentalities.

Section 133 of the Local Government Code starts with the saving clause "[u]nless otherwise provided in this Code." This means that
unless the Local Government Code grants an express authorization, local governments have no power to tax the national government,
its agencies and instrumentalities. Clearly, the rule is local governments have no power to tax the national government, its agencies
and instrumentalities. As an exception to this rule, local governments may tax the national government, its agencies and
instrumentalities only if the Local Government Code expressly so provides.

The saving clause in Section 133 refers to the exception to the exemption in Section 234(a) of the Code, which makes the national
government subject to real estate tax when it gives the beneficial use of its real properties to a taxable entity. Section 234(a) of the
Local Government Code provides:

SEC. 234. Exemptions from Real Property Tax – The following are exempted from payment of the real property tax:

(a) Real property owned by the Republic of the Philippines or any of its political subdivisions except when the beneficial use
thereof has been granted, for consideration or otherwise, to a taxable person.

x x x. (Emphasis supplied)

Under Section 234(a), real property owned by the Republic is exempt from real estate tax. The exception to this exemption is when the
government gives the beneficial use of the real property to a taxable entity.

The exception to the exemption in Section 234(a) is the only instance when the national government, its agencies and instrumentalities
are subject to any kind of tax by local governments. The exception to the exemption applies only to real estate tax and not to any other
tax. The justification for the exception to the exemption is that the real property, although owned by the Republic, is not devoted to
public use or public service but devoted to the private gain of a taxable person.

The minority also argues that since Section 133 precedes Section 193 and 234 of the Local Government Code, the later provisions
prevail over Section 133. Thus, the minority asserts:

x x x Moreover, sequentially Section 133 antecedes Section 193 and 234. Following an accepted rule of construction, in case
of conflict the subsequent provisions should prevail. Therefore, MIAA, as a juridical person, is subject to real property taxes,
the general exemptions attaching to instrumentalities under Section 133(o) of the Local Government Code being qualified by
Sections 193 and 234 of the same law. (Emphasis supplied)

The minority assumes that there is an irreconcilable conflict between Section 133 on one hand, and Sections 193 and 234 on the other.
No one has urged that there is such a conflict, much less has any one presenteda persuasive argument that there is such a conflict.
The minority's assumption of an irreconcilable conflict in the statutory provisions is an egregious error for two reasons.

First, there is no conflict whatsoever between Sections 133 and 193 because Section 193 expressly admits its subordination to other
provisions of the Code when Section 193 states "[u]nless otherwise provided in this Code." By its own words, Section 193 admits the
superiority of other provisions of the Local Government Code that limit the exercise of the taxing power in Section 193. When a
provision of law grants a power but withholds such power on certain matters, there is no conflict between the grant of power and the
withholding of power. The grantee of the power simply cannot exercise the power on matters withheld from its power.

Second, Section 133 is entitled "Common Limitations on the Taxing Powers of Local Government Units." Section 133 limits the grant to
local governments of the power to tax, and not merely the exercise of a delegated power to tax. Section 133 states that the taxing
powers of local governments "shall not extend to the levy" of any kind of tax on the national government, its agencies and
instrumentalities. There is no clearer limitation on the taxing power than this.

Since Section 133 prescribes the "common limitations" on the taxing powers of local governments, Section 133 logically prevails over
Section 193 which grants local governments such taxing powers. By their very meaning and purpose, the "common limitations" on the
taxing power prevail over the grant or exercise of the taxing power. If the taxing power of local governments in Section 193 prevails
over the limitations on such taxing power in Section 133, then local governments can impose any kind of tax on the national
government, its agencies and instrumentalities — a gross absurdity.

Local governments have no power to tax the national government, its agencies and instrumentalities, except as otherwise provided in
the Local Government Code pursuant to the saving clause in Section 133 stating "[u]nless otherwise provided in this Code." This
exception — which is an exception to the exemption of the Republic from real estate tax imposed by local governments — refers to
Section 234(a) of the Code. The exception to the exemption in Section 234(a) subjects real property owned by the Republic, whether
titled in the name of the national government, its agencies or instrumentalities, to real estate tax if the beneficial use of such property is
given to a taxable entity.

The minority also claims that the definition in the Administrative Code of the phrase "government-owned or controlled corporation" is not
controlling. The minority points out that Section 2 of the Introductory Provisions of the Administrative Code admits that its definitions are
not controlling when it provides:

SEC. 2. General Terms Defined. — Unless the specific words of the text, or the context as a whole, or a particular statute,
shall require a different meaning:

xxxx

The minority then concludes that reliance on the Administrative Code definition is "flawed."

The minority's argument is a non sequitur. True, Section 2 of the Administrative Code recognizes that a statute may require a different
meaning than that defined in the Administrative Code. However, this does not automatically mean that the definition in the
Administrative Code does not apply to the Local Government Code. Section 2 of the Administrative Code clearly states that "unless the
specific words x x x of a particular statute shall require a different meaning," the definition in Section 2 of the Administrative Code shall
apply. Thus, unless there is specific language in the Local Government Code defining the phrase "government-owned or controlled
corporation" differently from the definition in the Administrative Code, the definition in the Administrative Code prevails.

The minority does not point to any provision in the Local Government Code defining the phrase "government-owned or controlled
corporation" differently from the definition in the Administrative Code. Indeed, there is none. The Local Government Code is silent on
the definition of the phrase "government-owned or controlled corporation." The Administrative Code, however, expressly defines the
phrase "government-owned or controlled corporation." The inescapable conclusion is that the Administrative Code definition of the
phrase "government-owned or controlled corporation" applies to the Local Government Code.

The third whereas clause of the Administrative Code states that the Code "incorporates in a unified document the major structural,
functional and procedural principles and rules of governance." Thus, the Administrative Code is the governing law defining the status
and relationship of government departments, bureaus, offices, agencies and instrumentalities. Unless a statute expressly provides for a
different status and relationship for a specific government unit or entity, the provisions of the Administrative Code prevail.

The minority also contends that the phrase "government-owned or controlled corporation" should apply only to corporations organized
under the Corporation Code, the general incorporation law, and not to corporations created by special charters. The minority sees no
reason why government corporations with special charters should have a capital stock. Thus, the minority declares:
I submit that the definition of "government-owned or controlled corporations" under the Administrative Code refer to those
corporations owned by the government or its instrumentalities which are created not by legislative enactment, but formed and
organized under the Corporation Code through registration with the Securities and Exchange Commission. In short, these are
GOCCs without original charters.

xxxx

It might as well be worth pointing out that there is no point in requiring a capital structure for GOCCs whose full ownership is
limited by its charter to the State or Republic. Such GOCCs are not empowered to declare dividends or alienate their capital
shares.

The contention of the minority is seriously flawed. It is not in accord with the Constitution and existing legislations. It will also result in
gross absurdities.

First, the Administrative Code definition of the phrase "government-owned or controlled corporation" does not distinguish between one
incorporated under the Corporation Code or under a special charter. Where the law does not distinguish, courts should not distinguish.

Second, Congress has created through special charters several government-owned corporations organized as stock corporations.
Prime examples are the Land Bank of the Philippines and the Development Bank of the Philippines. The special charter 40 of the Land
Bank of the Philippines provides:

SECTION 81. Capital. — The authorized capital stock of the Bank shall be nine billion pesos, divided into seven hundred and
eighty million common shares with a par value of ten pesos each, which shall be fully subscribed by the Government, and one
hundred and twenty million preferred shares with a par value of ten pesos each, which shall be issued in accordance with the
provisions of Sections seventy-seven and eighty-three of this Code. (Emphasis supplied)

Likewise, the special charter41 of the Development Bank of the Philippines provides:

SECTION 7. Authorized Capital Stock – Par value. — The capital stock of the Bank shall be Five Billion Pesos to be divided
into Fifty Million common shares with par value of P100 per share. These shares are available for subscription by the National
Government. Upon the effectivity of this Charter, the National Government shall subscribe to Twenty-Five Million common
shares of stock worth Two Billion Five Hundred Million which shall be deemed paid for by the Government with the net asset
values of the Bank remaining after the transfer of assets and liabilities as provided in Section 30 hereof. (Emphasis supplied)

Other government-owned corporations organized as stock corporations under their special charters are the Philippine Crop Insurance
Corporation,42 Philippine International Trading Corporation,43 and the Philippine National Bank44 before it was reorganized as a stock
corporation under the Corporation Code. All these government-owned corporations organized under special charters as stock
corporations are subject to real estate tax on real properties owned by them. To rule that they are not government-owned or controlled
corporations because they are not registered with the Securities and Exchange Commission would remove them from the reach of
Section 234 of the Local Government Code, thus exempting them from real estate tax.

Third, the government-owned or controlled corporations created through special charters are those that meet the two conditions
prescribed in Section 16, Article XII of the Constitution. The first condition is that the government-owned or controlled corporation must
be established for the common good. The second condition is that the government-owned or controlled corporation must meet the test
of economic viability. Section 16, Article XII of the 1987 Constitution provides:

SEC. 16. The Congress shall not, except by general law, provide for the formation, organization, or regulation of private
corporations. Government-owned or controlled corporations may be created or established by special charters in the interest
of the common good and subject to the test of economic viability. (Emphasis and underscoring supplied)

The Constitution expressly authorizes the legislature to create "government-owned or controlled corporations" through special charters
only if these entities are required to meet the twin conditions of common good and economic viability. In other words, Congress has no
power to create government-owned or controlled corporations with special charters unless they are made to comply with the two
conditions of common good and economic viability. The test of economic viability applies only to government-owned or controlled
corporations that perform economic or commercial activities and need to compete in the market place. Being essentially economic
vehicles of the State for the common good — meaning for economic development purposes — these government-owned or controlled
corporations with special charters are usually organized as stock corporations just like ordinary private corporations.

In contrast, government instrumentalities vested with corporate powers and performing governmental or public functions need not meet
the test of economic viability. These instrumentalities perform essential public services for the common good, services that every
modern State must provide its citizens. These instrumentalities need not be economically viable since the government may even
subsidize their entire operations. These instrumentalities are not the "government-owned or controlled corporations" referred to in
Section 16, Article XII of the 1987 Constitution.
Thus, the Constitution imposes no limitation when the legislature creates government instrumentalities vested with corporate powers
but performing essential governmental or public functions. Congress has plenary authority to create government instrumentalities
vested with corporate powers provided these instrumentalities perform essential government functions or public services. However,
when the legislature creates through special charters corporations that perform economic or commercial activities, such entities —
known as "government-owned or controlled corporations" — must meet the test of economic viability because they compete in the
market place.

This is the situation of the Land Bank of the Philippines and the Development Bank of the Philippines and similar government-owned or
controlled corporations, which derive their income to meet operating expenses solely from commercial transactions in competition with
the private sector. The intent of the Constitution is to prevent the creation of government-owned or controlled corporations that cannot
survive on their own in the market place and thus merely drain the public coffers.

Commissioner Blas F. Ople, proponent of the test of economic viability, explained to the Constitutional Commission the purpose of this
test, as follows:

MR. OPLE: Madam President, the reason for this concern is really that when the government creates a corporation, there is a
sense in which this corporation becomes exempt from the test of economic performance. We know what happened in the past.
If a government corporation loses, then it makes its claim upon the taxpayers' money through new equity infusions from the
government and what is always invoked is the common good. That is the reason why this year, out of a budget of P115 billion
for the entire government, about P28 billion of this will go into equity infusions to support a few government financial
institutions. And this is all taxpayers' money which could have been relocated to agrarian reform, to social services like health
and education, to augment the salaries of grossly underpaid public employees. And yet this is all going down the drain.

Therefore, when we insert the phrase "ECONOMIC VIABILITY" together with the "common good," this becomes a restraint on
future enthusiasts for state capitalism to excuse themselves from the responsibility of meeting the market test so that they
become viable. And so, Madam President, I reiterate, for the committee's consideration and I am glad that I am joined in this
proposal by Commissioner Foz, the insertion of the standard of "ECONOMIC VIABILITY OR THE ECONOMIC TEST,"
together with the common good.45

Father Joaquin G. Bernas, a leading member of the Constitutional Commission, explains in his textbook The 1987 Constitution of the
Republic of the Philippines: A Commentary:

The second sentence was added by the 1986 Constitutional Commission. The significant addition, however, is the phrase "in
the interest of the common good and subject to the test of economic viability." The addition includes the ideas that they must
show capacity to function efficiently in business and that they should not go into activities which the private sector can do
better. Moreover, economic viability is more than financial viability but also includes capability to make profit and generate
benefits not quantifiable in financial terms.46(Emphasis supplied)

Clearly, the test of economic viability does not apply to government entities vested with corporate powers and performing essential
public services. The State is obligated to render essential public services regardless of the economic viability of providing such service.
The non-economic viability of rendering such essential public service does not excuse the State from withholding such essential
services from the public.

However, government-owned or controlled corporations with special charters, organized essentially for economic or commercial
objectives, must meet the test of economic viability. These are the government-owned or controlled corporations that are usually
organized under their special charters as stock corporations, like the Land Bank of the Philippines and the Development Bank of the
Philippines. These are the government-owned or controlled corporations, along with government-owned or controlled corporations
organized under the Corporation Code, that fall under the definition of "government-owned or controlled corporations" in Section 2(10)
of the Administrative Code.

The MIAA need not meet the test of economic viability because the legislature did not create MIAA to compete in the market place.
MIAA does not compete in the market place because there is no competing international airport operated by the private sector. MIAA
performs an essential public service as the primary domestic and international airport of the Philippines. The operation of an
international airport requires the presence of personnel from the following government agencies:

1. The Bureau of Immigration and Deportation, to document the arrival and departure of passengers, screening out those
without visas or travel documents, or those with hold departure orders;

2. The Bureau of Customs, to collect import duties or enforce the ban on prohibited importations;

3. The quarantine office of the Department of Health, to enforce health measures against the spread of infectious diseases into
the country;

4. The Department of Agriculture, to enforce measures against the spread of plant and animal diseases into the country;
5. The Aviation Security Command of the Philippine National Police, to prevent the entry of terrorists and the escape of
criminals, as well as to secure the airport premises from terrorist attack or seizure;

6. The Air Traffic Office of the Department of Transportation and Communications, to authorize aircraft to enter or leave
Philippine airspace, as well as to land on, or take off from, the airport; and

7. The MIAA, to provide the proper premises — such as runway and buildings — for the government personnel, passengers,
and airlines, and to manage the airport operations.

All these agencies of government perform government functions essential to the operation of an international airport.

MIAA performs an essential public service that every modern State must provide its citizens. MIAA derives its revenues principally from
the mandatory fees and charges MIAA imposes on passengers and airlines. The terminal fees that MIAA charges every passenger are
regulatory or administrative fees47 and not income from commercial transactions.

MIAA falls under the definition of a government instrumentality under Section 2(10) of the Introductory Provisions of the Administrative
Code, which provides:

SEC. 2. General Terms Defined. – x x x x

(10) Instrumentality refers to any agency of the National Government, not integrated within the department framework, vested
with special functions or jurisdiction by law, endowed with some if not all corporate powers, administering special funds, and
enjoying operational autonomy, usually through a charter. x x x (Emphasis supplied)

The fact alone that MIAA is endowed with corporate powers does not make MIAA a government-owned or controlled corporation.
Without a change in its capital structure, MIAA remains a government instrumentality under Section 2(10) of the Introductory Provisions
of the Administrative Code. More importantly, as long as MIAA renders essential public services, it need not comply with the test of
economic viability. Thus, MIAA is outside the scope of the phrase "government-owned or controlled corporations" under Section 16,
Article XII of the 1987 Constitution.

The minority belittles the use in the Local Government Code of the phrase "government-owned or controlled corporation" as merely
"clarificatory or illustrative." This is fatal. The 1987 Constitution prescribes explicit conditions for the creation of "government-owned or
controlled corporations." The Administrative Code defines what constitutes a "government-owned or controlled corporation." To belittle
this phrase as "clarificatory or illustrative" is grave error.

To summarize, MIAA is not a government-owned or controlled corporation under Section 2(13) of the Introductory Provisions of the
Administrative Code because it is not organized as a stock or non-stock corporation. Neither is MIAA a government-owned or controlled
corporation under Section 16, Article XII of the 1987 Constitution because MIAA is not required to meet the test of economic viability.
MIAA is a government instrumentality vested with corporate powers and performing essential public services pursuant to Section 2(10)
of the Introductory Provisions of the Administrative Code. As a government instrumentality, MIAA is not subject to any kind of tax by
local governments under Section 133(o) of the Local Government Code. The exception to the exemption in Section 234(a) does not
apply to MIAA because MIAA is not a taxable entity under the Local Government Code. Such exception applies only if the beneficial
use of real property owned by the Republic is given to a taxable entity.

Finally, the Airport Lands and Buildings of MIAA are properties devoted to public use and thus are properties of public dominion.
Properties of public dominion are owned by the State or the Republic. Article 420 of the Civil Code provides:

Art. 420. The following things are property of public dominion:

(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and bridges constructed by the State, banks,
shores, roadsteads, and others of similar character;

(2) Those which belong to the State, without being for public use, and are intended for some public service or for the
development of the national wealth. (Emphasis supplied)

The term "ports x x x constructed by the State" includes airports and seaports. The Airport Lands and Buildings of MIAA are intended
for public use, and at the very least intended for public service. Whether intended for public use or public service, the Airport Lands and
Buildings are properties of public dominion. As properties of public dominion, the Airport Lands and Buildings are owned by the
Republic and thus exempt from real estate tax under Section 234(a) of the Local Government Code.

4. Conclusion
Under Section 2(10) and (13) of the Introductory Provisions of the Administrative Code, which governs the legal relation and status of
government units, agencies and offices within the entire government machinery, MIAA is a government instrumentality and not a
government-owned or controlled corporation. Under Section 133(o) of the Local Government Code, MIAA as a government
instrumentality is not a taxable person because it is not subject to "[t]axes, fees or charges of any kind" by local governments. The only
exception is when MIAA leases its real property to a "taxable person" as provided in Section 234(a) of the Local Government Code, in
which case the specific real property leased becomes subject to real estate tax. Thus, only portions of the Airport Lands and Buildings
leased to taxable persons like private parties are subject to real estate tax by the City of Parañaque.

Under Article 420 of the Civil Code, the Airport Lands and Buildings of MIAA, being devoted to public use, are properties of public
dominion and thus owned by the State or the Republic of the Philippines. Article 420 specifically mentions "ports x x x constructed by
the State," which includes public airports and seaports, as properties of public dominion and owned by the Republic. As properties of
public dominion owned by the Republic, there is no doubt whatsoever that the Airport Lands and Buildings are expressly exempt from
real estate tax under Section 234(a) of the Local Government Code. This Court has also repeatedly ruled that properties of public
dominion are not subject to execution or foreclosure sale.

WHEREFORE, we GRANT the petition. We SET ASIDE the assailed Resolutions of the Court of Appeals of 5 October 2001 and 27
September 2002 in CA-G.R. SP No. 66878. We DECLARE the Airport Lands and Buildings of the Manila International Airport
Authority EXEMPT from the real estate tax imposed by the City of Parañaque. We declare VOID all the real estate tax assessments,
including the final notices of real estate tax delinquencies, issued by the City of Parañaque on the Airport Lands and Buildings of the
Manila International Airport Authority, except for the portions that the Manila International Airport Authority has leased to private parties.
We also declare VOID the assailed auction sale, and all its effects, of the Airport Lands and Buildings of the Manila International Airport
Authority.

No costs.

SO ORDERED.

BATAAN SHIPYARD & ENGINEERING CO., INC. (BASECO), petitioner,


vs.
PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT, CHAIRMAN JOVITO SALONGA, COMMISSIONER MARY
CONCEPCION BAUTISTA, COMMISSIONER RAMON DIAZ, COMMISSIONER RAUL R. DAZA, COMMISSIONER QUINTIN S.
DOROMAL, CAPT. JORGE B. SIACUNCO, et al., respondents.

Apostol, Bernas, Gumaru, Ona and Associates for petitioner.

Vicente G. Sison for intervenor A.T. Abesamis.

NARVASA, J.:

Challenged in this special civil action of certiorari and prohibition by a private corporation known as the Bataan Shipyard and
Engineering Co., Inc. are: (1) Executive Orders Numbered 1 and 2, promulgated by President Corazon C. Aquino on February 28, 1986
and March 12, 1986, respectively, and (2) the sequestration, takeover, and other orders issued, and acts done, in accordance with said
executive orders by the Presidential Commission on Good Government and/or its Commissioners and agents, affecting said
corporation.

1. The Sequestration, Takeover, and Other Orders Complained of

a. The Basic Sequestration Order

The sequestration order which, in the view of the petitioner corporation, initiated all its misery was issued on April 14, 1986 by
Commissioner Mary Concepcion Bautista. It was addressed to three of the agents of the Commission, hereafter simply referred to as
PCGG. It reads as follows:

RE: SEQUESTRATION ORDER

By virtue of the powers vested in the Presidential Commission on Good Government, by authority of the President of
the Philippines, you are hereby directed to sequester the following companies.

1. Bataan Shipyard and Engineering Co., Inc. (Engineering Island Shipyard and Mariveles
Shipyard)
2. Baseco Quarry

3. Philippine Jai-Alai Corporation

4. Fidelity Management Co., Inc.

5. Romson Realty, Inc.

6. Trident Management Co.

7. New Trident Management

8. Bay Transport

9. And all affiliate companies of Alfredo "Bejo" Romualdez

You are hereby ordered:

1. To implement this sequestration order with a minimum disruption of these companies' business activities.

2. To ensure the continuity of these companies as going concerns, the care and maintenance of these assets until
such time that the Office of the President through the Commission on Good Government should decide otherwise.

3. To report to the Commission on Good Government periodically.

Further, you are authorized to request for Military/Security Support from the Military/Police authorities, and such other
acts essential to the achievement of this sequestration order. 1

b. Order for Production of Documents

On the strength of the above sequestration order, Mr. Jose M. Balde, acting for the PCGG, addressed a letter dated April 18, 1986 to
the President and other officers of petitioner firm, reiterating an earlier request for the production of certain documents, to wit:

1. Stock Transfer Book

2. Legal documents, such as:

2.1. Articles of Incorporation

2.2. By-Laws

2.3. Minutes of the Annual Stockholders Meeting from 1973 to 1986

2.4. Minutes of the Regular and Special Meetings of the Board of Directors from 1973 to 1986

2.5. Minutes of the Executive Committee Meetings from 1973 to 1986

2.6. Existing contracts with suppliers/contractors/others.

3. Yearly list of stockholders with their corresponding share/stockholdings from 1973 to 1986 duly certified by the
Corporate Secretary.

4. Audited Financial Statements such as Balance Sheet, Profit & Loss and others from 1973 to December 31, 1985.

5. Monthly Financial Statements for the current year up to March 31, 1986.

6. Consolidated Cash Position Reports from January to April 15, 1986.

7. Inventory listings of assets up dated up to March 31, 1986.


8. Updated schedule of Accounts Receivable and Accounts Payable.

9. Complete list of depository banks for all funds with the authorized signatories for withdrawals thereof.

10. Schedule of company investments and placements. 2

The letter closed with the warning that if the documents were not submitted within five days, the officers would be cited for "contempt in
pursuance with Presidential Executive Order Nos. 1 and 2."

c. Orders Re Engineer Island

(1) Termination of Contract for Security Services

A third order assailed by petitioner corporation, hereafter referred to simply as BASECO, is that issued on April 21, 1986 by a Capt.
Flordelino B. Zabala, a member of the task force assigned to carry out the basic sequestration order. He sent a letter to BASECO's
Vice-President for Finance, 3 terminating the contract for security services within the Engineer Island compound between BASECO and
"Anchor and FAIRWAYS" and "other civilian security agencies," CAPCOM military personnel having already been assigned to the area,

(2) Change of Mode of Payment of Entry Charges

On July 15, 1986, the same Capt. Zabala issued a Memorandum addressed to "Truck Owners and Contractors," particularly a "Mr.
Buddy Ondivilla National Marine Corporation," advising of the amendment in part of their contracts with BASECO in the sense that the
stipulated charges for use of the BASECO road network were made payable "upon entry and not anymore subject to monthly billing as
was originally agreed upon." 4

d. Aborted Contract for Improvement of Wharf at Engineer Island

On July 9, 1986, a PCGG fiscal agent, S. Berenguer, entered into a contract in behalf of BASECO with Deltamarine Integrated Port
Services, Inc., in virtue of which the latter undertook to introduce improvements costing approximately P210,000.00 on the BASECO
wharf at Engineer Island, allegedly then in poor condition, avowedly to "optimize its utilization and in return maximize the revenue which
would flow into the government coffers," in consideration of Deltamarine's being granted "priority in using the improved portion of the
wharf ahead of anybody" and exemption "from the payment of any charges for the use of wharf including the area where it may install
its bagging equipments" "until the improvement remains in a condition suitable for port operations." 5 It seems however that this contract
was never consummated. Capt. Jorge B. Siacunco, "Head- (PCGG) BASECO Management Team," advised Deltamarine by letter
dated July 30, 1986 that "the new management is not in a position to honor the said contract" and thus "whatever improvements * *
(may be introduced) shall be deemed unauthorized * * and shall be at * * (Deltamarine's) own risk." 6

e. Order for Operation of Sesiman Rock Quarry, Mariveles, Bataan

By Order dated June 20, 1986, Commissioner Mary Bautista first directed a PCGG agent, Mayor Melba O. Buenaventura, "to plan and
implement progress towards maximizing the continuous operation of the BASECO Sesiman Rock Quarry * * by conventional methods;"
but afterwards, Commissioner Bautista, in representation of the PCGG, authorized another party, A.T. Abesamis, to operate the quarry,
located at Mariveles, Bataan, an agreement to this effect having been executed by them on September 17, 1986. 7

f. Order to Dispose of Scrap, etc.

By another Order of Commissioner Bautista, this time dated June 26, 1986, Mayor Buenaventura was also "authorized to clean and
beautify the Company's compound," and in this connection, to dispose of or sell "metal scraps" and other materials, equipment and
machineries no longer usable, subject to specified guidelines and safeguards including audit and verification. 8

g. The TAKEOVER Order

By letter dated July 14, 1986, Commissioner Ramon A. Diaz decreed the provisional takeover by the PCGG of BASECO, "the
Philippine Dockyard Corporation and all their affiliated companies." 9 Diaz invoked the provisions of Section 3 (c) of Executive Order
No. 1, empowering the Commission —

* * To provisionally takeover in the public interest or to prevent its disposal or dissipation, business enterprises and
properties taken over by the government of the Marcos Administration or by entities or persons close to former
President Marcos, until the transactions leading to such acquisition by the latter can be disposed of by the
appropriate authorities.

A management team was designated to implement the order, headed by Capt. Siacunco, and was given the following powers:
1. Conducts all aspects of operation of the subject companies;

2. Installs key officers, hires and terminates personnel as necessary;

3. Enters into contracts related to management and operation of the companies;

4. Ensures that the assets of the companies are not dissipated and used effectively and efficiently; revenues are duly
accounted for; and disburses funds only as may be necessary;

5. Does actions including among others, seeking of military support as may be necessary, that will ensure compliance
to this order;

6. Holds itself fully accountable to the Presidential Commission on Good Government on all aspects related to this
take-over order.

h. Termination of Services of BASECO Officers

Thereafter, Capt. Siacunco, sent letters to Hilario M. Ruiz, Manuel S. Mendoza, Moises M. Valdez, Gilberto Pasimanero, and Benito R.
Cuesta I, advising of the termination of their services by the PCGG. 10

2. Petitioner's Plea and Postulates

It is the foregoing specific orders and acts of the PCGG and its members and agents which, to repeat, petitioner BASECO would have
this Court nullify. More particularly, BASECO prays that this Court-

1) declare unconstitutional and void Executive Orders Numbered 1 and 2;

2) annul the sequestration order dated April- 14, 1986, and all other orders subsequently issued and acts done on the basis thereof,
inclusive of the takeover order of July 14, 1986 and the termination of the services of the BASECO executives. 11

a. Re Executive Orders No. 1 and 2, and the Sequestration and Takeover Orders

While BASECO concedes that "sequestration without resorting to judicial action, might be made within the context of Executive Orders
Nos. 1 and 2 before March 25, 1986 when the Freedom Constitution was promulgated, under the principle that the law promulgated by
the ruler under a revolutionary regime is the law of the land, it ceased to be acceptable when the same ruler opted to promulgate the
Freedom Constitution on March 25, 1986 wherein under Section I of the same, Article IV (Bill of Rights) of the 1973 Constitution was
adopted providing, among others, that "No person shall be deprived of life, liberty and property without due process of law." (Const.,
Art. I V, Sec. 1)." 12

It declares that its objection to the constitutionality of the Executive Orders "as well as the Sequestration Order * * and Takeover Order *
* issued purportedly under the authority of said Executive Orders, rests on four fundamental considerations: First, no notice and hearing
was accorded * * (it) before its properties and business were taken over; Second, the PCGG is not a court, but a purely investigative
agency and therefore not competent to act as prosecutor and judge in the same cause; Third, there is nothing in the issuances which
envisions any proceeding, process or remedy by which petitioner may expeditiously challenge the validity of the takeover after the
same has been effected; and Fourthly, being directed against specified persons, and in disregard of the constitutional presumption of
innocence and general rules and procedures, they constitute a Bill of Attainder." 13

b. Re Order to Produce Documents

It argues that the order to produce corporate records from 1973 to 1986, which it has apparently already complied with, was issued
without court authority and infringed its constitutional right against self-incrimination, and unreasonable search and seizure. 14

c. Re PCGG's Exercise of Right of Ownership and Management

BASECO further contends that the PCGG had unduly interfered with its right of dominion and management of its business affairs by —

1) terminating its contract for security services with Fairways & Anchor, without the consent and against the will of the contracting
parties; and amending the mode of payment of entry fees stipulated in its Lease Contract with National Stevedoring & Lighterage
Corporation, these acts being in violation of the non-impairment clause of the constitution; 15

2) allowing PCGG Agent Silverio Berenguer to enter into an "anomalous contract" with Deltamarine Integrated Port Services, Inc.,
giving the latter free use of BASECO premises; 16
3) authorizing PCGG Agent, Mayor Melba Buenaventura, to manage and operate its rock quarry at Sesiman, Mariveles; 17

4) authorizing the same mayor to sell or dispose of its metal scrap, equipment, machinery and other materials; 18

5) authorizing the takeover of BASECO, Philippine Dockyard Corporation, and all their affiliated companies;

6) terminating the services of BASECO executives: President Hilario M. Ruiz; EVP Manuel S. Mendoza; GM Moises M. Valdez;
Finance Mgr. Gilberto Pasimanero; Legal Dept. Mgr. Benito R. Cuesta I; 19

7) planning to elect its own Board of Directors; 20

8) allowing willingly or unwillingly its personnel to take, steal, carry away from petitioner's premises at Mariveles * * rolls of cable wires,
worth P600,000.00 on May 11, 1986; 21

22
9) allowing "indiscriminate diggings" at Engineer Island to retrieve gold bars supposed to have been buried therein.

3. Doubts, Misconceptions regarding Sequestration, Freeze and Takeover Orders

Many misconceptions and much doubt about the matter of sequestration, takeover and freeze orders have been engendered by
misapprehension, or incomplete comprehension if not indeed downright ignorance of the law governing these remedies. It is needful
that these misconceptions and doubts be dispelled so that uninformed and useless debates about them may be avoided, and
arguments tainted b sophistry or intellectual dishonesty be quickly exposed and discarded. Towards this end, this opinion will essay an
exposition of the law on the matter. In the process many of the objections raised by BASECO will be dealt with.

4. The Governing Law

a. Proclamation No. 3

The impugned executive orders are avowedly meant to carry out the explicit command of the Provisional Constitution, ordained by
Proclamation No. 3, 23 that the President-in the exercise of legislative power which she was authorized to continue to wield "(until a
legislature is elected and convened under a new Constitution" — "shall give priority to measures to achieve the mandate of the people,"
among others to (r)ecover ill-gotten properties amassed by the leaders and supporters of the previous regime and protect the interest of
the people through orders of sequestration or freezing of assets or accounts." 24

b. Executive Order No. 1

Executive Order No. 1 stresses the "urgent need to recover all ill-gotten wealth," and postulates that "vast resources of the government
have been amassed by former President Ferdinand E. Marcos, his immediate family, relatives, and close associates both here and
abroad." 25 Upon these premises, the Presidential Commission on Good Government was created, 26 "charged with the task of assisting
the President in regard to (certain specified) matters," among which was precisely-

* * The recovery of all in-gotten wealth accumulated by former President Ferdinand E. Marcos, his immediate family,
relatives, subordinates and close associates, whether located in the Philippines or abroad, including the takeover or
sequestration of all business enterprises and entities owned or controlled by them, during his administration, directly
or through nominees, by taking undue advantage of their public office and/or using their powers, authority, influence,
connections or relationship. 27

In relation to the takeover or sequestration that it was authorized to undertake in the fulfillment of its mission, the PCGG was granted
"power and authority" to do the following particular acts, to wit:

1. To sequester or place or cause to be placed under its control or possession any building or office wherein any ill-
gotten wealth or properties may be found, and any records pertaining thereto, in order to prevent their destruction,
concealment or disappearance which would frustrate or hamper the investigation or otherwise prevent the
Commission from accomplishing its task.

2. To provisionally take over in the public interest or to prevent the disposal or dissipation, business enterprises and
properties taken over by the government of the Marcos Administration or by entities or persons close to former
President Marcos, until the transactions leading to such acquisition by the latter can be disposed of by the
appropriate authorities.

3. To enjoin or restrain any actual or threatened commission of acts by any person or entity that may render moot and
academic, or frustrate or otherwise make ineffectual the efforts of the Commission to carry out its task under this
order. 28
So that it might ascertain the facts germane to its objectives, it was granted power to conduct investigations; require submission of
evidence by subpoenae ad testificandum and duces tecum; administer oaths; punish for contempt. 29It was given power also to
promulgate such rules and regulations as may be necessary to carry out the purposes of * * (its creation). 30

c. Executive Order No. 2

Executive Order No. 2 gives additional and more specific data and directions respecting "the recovery of ill-gotten properties amassed
by the leaders and supporters of the previous regime." It declares that:

1) * * the Government of the Philippines is in possession of evidence showing that there are assets and properties
purportedly pertaining to former Ferdinand E. Marcos, and/or his wife Mrs. Imelda Romualdez Marcos, their close
relatives, subordinates, business associates, dummies, agents or nominees which had been or were acquired by
them directly or indirectly, through or as a result of the improper or illegal use of funds or properties owned by the
government of the Philippines or any of its branches, instrumentalities, enterprises, banks or financial institutions, or
by taking undue advantage of their office, authority, influence, connections or relationship, resulting in their unjust
enrichment and causing grave damage and prejudice to the Filipino people and the Republic of the Philippines:" and

2) * * said assets and properties are in the form of bank accounts, deposits, trust accounts, shares of stocks,
buildings, shopping centers, condominiums, mansions, residences, estates, and other kinds of real and personal
properties in the Philippines and in various countries of the world." 31

Upon these premises, the President-

1) froze "all assets and properties in the Philippines in which former President Marcos and/or his wife, Mrs. Imelda
Romualdez Marcos, their close relatives, subordinates, business associates, dummies, agents, or nominees have
any interest or participation;

2) prohibited former President Ferdinand Marcos and/or his wife * *, their close relatives, subordinates, business
associates, duties, agents, or nominees from transferring, conveying, encumbering, concealing or dissipating said
assets or properties in the Philippines and abroad, pending the outcome of appropriate proceedings in the Philippines
to determine whether any such assets or properties were acquired by them through or as a result of improper or
illegal use of or the conversion of funds belonging to the Government of the Philippines or any of its branches,
instrumentalities, enterprises, banks or financial institutions, or by taking undue advantage of their official position,
authority, relationship, connection or influence to unjustly enrich themselves at the expense and to the grave damage
and prejudice of the Filipino people and the Republic of the Philippines;

3) prohibited "any person from transferring, conveying, encumbering or otherwise depleting or concealing such assets
and properties or from assisting or taking part in their transfer, encumbrance, concealment or dissipation under pain
of such penalties as are prescribed by law;" and

4) required "all persons in the Philippines holding such assets or properties, whether located in the Philippines or
abroad, in their names as nominees, agents or trustees, to make full disclosure of the same to the Commission on
Good Government within thirty (30) days from publication of * (the) Executive Order, * *. 32

d. Executive Order No. 14

A third executive order is relevant: Executive Order No. 14, 33 by which the PCGG is empowered, "with the assistance of the Office of
the Solicitor General and other government agencies, * * to file and prosecute all cases investigated by it * * as may be warranted by its
findings." 34 All such cases, whether civil or criminal, are to be filed "with the Sandiganbayan which shall have exclusive and original
jurisdiction thereof." 35 Executive Order No. 14 also pertinently provides that civil suits for restitution, reparation of damages, or
indemnification for consequential damages, forfeiture proceedings provided for under Republic Act No. 1379, or any other civil actions
under the Civil Code or other existing laws, in connection with * * (said Executive Orders Numbered 1 and 2) may be filed separately
from and proceed independently of any criminal proceedings and may be proved by a preponderance of evidence;" and that, moreover,
the "technical rules of procedure and evidence shall not be strictly applied to* * (said)civil cases." 36

5. Contemplated Situations

The situations envisaged and sought to be governed are self-evident, these being:

37
1) that "(i)ll-gotten properties (were) amassed by the leaders and supporters of the previous regime";

a) more particularly, that ill-gotten wealth (was) accumulated by former President Ferdinand E. Marcos, his immediate
family, relatives, subordinates and close associates, * * located in the Philippines or abroad, * * (and) business
enterprises and entities (came to be) owned or controlled by them, during * * (the Marcos) administration, directly or
through nominees, by taking undue advantage of their public office and/or using their powers, authority, influence,
Connections or relationship; 38

b) otherwise stated, that "there are assets and properties purportedly pertaining to former President Ferdinand E.
Marcos, and/or his wife Mrs. Imelda Romualdez Marcos, their close relatives, subordinates, business associates,
dummies, agents or nominees which had been or were acquired by them directly or indirectly, through or as a result
of the improper or illegal use of funds or properties owned by the Government of the Philippines or any of its
branches, instrumentalities, enterprises, banks or financial institutions, or by taking undue advantage of their office,
authority, influence, connections or relationship, resulting in their unjust enrichment and causing grave damage and
prejudice to the Filipino people and the Republic of the Philippines"; 39

c) that "said assets and properties are in the form of bank accounts. deposits, trust. accounts, shares of stocks,
buildings, shopping centers, condominiums, mansions, residences, estates, and other kinds of real and personal
properties in the Philippines and in various countries of the world;" 40 and

2) that certain "business enterprises and properties (were) taken over by the government of the Marcos
Administration or by entities or persons close to former President Marcos. 41

6. Government's Right and Duty to Recover All Ill-gotten Wealth

There can be no debate about the validity and eminent propriety of the Government's plan "to recover all ill-gotten wealth."

Neither can there be any debate about the proposition that assuming the above described factual premises of the Executive Orders and
Proclamation No. 3 to be true, to be demonstrable by competent evidence, the recovery from Marcos, his family and his dominions of
the assets and properties involved, is not only a right but a duty on the part of Government.

But however plain and valid that right and duty may be, still a balance must be sought with the equally compelling necessity that a
proper respect be accorded and adequate protection assured, the fundamental rights of private property and free enterprise which are
deemed pillars of a free society such as ours, and to which all members of that society may without exception lay claim.

* * Democracy, as a way of life enshrined in the Constitution, embraces as its necessary components freedom of
conscience, freedom of expression, and freedom in the pursuit of happiness. Along with these freedoms are included
economic freedom and freedom of enterprise within reasonable bounds and under proper control. * * Evincing much
concern for the protection of property, the Constitution distinctly recognizes the preferred position which real estate
has occupied in law for ages. Property is bound up with every aspect of social life in a democracy as democracy is
conceived in the Constitution.The Constitution realizes the indispensable role which property, owned in reasonable
quantities and used legitimately, plays in the stimulation to economic effort and the formation and growth of a solid
social middle class that is said to be the bulwark of democracy and the backbone of every progressive and happy
country. 42

a. Need of Evidentiary Substantiation in Proper Suit

Consequently, the factual premises of the Executive Orders cannot simply be assumed. They will have to be duly established by
adequate proof in each case, in a proper judicial proceeding, so that the recovery of the ill-gotten wealth may be validly and properly
adjudged and consummated; although there are some who maintain that the fact-that an immense fortune, and "vast resources of the
government have been amassed by former President Ferdinand E. Marcos, his immediate family, relatives, and close associates both
here and abroad," and they have resorted to all sorts of clever schemes and manipulations to disguise and hide their illicit acquisitions-
is within the realm of judicial notice, being of so extensive notoriety as to dispense with proof thereof, Be this as it may, the requirement
of evidentiary substantiation has been expressly acknowledged, and the procedure to be followed explicitly laid down, in Executive
Order No. 14.

b. Need of Provisional Measures to Collect and Conserve Assets Pending Suits

Nor may it be gainsaid that pending the institution of the suits for the recovery of such "ill-gotten wealth" as the evidence at hand may
reveal, there is an obvious and imperative need for preliminary, provisional measures to prevent the concealment, disappearance,
destruction, dissipation, or loss of the assets and properties subject of the suits, or to restrain or foil acts that may render moot and
academic, or effectively hamper, delay, or negate efforts to recover the same.

7. Provisional Remedies Prescribed by Law

To answer this need, the law has prescribed three (3) provisional remedies. These are: (1) sequestration; (2) freeze orders; and (3)
provisional takeover.
Sequestration and freezing are remedies applicable generally to unearthed instances of "ill-gotten wealth." The remedy of "provisional
takeover" is peculiar to cases where "business enterprises and properties (were) taken over by the government of the Marcos
Administration or by entities or persons close to former President Marcos." 43

a. Sequestration

By the clear terms of the law, the power of the PCGG to sequester property claimed to be "ill-gotten" means to place or cause to be
placed under its possession or control said property, or any building or office wherein any such property and any records pertaining
thereto may be found, including "business enterprises and entities,"-for the purpose of preventing the destruction, concealment or
dissipation of, and otherwise conserving and preserving, the same-until it can be determined, through appropriate judicial proceedings,
whether the property was in truth will- gotten," i.e., acquired through or as a result of improper or illegal use of or the conversion of
funds belonging to the Government or any of its branches, instrumentalities, enterprises, banks or financial institutions, or by taking
undue advantage of official position, authority relationship, connection or influence, resulting in unjust enrichment of the ostensible
owner and grave damage and prejudice to the State. 44 And this, too, is the sense in which the term is commonly understood in other
jurisdictions. 45

b. "Freeze Order"

A "freeze order" prohibits the person having possession or control of property alleged to constitute "ill-gotten wealth" "from transferring,
conveying, encumbering or otherwise depleting or concealing such property, or from assisting or taking part in its transfer,
encumbrance, concealment, or dissipation." 46 In other words, it commands the possessor to hold the property and conserve it subject
to the orders and disposition of the authority decreeing such freezing. In this sense, it is akin to a garnishment by which the possessor
or ostensible owner of property is enjoined not to deliver, transfer, or otherwise dispose of any effects or credits in his possession or
control, and thus becomes in a sense an involuntary depositary thereof. 47

c. Provisional Takeover

In providing for the remedy of "provisional takeover," the law acknowledges the apparent distinction between "ill gotten" "business
enterprises and entities" (going concerns, businesses in actual operation), generally, as to which the remedy of sequestration applies, it
being necessarily inferred that the remedy entails no interference, or the least possible interference with the actual management and
operations thereof; and "business enterprises which were taken over by the government government of the Marcos Administration or by
entities or persons close to him," in particular, as to which a "provisional takeover" is authorized, "in the public interest or to prevent
disposal or dissipation of the enterprises." 48 Such a "provisional takeover" imports something more than sequestration or freezing,
more than the placing of the business under physical possession and control, albeit without or with the least possible interference with
the management and carrying on of the business itself. In a "provisional takeover," what is taken into custody is not only the physical
assets of the business enterprise or entity, but the business operation as well. It is in fine the assumption of control not only over things,
but over operations or on- going activities. But, to repeat, such a "provisional takeover" is allowed only as regards "business enterprises
* * taken over by the government of the Marcos Administration or by entities or persons close to former President Marcos."

d. No Divestment of Title Over Property Seized

It may perhaps be well at this point to stress once again the provisional, contingent character of the remedies just described. Indeed the
law plainly qualifies the remedy of take-over by the adjective, "provisional." These remedies may be resorted to only for a particular
exigency: to prevent in the public interest the disappearance or dissipation of property or business, and conserve it pending adjudgment
in appropriate proceedings of the primary issue of whether or not the acquisition of title or other right thereto by the apparent owner was
attended by some vitiating anomaly. None of the remedies is meant to deprive the owner or possessor of his title or any right to the
property sequestered, frozen or taken over and vest it in the sequestering agency, the Government or other person. This can be done
only for the causes and by the processes laid down by law.

That this is the sense in which the power to sequester, freeze or provisionally take over is to be understood and exercised, the
language of the executive orders in question leaves no doubt. Executive Order No. 1 declares that the sequestration of property the
acquisition of which is suspect shall last "until the transactions leading to such acquisition * * can be disposed of by the appropriate
authorities." 49 Executive Order No. 2 declares that the assets or properties therein mentioned shall remain frozen "pending the
outcome of appropriate proceedings in the Philippines to determine whether any such assets or properties were acquired" by illegal
means. Executive Order No. 14 makes clear that judicial proceedings are essential for the resolution of the basic issue of whether or
not particular assets are "ill-gotten," and resultant recovery thereof by the Government is warranted.

e. State of Seizure Not To Be Indefinitely Maintained; The Constitutional Command

There is thus no cause for the apprehension voiced by BASECO 50 that sequestration, freezing or provisional takeover is designed to
be an end in itself, that it is the device through which persons may be deprived of their property branded as "ill-gotten," that it is
intended to bring about a permanent, rather than a passing, transitional state of affairs. That this is not so is quite explicitly declared by
the governing rules.
Be this as it may, the 1987 Constitution should allay any lingering fears about the duration of these provisional remedies. Section 26 of
its Transitory Provisions, 51 lays down the relevant rule in plain terms, apart from extending ratification or confirmation (although not
really necessary) to the institution by presidential fiat of the remedy of sequestration and freeze orders:

SEC. 26. The authority to issue sequestration or freeze orders under Proclamation No. 3 dated March 25, 1986 in
relation to the recovery of ill-gotten wealth shag remain operative for not more than eighteen months after the
ratification of this Constitution. However, in the national interest, as certified by the President, the Congress may
extend said period.

A sequestration or freeze order shall be issued only upon showing of a prima facie case. The order and the list of the
sequestered or frozen properties shall forthwith be registered with the proper court. For orders issued before the
ratification of this Constitution, the corresponding judicial action or proceeding shall be filed within six months from its
ratification. For those issued after such ratification, the judicial action or proceeding shall be commenced within six
months from the issuance thereof.

The sequestration or freeze order is deemed automatically lifted if no judicial action or proceeding is commenced as
herein provided. 52

f. Kinship to Attachment Receivership

As thus described, sequestration, freezing and provisional takeover are akin to the provisional remedy of preliminary attachment, or
receivership. 53 By attachment, a sheriff seizes property of a defendant in a civil suit so that it may stand as security for the satisfaction
of any judgment that may be obtained, and not disposed of, or dissipated, or lost intentionally or otherwise, pending the action. 54 By
receivership, property, real or personal, which is subject of litigation, is placed in the possession and control of a receiver appointed by
the Court, who shall conserve it pending final determination of the title or right of possession over it. 55 All these remedies —
sequestration, freezing, provisional, takeover, attachment and receivership — are provisional, temporary, designed for-particular
exigencies, attended by no character of permanency or finality, and always subject to the control of the issuing court or agency.

g. Remedies, Non-Judicial

Parenthetically, that writs of sequestration or freeze or takeover orders are not issued by a court is of no moment. The Solicitor General
draws attention to the writ of distraint and levy which since 1936 the Commissioner of Internal Revenue has been by law authorized to
issue against property of a delinquent taxpayer. 56 BASECO itself declares that it has not manifested "a rigid insistence on
sequestration as a purely judicial remedy * * (as it feels) that the law should not be ossified to a point that makes it insensitive to
change." What it insists on, what it pronounces to be its "unyielding position, is that any change in procedure, or the institution of a new
one, should conform to due process and the other prescriptions of the Bill of Rights of the Constitution." 57 It is, to be sure, a proposition
on which there can be no disagreement.

h. Orders May Issue Ex Parte

Like the remedy of preliminary attachment and receivership, as well as delivery of personal property in replevin suits, sequestration and
provisional takeover writs may issue ex parte. 58 And as in preliminary attachment, receivership, and delivery of personality, no
objection of any significance may be raised to the ex parte issuance of an order of sequestration, freezing or takeover, given its
fundamental character of temporariness or conditionality; and taking account specially of the constitutionally expressed "mandate of the
people to recover ill-gotten properties amassed by the leaders and supporters of the previous regime and protect the interest of the
people;" 59 as well as the obvious need to avoid alerting suspected possessors of "ill-gotten wealth" and thereby cause that
disappearance or loss of property precisely sought to be prevented, and the fact, just as self-evident, that "any transfer, disposition,
concealment or disappearance of said assets and properties would frustrate, obstruct or hamper the efforts of the Government" at the
just recovery thereof. 60

8. Requisites for Validity

What is indispensable is that, again as in the case of attachment and receivership, there exist a prima facie factual foundation, at least,
for the sequestration, freeze or takeover order, and adequate and fair opportunity to contest it and endeavor to cause its negation or
nullification. 61

Both are assured under the executive orders in question and the rules and regulations promulgated by the PCGG.

a. Prima Facie Evidence as Basis for Orders

Executive Order No. 14 enjoins that there be "due regard to the requirements of fairness and due process." 62Executive Order No. 2
declares that with respect to claims on allegedly "ill-gotten" assets and properties, "it is the position of the new democratic government
that President Marcos * * (and other parties affected) be afforded fair opportunity to contest these claims before appropriate Philippine
authorities." 63 Section 7 of the Commission's Rules and Regulations provides that sequestration or freeze (and takeover) orders issue
upon the authority of at least two commissioners, based on the affirmation or complaint of an interested party, or motu proprio when the
Commission has reasonable grounds to believe that the issuance thereof is warranted. 64 A similar requirement is now found in Section
26, Art. XVIII of the 1987 Constitution, which requires that a "sequestration or freeze order shall be issued only upon showing of a prima
facie case." 65

b. Opportunity to Contest

And Sections 5 and 6 of the same Rules and Regulations lay down the procedure by which a party may seek to set aside a writ of
sequestration or freeze order, viz:

SECTION 5. Who may contend.-The person against whom a writ of sequestration or freeze or hold order is directed
may request the lifting thereof in writing, either personally or through counsel within five (5) days from receipt of the
writ or order, or in the case of a hold order, from date of knowledge thereof.

SECTION 6. Procedure for review of writ or order.-After due hearing or motu proprio for good cause shown, the
Commission may lift the writ or order unconditionally or subject to such conditions as it may deem necessary, taking
into consideration the evidence and the circumstance of the case. The resolution of the commission may be appealed
by the party concerned to the Office of the President of the Philippines within fifteen (15) days from receipt thereof.

Parenthetically, even if the requirement for a prima facie showing of "ill- gotten wealth" were not expressly imposed by some rule or
regulation as a condition to warrant the sequestration or freezing of property contemplated in the executive orders in question, it would
nevertheless be exigible in this jurisdiction in which the Rule of Law prevails and official acts which are devoid of rational basis in fact or
law, or are whimsical and capricious, are condemned and struck down. 66

9. Constitutional Sanction of Remedies

If any doubt should still persist in the face of the foregoing considerations as to the validity and propriety of sequestration, freeze and
takeover orders, it should be dispelled by the fact that these particular remedies and the authority of the PCGG to issue them have
received constitutional approbation and sanction. As already mentioned, the Provisional or "Freedom" Constitution recognizes the
power and duty of the President to enact "measures to achieve the mandate of the people to * * * (recover ill- gotten properties
amassed by the leaders and supporters of the previous regime and protect the interest of the people through orders of sequestration or
freezing of assets or accounts." And as also already adverted to, Section 26, Article XVIII of the 1987 Constitution 67 treats of, and
ratifies the "authority to issue sequestration or freeze orders under Proclamation No. 3 dated March 25, 1986."

The institution of these provisional remedies is also premised upon the State's inherent police power, regarded, as t lie power of
promoting the public welfare by restraining and regulating the use of liberty and property," 68 and as "the most essential, insistent and
illimitable of powers * * in the promotion of general welfare and the public interest," 69and said to be co-extensive with self-protection
and * * not inaptly termed (also) the'law of overruling necessity." "70

10. PCGG not a "Judge"; General Functions

It should also by now be reasonably evident from what has thus far been said that the PCGG is not, and was never intended to act as,
a judge. Its general function is to conduct investigations in order to collect evidence establishing instances of "ill-gotten wealth;" issue
sequestration, and such orders as may be warranted by the evidence thus collected and as may be necessary to preserve and
conserve the assets of which it takes custody and control and prevent their disappearance, loss or dissipation; and eventually file and
prosecute in the proper court of competent jurisdiction all cases investigated by it as may be warranted by its findings. It does not try
and decide, or hear and determine, or adjudicate with any character of finality or compulsion, cases involving the essential issue of
whether or not property should be forfeited and transferred to the State because "ill-gotten" within the meaning of the Constitution and
the executive orders. This function is reserved to the designated court, in this case, the Sandiganbayan. 71 There can therefore be no
serious regard accorded to the accusation, leveled by BASECO, 72that the PCGG plays the perfidious role of prosecutor and judge at
the same time.

11. Facts Preclude Grant of Relief to Petitioner

Upon these premises and reasoned conclusions, and upon the facts disclosed by the record, hereafter to be discussed, the petition
cannot succeed. The writs of certiorari and prohibition prayed for will not be issued.

The facts show that the corporation known as BASECO was owned or controlled by President Marcos "during his administration,
through nominees, by taking undue advantage of his public office and/or using his powers, authority, or influence, " and that it was by
and through the same means, that BASECO had taken over the business and/or assets of the National Shipyard and Engineering Co.,
Inc., and other government-owned or controlled entities.

12. Organization and Stock Distribution of BASECO


BASECO describes itself in its petition as "a shiprepair and shipbuilding company * * incorporated as a domestic private corporation * *
(on Aug. 30, 1972) by a consortium of Filipino shipowners and shipping executives. Its main office is at Engineer Island, Port Area,
Manila, where its Engineer Island Shipyard is housed, and its main shipyard is located at Mariveles Bataan." 73 Its Articles of
Incorporation disclose that its authorized capital stock is P60,000,000.00 divided into 60,000 shares, of which 12,000 shares with a
value of P12,000,000.00 have been subscribed, and on said subscription, the aggregate sum of P3,035,000.00 has been paid by the
incorporators. 74The same articles Identify the incorporators, numbering fifteen (15), as follows: (1) Jose A. Rojas, (2) Anthony P. Lee,
(3) Eduardo T. Marcelo, (4) Jose P. Fernandez, (5) Generoso Tanseco, (6) Emilio T. Yap, (7) Antonio M. Ezpeleta, (8) Zacarias
Amante, (9) Severino de la Cruz, (10) Jose Francisco, (11) Dioscoro Papa, (12) Octavio Posadas, (13) Manuel S. Mendoza, (14)
Magiliw Torres, and (15) Rodolfo Torres.

By 1986, however, of these fifteen (15) incorporators, six (6) had ceased to be stockholders, namely: (1) Generoso Tanseco, (2)
Antonio Ezpeleta, (3) Zacarias Amante, (4) Octavio Posadas, (5) Magiliw Torres, and (6) Rodolfo Torres. As of this year, 1986, there
were twenty (20) stockholders listed in BASECO's Stock and Transfer Book. 75Their names and the number of shares respectively held
by them are as follows:

1. Jose A. Rojas 1,248 shares

2. Severino G. de la 1,248 shares


Cruz

3. Emilio T. Yap 2,508 shares

4. Jose Fernandez 1,248 shares

5. Jose Francisco 128 shares

6. Manuel S. 96 shares
Mendoza

7. Anthony P. Lee 1,248 shares

8. Hilario M. Ruiz 32 shares

9. Constante L. 8 shares
Fariñas

10. Fidelity 65,882 shares


Management, Inc.

11. Trident 7,412 shares


Management

12. United Phil. Lines 1,240 shares

13. Renato M. 8 shares


Tanseco

14. Fidel Ventura 8 shares

15. Metro Bay 136,370


Drydock shares

16. Manuel Jacela 1 share

17. Jonathan G. Lu 1 share

18. Jose J. 1 share


Tanchanco

19. Dioscoro Papa 128 shares

20. Edward T. 4 shares


Marcelo

TOTAL 218,819
shares.
13 Acquisition of NASSCO by BASECO

Barely six months after its incorporation, BASECO acquired from National Shipyard & Steel Corporation, or NASSCO, a government-
owned or controlled corporation, the latter's shipyard at Mariveles, Bataan, known as the Bataan National Shipyard (BNS), and —
except for NASSCO's Engineer Island Shops and certain equipment of the BNS, consigned for future negotiation — all its structures,
buildings, shops, quarters, houses, plants, equipment and facilities, in stock or in transit. This it did in virtue of a "Contract of Purchase
and Sale with Chattel Mortgage" executed on February 13, 1973. The price was P52,000,000.00. As partial payment thereof, BASECO
delivered to NASSCO a cash bond of P11,400,000.00, convertible into cash within twenty-four (24) hours from completion of the
inventory undertaken pursuant to the contract. The balance of P41,600,000.00, with interest at seven percent (7%) per annum,
compounded semi-annually, was stipulated to be paid in equal semi-annual installments over a term of nine (9) years, payment to
commence after a grace period of two (2) years from date of turnover of the shipyard to BASECO. 76

14. Subsequent Reduction of Price; Intervention of Marcos

Unaccountably, the price of P52,000,000.00 was reduced by more than one-half, to P24,311,550.00, about eight (8) months later. A
document to this effect was executed on October 9, 1973, entitled "Memorandum Agreement," and was signed for NASSCO by Arturo
Pacificador, as Presiding Officer of the Board of Directors, and David R. Ines, as General Manager. 77 This agreement bore, at the top
right corner of the first page, the word "APPROVED" in the handwriting of President Marcos, followed by his usual full signature. The
document recited that a down payment of P5,862,310.00 had been made by BASECO, and the balance of P19,449,240.00 was
payable in equal semi-annual installments over nine (9) years after a grace period of two (2) years, with interest at 7% per annum.

15. Acquisition of 300 Hectares from Export Processing Zone Authority

On October 1, 1974, BASECO acquired three hundred (300) hectares of land in Mariveles from the Export Processing Zone Authority
for the price of P10,047,940.00 of which, as set out in the document of sale, P2,000.000.00 was paid upon its execution, and the
balance stipulated to be payable in installments. 78

16. Acquisition of Other Assets of NASSCO; Intervention of Marcos

Some nine months afterwards, or on July 15, 1975, to be precise, BASECO, again with the intervention of President Marcos, acquired
ownership of the rest of the assets of NASSCO which had not been included in the first two (2) purchase documents. This was
accomplished by a deed entitled "Contract of Purchase and Sale," 79 which, like the Memorandum of Agreement dated October 9,
1973 supra also bore at the upper right-hand corner of its first page, the handwritten notation of President Marcos reading,
"APPROVED, July 29, 1973," and underneath it, his usual full signature. Transferred to BASECO were NASSCO's "ownership and all
its titles, rights and interests over all equipment and facilities including structures, buildings, shops, quarters, houses, plants and
expendable or semi-expendable assets, located at the Engineer Island, known as the Engineer Island Shops, including all the
equipment of the Bataan National Shipyards (BNS) which were excluded from the sale of NBS to BASECO but retained by BASECO
and all other selected equipment and machineries of NASSCO at J. Panganiban Smelting Plant." In the same deed, NASSCO
committed itself to cooperate with BASECO for the acquisition from the National Government or other appropriate Government entity of
Engineer Island. Consideration for the sale was set at P5,000,000.00; a down payment of P1,000,000.00 appears to have been made,
and the balance was stipulated to be paid at 7% interest per annum in equal semi annual installments over a term of nine (9) years, to
commence after a grace period of two (2) years. Mr. Arturo Pacificador again signed for NASSCO, together with the general manager,
Mr. David R. Ines.

17. Loans Obtained

It further appears that on May 27, 1975 BASECO obtained a loan from the NDC, taken from "the last available Japanese war damage
fund of $19,000,000.00," to pay for "Japanese made heavy equipment (brand new)." 80 On September 3, 1975, it got another loan also
from the NDC in the amount of P30,000,000.00 (id.). And on January 28, 1976, it got still another loan, this time from the GSIS, in the
sum of P12,400,000.00. 81 The claim has been made that not a single centavo has been paid on these loans. 82

18. Reports to President Marcos

In September, 1977, two (2) reports were submitted to President Marcos regarding BASECO. The first was contained in a letter dated
September 5, 1977 of Hilario M. Ruiz, BASECO president. 83 The second was embodied in a confidential memorandum dated
September 16, 1977 of Capt. A.T. Romualdez. 84 They further disclose the fine hand of Marcos in the affairs of BASECO, and that of a
Romualdez, a relative by affinity.

a. BASECO President's Report

In his letter of September 5, 1977, BASECO President Ruiz reported to Marcos that there had been "no orders or demands for ship
construction" for some time and expressed the fear that if that state of affairs persisted, BASECO would not be able to pay its debts to
the Government, which at the time stood at the not inconsiderable amount of P165,854,000.00. 85 He suggested that, to "save the
situation," there be a "spin-off (of their) shipbuilding activities which shall be handled exclusively by an entirely new corporation to be
created;" and towards this end, he informed Marcos that BASECO was —

* * inviting NDC and LUSTEVECO to participate by converting the NDC shipbuilding loan to BASECO amounting to
P341.165M and assuming and converting a portion of BASECO's shipbuilding loans from REPACOM amounting to
P52.2M or a total of P83.365M as NDC's equity contribution in the new corporation. LUSTEVECO will participate by
absorbing and converting a portion of the REPACOM loan of Bay Shipyard and Drydock, Inc., amounting to
P32.538M.86

b. Romualdez' Report

Capt. A.T. Romualdez' report to the President was submitted eleven (11) days later. It opened with the following caption:

MEMORANDUM:

FOR : The President

SUBJECT: An Evaluation and Re-assessment of a Performance of a Mission

FROM: Capt. A.T. Romualdez.

Like Ruiz, Romualdez wrote that BASECO faced great difficulties in meeting its loan obligations due chiefly to the fact that "orders to
build ships as expected * * did not materialize."

He advised that five stockholders had "waived and/or assigned their holdings inblank," these being: (1) Jose A. Rojas, (2) Severino de
la Cruz, (3) Rodolfo Torres, (4) Magiliw Torres, and (5) Anthony P. Lee. Pointing out that "Mr. Magiliw Torres * * is already dead and Mr.
Jose A. Rojas had a major heart attack," he made the following quite revealing, and it may be added, quite cynical and indurate
recommendation, to wit:

* * (that) their replacements (be effected) so we can register their names in the stock book prior to the implementation
of your instructions to pass a board resolution to legalize the transfers under SEC regulations;

2. By getting their replacements, the families cannot question us later on; and

87
3. We will owe no further favors from them.

88
He also transmitted to Marcos, together with the report, the following documents:

89
1. Stock certificates indorsed and assigned in blank with assignments and waivers;

2. The articles of incorporation, the amended articles, and the by-laws of BASECO;

3. Deed of Sales, wherein NASSCO sold to BASECO four (4) parcels of land in "Engineer Island", Port Area, Manila;

4. Transfer Certificate of Title No. 124822 in the name of BASECO, covering "Engineer Island";

5. Contract dated October 9, 1973, between NASSCO and BASECO re-structure and equipment at Mariveles,
Bataan;

6. Contract dated July 16, 1975, between NASSCO and BASECO re-structure and equipment at Engineer Island,
Port Area Manila;

7. Contract dated October 1, 1974, between EPZA and BASECO re 300 hectares of land at Mariveles, Bataan;

8. List of BASECO's fixed assets;

9. Loan Agreement dated September 3, 1975, BASECO's loan from NDC of P30,000,000.00;

10. BASECO-REPACOM Agreement dated May 27, 1975;


11. GSIS loan to BASECO dated January 28, 1976 of P12,400,000.00 for the housing facilities for BASECO's rank-
and-file employees. 90

Capt. Romualdez also recommended that BASECO's loans be restructured "until such period when BASECO will have enough orders
for ships in order for the company to meet loan obligations," and that —

An LOI may be issued to government agencies using floating equipment, that a linkage scheme be applied to a
certain percent of BASECO's net profit as part of BASECO's amortization payments to make it justifiable for you,
Sir. 91

It is noteworthy that Capt. A.T. Romualdez does not appear to be a stockholder or officer of BASECO, yet he has presented a report on
BASECO to President Marcos, and his report demonstrates intimate familiarity with the firm's affairs and problems.

19. Marcos' Response to Reports

President Marcos lost no time in acting on his subordinates' recommendations, particularly as regards the "spin-off" and the "linkage
scheme" relative to "BASECO's amortization payments."

a. Instructions re "Spin-Off"

Under date of September 28, 1977, he addressed a Memorandum to Secretary Geronimo Velasco of the Philippine National Oil
Company and Chairman Constante Fariñas of the National Development Company, directing them "to participate in the formation of a
new corporation resulting from the spin-off of the shipbuilding component of BASECO along the following guidelines:

a. Equity participation of government shall be through LUSTEVECO and NDC in the amount of P115,903,000
consisting of the following obligations of BASECO which are hereby authorized to be converted to equity of the said
new corporation, to wit:

1. NDC P83,865,000 (P31.165M loan & P52.2M Reparation)

2. LUSTEVECO P32,538,000 (Reparation)

b. Equity participation of government shall be in the form of non- voting shares.

For immediate compliance. 92

Mr. Marcos' guidelines were promptly complied with by his subordinates. Twenty-two (22) days after receiving their president's
memorandum, Messrs. Hilario M. Ruiz, Constante L. Fariñas and Geronimo Z. Velasco, in representation of their respective
corporations, executed a PRE-INCORPORATION AGREEMENT dated October 20, 1977. 93 In it, they undertook to form a shipbuilding
corporation to be known as "PHIL-ASIA SHIPBUILDING CORPORATION," to bring to realization their president's instructions. It would
seem that the new corporation ultimately formed was actually named "Philippine Dockyard Corporation (PDC)." 94

b. Letter of Instructions No. 670

Mr. Marcos did not forget Capt. Romualdez' recommendation for a letter of instructions. On February 14, 1978, he issued Letter of
Instructions No. 670 addressed to the Reparations Commission REPACOM the Philippine National Oil Company (PNOC), the Luzon
Stevedoring Company (LUSTEVECO), and the National Development Company (NDC). What is commanded therein is summarized by
the Solicitor General, with pithy and not inaccurate observations as to the effects thereof (in italics), as follows:

* * 1) the shipbuilding equipment procured by BASECO through reparations be transferred to NDC subject to
reimbursement by NDC to BASECO (of) the amount of s allegedly representing the handling and incidental expenses
incurred by BASECO in the installation of said equipment (so instead of NDC getting paid on its loan to BASECO, it
was made to pay BASECO instead the amount of P18.285M); 2) the shipbuilding equipment procured from
reparations through EPZA, now in the possession of BASECO and BSDI (Bay Shipyard & Drydocking, Inc.) be
transferred to LUSTEVECO through PNOC; and 3) the shipbuilding equipment (thus) transferred be invested by
LUSTEVECO, acting through PNOC and NDC, as the government's equity participation in a shipbuilding corporation
to be established in partnership with the private sector.

xxx xxx xxx

And so, through a simple letter of instruction and memorandum, BASECO's loan obligation to NDC and REPACOM *
* in the total amount of P83.365M and BSD's REPACOM loan of P32.438M were wiped out and converted into non-
voting preferred shares. 95
20. Evidence of Marcos'

Ownership of BASECO

It cannot therefore be gainsaid that, in the context of the proceedings at bar, the actuality of the control by President Marcos of
BASECO has been sufficiently shown.

Other evidence submitted to the Court by the Solicitor General proves that President Marcos not only exercised control over BASECO,
but also that he actually owns well nigh one hundred percent of its outstanding stock.

It will be recalled that according to petitioner- itself, as of April 23, 1986, there were 218,819 shares of stock outstanding, ostensibly
owned by twenty (20) stockholders. 96 Four of these twenty are juridical persons: (1) Metro Bay Drydock, recorded as holding 136,370
shares; (2) Fidelity Management, Inc., 65,882 shares; (3) Trident Management, 7,412 shares; and (4) United Phil. Lines, 1,240 shares.
The first three corporations, among themselves, own an aggregate of 209,664 shares of BASECO stock, or 95.82% of the outstanding
stock.

Now, the Solicitor General has drawn the Court's attention to the intriguing circumstance that found in Malacanang shortly after the
sudden flight of President Marcos, were certificates corresponding to more than ninety-five percent (95%) of all the outstanding shares
of stock of BASECO, endorsed in blank, together with deeds of assignment of practically all the outstanding shares of stock of the three
(3) corporations above mentioned (which hold 95.82% of all BASECO stock), signed by the owners thereof although not notarized. 97

More specifically, found in Malacanang (and now in the custody of the PCGG) were:

1) the deeds of assignment of all 600 outstanding shares of Fidelity Management Inc. — which supposedly owns as
aforesaid 65,882 shares of BASECO stock;

2) the deeds of assignment of 2,499,995 of the 2,500,000 outstanding shares of Metro Bay Drydock Corporation —
which allegedly owns 136,370 shares of BASECO stock;

3) the deeds of assignment of 800 outstanding shares of Trident Management Co., Inc. — which allegedly owns
7,412 shares of BASECO stock, assigned in blank; 98 and

4) stock certificates corresponding to 207,725 out of the 218,819 outstanding shares of BASECO stock; that is, all but
5 % — all endorsed in blank. 99

While the petitioner's counsel was quick to dispute this asserted fact, assuring this Court that the BASECO stockholders were still in
possession of their respective stock certificates and had "never endorsed * * them in blank or to anyone else," 100 that denial is
exposed by his own prior and subsequent recorded statements as a mere gesture of defiance rather than a verifiable factual
declaration.

By resolution dated September 25, 1986, this Court granted BASECO's counsel a period of 10 days "to SUBMIT, as undertaken by
him, * * the certificates of stock issued to the stockholders of * * BASECO as of April 23, 1986, as listed in Annex 'P' of the
petition.' 101 Counsel thereafter moved for extension; and in his motion dated October 2, 1986, he declared inter alia that "said
certificates of stock are in the possession of third parties, among whom being the respondents themselves * * and petitioner is still
endeavoring to secure copies thereof from them." 102 On the same day he filed another motion praying that he be allowed "to secure
copies of the Certificates of Stock in the name of Metro Bay Drydock, Inc., and of all other Certificates, of Stock of petitioner's
stockholders in possession of respondents." 103

In a Manifestation dated October 10, 1986,, 104 the Solicitor General not unreasonably argued that counsel's aforestated motion to
secure copies of the stock certificates "confirms the fact that stockholders of petitioner corporation are not in possession of * * (their)
certificates of stock," and the reason, according to him, was "that 95% of said shares * * have been endorsed in blank and found in
Malacañang after the former President and his family fled the country." To this manifestation BASECO's counsel replied on November
5, 1986, as already mentioned, Stubbornly insisting that the firm's stockholders had not really assigned their stock. 105

In view of the parties' conflicting declarations, this Court resolved on November 27, 1986 among other things "to require * * the
petitioner * * to deposit upon proper receipt with Clerk of Court Juanito Ranjo the originals of the stock certificates alleged to be in its
possession or accessible to it, mentioned and described in Annex 'P' of its petition, (and other pleadings) * * within ten (10) days from
notice." 106 In a motion filed on December 5, 1986, 107 BASECO's counsel made the statement, quite surprising in the premises, that
"it will negotiate with the owners (of the BASECO stock in question) to allow petitioner to borrow from them, if available, the certificates
referred to" but that "it needs a more sufficient time therefor" (sic). BASECO's counsel however eventually had to confess inability to
produce the originals of the stock certificates, putting up the feeble excuse that while he had "requested the stockholders to allow * *
(him) to borrow said certificates, * * some of * * (them) claimed that they had delivered the certificates to third parties by way of pledge
and/or to secure performance of obligations, while others allegedly have entrusted them to third parties in view of last national
emergency." 108 He has conveniently omitted, nor has he offered to give the details of the transactions adverted to by him, or to
explain why he had not impressed on the supposed stockholders the primordial importance of convincing this Court of their present
custody of the originals of the stock, or if he had done so, why the stockholders are unwilling to agree to some sort of arrangement so
that the originals of their certificates might at the very least be exhibited to the Court. Under the circumstances, the Court can only
conclude that he could not get the originals from the stockholders for the simple reason that, as the Solicitor General maintains, said
stockholders in truth no longer have them in their possession, these having already been assigned in blank to then President Marcos.

21. Facts Justify Issuance of Sequestration and Takeover Orders

In the light of the affirmative showing by the Government that, prima facie at least, the stockholders and directors of BASECO as of
April, 1986 109 were mere "dummies," nominees or alter egos of President Marcos; at any rate, that they are no longer owners of any
shares of stock in the corporation, the conclusion cannot be avoided that said stockholders and directors have no basis and no standing
whatever to cause the filing and prosecution of the instant proceeding; and to grant relief to BASECO, as prayed for in the petition,
would in effect be to restore the assets, properties and business sequestered and taken over by the PCGG to persons who are
"dummies," nominees or alter egos of the former president.

From the standpoint of the PCGG, the facts herein stated at some length do indeed show that the private corporation known as
BASECO was "owned or controlled by former President Ferdinand E. Marcos * * during his administration, * * through nominees, by
taking advantage of * * (his) public office and/or using * * (his) powers, authority, influence * *," and that NASSCO and other property of
the government had been taken over by BASECO; and the situation justified the sequestration as well as the provisional takeover of the
corporation in the public interest, in accordance with the terms of Executive Orders No. 1 and 2, pending the filing of the requisite
actions with the Sandiganbayan to cause divestment of title thereto from Marcos, and its adjudication in favor of the Republic pursuant
to Executive Order No. 14.

As already earlier stated, this Court agrees that this assessment of the facts is correct; accordingly, it sustains the acts of sequestration
and takeover by the PCGG as being in accord with the law, and, in view of what has thus far been set out in this opinion, pronounces to
be without merit the theory that said acts, and the executive orders pursuant to which they were done, are fatally defective in not
according to the parties affected prior notice and hearing, or an adequate remedy to impugn, set aside or otherwise obtain relief
therefrom, or that the PCGG had acted as prosecutor and judge at the same time.

22. Executive Orders Not a Bill of Attainder

Neither will this Court sustain the theory that the executive orders in question are a bill of attainder. 110 "A bill of attainder is a
legislative act which inflicts punishment without judicial trial." 111 "Its essence is the substitution of a legislative for a judicial
determination of guilt." 112

In the first place, nothing in the executive orders can be reasonably construed as a determination or declaration of guilt. On the
contrary, the executive orders, inclusive of Executive Order No. 14, make it perfectly clear that any judgment of guilt in the amassing or
acquisition of "ill-gotten wealth" is to be handed down by a judicial tribunal, in this case, the Sandiganbayan, upon complaint filed and
prosecuted by the PCGG. In the second place, no punishment is inflicted by the executive orders, as the merest glance at their
provisions will immediately make apparent. In no sense, therefore, may the executive orders be regarded as a bill of attainder.

23. No Violation of Right against Self-Incrimination and Unreasonable Searches and Seizures

BASECO also contends that its right against self incrimination and unreasonable searches and seizures had been transgressed by the
Order of April 18, 1986 which required it "to produce corporate records from 1973 to 1986 under pain of contempt of the Commission if
it fails to do so." The order was issued upon the authority of Section 3 (e) of Executive Order No. 1, treating of the PCGG's power to
"issue subpoenas requiring * * the production of such books, papers, contracts, records, statements of accounts and other documents
as may be material to the investigation conducted by the Commission, " and paragraph (3), Executive Order No. 2 dealing with its
power to "require all persons in the Philippines holding * * (alleged "ill-gotten") assets or properties, whether located in the Philippines or
abroad, in their names as nominees, agents or trustees, to make full disclosure of the same * *." The contention lacks merit.

It is elementary that the right against self-incrimination has no application to juridical persons.

While an individual may lawfully refuse to answer incriminating questions unless protected by an immunity statute, it
does not follow that a corporation, vested with special privileges and franchises, may refuse to show its hand when
charged with an abuse ofsuchprivileges * * 113

Relevant jurisprudence is also cited by the Solicitor General. 114

* * corporations are not entitled to all of the constitutional protections which private individuals have. * * They are not
at all within the privilege against self-incrimination, although this court more than once has said that the privilege runs
very closely with the 4th Amendment's Search and Seizure provisions. It is also settled that an officer of the company
cannot refuse to produce its records in its possession upon the plea that they will either incriminate him or may
incriminate it." (Oklahoma Press Publishing Co. v. Walling, 327 U.S. 186; emphasis, the Solicitor General's).
* * The corporation is a creature of the state. It is presumed to be incorporated for the benefit of the public. It received
certain special privileges and franchises, and holds them subject to the laws of the state and the limitations of its
charter. Its powers are limited by law. It can make no contract not authorized by its charter. Its rights to act as a
corporation are only preserved to it so long as it obeys the laws of its creation. There is a reserve right in the
legislature to investigate its contracts and find out whether it has exceeded its powers. It would be a strange anomaly
to hold that a state, having chartered a corporation to make use of certain franchises, could not, in the exercise of
sovereignty, inquire how these franchises had been employed, and whether they had been abused, and demand the
production of the corporate books and papers for that purpose. The defense amounts to this, that an officer of the
corporation which is charged with a criminal violation of the statute may plead the criminality of such corporation as a
refusal to produce its books. To state this proposition is to answer it. While an individual may lawfully refuse to
answer incriminating questions unless protected by an immunity statute, it does not follow that a corporation, vested
with special privileges and franchises may refuse to show its hand when charged with an abuse of such
privileges. (Wilson v. United States, 55 Law Ed., 771, 780 [emphasis, the Solicitor General's])

At any rate, Executive Order No. 14-A, amending Section 4 of Executive Order No. 14 assures protection to individuals required to
produce evidence before the PCGG against any possible violation of his right against self-incrimination. It gives them immunity from
prosecution on the basis of testimony or information he is compelled to present. As amended, said Section 4 now provides that —

xxx xxx xxx

The witness may not refuse to comply with the order on the basis of his privilege against self-incrimination; but no
testimony or other information compelled under the order (or any information directly or indirectly derived from such
testimony, or other information) may be used against the witness in any criminal case, except a prosecution for
perjury, giving a false statement, or otherwise failing to comply with the order.

The constitutional safeguard against unreasonable searches and seizures finds no application to the case at bar either. There has been
no search undertaken by any agent or representative of the PCGG, and of course no seizure on the occasion thereof.

24. Scope and Extent of Powers of the PCGG

One other question remains to be disposed of, that respecting the scope and extent of the powers that may be wielded by the PCGG
with regard to the properties or businesses placed under sequestration or provisionally taken over. Obviously, it is not a question to
which an answer can be easily given, much less one which will suffice for every conceivable situation.

a. PCGG May Not Exercise Acts of Ownership

One thing is certain, and should be stated at the outset: the PCGG cannot exercise acts of dominion over property sequestered, frozen
or provisionally taken over. AS already earlier stressed with no little insistence, the act of sequestration; freezing or provisional takeover
of property does not import or bring about a divestment of title over said property; does not make the PCGG the owner thereof. In
relation to the property sequestered, frozen or provisionally taken over, the PCGG is a conservator, not an owner. Therefore, it can not
perform acts of strict ownership; and this is specially true in the situations contemplated by the sequestration rules where, unlike cases
of receivership, for example, no court exercises effective supervision or can upon due application and hearing, grant authority for the
performance of acts of dominion.

Equally evident is that the resort to the provisional remedies in question should entail the least possible interference with business
operations or activities so that, in the event that the accusation of the business enterprise being "ill gotten" be not proven, it may be
returned to its rightful owner as far as possible in the same condition as it was at the time of sequestration.

b. PCGG Has Only Powers of Administration

The PCGG may thus exercise only powers of administration over the property or business sequestered or provisionally taken over,
much like a court-appointed receiver, 115 such as to bring and defend actions in its own name; receive rents; collect debts due; pay
outstanding debts; and generally do such other acts and things as may be necessary to fulfill its mission as conservator and
administrator. In this context, it may in addition enjoin or restrain any actual or threatened commission of acts by any person or entity
that may render moot and academic, or frustrate or otherwise make ineffectual its efforts to carry out its task; punish for direct or
indirect contempt in accordance with the Rules of Court; and seek and secure the assistance of any office, agency or instrumentality of
the government. 116 In the case of sequestered businesses generally (i.e., going concerns, businesses in current operation), as in the
case of sequestered objects, its essential role, as already discussed, is that of conservator, caretaker, "watchdog" or overseer. It is not
that of manager, or innovator, much less an owner.

c. Powers over Business Enterprises Taken Over by Marcos or Entities or Persons Close to him; Limitations Thereon

Now, in the special instance of a business enterprise shown by evidence to have been "taken over by the government of the Marcos
Administration or by entities or persons close to former President Marcos," 117 the PCGG is given power and authority, as already
adverted to, to "provisionally take (it) over in the public interest or to prevent * * (its) disposal or dissipation;" and since the term is
obviously employed in reference to going concerns, or business enterprises in operation, something more than mere physical custody
is connoted; the PCGG may in this case exercise some measure of control in the operation, running, or management of the business
itself. But even in this special situation, the intrusion into management should be restricted to the minimum degree necessary to
accomplish the legislative will, which is "to prevent the disposal or dissipation" of the business enterprise. There should be no hasty,
indiscriminate, unreasoned replacement or substitution of management officials or change of policies, particularly in respect of viable
establishments. In fact, such a replacement or substitution should be avoided if at all possible, and undertaken only when justified by
demonstrably tenable grounds and in line with the stated objectives of the PCGG. And it goes without saying that where replacement of
management officers may be called for, the greatest prudence, circumspection, care and attention - should accompany that undertaking
to the end that truly competent, experienced and honest managers may be recruited. There should be no role to be played in this area
by rank amateurs, no matter how wen meaning. The road to hell, it has been said, is paved with good intentions. The business is not to
be experimented or played around with, not run into the ground, not driven to bankruptcy, not fleeced, not ruined. Sight should never be
lost sight of the ultimate objective of the whole exercise, which is to turn over the business to the Republic, once judicially established to
be "ill-gotten." Reason dictates that it is only under these conditions and circumstances that the supervision, administration and control
of business enterprises provisionally taken over may legitimately be exercised.

d. Voting of Sequestered Stock; Conditions Therefor

So, too, it is within the parameters of these conditions and circumstances that the PCGG may properly exercise the prerogative to vote
sequestered stock of corporations, granted to it by the President of the Philippines through a Memorandum dated June 26, 1986. That
Memorandum authorizes the PCGG, "pending the outcome of proceedings to determine the ownership of * * (sequestered) shares of
stock," "to vote such shares of stock as it may have sequestered in corporations at all stockholders' meetings called for the election of
directors, declaration of dividends, amendment of the Articles of Incorporation, etc." The Memorandum should be construed in such a
manner as to be consistent with, and not contradictory of the Executive Orders earlier promulgated on the same matter. There should
be no exercise of the right to vote simply because the right exists, or because the stocks sequestered constitute the controlling or a
substantial part of the corporate voting power. The stock is not to be voted to replace directors, or revise the articles or by-laws, or
otherwise bring about substantial changes in policy, program or practice of the corporation except for demonstrably weighty and
defensible grounds, and always in the context of the stated purposes of sequestration or provisional takeover, i.e., to prevent the
dispersion or undue disposal of the corporate assets. Directors are not to be voted out simply because the power to do so exists.
Substitution of directors is not to be done without reason or rhyme, should indeed be shunned if at an possible, and undertaken only
when essential to prevent disappearance or wastage of corporate property, and always under such circumstances as assure that the
replacements are truly possessed of competence, experience and probity.

In the case at bar, there was adequate justification to vote the incumbent directors out of office and elect others in their stead because
the evidence showed prima facie that the former were just tools of President Marcos and were no longer owners of any stock in the
firm, if they ever were at all. This is why, in its Resolution of October 28, 1986; 118 this Court declared that —

Petitioner has failed to make out a case of grave abuse or excess of jurisdiction in respondents' calling and holding of
a stockholders' meeting for the election of directors as authorized by the Memorandum of the President * * (to the
PCGG) dated June 26, 1986, particularly, where as in this case, the government can, through its designated
directors, properly exercise control and management over what appear to be properties and assets owned and
belonging to the government itself and over which the persons who appear in this case on behalf of BASECO have
failed to show any right or even any shareholding in said corporation.

It must however be emphasized that the conduct of the PCGG nominees in the BASECO Board in the management of the company's
affairs should henceforth be guided and governed by the norms herein laid down. They should never for a moment allow themselves to
forget that they are conservators, not owners of the business; they are fiduciaries, trustees, of whom the highest degree of diligence
and rectitude is, in the premises, required.

25. No Sufficient Showing of Other Irregularities

As to the other irregularities complained of by BASECO, i.e., the cancellation or revision, and the execution of certain contracts,
inclusive of the termination of the employment of some of its executives, 119 this Court cannot, in the present state of the evidence on
record, pass upon them. It is not necessary to do so. The issues arising therefrom may and will be left for initial determination in the
appropriate action. But the Court will state that absent any showing of any important cause therefor, it will not normally substitute its
judgment for that of the PCGG in these individual transactions. It is clear however, that as things now stand, the petitioner cannot be
said to have established the correctness of its submission that the acts of the PCGG in question were done without or in excess of its
powers, or with grave abuse of discretion.

WHEREFORE, the petition is dismissed. The temporary restraining order issued on October 14, 1986 is lifted.

PEDRO R. PALTING, petitioner,


vs.
SAN JOSE PETROLEUM INCORPORATED, respondent.

BARRERA, J.:
This is a petition for review of the order of August 29, 1958, later supplemented and amplified by another dated September 9, 1958, of
the Securities and Exchange Commission denying the opposition to, and instead, granting the registration, and licensing the sale in the
Philippines, of 5,000,000 shares of the capital stock of the respondent-appellee San Jose Petroleum, Inc. (hereafter referred to as SAN
JOSE PETROLEUM), a corporation organized and existing in the Republic of Panama.

On September 7, 1956, SAN JOSE PETROLEUM filed with the Philippine Securities and Exchange Commission a sworn registration
statement, for the registration and licensing for sale in the Philippines Voting Trust Certificates representing 2,000,000 shares of its
capital stock of a par value of $0.35 a share, at P1.00 per share. It was alleged that the entire proceeds of the sale of said securities will
be devoted or used exclusively to finance the operations of San Jose Oil Company, Inc. (a domestic mining corporation hereafter to be
referred to as SAN JOSE OIL) which has 14 petroleum exploration concessions covering an area of a little less than 1,000,000
hectares, located in the provinces of Pangasinan, Tarlac, Nueva Ecija, La Union, Iloilo, Cotabato, Davao and Agusan. It was the
express condition of the sale that every purchaser of the securities shall not receive a stock certificate, but a registered or bearer-
voting-trust certificate from the voting trustees named therein James L. Buckley and Austin G.E. Taylor, the first residing in Connecticut,
U.S.A., and the second in New York City. While this application for registration was pending consideration by the Securities and
Exchange Commission, SAN JOSE PETROLEUM filed an amended Statement on June 20, 1958, for registration of the sale in the
Philippines of its shares of capital stock, which was increased from 2,000,000 to 5,000,000, at a reduced offering price of from P1.00 to
P0.70 per share. At this time the par value of the shares has also been reduced from $.35 to $.01 per share. 1

Pedro R. Palting and others, allegedly prospective investors in the shares of SAN JOSE PETROLEUM, filed with the Securities and
Exchange Commission an opposition to registration and licensing of the securities on the grounds that (1) the tie-up between the issuer,
SAN JOSE PETROLEUM, a Panamanian corporation and SAN JOSE OIL, a domestic corporation, violates the Constitution of the
Philippines, the Corporation Law and the Petroleum Act of 1949; (2) the issuer has not been licensed to transact business in the
Philippines; (3) the sale of the shares of the issuer is fraudulent, and works or tends to work a fraud upon Philippine purchasers; and (4)
the issuer as an enterprise, as well as its business, is based upon unsound business principles. Answering the foregoing opposition of
Palting, et al., the registrant SAN JOSE PETROLEUM claimed that it was a "business enterprise" enjoying parity rights under the
Ordinance appended to the Constitution, which parity right, with respect to mineral resources in the Philippines, may be exercised,
pursuant to the Laurel-Langley Agreement, only through the medium of a corporation organized under the laws of the Philippines. Thus,
registrant which is allegedly qualified to exercise rights under the Parity Amendment, had to do so through the medium of a domestic
corporation, which is the SAN JOSE OIL. It refused the contention that the Corporation Law was being violated, by alleging that Section
13 thereof applies only to foreign corporations doing business in the Philippines, and registrant was not doing business here. The mere
fact that it was a holding company of SAN JOSE OIL and that registrant undertook the financing of and giving technical assistance to
said corporation did not constitute transaction of business in the Philippines. Registrant also denied that the offering for sale in the
Philippines of its shares of capital stock was fraudulent or would work or tend to work fraud on the investors. On August 29, 1958, and
on September 9, 1958 the Securities and Exchange Commissioner issued the orders object of the present appeal.

The issues raised by the parties in this appeal are as follows:

1. Whether or not petitioner Pedro R. Palting, as a "prospective investor" in respondent's securities, has personality to file the
present petition for review of the order of the Securities and Exchange Commission;

2. Whether or not the issue raised herein is already moot and academic;

3. Whether or not the "tie-up" between the respondent SAN JOSE PETROLEUM, a foreign corporation, and SAN JOSE OIL
COMPANY, INC., a domestic mining corporation, is violative of the Constitution, the Laurel-Langley Agreement, the Petroleum
Act of 1949, and the Corporation Law; and

4. Whether or not the sale of respondent's securities is fraudulent, or would work or tend to work fraud to purchasers of such
securities in the Philippines.

1. In answer to the notice and order of the Securities and Exchange Commissioner, published in 2 newspapers of general circulation in
the Philippines, for "any person who is opposed" to the petition for registration and licensing of respondent's securities, to file his
opposition in 7 days, herein petitioner so filed an opposition. And, the Commissioner, having denied his opposition and instead, directed
the registration of the securities to be offered for sale, oppositor Palting instituted the present proceeding for review of said order.

Respondent raises the question of the personality of petitioner to bring this appeal, contending that as a mere "prospective investor", he
is not an "Aggrieved" or "interested" person who may properly maintain the suit. Citing a 1931 ruling of Utah State Supreme Court 2 it is
claimed that the phrase "party aggrieved" used in the Securities Act 3and the Rules of Court4 as having the right to appeal should refer
only to issuers, dealers and salesmen of securities.

It is true that in the cited case, it was ruled that the phrase "person aggrieved" is that party "aggrieved by the judgment or decree where
it operates on his rights of property or bears directly upon his interest", that the word "aggrieved" refers to "a substantial grievance, a
denial of some personal property right or the imposition upon a party of a burden or obligation." But a careful reading of the case would
show that the appeal therein was dismissed because the court held that an order of registration was not final and therefore not
appealable. The foregoing pronouncement relied upon by herein respondent was made in construing the provision regarding an order
of revocation which the court held was the one appealable. And since the law provides that in revoking the registration of any security,
only the issuer and every registered dealer of the security are notified, excluding any person or group of persons having no such
interest in the securities, said court concluded that the phrase "interested person" refers only to issuers, dealers or salesmen of
securities.

We cannot consider the foregoing ruling by the Utah State Court as controlling on the issue in this case. Our Securities Act in Section
7(c) thereof, requires the publication and notice of the registration statement. Pursuant thereto, the Securities and Exchange
Commissioner caused the publication of an order in part reading as follows:

. . . Any person who is opposed with this petition must file his written opposition with this Commission within said period (2
weeks). . . .

In other words, as construed by the administrative office entrusted with the enforcement of the Securities Act, any person (who may not
be "aggrieved" or "interested" within the legal acceptation of the word) is allowed or permitted to file an opposition to the registration of
securities for sale in the Philippines. And this is in consonance with the generally accepted principle that Blue Sky Laws are enacted to
protect investors and prospective purchasers and to prevent fraud and preclude the sale of securities which are in fact worthless or
worth substantially less than the asking price. It is for this purpose that herein petitioner duly filed his opposition giving grounds therefor.
Respondent SAN JOSE PETROLEUM was required to reply to the opposition. Subsequently both the petition and the opposition were
set for hearing during which the petitioner was allowed to actively participate and did so by cross-examining the respondent's witnesses
and filing his memorandum in support of his opposition. He therefore to all intents and purposes became a party to the proceedings.
And under the New Rules of Court,5 such a party can appeal from a final order, ruling or decision of the Securities and Exchange
Commission. This new Rule eliminating the word "aggrieved" appearing in the old Rule, being procedural in nature, 6 and in view of the
express provision of Rule 144 that the new rules made effective on January 1, 1964 shall govern not only cases brought after they took
effect but all further proceedings in cases then pending, except to the extent that in the opinion of the Court their application would not
be feasible or would work injustice, in which event the former procedure shall apply, we hold that the present appeal is properly within
the appellate jurisdiction of this Court.

The order allowing the registration and sale of respondent's securities is clearly a final order that is appealable. The mere fact that such
authority may be later suspended or revoked, depending on future developments, does not give it the character of an interlocutory or
provisional ruling. And the fact that seven days after the publication of the order, the securities are deemed registered (Sec. 7, Com. Act
83, as amended), points to the finality of the order. Rights and obligations necessarily arise therefrom if not reviewed on appeal.

Our position on this procedural matter — that the order is appealable and the appeal taken here is proper — is strengthened by the
intervention of the Solicitor General, under Section 23 of Rule 3 of the Rules of Court, as the constitutional issues herein presented
affect the validity of Section 13 of the Corporation Law, which, according to the respondent, conflicts with the Parity Ordinance and the
Laurel-Langley Agreement recognizing, it is claimed, its right to exploit our petroleum resources notwithstanding said provisions of the
Corporation Law.

2. Respondent likewise contends that since the order of Registration/Licensing dated September 9, 1958 took effect 30 days from
September 3, 1958, and since no stay order has been issued by the Supreme Court, respondent's shares became registered and
licensed under the law as of October 3, 1958. Consequently, it is asserted, the present appeal has become academic. Frankly we are
unable to follow respondent's argumentation. First it claims that the order of August 29 and that of September 9, 1958 are not final
orders and therefor are not appealable. Then when these orders, according to its theory became final and were implemented, it argues
that the orders can no longer be appealed as the question of registration and licensing became moot and academic.

But the fact is that because of the authority to sell, the securities are, in all probabilities, still being traded in the open market.
Consequently the issue is much alive as to whether respondent's securities should continue to be the subject of sale. The purpose of
the inquiry on this matter is not fully served just because the securities had passed out of the hands of the issuer and its dealers.
Obviously, so long as the securities are outstanding and are placed in the channels of trade and commerce, members of the investing
public are entitled to have the question of the worth or legality of the securities resolved one way or another.

But more fundamental than this consideration, we agree with the late Senator Claro M. Recto, who appeared as amicus curiae in this
case, that while apparently the immediate issue in this appeal is the right of respondent SAN JOSE PETROLEUM to dispose of and sell
its securities to the Filipino public, the real and ultimate controversy here would actually call for the construction of the constitutional
provisions governing the disposition, utilization, exploitation and development of our natural resources. And certainly this is neither moot
nor academic.

3. We now come to the meat of the controversy — the "tie-up" between SAN JOSE OIL on the one hand, and the respondent SAN
JOSE PETROLEUM and its associates, on the other. The relationship of these corporations involved or affected in this case is admitted
and established through the papers and documents which are parts of the records: SAN JOSE OIL, is a domestic mining corporation,
90% of the outstanding capital stock of which is owned by respondent SAN JOSE PETROLEUM, a foreign (Panamanian) corporation,
the majority interest of which is owned by OIL INVESTMENTS, Inc., another foreign (Panamanian) company. This latter corporation in
turn is wholly (100%) owned by PANTEPEC OIL COMPANY, C.A., and PANCOASTAL PETROLEUM COMPANY, C.A., both organized
and existing under the laws of Venezuela. As of September 30, 1956, there were 9,976 stockholders of PANCOASTAL PETROLEUM
found in 49 American states and U.S. territories, holding 3,476,988 shares of stock; whereas, as of November 30, 1956, PANTEPEC
OIL COMPANY was said to have 3,077,916 shares held by 12,373 stockholders scattered in 49 American state. In the two lists of
stockholders, there is no indication of the citizenship of these stockholders, 7 or of the total number of authorized stocks of each
corporation, for the purpose of determining the corresponding percentage of these listed stockholders in relation to the respective
capital stock of said corporation.

Petitioner, as well as the amicus curiae and the Solicitor General8 contend that the relationship between herein respondent SAN JOSE
PETROLEUM and its subsidiary, SAN JOSE OIL, violates the Petroleum Law of 1949, the Philippine Constitution, and Section 13 of the
Corporation Law, which inhibits a mining corporation from acquiring an interest in another mining corporation. It is respondent's theory,
on the other hand, that far from violating the Constitution; such relationship between the two corporations is in accordance with the
Laurel-Langley Agreement which implemented the Ordinance Appended to the Constitution, and that Section 13 of the Corporation Law
is not applicable because respondent is not licensed to do business, as it is not doing business, in the Philippines.

Article XIII, Section 1 of the Philippine Constitution provides:

SEC. 1. All agricultural, timber, and mineral lands of the public domain, waters, minerals, coal, petroleum, and other mineral
oils, all forces of potential energy, and other natural resources of the Philippines belong to the State, and their disposition,
exploitation, development, or utilization shall be limited to citizens of the Philippines, or to corporations or associations at least
sixty per centum of the capital of which is owned by such citizens, subject to any existing right, grant, lease or concession at
the time of the inauguration of this Government established under this Constitution. . . . (Emphasis supplied)

In the 1946 Ordinance Appended to the Constitution, this right (to utilize and exploit our natural resources) was extended to citizens of
the United States, thus:

Notwithstanding the provisions of section one, Article Thirteen, and section eight, Article Fourteen, of the foregoing
Constitution, during the effectivity of the Executive Agreement entered into by the President of the Philippines with the
President of the United States on the fourth of July, nineteen hundred and forty-six, pursuant to the provisions of
Commonwealth Act Numbered Seven hundred and thirty-three, but in no case to extend beyond the third of July, nineteen
hundred and seventy-four, the disposition, exploitation, development, and utilization of all agricultural, timber, and mineral
lands of the public domain, waters, minerals, coal, petroleum, and other mineral oils, all forces of potential energy, and other
natural resources of the Philippines, and the operation of public utilities shall, if open to any person, be open to citizens of the
United States, and to all forms of business enterprises owned or controlled, directly or indirectly, by citizens of the United
States in the same manner as to, and under the same conditions imposed upon, citizens of the Philippines or corporations or
associations owned or controlled by citizens of the Philippines (Emphasis supplied.)

In the 1954 Revised Trade Agreement concluded between the United States and the Philippines, also known as the Laurel-Langley
Agreement, embodied in Republic Act 1355, the following provisions appear:

ARTICLE VI

1. The disposition, exploitation, development and utilization of all agricultural, timber, and mineral lands of the public domain,
waters, minerals, coal, petroleum and other mineral oils, all forces and sources of potential energy, and other natural
resources of either Party, and the operation of public utilities, shall, if open to any person, be open to citizens of the other Party
and to all forms of business enterprise owned or controlled, directly or indirectly, by citizens of such other Party in the same
manner as to and under the same conditions imposed upon citizens or corporations or associations owned or controlled by
citizens of the Party granting the right.

2. The rights provided for in Paragraph 1 may be exercised, . . . in the case of citizens of the United States, with respect to
natural resources in the public domain in the Philippines, only through the medium of a corporation organized under the laws
of the Philippines and at least 60% of the capital stock of which is owned or controlled by citizens of the United States. . . .

3. The United States of America reserves the rights of the several States of the United States to limit the extent to which
citizens or corporations or associations owned or controlled by citizens of the Philippines may engage in the activities specified
in this Article. The Republic of the Philippines reserves the power to deny any of the rights specified in this Article to citizens of
the United States who are citizens of States, or to corporations or associations at least 60% of whose capital stock or capital is
owned or controlled by citizens of States, which deny like rights to citizens of the Philippines, or to corporations or associations
which are owned or controlled by citizens of the Philippines. . . . (Emphasis supplied.)

Re-stated, the privilege to utilize, exploit, and develop the natural resources of this country was granted, by Article XIII of the
Constitution, to Filipino citizens or to corporations or associations 60% of the capital of which is owned by such citizens. With the Parity
Amendment to the Constitution, the same right was extended to citizens of the United States and business enterprises owned or
controlled directly or indirectly, by citizens of the United States.

There could be no serious doubt as to the meaning of the word "citizens" used in the aforementioned provisions of the Constitution. The
right was granted to 2 types of persons: natural persons (Filipino or American citizens) and juridical persons (corporations 60% of which
capital is owned by Filipinos and business enterprises owned or controlled directly or indirectly, by citizens of the United States). In
American law, "citizen" has been defined as "one who, under the constitution and laws of the United States, has a right to vote for
representatives in congress and other public officers, and who is qualified to fill offices in the gift of the people. (1 Bouvier's Law
Dictionary, p. 490.) A citizen is —

One of the sovereign people. A constituent member of the sovereignty, synonymous with the people." (Scott v. Sandford, 19
Ho. [U.S.] 404, 15 L. Ed. 691.)

A member of the civil state entitled to all its privileges. (Cooley, Const. Lim. 77. See U.S. v. Cruikshank 92 U.S. 542, 23 L. Ed.
588; Minor v. Happersett 21 Wall. [U.S.] 162, 22 L. Ed. 627.)

These concepts clarified, is herein respondent SAN JOSE PETROLEUM an American business enterprise entitled to parity rights in the
Philippines? The answer must be in the negative, for the following reasons:

Firstly — It is not owned or controlled directly by citizens of the United States, because it is owned and controlled by a corporation, the
OIL INVESTMENTS, another foreign (Panamanian) corporation.

Secondly — Neither can it be said that it is indirectly owned and controlled by American citizens through the OIL INVESTMENTS, for
this latter corporation is in turn owned and controlled, not by citizens of the United States, but still by two foreign (Venezuelan)
corporations, the PANTEPEC OIL COMPANY and PANCOASTAL PETROLEUM.

Thirdly — Although it is claimed that these two last corporations are owned and controlled respectively by 12,373 and 9,979
stockholders residing in the different American states, there is no showing in the certification furnished by respondent that the
stockholders of PANCOASTAL or those of them holding the controlling stock, are citizens of the United States.

Fourthly — Granting that these individual stockholders are American citizens, it is yet necessary to establish that the different states of
which they are citizens, allow Filipino citizens or corporations or associations owned or controlled by Filipino citizens, to engage in the
exploitation, etc. of the natural resources of these states (see paragraph 3, Article VI of the Laurel-Langley Agreement, supra).
Respondent has presented no proof to this effect.

Fifthly — But even if the requirements mentioned in the two immediately preceding paragraphs are satisfied, nevertheless to hold that
the set-up disclosed in this case, with a long chain of intervening foreign corporations, comes within the purview of the Parity
Amendment regarding business enterprises indirectly owned or controlled by citizens of the United States, is to unduly stretch and
strain the language and intent of the law. For, to what extent must the word "indirectly" be carried? Must we trace the ownership or
control of these various corporations ad infinitum for the purpose of determining whether the American ownership-control-requirement is
satisfied? Add to this the admitted fact that the shares of stock of the PANTEPEC and PANCOASTAL which are allegedly owned or
controlled directly by citizens of the United States, are traded in the stock exchange in New York, and you have a situation where it
becomes a practical impossibility to determine at any given time, the citizenship of the controlling stock required by the law. In the
circumstances, we have to hold that the respondent SAN JOSE PETROLEUM, as presently constituted, is not a business enterprise
that is authorized to exercise the parity privileges under the Parity Ordinance, the Laurel-Langley Agreement and the Petroleum Law.
Its tie-up with SAN JOSE OIL is, consequently, illegal.

What, then, would be the Status of SAN JOSE OIL, about 90% of whose stock is owned by SAN JOSE PETROLEUM? This is a query
which we need not resolve in this case as SAN JOSE OIL is not a party and it is not necessary to do so to dispose of the present
controversy. But it is a matter that probably the Solicitor General would want to look into.

There is another issue which has been discussed extensively by the parties. This is whether or not an American mining corporation
may lawfully "be in anywise interested in any other corporation (domestic or foreign) organized for the purpose of engaging in
agriculture or in mining," in the Philippines or whether an American citizen owning stock in more than one corporation organized for the
purpose of engaging in agriculture or in mining, may own more than 15% of the capital stock then outstanding and entitled to vote, of
each of such corporations, in view of the express prohibition contained in Section 13 of the Philippine Corporation Law. The petitioner in
this case contends that the provisions of the Corporation Law must be applied to American citizens and business enterprise otherwise
entitled to exercise the parity privileges, because both the Laurel-Langley Agreement (Art. VI, par. 1) and the Petroleum Act of 1948
(Art. 31), specifically provide that the enjoyment by them of the same rights and obligations granted under the provisions of both laws
shall be "in the same manner as to, and under the same conditions imposed upon, citizens of the Philippines or corporations or
associations owned or controlled by citizens of the Philippines." The petitioner further contends that, as the enjoyment of the privilege of
exploiting mineral resources in the Philippines by Filipino citizens or corporations owned or controlled by citizens of the Philippines
(which corporation must necessarily be organized under the Corporation Law), is made subject to the limitations provided in Section 13
of the Corporation Law, so necessarily the exercise of the parity rights by citizens of the United States or business enterprise owned or
controlled, directly or indirectly, by citizens of the United States, must equally be subject to the same limitations contained in the
aforesaid Section 13 of the Corporation Law.

In view of the conclusions we have already arrived at, we deem it not indispensable for us to pass upon this legal question, especially
taking into account the statement of the respondent (SAN JOSE PETROLEUM) that it is essentially a holding company, and as found
by the Securities and Exchange Commissioner, its principal activity is limited to the financing and giving technical assistance to SAN
JOSE OIL.
4. Respondent SAN JOSE PETROLEUM, whose shares of stock were allowed registration for sale in the Philippines, was incorporated
under the laws of Panama in April, 1956 with an authorized capital stock of $500,000.00, American currency, divided into 50,000,000
shares at par value of $0.01 per share. By virtue of a 3-party Agreement of June 14, 1956, respondent was supposed to have received
from OIL INVESTMENTS 8,000,000 shares of the capital stock of SAN JOSE OIL (at par value of $0.01 per share), plus a note for
$250,000.00 due in 6 months, for which respondent issued in favor of OIL INVESTMENTS 16,000,000 shares of its capital stock, at
$0.01 per share or with a value of $160,000.00, plus a note for $230,297.97 maturing in 2 years at 6% per annum interest, 9 and the
assumption of payment of the unpaid price of 7,500,000 (of the 8,000,000 shares of SAN JOSE OIL).

On June 27, 1956, the capitalization of SAN JOSE PETROLEUM was increased from $500,000.00 to $17,500,000.00 by increasing the
par value of the same 50,000,000 shares, from $0.01 to $0.35. Without any additional consideration, the 16,000,000 shares of $0.01
previously issued to OIL INVESTMENTS with a total value of $160,000.00 were changed with 16,000,000 shares of the recapitalized
stock at $0.35 per share, or valued at $5,600,000.00. And, to make it appear that cash was received for these re-issued 16,000,000
shares, the board of directors of respondent corporation placed a valuation of $5,900,000.00 on the 8,000,000 shares of SAN JOSE
OIL (still having par value of $0.10 per share) which were received from OIL INVESTMENTS as part-consideration for the 16,000,000
shares at $0.01 per share.

In the Balance Sheet of respondent, dated July 12, 1956, from the $5,900,000.00, supposedly the value of the 8,000,000 shares of
SAN JOSE OIL, the sum of $5,100,000.00 was deducted, corresponding to the alleged difference between the "value" of the said
shares and the subscription price thereof which is $800,000.00 (at $0.10 per share). From this $800,000.00, the subscription price of
the SAN JOSE OIL shares, the amount of $319,702.03 was deducted, as allegedly unpaid subscription price, thereby giving a
difference of $480,297.97, which was placed as the amount allegedly paid in on the subscription price of the 8,000,000 SAN JOSE OIL
shares. Then, by adding thereto the note receivable from OIL INVESTMENTS, for $250,000.00 (part-consideration for the 16,000,000
SAN JOSE PETROLEUM shares), and the sum of $6,516.21, as deferred expenses, SAN JOSE PETROLEUM appeared to have
assets in the sum of $736,814.18.

These figures are highly questionable. Take the item $5,900,000.00 the valuation placed on the 8,000,000 shares of SAN JOSE OIL.
There appears no basis for such valuation other than belief by the board of directors of respondent that "should San Jose Oil Company
be granted the bulk of the concessions applied for upon reasonable terms, that it would have a reasonable value of approximately
$10,000,000." 10 Then, of this amount, the subscription price of $800,000.00 was deducted and called it "difference between the
(above) valuation and the subscription price for the 8,000,000 shares." Of this $800,000.00 subscription price, they deducted the sum of
$480,297.97 and the difference was placed as the unpaid portion of the subscription price. In other words, it was made to appear that
they paid in $480,297.97 for the 8,000,000 shares of SAN JOSE OIL. This amount ($480,297.97) was supposedly that $250,000.00
paid by OIL INVESMENTS for 7,500,000 shares of SAN JOSE OIL, embodied in the June 14 Agreement, and a sum of $230,297.97
the amount expended or advanced by OIL INVESTMENTS to SAN JOSE OIL. And yet, there is still an item among respondent's
liabilities, for $230,297.97 appearing as note payable to Oil Investments, maturing in two (2) years at six percent (6%) per annum. 11 As
far as it appears from the records, for the 16,000,000 shares at $0.35 per share issued to OIL INVESTMENTS, respondent SAN JOSE
PETROLEUM received from OIL INVESTMENTS only the note for $250,000.00 plus the 8,000,000 shares of SAN JOSE OIL, with par
value of $0.10 per share or a total of $1,050,000.00 — the only assets of the corporation. In other words, respondent actually lost
$4,550,000.00, which was received by OIL INVESTMENTS.

But this is not all. Some of the provisions of the Articles of Incorporation of respondent SAN JOSE PETROLEUM are noteworthy; viz:

(1) the directors of the Company need not be shareholders;

(2) that in the meetings of the board of directors, any director may be represented and may vote through a proxy who also
need not be a director or stockholder; and

(3) that no contract or transaction between the corporation and any other association or partnership will be affected, except in
case of fraud, by the fact that any of the directors or officers of the corporation is interested in, or is a director or officer of, such
other association or partnership, and that no such contract or transaction of the corporation with any other person or persons,
firm, association or partnership shall be affected by the fact that any director or officer of the corporation is a party to or has an
interest in, such contract or transaction, or has in anyway connected with such other person or persons, firm, association or
partnership; and finally, that all and any of the persons who may become director or officer of the corporation shall be relieved
from all responsibility for which they may otherwise be liable by reason of any contract entered into with the corporation,
whether it be for his benefit or for the benefit of any other person, firm, association or partnership in which he may be
interested.

These provisions are in direct opposition to our corporation law and corporate practices in this country. These provisions alone would
outlaw any corporation locally organized or doing business in this jurisdiction. Consider the unique and unusual provision that no
contract or transaction between the company and any other association or corporation shall be affected except in case of fraud, by the
fact that any of the directors or officers of the company may be interested in or are directors or officers of such other association or
corporation; and that none of such contracts or transactions of this company with any person or persons, firms, associations or
corporations shall be affected by the fact that any director or officer of this company is a party to or has an interest in such contract or
transaction or has any connection with such person or persons, firms associations or corporations; and that any and all persons who
may become directors or officers of this company are hereby relieved of all responsibility which they would otherwise incur by reason of
any contract entered into which this company either for their own benefit, or for the benefit of any person, firm, association or
corporation in which they may be interested.

The impact of these provisions upon the traditional judiciary relationship between the directors and the stockholders of a corporation is
too obvious to escape notice by those who are called upon to protect the interest of investors. The directors and officers of the company
can do anything, short of actual fraud, with the affairs of the corporation even to benefit themselves directly or other persons or entities
in which they are interested, and with immunity because of the advance condonation or relief from responsibility by reason of such acts.
This and the other provision which authorizes the election of non-stockholders as directors, completely disassociate the stockholders
from the government and management of the business in which they have invested.

To cap it all on April 17, 1957, admittedly to assure continuity of the management and stability of SAN JOSE PETROLEUM, OIL
INVESTMENTS, as holder of the only subscribed stock of the former corporation and acting "on behalf of all future holders of voting
trust certificates," entered into a voting trust agreement 12 with James L. Buckley and Austin E. Taylor, whereby said Trustees were
given authority to vote the shares represented by the outstanding trust certificates (including those that may henceforth be issued) in
the following manner:

(a) At all elections of directors, the Trustees will designate a suitable proxy or proxies to vote for the election of directors
designated by the Trustees in their own discretion, having in mind the best interests of the holders of the voting trust
certificates, it being understood that any and all of the Trustees shall be eligible for election as directors;

(b) On any proposition for removal of a director, the Trustees shall designate a suitable proxy or proxies to vote for or against
such proposition as the Trustees in their own discretion may determine, having in mind the best interest of the holders of the
voting trust certificates;

(c) With respect to all other matters arising at any meeting of stockholders, the Trustees will instruct such proxy or proxies
attending such meetings to vote the shares of stock held by the Trustees in accordance with the written instructions of each
holder of voting trust certificates. (Emphasis supplied.)

It was also therein provided that the said Agreement shall be binding upon the parties thereto, their successors, and upon all holders of
voting trust certificates.

And these are the voting trust certificates that are offered to investors as authorized by Security and Exchange Commissioner. It can
not be doubted that the sale of respondent's securities would, to say the least, work or tend to work fraud to Philippine investors.

FOR ALL THE FOREGOING CONSIDERATIONS, the motion of respondent to dismiss this appeal, is denied and the orders of the
Securities and Exchange Commissioner, allowing the registration of Respondent's securities and licensing their sale in the Philippines
are hereby set aside. The case is remanded to the Securities and Exchange Commission for appropriate action in consonance with this
decision. With costs. Let a copy of this decision be furnished the Solicitor General for whatever action he may deem advisable to take in
the premises. So ordered.

MARISSA R. UNCHUAN, Petitioner,


vs.
ANTONIO J.P. LOZADA, ANITA LOZADA and THE REGISTER OF DEEDS OF CEBU CITY, Respondents.

DECISION

QUISUMBING, J.:

For review are the Decision1 dated February 23, 2006 and Resolution2 dated April 12, 2006 of the Court of Appeals in CA-G.R. CV. No.
73829. The appellate court had affirmed with modification the Order 3 of the Regional Trial Court (RTC) of Cebu City, Branch 10
reinstating its Decision4 dated June 9, 1997.

The facts of the case are as follows:

Sisters Anita Lozada Slaughter and Peregrina Lozada Saribay were the registered co-owners of Lot Nos. 898-A-3 and 898-A-4 covered
by Transfer Certificates of Title (TCT) Nos. 532585 and 532576 in Cebu City.

The sisters, who were based in the United States, sold the lots to their nephew Antonio J.P. Lozada (Antonio) under a Deed of
Sale7 dated March 11, 1994. Armed with a Special Power of Attorney8 from Anita, Peregrina went to the house of their brother, Dr.
Antonio Lozada (Dr. Lozada), located at 4356 Faculty Avenue, Long Beach California. 9Dr. Lozada agreed to advance the purchase
price of US$367,000 or ₱10,000,000 for Antonio, his nephew. The Deed of Sale was later notarized and authenticated at the Philippine
Consul’s Office. Dr. Lozada then forwarded the deed, special power of attorney, and owners’ copies of the titles to Antonio in the
Philippines. Upon receipt of said documents, the latter recorded the sale with the Register of Deeds of Cebu. Accordingly, TCT Nos.
12832210 and 12832311 were issued in the name of Antonio Lozada.
Pending registration of the deed, petitioner Marissa R. Unchuan caused the annotation of an adverse claim on the lots. Marissa claimed
that Anita donated an undivided share in the lots to her under an unregistered Deed of Donation 12 dated February 4, 1987.

Antonio and Anita brought a case against Marissa for quieting of title with application for preliminary injunction and restraining order.
Marissa for her part, filed an action to declare the Deed of Sale void and to cancel TCT Nos. 128322 and 128323. On motion, the cases
were consolidated and tried jointly.

At the trial, respondents presented a notarized and duly authenticated sworn statement, and a videotape where Anita denied having
donated land in favor of Marissa. Dr. Lozada testified that he agreed to advance payment for Antonio in preparation for their plan to
form a corporation. The lots are to be eventually infused in the capitalization of Damasa Corporation, where he and Antonio are to have
40% and 60% stake, respectively. Meanwhile, Lourdes G. Vicencio, a witness for respondents confirmed that she had been renting the
ground floor of Anita’s house since 1983, and tendering rentals to Antonio.

For her part, Marissa testified that she accompanied Anita to the office of Atty. Cresencio Tomakin for the signing of the Deed of
Donation. She allegedly kept it in a safety deposit box but continued to funnel monthly rentals to Peregrina’s account.

A witness for petitioner, one Dr. Cecilia Fuentes, testified on Peregrina’s medical records. According to her interpretation of said
records, it was physically impossible for Peregrina to have signed the Deed of Sale on March 11, 1994, when she was reported to be
suffering from edema. Peregrina died on April 4, 1994.

In a Decision dated June 9, 1997, RTC Judge Leonardo B. Cañares disposed of the consolidated cases as follows:

WHEREFORE, judgment is hereby rendered in Civil Case No. CEB-16145, to wit:

1. Plaintiff Antonio J.P. Lozada is declared the absolute owner of the properties in question;

2. The Deed of Donation (Exh. "9") is declared null and void, and Defendant Marissa R. Unchuan is directed to surrender the
original thereof to the Court for cancellation;

3. The Register of Deeds of Cebu City is ordered to cancel the annotations of the Affidavit of Adverse Claim of defendant
Marissa R. Unchuan on TCT Nos. 53257 and 53258 and on such all other certificates of title issued in lieu of the
aforementioned certificates of title;

4. Defendant Marissa R. Unchuan is ordered to pay Antonio J.P. Lozada and Anita Lozada Slaughter the sum of ₱100,000.00
as moral damages; exemplary damages of ₱50,000.00; ₱50,000.00 for litigation expenses and attorney’s fees of ₱50,000.00;
and

5. The counterclaims of defendant Marissa R. Unchuan [are] DISMISSED.

In Civil Case No. CEB-16159, the complaint is hereby DISMISSED.

In both cases, Marissa R. Unchuan is ordered to pay the costs of suit.

SO ORDERED.13

On motion for reconsideration by petitioner, the RTC of Cebu City, Branch 10, with Hon. Jesus S. dela Peña as Acting Judge, issued an
Order14 dated April 5, 1999. Said order declared the Deed of Sale void, ordered the cancellation of the new TCTs in Antonio’s name,
and directed Antonio to pay Marissa ₱200,000 as moral damages, ₱100,000 as exemplary damages, ₱100,000 attorney’s fees and
₱50,000 for expenses of litigation. The trial court also declared the Deed of Donation in favor of Marissa valid. The RTC gave credence
to the medical records of Peregrina.

Respondents moved for reconsideration. On July 6, 2000, now with Hon. Soliver C. Peras, as Presiding Judge, the RTC of Cebu City,
Branch 10, reinstated the Decision dated June 9, 1997, but with the modification that the award of damages, litigation expenses and
attorney’s fees were disallowed.

Petitioner appealed to the Court of Appeals. On February 23, 2006 the appellate court affirmed with modification the July 6, 2000 Order
of the RTC. It, however, restored the award of ₱50,000 attorney’s fees and ₱50,000 litigation expenses to respondents.

Thus, the instant petition which raises the following issues:

I.
WHETHER THE COURT OF APPEALS ERRED AND VIOLATED PETITIONER’S RIGHT TO DUE PROCESS WHEN IT FAILED TO
RESOLVE PETITIONER’S THIRD ASSIGNED ERROR.

II.

WHETHER THE HONORABLE SUPREME COURT MAY AND SHOULD REVIEW THE CONFLICTING FACTUAL FINDINGS OF THE
HONORABLE REGIONAL TRIAL COURT IN ITS OWN DECISION AND RESOLUTIONS ON THE MOTIONS FOR
RECONSIDERATION, AND THAT OF THE HONORABLE COURT OF APPEALS.

III.

WHETHER THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER’S CASE IS BARRED BY LACHES.

IV.

WHETHER THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE DEED OF DONATION EXECUTED IN
FAVOR OF PETITIONER IS VOID.

V.

WHETHER THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT ANITA LOZADA’S VIDEOTAPED
STATEMENT IS HEARSAY.15

Simply stated, the issues in this appeal are: (1) Whether the Court of Appeals erred in upholding the Decision of the RTC which
declared Antonio J.P. Lozada the absolute owner of the questioned properties; (2) Whether the Court of Appeals violated petitioner’s
right to due process; and (3) Whether petitioner’s case is barred by laches.

Petitioner contends that the appellate court violated her right to due process when it did not rule on the validity of the sale between the
sisters Lozada and their nephew, Antonio. Marissa finds it anomalous that Dr. Lozada, an American citizen, had paid the lots for
Antonio. Thus, she accuses the latter of being a mere dummy of the former. Petitioner begs the Court to review the conflicting factual
findings of the trial and appellate courts on Peregrina’s medical condition on March 11, 1994 and Dr. Lozada’s financial capacity to
advance payment for Antonio. Likewise, petitioner assails the ruling of the Court of Appeals which nullified the donation in her favor and
declared her case barred by laches. Petitioner finally challenges the admissibility of the videotaped statement of Anita who was not
presented as a witness.

On their part, respondents pray for the dismissal of the petition for petitioner’s failure to furnish the Register of Deeds of Cebu City with
a copy thereof in violation of Sections 316 and 4,17 Rule 45 of the Rules. In addition, they aver that Peregrina’s unauthenticated medical
records were merely falsified to make it appear that she was confined in the hospital on the day of the sale. Further, respondents
question the credibility of Dr. Fuentes who was neither presented in court as an expert witness 18 nor professionally involved in
Peregrina’s medical care.

Further, respondents impugn the validity of the Deed of Donation in favor of Marissa. They assert that the Court of Appeals did not
violate petitioner’s right to due process inasmuch as it resolved collectively all the factual and legal issues on the validity of the sale.

Faithful adherence to Section 14,19 Article VIII of the 1987 Constitution is indisputably a paramount component of due process and fair
play. The parties to a litigation should be informed of how it was decided, with an explanation of the factual and legal reasons that led to
the conclusions of the court.20

In the assailed Decision, the Court of Appeals reiterates the rule that a notarized and authenticated deed of sale enjoys the
presumption of regularity, and is admissible without further proof of due execution. On the basis thereof, it declared Antonio a buyer in
good faith and for value, despite petitioner’s contention that the sale violates public policy. While it is a part of the right of appellant to
urge that the decision should directly meet the issues presented for resolution, 21 mere failure by the appellate court to specify in its
decision all contentious issues raised by the appellant and the reasons for refusing to believe appellant’s contentions is not sufficient to
hold the appellate court’s decision contrary to the requirements of the law22 and the Constitution.23 So long as the decision of the Court
of Appeals contains the necessary findings of facts to warrant its conclusions, we cannot declare said court in error if it withheld "any
specific findings of fact with respect to the evidence for the defense."24 We will abide by the legal presumption that official duty has
been regularly performed,25 and all matters within an issue in a case were laid down before the court and were passed upon by it.26

In this case, we find nothing to show that the sale between the sisters Lozada and their nephew Antonio violated the public policy
prohibiting aliens from owning lands in the Philippines. Even as Dr. Lozada advanced the money for the payment of Antonio’s share, at
no point were the lots registered in Dr. Lozada’s name. Nor was it contemplated that the lots be under his control for they are actually to
be included as capital of Damasa Corporation. According to their agreement, Antonio and Dr. Lozada are to hold 60% and 40% of the
shares in said corporation, respectively. Under Republic Act No. 7042, 27 particularly Section 3,28 a corporation organized under the laws
of the Philippines of which at least 60% of the capital stock outstanding and entitled to vote is owned and held by citizens of the
Philippines, is considered a Philippine National. As such, the corporation may acquire disposable lands in the Philippines. Neither did
petitioner present proof to belie Antonio’s capacity to pay for the lots subjects of this case.

Petitioner, likewise, calls on the Court to ascertain Peregrina’s physical ability to execute the Deed of Sale on March 11, 1994. This
essentially necessitates a calibration of facts, which is not the function of this Court.29 Nevertheless, we have sifted through the
Decisions of the RTC and the Court of Appeals but found no reason to overturn their factual findings. Both the trial court and appellate
court noted the lack of substantial evidence to establish total impossibility for Peregrina to execute the Deed of Sale.

In support of its contentions, petitioner submits a copy of Peregrina’s medical records to show that she was confined at the Martin
Luther Hospital from February 27, 1994 until she died on April 4, 1994. However, a Certification 30 from Randy E. Rice, Manager for the
Health Information Management of the hospital undermines the authenticity of said medical records. In the certification, Rice denied
having certified or having mailed copies of Peregrina’s medical records to the Philippines. As a rule, a document to be admissible in
evidence, should be previously authenticated, that is, its due execution or genuineness should be first shown. 31 Accordingly, the
unauthenticated medical records were excluded from the evidence. Even assuming that Peregrina was confined in the cited hospital,
the Deed of Sale was executed on March 11, 1994, a month before Peregrina reportedly succumbed to Hepato Renal Failure caused
by Septicemia due to Myflodysplastic Syndrome.32 Nothing in the records appears to show that Peregrina was so incapacitated as to
prevent her from executing the Deed of Sale. Quite the contrary, the records reveal that close to the date of the sale, specifically on
March 9, 1994, Peregrina was even able to issue checks 33 to pay for her attorney’s professional fees and her own hospital bills. At no
point in the course of the trial did petitioner dispute this revelation.

Now, as to the validity of the donation, the provision of Article 749 of the Civil Code is in point:

art. 749. In order that the donation of an immovable may be valid, it must be made in a public document, specifying therein the property
donated and the value of the charges which the donee must satisfy.

The acceptance may be made in the same deed of donation or in a separate public document, but it shall not take effect unless it is
done during the lifetime of the donor.

If the acceptance is made in a separate instrument, the donor shall be notified thereof in an authentic form, and this step shall be noted
in both instruments.

When the law requires that a contract be in some form in order that it may be valid or enforceable, or that a contract be proved in a
certain way, that requirement is absolute and indispensable. 34 Here, the Deed of Donation does not appear to be duly notarized. In
page three of the deed, the stamped name of Cresencio Tomakin appears above the words Notary Public until December 31, 1983 but
below it were the typewritten words Notary Public until December 31, 1987. A closer examination of the document further reveals that
the number 7 in 1987 and Series of 1987 were merely superimposed.35 This was confirmed by petitioner’s nephew Richard Unchuan
who testified that he saw petitioner’s husband write 7 over 1983 to make it appear that the deed was notarized in 1987. Moreover, a
Certification36 from Clerk of Court Jeoffrey S. Joaquino of the Notarial Records Division disclosed that the Deed of Donation purportedly
identified in Book No. 4, Document No. 48, and Page No. 35 Series of 1987 was not reported and filed with said office. Pertinent to this,
the Rules require a party producing a document as genuine which has been altered and appears to have been altered after its
execution, in a part material to the question in dispute, to account for the alteration. He may show that the alteration was made by
another, without his concurrence, or was made with the consent of the parties affected by it, or was otherwise properly or innocently
made, or that the alteration did not change the meaning or language of the instrument. If he fails to do that, the document shall, as in
this case, not be admissible in evidence.371avvphi1

Remarkably, the lands described in the Deed of Donation are covered by TCT Nos. 73645 38 and 73646,39 both of which had been
previously cancelled by an Order40 dated April 8, 1981 in LRC Record No. 5988. We find it equally puzzling that on August 10, 1987, or
six months after Anita supposedly donated her undivided share in the lots to petitioner, the Unchuan Development Corporation, which
was represented by petitioner’s husband, filed suit to compel the Lozada sisters to surrender their titles by virtue of a sale. The sum of
all the circumstances in this case calls for no other conclusion than that the Deed of Donation allegedly in favor of petitioner is void.
Having said that, we deem it unnecessary to rule on the issue of laches as the execution of the deed created no right from which to
reckon delay in making any claim of rights under the instrument.

Finally, we note that petitioner faults the appellate court for not excluding the videotaped statement of Anita as hearsay evidence.
Evidence is hearsay when its probative force depends, in whole or in part, on the competency and credibility of some persons other
than the witness by whom it is sought to be produced. There are three reasons for excluding hearsay evidence: (1) absence of cross-
examination; (2) absence of demeanor evidence; and (3) absence of oath. 41 It is a hornbook doctrine that an affidavit is merely hearsay
evidence where its maker did not take the witness stand.42 Verily, the sworn statement of Anita was of this kind because she did not
appear in court to affirm her averments therein. Yet, a more circumspect examination of our rules of exclusion will show that they do not
cover admissions of a party;43 the videotaped statement of Anita appears to belong to this class. Section 26 of Rule 130 provides that
"the act, declaration or omission of a party as to a relevant fact may be given in evidence against him. It has long been settled that
these admissions are admissible even if they are hearsay. 44 Indeed, there is a vital distinction between admissions against interest and
declaration against interest. Admissions against interest are those made by a party to a litigation or by one in privity with or identified in
legal interest with such party, and are admissible whether or not the declarant is available as a witness. Declaration against interest are
those made by a person who is neither a party nor in privity with a party to the suit, are secondary evidence and constitute an exception
to the hearsay rule. They are admissible only when the declarant is unavailable as a witness. 45 Thus, a man’s acts, conduct, and
declaration, wherever made, if voluntary, are admissible against him, for the reason that it is fair to presume that they correspond with
the truth, and it is his fault if they do not.46 However, as a further qualification, object evidence, such as the videotape in this case, must
be authenticated by a special testimony showing that it was a faithful reproduction. 47 Lacking this, we are constrained to exclude as
evidence the videotaped statement of Anita. Even so, this does not detract from our conclusion concerning petitioner’s failure to prove,
by preponderant evidence, any right to the lands subject of this case.

Anent the award of moral damages in favor of respondents, we find no factual and legal basis therefor. Moral damages cannot be
awarded in the absence of a wrongful act or omission or fraud or bad faith. When the action is filed in good faith there should be no
penalty on the right to litigate. One may have erred, but error alone is not a ground for moral damages. 48 The award of moral damages
must be solidly anchored on a definite showing that respondents actually experienced emotional and mental sufferings. Mere
allegations do not suffice; they must be substantiated by clear and convincing proof.49 As exemplary damages can be awarded only
after the claimant has shown entitlement to moral damages, 50 neither can it be granted in this case.

WHEREFORE, the instant petition is DENIED. The Decision dated February 23, 2006, and Resolution dated April 12, 2006 of the Court
of Appeals in CA-G.R. CV. No. 73829 are AFFIRMED with MODIFICATION. The awards of moral damages and exemplary damages in
favor of respondents are deleted. No pronouncement as to costs.

SO ORDERED.

HEIRS OF WILSON P. GAMBOA,* Petitioners,


vs.
FINANCE SECRETARYMARGARITO B. TEVES, FINANCE UNDERSECRETARYJOHN P. SEVILLA, AND COMMISSIONER
RICARDO ABCEDE OF THE PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT(PCGG) IN THEIR CAPACITIES AS CHAIR
AND MEMBERS, RESPECTIVELY, OF THE PRIVATIZATION COUNCIL, CHAIRMAN ANTHONI SALIM OF FIRST PACIFIC CO.,
LTD. IN HIS CAPACITY AS DIRECTOR OF METRO PACIFIC ASSET HOLDINGS INC., CHAIRMAN MANUEL V. PANGILINAN OF
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY (PLDT) IN HIS CAPACITY AS MANAGING DIRECTOR OF FIRST
PACIFIC CO., LTD., PRESIDENT NAPOLEON L. NAZARENO OF PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, CHAIR
FE BARIN OF THE SECURITIES AND EXCHANGE COMMISSION, and PRESIDENT FRANCIS LIM OF THE PHILIPPINE STOCK
EXCHANGE, Respondents.

PABLITO V. SANIDAD and ARNO V. SANIDAD, Petitioner-in-Intervention.

RESOLUTION

CARPIO, J.:

This resolves the motions for reconsideration of the 28 June 2011 Decision filed by (1) the Philippine Stock Exchange's (PSE)
President, 1 (2) Manuel V. Pangilinan (Pangilinan),2 (3) Napoleon L. Nazareno (Nazareno ),3 and ( 4) the Securities and Exchange
Commission (SEC)4 (collectively, movants ).

The Office of the Solicitor General (OSG) initially filed a motion for reconsideration on behalfofthe SEC, 5 assailing the 28 June 2011
Decision. However, it subsequently filed a Consolidated Comment on behalf of the State, 6declaring expressly that it agrees with the
Court's definition of the term "capital" in Section 11, Article XII of the Constitution. During the Oral Arguments on 26 June 2012, the
OSG reiterated its position consistent with the Court's 28 June 2011 Decision.

We deny the motions for reconsideration.

I.
Far-reaching implications of the legal issue justify
treatment of petition for declaratory relief as one for mandamus.

As we emphatically stated in the 28 June 2011 Decision, the interpretation of the term "capital" in Section 11, Article XII of the
Constitution has far-reaching implications to the national economy. In fact, a resolution of this issue will determine whether Filipinos are
masters, or second-class citizens, in their own country. What is at stake here is whether Filipinos or foreigners will have effective
control of the Philippine national economy. Indeed, if ever there is a legal issue that has far-reaching implications to the entire nation,
and to future generations of Filipinos, it is the threshold legal issue presented in this case.

Contrary to Pangilinan’s narrow view, the serious economic consequences resulting in the interpretation of the term "capital" in Section
11, Article XII of the Constitution undoubtedly demand an immediate adjudication of this issue. Simply put, the far-reaching
implications of this issue justify the treatment of the petition as one for mandamus.7

In Luzon Stevedoring Corp. v. Anti-Dummy Board,8 the Court deemed it wise and expedient to resolve the case although the petition for
declaratory relief could be outrightly dismissed for being procedurally defective. There, appellant admittedly had already committed a
breach of the Public Service Act in relation to the Anti-Dummy Law since it had been employing non- American aliens long before the
decision in a prior similar case. However, the main issue in Luzon Stevedoring was of transcendental importance, involving the exercise
or enjoyment of rights, franchises, privileges, properties and businesses which only Filipinos and qualified corporations could exercise
or enjoy under the Constitution and the statutes. Moreover, the same issue could be raised by appellant in an appropriate action. Thus,
in Luzon Stevedoring the Court deemed it necessary to finally dispose of the case for the guidance of all concerned, despite the
apparent procedural flaw in the petition.

The circumstances surrounding the present case, such as the supposed procedural defect of the petition and the pivotal legal issue
involved, resemble those in Luzon Stevedoring. Consequently, in the interest of substantial justice and faithful adherence to the
Constitution, we opted to resolve this case for the guidance of the public and all concerned parties.

II.
No change of any long-standing rule;
thus, no redefinition of the term "capital."

Movants contend that the term "capital" in Section 11, Article XII of the Constitution has long been settled and defined to refer to the
total outstanding shares of stock, whether voting or non-voting. In fact, movants claim that the SEC, which is the administrative agency
tasked to enforce the 60-40 ownership requirement in favor of Filipino citizens in the Constitution and various statutes, has consistently
adopted this particular definition in its numerous opinions. Movants point out that with the 28 June 2011 Decision, the Court in effect
introduced a "new" definition or "midstream redefinition" 9 of the term "capital" in Section 11, Article XII of the Constitution.

This is egregious error.

For more than 75 years since the 1935 Constitution, the Court has not interpreted or defined the term "capital" found in various
economic provisions of the 1935, 1973 and 1987 Constitutions. There has never been a judicial precedent interpreting the term "capital"
in the 1935, 1973 and 1987 Constitutions, until now. Hence, it is patently wrong and utterly baseless to claim that the Court in defining
the term "capital" in its 28 June 2011 Decision modified, reversed, or set aside the purported long-standing definition of the term
"capital," which supposedly refers to the total outstanding shares of stock, whether voting or non-voting. To repeat, until the present
case there has never been a Court ruling categorically defining the term "capital" found in the various economic provisions of the 1935,
1973 and 1987 Philippine Constitutions.

The opinions of the SEC, as well as of the Department of Justice (DOJ), on the definition of the term "capital" as referring to both voting
and non-voting shares (combined total of common and preferred shares) are, in the first place, conflicting and inconsistent. There is no
basis whatsoever to the claim that the SEC and the DOJ have consistently and uniformly adopted a definition of the term "capital"
contrary to the definition that this Court adopted in its 28 June 2011 Decision.

In DOJ Opinion No. 130, s. 1985,10 dated 7 October 1985, the scope of the term "capital" in Section 9, Article XIV of the 1973
Constitution was raised, that is, whether the term "capital" includes "both preferred and common stocks." The issue was raised in
relation to a stock-swap transaction between a Filipino and a Japanese corporation, both stockholders of a domestic corporation that
owned lands in the Philippines. Then Minister of Justice Estelito P. Mendoza ruled that the resulting ownership structure of the
corporation would be unconstitutional because 60% of the voting stock would be owned by Japanese while Filipinos would own only
40% of the voting stock, although when the non-voting stock is added, Filipinos would own 60% of the combined voting and non-voting
stock. This ownership structure is remarkably similar to the current ownership structure of PLDT. Minister Mendoza ruled:

xxxx

Thus, the Filipino group still owns sixty (60%) of the entire subscribed capital stock (common and preferred) while the Japanese
investors control sixty percent (60%) of the common (voting) shares.

It is your position that x x x since Section 9, Article XIV of the Constitution uses the word "capital," which is construed "to
include both preferred and common shares" and "that where the law does not distinguish, the courts shall not distinguish."

xxxx

In light of the foregoing jurisprudence, it is my opinion that the stock-swap transaction in question may not be constitutionally
upheld. While it may be ordinary corporate practice to classify corporate shares into common voting shares and preferred non-voting
shares, any arrangement which attempts to defeat the constitutional purpose should be eschewed. Thus, the resultant equity
arrangement which would place ownership of 60%11 of the common (voting) shares in the Japanese group, while retaining
60% of the total percentage of common and preferred shares in Filipino hands would amount to circumvention of the principle
of control by Philippine stockholders that is implicit in the 60% Philippine nationality requirement in the
Constitution. (Emphasis supplied)

In short, Minister Mendoza categorically rejected the theory that the term "capital" in Section 9, Article XIV of the 1973 Constitution
includes "both preferred and common stocks" treated as the same class of shares regardless of differences in voting rights and
privileges. Minister Mendoza stressed that the 60-40 ownership requirement in favor of Filipino citizens in the Constitution is not
complied with unless the corporation "satisfies the criterion of beneficial ownership" and that in applying the same "the primordial
consideration is situs of control."

On the other hand, in Opinion No. 23-10 dated 18 August 2010, addressed to Castillo Laman Tan Pantaleon & San Jose, then SEC
General Counsel Vernette G. Umali-Paco applied the Voting Control Test, that is, using only the voting stock to determine whether a
corporation is a Philippine national. The Opinion states:

Applying the foregoing, particularly the Control Test, MLRC is deemed as a Philippine national because: (1) sixty percent (60%) of
its outstanding capital stock entitled to vote is owned by a Philippine national, the Trustee; and (2) at least sixty percent (60%) of the
ERF will accrue to the benefit of Philippine nationals. Still pursuant to the Control Test, MLRC’s investment in 60% of BFDC’s
outstanding capital stock entitled to vote shall be deemed as of Philippine nationality, thereby qualifying BFDC to own private
land.

Further, under, and for purposes of, the FIA, MLRC and BFDC are both Philippine nationals, considering that: (1) sixty percent (60%) of
their respective outstanding capital stock entitled to vote is owned by a Philippine national (i.e., by the Trustee, in the case of
MLRC; and by MLRC, in the case of BFDC); and (2) at least 60% of their respective board of directors are Filipino citizens. (Boldfacing
and italicization supplied)

Clearly, these DOJ and SEC opinions are compatible with the Court’s interpretation of the 60-40 ownership requirement in favor of
Filipino citizens mandated by the Constitution for certain economic activities. At the same time, these opinions highlight the conflicting,
contradictory, and inconsistent positions taken by the DOJ and the SEC on the definition of the term "capital" found in the economic
provisions of the Constitution.

The opinions issued by SEC legal officers do not have the force and effect of SEC rules and regulations because only the SEC en
banc can adopt rules and regulations. As expressly provided in Section 4.6 of the Securities Regulation Code, 12 the SEC cannot
delegate to any of its individual Commissioner or staff the power to adopt any rule or regulation. Further, under Section 5.1 of the
same Code, it is the SEC as a collegial body, and not any of its legal officers, that is empowered to issue opinions and
approve rules and regulations. Thus:

4.6. The Commission may, for purposes of efficiency, delegate any of its functions to any department or office of the Commission, an
individual Commissioner or staff member of the Commission except its review or appellate authority and its power to adopt, alter and
supplement any rule or regulation.

The Commission may review upon its own initiative or upon the petition of any interested party any action of any department or office,
individual Commissioner, or staff member of the Commission.

SEC. 5. Powers and Functions of the Commission.- 5.1. The Commission shall act with transparency and shall have the powers and
functions provided by this Code, Presidential Decree No. 902-A, the Corporation Code, the Investment Houses Law, the Financing
Company Act and other existing laws. Pursuant thereto the Commission shall have, among others, the following powers and functions:

xxxx

(g) Prepare, approve, amend or repeal rules, regulations and orders, and issue opinions and provide guidance on and
supervise compliance with such rules, regulations and orders;

x x x x (Emphasis supplied)

Thus, the act of the individual Commissioners or legal officers of the SEC in issuing opinions that have the effect of SEC rules or
regulations is ultra vires. Under Sections 4.6 and 5.1(g) of the Code, only the SEC en banc can "issue opinions" that have the force and
effect of rules or regulations. Section 4.6 of the Code bars the SEC en banc from delegating to any individual Commissioner or staff the
power to adopt rules or regulations. In short, any opinion of individual Commissioners or SEC legal officers does not constitute
a rule or regulation of the SEC.

The SEC admits during the Oral Arguments that only the SEC en banc, and not any of its individual commissioners or legal staff, is
empowered to issue opinions which have the same binding effect as SEC rules and regulations, thus:

JUSTICE CARPIO:

So, under the law, it is the Commission En Banc that can issue an

SEC Opinion, correct?

COMMISSIONER GAITE:13
That’s correct, Your Honor.

JUSTICE CARPIO:

Can the Commission En Banc delegate this function to an SEC officer?

COMMISSIONER GAITE:

Yes, Your Honor, we have delegated it to the General Counsel.

JUSTICE CARPIO:

It can be delegated. What cannot be delegated by the Commission En Banc to a commissioner or an individual
employee of the Commission?

COMMISSIONER GAITE:

Novel opinions that [have] to be decided by the En Banc...

JUSTICE CARPIO:

What cannot be delegated, among others, is the power to adopt or amend rules and regulations, correct?

COMMISSIONER GAITE:

That’s correct, Your Honor.

JUSTICE CARPIO:

So, you combine the two (2), the SEC officer, if delegated that power, can issue an opinion but that opinion
does not constitute a rule or regulation, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

So, all of these opinions that you mentioned they are not rules and regulations, correct?

COMMISSIONER GAITE:

They are not rules and regulations.

JUSTICE CARPIO:

If they are not rules and regulations, they apply only to that particular situation and will not constitute a precedent,
correct?

COMMISSIONER GAITE:

Yes, Your Honor.14 (Emphasis supplied)

Significantly, the SEC en banc, which is the collegial body statutorily empowered to issue rules and opinions on behalf of the SEC, has
adopted even the Grandfather Rule in determining compliance with the 60-40 ownership requirement in favor of Filipino citizens
mandated by the Constitution for certain economic activities. This prevailing SEC ruling, which the SEC correctly adopted to thwart any
circumvention of the required Filipino "ownership and control," is laid down in the 25 March 2010 SEC en banc ruling in Redmont
Consolidated Mines, Corp. v. McArthur Mining, Inc., et al.,15 to wit:
The avowed purpose of the Constitution is to place in the hands of Filipinos the exploitation of our natural resources. Necessarily,
therefore, the Rule interpreting the constitutional provision should not diminish that right through the legal fiction of
corporate ownership and control. But the constitutional provision, as interpreted and practiced via the 1967 SEC Rules, has favored
foreigners contrary to the command of the Constitution. Hence, the Grandfather Rule must be applied to accurately determine the
actual participation, both direct and indirect, of foreigners in a corporation engaged in a nationalized activity or business.

Compliance with the constitutional limitation(s) on engaging in nationalized activities must be determined by ascertaining if 60% of the
investing corporation’s outstanding capital stock is owned by "Filipino citizens", or as interpreted, by natural or individual Filipino
citizens. If such investing corporation is in turn owned to some extent by another investing corporation, the same process must be
observed. One must not stop until the citizenships of the individual or natural stockholders of layer after layer of investing corporations
have been established, the very essence of the Grandfather Rule.

Lastly, it was the intent of the framers of the 1987 Constitution to adopt the Grandfather Rule. In one of the discussions on what
is now Article XII of the present Constitution, the framers made the following exchange:

MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign equity; namely, 60-40 in Section 3,
60-40 in Section 9, and 2/3-1/3 in Section 15.

MR. VILLEGAS. That is right.

MR. NOLLEDO. In teaching law, we are always faced with the question: ‘Where do we base the equity requirement, is it on the
authorized capital stock, on the subscribed capital stock, or on the paid-up capital stock of a corporation’? Will the Committee please
enlighten me on this?

MR. VILLEGAS. We have just had a long discussion with the members of the team from the UP Law Center who provided us a draft.
The phrase that is contained here which we adopted from the UP draft is ‘60 percent of voting stock.’

MR. NOLLEDO. That must be based on the subscribed capital stock, because unless declared delinquent, unpaid capital stock shall be
entitled to vote.

MR. VILLEGAS. That is right.

MR. NOLLEDO. Thank you. With respect to an investment by one corporation in another corporation, say, a corporation with 60-40
percent equity invests in another corporation which is permitted by the Corporation Code, does the Committee adopt the grandfather
rule?

MR. VILLEGAS. Yes, that is the understanding of the Committee.

MR. NOLLEDO. Therefore, we need additional Filipino capital?

MR. VILLEGAS. Yes. (Boldfacing and underscoring supplied; italicization in the original)

This SEC en banc ruling conforms to our 28 June 2011 Decision that the 60-40 ownership requirement in favor of Filipino citizens in the
Constitution to engage in certain economic activities applies not only to voting control of the corporation, but also to the beneficial
ownership of the corporation. Thus, in our 28 June 2011 Decision we stated:

Mere legal title is insufficient to meet the 60 percent Filipinoowned "capital" required in the Constitution. Full beneficial ownership of
60 percent of the outstanding capital stock, coupled with 60 percent of the voting rights, is required. The legal and beneficial
ownership of 60 percent of the outstanding capital stock must rest in the hands of Filipino nationals in accordance with the constitutional
mandate. Otherwise, the corporation is "considered as non-Philippine national[s]." (Emphasis supplied)

Both the Voting Control Test and the Beneficial Ownership Test must be applied to determine whether a corporation is a "Philippine
national."

The interpretation by legal officers of the SEC of the term "capital," embodied in various opinions which respondents relied upon, is
merely preliminary and an opinion only of such officers. To repeat, any such opinion does not constitute an SEC rule or regulation. In
fact, many of these opinions contain a disclaimer which expressly states: "x x x the foregoing opinion is based solely on facts
disclosed in your query and relevant only to the particular issue raised therein and shall not be used in the nature of a standing rule
binding upon the Commission in other cases whether of similar or dissimilar circumstances."16 Thus, the opinions clearly make
a caveat that they do not constitute binding precedents on any one, not even on the SEC itself.

Likewise, the opinions of the SEC en banc, as well as of the DOJ, interpreting the law are neither conclusive nor controlling and thus,
do not bind the Court. It is hornbook doctrine that any interpretation of the law that administrative or quasi-judicial agencies make is only
preliminary, never conclusive on the Court. The power to make a final interpretation of the law, in this case the term "capital" in Section
11, Article XII of the 1987 Constitution, lies with this Court, not with any other government entity.

In his motion for reconsideration, the PSE President cites the cases of National Telecommunications Commission v. Court of
Appeals17 and Philippine Long Distance Telephone Company v. National Telecommunications Commission18 in arguing that the Court
has already defined the term "capital" in Section 11, Article XII of the 1987 Constitution. 19

The PSE President is grossly mistaken. In both cases of National Telecommunications v. Court of Appeals20 and Philippine Long
Distance Telephone Company v. National Telecommunications Commission,21 the Court did not define the term "capital" as found in
Section 11, Article XII of the 1987 Constitution. In fact, these two cases never mentioned, discussed or cited Section 11, Article
XII of the Constitution or any of its economic provisions, and thus cannot serve as precedent in the interpretation of Section
11, Article XII of the Constitution. These two cases dealt solely with the determination of the correct regulatory fees under Section
40(e) and (f) of the Public Service Act, to wit:

(e) For annual reimbursement of the expenses incurred by the Commission in the supervision of other public services and/or in the
regulation or fixing of their rates, twenty centavos for each one hundred pesos or fraction thereof, of the capital stock subscribed or
paid, or if no shares have been issued, of the capital invested, or of the property and equipment whichever is higher.

(f) For the issue or increase of capital stock, twenty centavos for each one hundred pesos or fraction thereof, of the increased capital.
(Emphasis supplied)

The Court’s interpretation in these two cases of the terms "capital stock subscribed or paid," "capital stock" and "capital" does not
pertain to, and cannot control, the definition of the term "capital" as used in Section 11, Article XII of the Constitution, or any of the
economic provisions of the Constitution where the term "capital" is found. The definition of the term "capital" found in the Constitution
must not be taken out of context. A careful reading of these two cases reveals that the terms "capital stock subscribed or paid," "capital
stock" and "capital" were defined solely to determine the basis for computing the supervision and regulation fees under Section 40(e)
and (f) of the Public Service Act.

III.
Filipinization of Public Utilities

The Preamble of the 1987 Constitution, as the prologue of the supreme law of the land, embodies the ideals that the Constitution
intends to achieve.22 The Preamble reads:

We, the sovereign Filipino people, imploring the aid of Almighty God, in order to build a just and humane society, and establish a
Government that shall embody our ideals and aspirations, promote the common good, conserve and develop our patrimony, and
secure to ourselves and our posterity, the blessings of independence and democracy under the rule of law and a regime of truth,
justice, freedom, love, equality, and peace, do ordain and promulgate this Constitution. (Emphasis supplied)

Consistent with these ideals, Section 19, Article II of the 1987 Constitution declares as State policy the development of a national
economy "effectively controlled" by Filipinos:

Section 19. The State shall develop a self-reliant and independent national economy effectively controlled by Filipinos.

Fortifying the State policy of a Filipino-controlled economy, the Constitution decrees:

Section 10. The Congress shall, upon recommendation of the economic and planning agency, when the national interest dictates,
reserve to citizens of the Philippines or to corporations or associations at least sixty per centum of whose capital is owned by such
citizens, or such higher percentage as Congress may prescribe, certain areas of investments. The Congress shall enact measures that
will encourage the formation and operation of enterprises whose capital is wholly owned by Filipinos.

In the grant of rights, privileges, and concessions covering the national economy and patrimony, the State shall give preference to
qualified Filipinos.

The State shall regulate and exercise authority over foreign investments within its national jurisdiction and in accordance with its
national goals and priorities.23

Under Section 10, Article XII of the 1987 Constitution, Congress may "reserve to citizens of the Philippines or to corporations or
associations at least sixty per centum of whose capital is owned by such citizens, or such higher percentage as Congress may
prescribe, certain areas of investments." Thus, in numerous laws Congress has reserved certain areas of investments to Filipino
citizens or to corporations at least sixty percent of the "capital" of which is owned by Filipino citizens. Some of these laws are: (1)
Regulation of Award of Government Contracts or R.A. No. 5183; (2) Philippine Inventors Incentives Act or R.A. No. 3850; (3) Magna
Carta for Micro, Small and Medium Enterprises or R.A. No. 6977; (4) Philippine Overseas Shipping Development Act or R.A. No. 7471;
(5) Domestic Shipping Development Act of 2004 or R.A. No. 9295; (6) Philippine Technology Transfer Act of 2009 or R.A. No. 10055;
and (7) Ship Mortgage Decree or P.D. No. 1521.

With respect to public utilities, the 1987 Constitution specifically ordains:

Section 11. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted
except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines, at least
sixty per centum of whose capital is owned by such citizens; nor shall such franchise, certificate, or authorization be exclusive in
character or for a longer period than fifty years. Neither shall any such franchise or right be granted except under the condition that it
shall be subject to amendment, alteration, or repeal by the Congress when the common good so requires. The State shall encourage
equity participation in public utilities by the general public. The participation of foreign investors in the governing body of any public
utility enterprise shall be limited to their proportionate share in its capital, and all the executive and managing officers of such
corporation or association must be citizens of the Philippines. (Emphasis supplied)

This provision, which mandates the Filipinization of public utilities, requires that any form of authorization for the operation of public
utilities shall be granted only to "citizens of the Philippines or to corporations or associations organized under the laws of the Philippines
at least sixty per centum of whose capital is owned by such citizens." "The provision is [an express] recognition of the sensitive
and vital position of public utilities both in the national economy and for national security." 24

The 1987 Constitution reserves the ownership and operation of public utilities exclusively to (1) Filipino citizens, or (2) corporations or
associations at least 60 percent of whose "capital" is owned by Filipino citizens. Hence, in the case of individuals, only Filipino citizens
can validly own and operate a public utility. In the case of corporations or associations, at least 60 percent of their "capital" must be
owned by Filipino citizens. In other words, under Section 11, Article XII of the 1987 Constitution, to own and operate a public
utility a corporation’s capital must at least be 60 percent owned by Philippine nationals.

IV.
Definition of "Philippine National"

Pursuant to the express mandate of Section 11, Article XII of the 1987 Constitution, Congress enacted Republic Act No. 7042 or
the Foreign Investments Act of 1991 (FIA), as amended, which defined a "Philippine national" as follows:

SEC. 3. Definitions. - As used in this Act:

a. The term "Philippine national" shall mean a citizen of the Philippines; or a domestic partnership or association wholly owned by
citizens of the Philippines; or a corporation organized under the laws of the Philippines of which at least sixty percent (60%) of
the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines; or a corporation organized
abroad and registered as doing business in the Philippines under the Corporation Code of which one hundred percent (100%) of the
capital stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee of funds for pension or other employee retirement
or separation benefits, where the trustee is a Philippine national and at least sixty percent (60%) of the fund will accrue to the benefit of
Philippine nationals: Provided, That where a corporation and its non-Filipino stockholders own stocks in a Securities and Exchange
Commission (SEC) registered enterprise, at least sixty percent (60%) of the capital stock outstanding and entitled to vote of each of
both corporations must be owned and held by citizens of the Philippines and at least sixty percent (60%) of the members of the Board
of Directors of each of both corporations must be citizens of the Philippines, in order that the corporation, shall be considered a
"Philippine national." (Boldfacing, italicization and underscoring supplied)

Thus, the FIA clearly and unequivocally defines a "Philippine national" as a Philippine citizen, or a domestic corporation at least "60%
of the capital stock outstanding and entitled to vote" is owned by Philippine citizens.

The definition of a "Philippine national" in the FIA reiterated the meaning of such term as provided in its predecessor statute, Executive
Order No. 226 or the Omnibus Investments Code of 1987,25 which was issued by then President Corazon C. Aquino. Article 15 of this
Code states:

Article 15. "Philippine national" shall mean a citizen of the Philippines or a diplomatic partnership or association wholly-owned by
citizens of the Philippines; or a corporation organized under the laws of the Philippines of which at least sixty per cent (60%) of
the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines; or a trustee of funds for
pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least sixty per cent (60%)
of the fund will accrue to the benefit of Philippine nationals: Provided, That where a corporation and its non-Filipino stockholders own
stock in a registered enterprise, at least sixty per cent (60%) of the capital stock outstanding and entitled to vote of both corporations
must be owned and held by the citizens of the Philippines and at least sixty per cent (60%) of the members of the Board of Directors of
both corporations must be citizens of the Philippines in order that the corporation shall be considered a Philippine national. (Boldfacing,
italicization and underscoring supplied)

Under Article 48(3)26 of the Omnibus Investments Code of 1987, "no corporation x x x which is not a ‘Philippine national’ x x x shall do
business
x x x in the Philippines x x x without first securing from the Board of Investments a written certificate to the effect that such business or
economic activity x x x would not conflict with the Constitution or laws of the Philippines."27 Thus, a "non-Philippine national" cannot
own and operate a reserved economic activity like a public utility. This means, of course, that only a "Philippine national" can own and
operate a public utility.

In turn, the definition of a "Philippine national" under Article 15 of the Omnibus Investments Code of 1987 was a reiteration of the
meaning of such term as provided in Article 14 of the Omnibus Investments Code of 1981,28 to wit:

Article 14. "Philippine national" shall mean a citizen of the Philippines; or a domestic partnership or association wholly owned by
citizens of the Philippines; or a corporation organized under the laws of the Philippines of which at least sixty per cent (60%) of
the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines; or a trustee of funds for
pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least sixty per cent (60%)
of the fund will accrue to the benefit of Philippine nationals: Provided, That where a corporation and its non-Filipino stockholders own
stock in a registered enterprise, at least sixty per cent (60%) of the capital stock outstanding and entitled to vote of both corporations
must be owned and held by the citizens of the Philippines and at least sixty per cent (60%) of the members of the Board of Directors of
both corporations must be citizens of the Philippines in order that the corporation shall be considered a Philippine national. (Boldfacing,
italicization and underscoring supplied)

Under Article 69(3) of the Omnibus Investments Code of 1981, "no corporation x x x which is not a ‘Philippine national’ x x x shall do
business x x x in the Philippines x x x without first securing a written certificate from the Board of Investments to the effect that such
business or economic activity x x x would not conflict with the Constitution or laws of the Philippines."29 Thus, a "non-Philippine
national" cannot own and operate a reserved economic activity like a public utility. Again, this means that only a "Philippine national"
can own and operate a public utility.

Prior to the Omnibus Investments Code of 1981, Republic Act No. 5186 30 or the Investment Incentives Act, which took effect on 16
September 1967, contained a similar definition of a "Philippine national," to wit:

(f) "Philippine National" shall mean a citizen of the Philippines; or a partnership or association wholly owned by citizens of the
Philippines; or a corporation organized under the laws of the Philippines of which at least sixty per cent of the capital stock
outstanding and entitled to vote is owned and held by citizens of the Philippines; or a trustee of funds for pension or other
employee retirement or separation benefits, where the trustee is a Philippine National and at least sixty per cent of the fund will accrue
to the benefit of Philippine Nationals: Provided, That where a corporation and its non-Filipino stockholders own stock in a registered
enterprise, at least sixty per cent of the capital stock outstanding and entitled to vote of both corporations must be owned and held by
the citizens of the Philippines and at least sixty per cent of the members of the Board of Directors of both corporations must be citizens
of the Philippines in order that the corporation shall be considered a Philippine National. (Boldfacing, italicization and underscoring
supplied)

Under Section 3 of Republic Act No. 5455 or the Foreign Business Regulations Act, which took effect on 30 September 1968, if the
investment in a domestic enterprise by non-Philippine nationals exceeds 30% of its outstanding capital stock, such enterprise must
obtain prior approval from the Board of Investments before accepting such investment. Such approval shall not be granted if the
investment "would conflict with existing constitutional provisions and laws regulating the degree of required ownership by Philippine
nationals in the enterprise."31 A "non-Philippine national" cannot own and operate a reserved economic activity like a public utility.
Again, this means that only a "Philippine national" can own and operate a public utility.

The FIA, like all its predecessor statutes, clearly defines a "Philippine national" as a Filipino citizen, or a domestic corporation "at
least sixty percent (60%) of the capital stock outstanding and entitled to vote" is owned by Filipino citizens. A domestic
corporation is a "Philippine national" only if at least 60% of its voting stock is owned by Filipino citizens. This definition of a "Philippine
national" is crucial in the present case because the FIA reiterates and clarifies Section 11, Article XII of the 1987 Constitution, which
limits the ownership and operation of public utilities to Filipino citizens or to corporations or associations at least 60% Filipino-owned.

The FIA is the basic law governing foreign investments in the Philippines, irrespective of the nature of business and area of investment.
The FIA spells out the procedures by which non-Philippine nationals can invest in the Philippines. Among the key features of this law is
the concept of a negative list or the Foreign Investments Negative List. 32 Section 8 of the law states:

SEC. 8. List of Investment Areas Reserved to Philippine Nationals [Foreign Investment Negative List]. - The Foreign Investment
Negative List shall have two 2 component lists: A and B:

a. List A shall enumerate the areas of activities reserved to Philippine nationals by mandate of the Constitution and specific
laws.

b. List B shall contain the areas of activities and enterprises regulated pursuant to law:

1. which are defense-related activities, requiring prior clearance and authorization from the Department of National Defense [DND] to
engage in such activity, such as the manufacture, repair, storage and/or distribution of firearms, ammunition, lethal weapons, military
ordinance, explosives, pyrotechnics and similar materials; unless such manufacturing or repair activity is specifically authorized, with a
substantial export component, to a non-Philippine national by the Secretary of National Defense; or

2. which have implications on public health and morals, such as the manufacture and distribution of dangerous drugs; all forms of
gambling; nightclubs, bars, beer houses, dance halls, sauna and steam bathhouses and massage clinics. (Boldfacing, underscoring
and italicization supplied)

Section 8 of the FIA enumerates the investment areas "reserved to Philippine nationals." Foreign Investment Negative List A
consists of "areas of activities reserved to Philippine nationals by mandate of the Constitution and specific laws," where
foreign equity participation in any enterprise shall be limited to the maximum percentage expressly prescribed by the
Constitution and other specific laws. In short, to own and operate a public utility in the Philippines one must be a "Philippine
national" as defined in the FIA. The FIA is abundant notice to foreign investors to what extent they can invest in public utilities
in the Philippines.

To repeat, among the areas of investment covered by the Foreign Investment Negative List A is the ownership and operation of public
utilities, which the Constitution expressly reserves to Filipino citizens and to corporations at least 60% owned by Filipino citizens. In
other words, Negative List A of the FIA reserves the ownership and operation of public utilities only to "Philippine nationals,"
defined in Section 3(a) of the FIA as "(1) a citizen of the Philippines; x x x or (3) a corporation organized under the laws of the
Philippines of which at least sixty percent (60%) of the capital stock outstanding and entitled to vote is owned and held by
citizens of the Philippines; or (4) a corporation organized abroad and registered as doing business in the Philippines under the
Corporation Code of which one hundred percent (100%) of the capital stock outstanding and entitled to vote is wholly owned by
Filipinos or a trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national
and at least sixty percent (60%) of the fund will accrue to the benefit of Philippine nationals."

Clearly, from the effectivity of the Investment Incentives Act of 1967 to the adoption of the Omnibus Investments Code of 1981, to the
enactment of the Omnibus Investments Code of 1987, and to the passage of the present Foreign Investments Act of 1991, or for more
than four decades, the statutory definition of the term "Philippine national" has been uniform and consistent: it means a
Filipino citizen, or a domestic corporation at least 60% of the voting stock is owned by Filipinos. Likewise, these same
statutes have uniformly and consistently required that only "Philippine nationals" could own and operate public utilities in the
Philippines. The following exchange during the Oral Arguments is revealing:

JUSTICE CARPIO:

Counsel, I have some questions. You are aware of the Foreign Investments Act of 1991, x x x? And the FIA of 1991
took effect in 1991, correct? That’s over twenty (20) years ago, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

And Section 8 of the Foreign Investments Act of 1991 states that []only Philippine nationals can own and operate
public utilities[], correct?

COMMISSIONER GAITE:

Yes, Your Honor.

JUSTICE CARPIO:

And the same Foreign Investments Act of 1991 defines a "Philippine national" either as a citizen of the Philippines, or
if it is a corporation at least sixty percent (60%) of the voting stock is owned by citizens of the Philippines, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

And, you are also aware that under the predecessor law of the Foreign Investments Act of 1991, the Omnibus
Investments Act of 1987, the same provisions apply: x x x only Philippine nationals can own and operate a public
utility and the Philippine national, if it is a corporation, x x x sixty percent (60%) of the capital stock of that corporation
must be owned by citizens of the Philippines, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

And even prior to the Omnibus Investments Act of 1987, under the Omnibus Investments Act of 1981, the same rules
apply: x x x only a Philippine national can own and operate a public utility and a Philippine national, if it is a
corporation, sixty percent (60%) of its x x x voting stock, must be owned by citizens of the Philippines, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

And even prior to that, under [the]1967 Investments Incentives Act and the Foreign Company Act of 1968, the same
rules applied, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

So, for the last four (4) decades, x x x, the law has been very consistent – only a Philippine national can own
and operate a public utility, and a Philippine national, if it is a corporation, x x x at least sixty percent (60%) of
the voting stock must be owned by citizens of the Philippines, correct?

COMMISSIONER GAITE:

Correct, Your Honor.33 (Emphasis supplied)

Government agencies like the SEC cannot simply ignore Sections 3(a) and 8 of the FIA which categorically prescribe that certain
economic activities, like the ownership and operation of public utilities, are reserved to corporations "at least sixty percent (60%) of the
capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines." Foreign Investment Negative List A
refers to "activities reserved to Philippine nationals by mandate of the Constitution and specific laws." The FIA is the basic statute
regulating foreign investments in the Philippines. Government agencies tasked with regulating or monitoring foreign investments,
as well as counsels of foreign investors, should start with the FIA in determining to what extent a particular foreign investment is
allowed in the Philippines. Foreign investors and their counsels who ignore the FIA do so at their own peril. Foreign investors and their
counsels who rely on opinions of SEC legal officers that obviously contradict the FIA do so also at their own peril.

Occasional opinions of SEC legal officers that obviously contradict the FIA should immediately raise a red flag. There are already
numerous opinions of SEC legal officers that cite the definition of a "Philippine national" in Section 3(a) of the FIA in determining
whether a particular corporation is qualified to own and operate a nationalized or partially nationalized business in the Philippines. This
shows that SEC legal officers are not only aware of, but also rely on and invoke, the provisions of the FIA in ascertaining the eligibility of
a corporation to engage in partially nationalized industries. The following are some of such opinions:

1. Opinion of 23 March 1993, addressed to Mr. Francis F. How;

2. Opinion of 14 April 1993, addressed to Director Angeles T. Wong of the Philippine Overseas Employment Administration;

3. Opinion of 23 November 1993, addressed to Messrs. Dominador Almeda and Renato S. Calma;

4. Opinion of 7 December 1993, addressed to Roco Bunag Kapunan Migallos & Jardeleza;

5. SEC Opinion No. 49-04, addressed to Romulo Mabanta Buenaventura Sayoc & De Los Angeles;
6. SEC-OGC Opinion No. 17-07, addressed to Mr. Reynaldo G. David; and

7. SEC-OGC Opinion No. 03-08, addressed to Attys. Ruby Rose J. Yusi and Rudyard S. Arbolado.

The SEC legal officers’ occasional but blatant disregard of the definition of the term "Philippine national" in the FIA signifies their lack of
integrity and competence in resolving issues on the 60-40 ownership requirement in favor of Filipino citizens in Section 11, Article XII of
the Constitution.

The PSE President argues that the term "Philippine national" defined in the FIA should be limited and interpreted to refer to
corporations seeking to avail of tax and fiscal incentives under investment incentives laws and cannot be equated with the term "capital"
in Section 11, Article XII of the 1987 Constitution. Pangilinan similarly contends that the FIA and its predecessor statutes do not apply to
"companies which have not registered and obtained special incentives under the schemes established by those laws."

Both are desperately grasping at straws. The FIA does not grant tax or fiscal incentives to any enterprise. Tax and fiscal incentives to
investments are granted separately under the Omnibus Investments Code of 1987, not under the FIA. In fact, the FIA expressly
repealed Articles 44 to 56 of Book II of the Omnibus Investments Code of 1987, which articles previously regulated foreign investments
in nationalized or partially nationalized industries.

The FIA is the applicable law regulating foreign investments in nationalized or partially nationalized industries. There is nothing in the
FIA, or even in the Omnibus Investments Code of 1987 or its predecessor statutes, that states, expressly or impliedly, that the FIA or its
predecessor statutes do not apply to enterprises not availing of tax and fiscal incentives under the Code. The FIA and its predecessor
statutes apply to investments in all domestic enterprises, whether or not such enterprises enjoy tax and fiscal incentives under the
Omnibus Investments Code of 1987 or its predecessor statutes. The reason is quite obvious – mere non-availment of tax and
fiscal incentives by a non-Philippine national cannot exempt it from Section 11, Article XII of the Constitution regulating
foreign investments in public utilities. In fact, the Board of Investments’ Primer on Investment Policies in the Philippines,34 which
is given out to foreign investors, provides:

PART III. FOREIGN INVESTMENTS WITHOUT INCENTIVES

Investors who do not seek incentives and/or whose chosen activities do not qualify for incentives, (i.e., the activity is not listed in the
IPP, and they are not exporting at least 70% of their production) may go ahead and make the investments without seeking
incentives. They only have to be guided by the Foreign Investments Negative List (FINL).

The FINL clearly defines investment areas requiring at least 60% Filipino ownership. All other areas outside of this list are fully open to
foreign investors. (Emphasis supplied)

V.
Right to elect directors, coupled with beneficial ownership,
translates to effective control.

The 28 June 2011 Decision declares that the 60 percent Filipino ownership required by the Constitution to engage in certain economic
activities applies not only to voting control of the corporation, but also to the beneficial ownership of the corporation. To repeat, we
held:

Mere legal title is insufficient to meet the 60 percent Filipino-owned "capital" required in the Constitution. Full beneficial ownership of
60 percent of the outstanding capital stock, coupled with 60 percent of the voting rights, is required. The legal and beneficial
ownership of 60 percent of the outstanding capital stock must rest in the hands of Filipino nationals in accordance with the constitutional
mandate. Otherwise, the corporation is "considered as non-Philippine national[s]." (Emphasis supplied)

This is consistent with Section 3 of the FIA which provides that where 100% of the capital stock is held by "a trustee of funds for
pension or other employee retirement or separation benefits," the trustee is a Philippine national if "at least sixty percent (60%) of the
fund will accrue to the benefit of Philippine nationals." Likewise, Section 1(b) of the Implementing Rules of the FIA provides that "for
stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not enough to meet the required
Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate voting rights, is essential."

Since the constitutional requirement of at least 60 percent Filipino ownership applies not only to voting control of the corporation but
also to the beneficial ownership of the corporation, it is therefore imperative that such requirement apply uniformly and across the board
to all classes of shares, regardless of nomenclature and category, comprising the capital of a corporation. Under the Corporation Code,
capital stock35 consists of all classes of shares issued to stockholders, that is, common shares as well as preferred shares, which may
have different rights, privileges or restrictions as stated in the articles of incorporation.36

The Corporation Code allows denial of the right to vote to preferred and redeemable shares, but disallows denial of the right to vote in
specific corporate matters. Thus, common shares have the right to vote in the election of directors, while preferred shares may be
denied such right. Nonetheless, preferred shares, even if denied the right to vote in the election of directors, are entitled to vote on the
following corporate matters: (1) amendment of articles of incorporation; (2) increase and decrease of capital stock; (3) incurring,
creating or increasing bonded indebtedness; (4) sale, lease, mortgage or other disposition of substantially all corporate assets; (5)
investment of funds in another business or corporation or for a purpose other than the primary purpose for which the corporation was
organized; (6) adoption, amendment and repeal of by-laws; (7) merger and consolidation; and (8) dissolution of corporation.37

Since a specific class of shares may have rights and privileges or restrictions different from the rest of the shares in a corporation, the
60-40 ownership requirement in favor of Filipino citizens in Section 11, Article XII of the Constitution must apply not only to shares with
voting rights but also to shares without voting rights. Preferred shares, denied the right to vote in the election of directors, are anyway
still entitled to vote on the eight specific corporate matters mentioned above. Thus, if a corporation, engaged in a partially
nationalized industry, issues a mixture of common and preferred non-voting shares, at least 60 percent of the common shares
and at least 60 percent of the preferred non-voting shares must be owned by Filipinos. Of course, if a corporation issues only a
single class of shares, at least 60 percent of such shares must necessarily be owned by Filipinos. In short, the 60-40 ownership
requirement in favor of Filipino citizens must apply separately to each class of shares, whether common, preferred non-
voting, preferred voting or any other class of shares. This uniform application of the 60-40 ownership requirement in favor of
Filipino citizens clearly breathes life to the constitutional command that the ownership and operation of public utilities shall be reserved
exclusively to corporations at least 60 percent of whose capital is Filipino-owned. Applying uniformly the 60-40 ownership requirement
in favor of Filipino citizens to each class of shares, regardless of differences in voting rights, privileges and restrictions, guarantees
effective Filipino control of public utilities, as mandated by the Constitution.

Moreover, such uniform application to each class of shares insures that the "controlling interest" in public utilities always lies in the
hands of Filipino citizens. This addresses and extinguishes Pangilinan’s worry that foreigners, owning most of the non-voting shares,
will exercise greater control over fundamental corporate matters requiring two-thirds or majority vote of all shareholders.

VI.
Intent of the framers of the Constitution

While Justice Velasco quoted in his Dissenting Opinion38 a portion of the deliberations of the Constitutional Commission to support his
claim that the term "capital" refers to the total outstanding shares of stock, whether voting or non-voting, the following excerpts of the
deliberations reveal otherwise. It is clear from the following exchange that the term "capital" refers to controlling interest of a
corporation, thus:

MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign equity; namely, 60-40 in Section 3,
60-40 in Section 9 and 2/3-1/3 in Section 15.

MR. VILLEGAS. That is right.

MR. NOLLEDO. In teaching law, we are always faced with this question: "Where do we base the equity requirement, is it on the
authorized capital stock, on the subscribed capital stock, or on the paid-up capital stock of a corporation"? Will the Committee please
enlighten me on this?

MR. VILLEGAS. We have just had a long discussion with the members of the team from the UP Law Center who provided us a
draft. The phrase that is contained here which we adopted from the UP draft is "60 percent of voting stock."

MR. NOLLEDO. That must be based on the subscribed capital stock, because unless declared delinquent, unpaid capital stock shall be
entitled to vote.

MR. VILLEGAS. That is right.

MR. NOLLEDO. Thank you.

With respect to an investment by one corporation in another corporation, say, a corporation with 60-40 percent equity invests in another
corporation which is permitted by the Corporation Code, does the Committee adopt the grandfather rule?

MR. VILLEGAS. Yes, that is the understanding of the Committee.

MR. NOLLEDO. Therefore, we need additional Filipino capital?

MR. VILLEGAS. Yes.39

xxxx

MR. AZCUNA. May I be clarified as to that portion that was accepted by the Committee.
MR. VILLEGAS. The portion accepted by the Committee is the deletion of the phrase "voting stock or controlling interest."

MR. AZCUNA. Hence, without the Davide amendment, the committee report would read: "corporations or associations at least sixty
percent of whose CAPITAL is owned by such citizens."

MR. VILLEGAS. Yes.

MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60 percent of the capital to be owned by citizens.

MR. VILLEGAS. That is right.

MR. AZCUNA. But the control can be with the foreigners even if they are the minority. Let us say 40 percent of the capital is
owned by them, but it is the voting capital, whereas, the Filipinos own the nonvoting shares. So we can have a situation
where the corporation is controlled by foreigners despite being the minority because they have the voting capital. That is the
anomaly that would result here.

MR. BENGZON. No, the reason we eliminated the word "stock" as stated in the 1973 and 1935 Constitutions is that according
to Commissioner Rodrigo, there are associations that do not have stocks. That is why we say "CAPITAL."

MR. AZCUNA. We should not eliminate the phrase "controlling interest."

MR. BENGZON. In the case of stock corporations, it is assumed.40 (Boldfacing and underscoring supplied)

Thus, 60 percent of the "capital" assumes, or should result in, a "controlling interest" in the corporation.

The use of the term "capital" was intended to replace the word "stock" because associations without stocks can operate public utilities
as long as they meet the 60-40 ownership requirement in favor of Filipino citizens prescribed in Section 11, Article XII of the
Constitution. However, this did not change the intent of the framers of the Constitution to reserve exclusively to Philippine nationals the
"controlling interest" in public utilities.

During the drafting of the 1935 Constitution, economic protectionism was "the battle-cry of the nationalists in the Convention."41 The
same battle-cry resulted in the nationalization of the public utilities.42 This is also the same intent of the framers of the 1987 Constitution
who adopted the exact formulation embodied in the 1935 and 1973 Constitutions on foreign equity limitations in partially nationalized
industries.

The OSG, in its own behalf and as counsel for the State, 43 agrees fully with the Court’s interpretation of the term "capital." In its
Consolidated Comment, the OSG explains that the deletion of the phrase "controlling interest" and replacement of the word "stock" with
the term "capital" were intended specifically to extend the scope of the entities qualified to operate public utilities to include associations
without stocks. The framers’ omission of the phrase "controlling interest" did not mean the inclusion of all shares of stock, whether
voting or non-voting. The OSG reiterated essentially the Court’s declaration that the Constitution reserved exclusively to Philippine
nationals the ownership and operation of public utilities consistent with the State’s policy to "develop a self-reliant and independent
national economy effectively controlled by Filipinos."

As we held in our 28 June 2011 Decision, to construe broadly the term "capital" as the total outstanding capital stock, treated as
a single class regardless of the actual classification of shares, grossly contravenes the intent and letter of the Constitution that the
"State shall develop a self-reliant and independent national economy effectively controlled by Filipinos." We illustrated the glaring
anomaly which would result in defining the term "capital" as the total outstanding capital stock of a corporation, treated as
a single class of shares regardless of the actual classification of shares, to wit:

Let us assume that a corporation has 100 common shares owned by foreigners and 1,000,000 non-voting preferred shares owned by
Filipinos, with both classes of share having a par value of one peso (₱ 1.00) per share. Under the broad definition of the term "capital,"
such corporation would be considered compliant with the 40 percent constitutional limit on foreign equity of public utilities since the
overwhelming majority, or more than 99.999 percent, of the total outstanding capital stock is Filipino owned. This is obviously absurd.

In the example given, only the foreigners holding the common shares have voting rights in the election of directors, even if they hold
only 100 shares. The foreigners, with a minuscule equity of less than 0.001 percent, exercise control over the public utility. On the other
hand, the Filipinos, holding more than 99.999 percent of the equity, cannot vote in the election of directors and hence, have no control
over the public utility. This starkly circumvents the intent of the framers of the Constitution, as well as the clear language of the
Constitution, to place the control of public utilities in the hands of Filipinos. x x x

Further, even if foreigners who own more than forty percent of the voting shares elect an all-Filipino board of directors, this situation
does not guarantee Filipino control and does not in any way cure the violation of the Constitution. The independence of the Filipino
board members so elected by such foreign shareholders is highly doubtful. As the OSG pointed out, quoting Justice George
Sutherland’s words in Humphrey’s Executor v. US,44 "x x x it is quite evident that one who holds his office only during the pleasure of
another cannot be depended upon to maintain an attitude of independence against the latter’s will." Allowing foreign shareholders to
elect a controlling majority of the board, even if all the directors are Filipinos, grossly circumvents the letter and intent of the Constitution
and defeats the very purpose of our nationalization laws.

VII.
Last sentence of Section 11, Article XII of the Constitution

The last sentence of Section 11, Article XII of the 1987 Constitution reads:

The participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in
its capital, and all the executive and managing officers of such corporation or association must be citizens of the Philippines.

During the Oral Arguments, the OSG emphasized that there was never a question on the intent of the framers of the Constitution to limit
foreign ownership, and assure majority Filipino ownership and control of public utilities. The OSG argued, "while the delegates
disagreed as to the percentage threshold to adopt, x x x the records show they clearly understood that Filipino control of the public
utility corporation can only be and is obtained only through the election of a majority of the members of the board."

Indeed, the only point of contention during the deliberations of the Constitutional Commission on 23 August 1986 was the extent of
majority Filipino control of public utilities. This is evident from the following exchange:

THE PRESIDENT. Commissioner Jamir is recognized.

MR. JAMIR. Madam President, my proposed amendment on lines 20 and 21 is to delete the phrase "two thirds of whose voting stock or
controlling interest," and instead substitute the words "SIXTY PERCENT OF WHOSE CAPITAL" so that the sentence will read: "No
franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to citizens of the
Philippines or to corporations or associations organized under the laws of the Philippines at least SIXTY PERCENT OF WHOSE
CAPITAL is owned by such citizens."

xxxx

THE PRESIDENT: Will Commissioner Jamir first explain?

MR. JAMIR. Yes, in this Article on National Economy and Patrimony, there were two previous sections in which we fixed the Filipino
equity to 60 percent as against 40 percent for foreigners. It is only in this Section 15 with respect to public utilities that the committee
proposal was increased to two-thirds. I think it would be better to harmonize this provision by providing that even in the case of public
utilities, the minimum equity for Filipino citizens should be 60 percent.

MR. ROMULO. Madam President.

THE PRESIDENT. Commissioner Romulo is recognized.

MR. ROMULO. My reason for supporting the amendment is based on the discussions I have had with representatives of the Filipino
majority owners of the international record carriers, and the subsequent memoranda they submitted to me. x x x

Their second point is that under the Corporation Code, the management and control of a corporation is vested in the board of directors,
not in the officers but in the board of directors. The officers are only agents of the board. And they believe that with 60 percent of the
equity, the Filipino majority stockholders undeniably control the board. Only on important corporate acts can the 40-percent foreign
equity exercise a veto, x x x.

x x x x45

MS. ROSARIO BRAID. Madam President.

THE PRESIDENT. Commissioner Rosario Braid is recognized.

MS. ROSARIO BRAID. Yes, in the interest of equal time, may I also read from a memorandum by the spokesman of the Philippine
Chamber of Communications on why they would like to maintain the present equity, I am referring to the 66 2/3. They would prefer to
have a 75-25 ratio but would settle for 66 2/3. x x x

xxxx
THE PRESIDENT. Just to clarify, would Commissioner Rosario Braid support the proposal of two-thirds rather than the 60 percent?

MS. ROSARIO BRAID. I have added a clause that will put management in the hands of Filipino citizens.

x x x x46

While they had differing views on the percentage of Filipino ownership of capital, it is clear that the framers of the Constitution intended
public utilities to be majority Filipino-owned and controlled. To ensure that Filipinos control public utilities, the framers of the
Constitution approved, as additional safeguard, the inclusion of the last sentence of Section 11, Article XII of the Constitution
commanding that "[t]he participation of foreign investors in the governing body of any public utility enterprise shall be limited to their
proportionate share in its capital, and all the executive and managing officers of such corporation or association must be citizens of the
Philippines." In other words, the last sentence of Section 11, Article XII of the Constitution mandates that (1) the participation of foreign
investors in the governing body of the corporation or association shall be limited to their proportionate share in the capital of such entity;
and (2) all officers of the corporation or association must be Filipino citizens.

Commissioner Rosario Braid proposed the inclusion of the phrase requiring the managing officers of the corporation or association to
be Filipino citizens specifically to prevent management contracts, which were designed primarily to circumvent the Filipinization of
public utilities, and to assure Filipino control of public utilities, thus:

MS. ROSARIO BRAID. x x x They also like to suggest that we amend this provision by adding a phrase which states: "THE
MANAGEMENT BODY OF EVERY CORPORATION OR ASSOCIATION SHALL IN ALL CASES BE CONTROLLED BY CITIZENS OF
THE PHILIPPINES." I have with me their position paper.

THE PRESIDENT. The Commissioner may proceed.

MS. ROSARIO BRAID. The three major international record carriers in the Philippines, which Commissioner Romulo mentioned –
Philippine Global Communications, Eastern Telecommunications, Globe Mackay Cable – are 40-percent owned by foreign multinational
companies and 60-percent owned by their respective Filipino partners. All three, however, also have management contracts with these
foreign companies – Philcom with RCA, ETPI with Cable and Wireless PLC, and GMCR with ITT. Up to the present time, the general
managers of these carriers are foreigners. While the foreigners in these common carriers are only minority owners, the foreign
multinationals are the ones managing and controlling their operations by virtue of their management contracts and by virtue of their
strength in the governing bodies of these carriers.47

xxxx

MR. OPLE. I think a number of us have agreed to ask Commissioner Rosario Braid to propose an amendment with respect to the
operating management of public utilities, and in this amendment, we are associated with Fr. Bernas, Commissioners Nieva and
Rodrigo. Commissioner Rosario Braid will state this amendment now.

Thank you.

MS. ROSARIO BRAID. Madam President.

THE PRESIDENT. This is still on Section 15.

MS. ROSARIO BRAID. Yes.

MR. VILLEGAS. Yes, Madam President.

xxxx

MS. ROSARIO BRAID. Madam President, I propose a new section to read: ‘THE MANAGEMENT BODY OF EVERY CORPORATION
OR ASSOCIATION SHALL IN ALL CASES BE CONTROLLED BY CITIZENS OF THE PHILIPPINES."

This will prevent management contracts and assure control by Filipino citizens. Will the committee assure us that this
amendment will insure that past activities such as management contracts will no longer be possible under this amendment?

xxxx

FR. BERNAS. Madam President.

THE PRESIDENT. Commissioner Bernas is recognized.


FR. BERNAS. Will the committee accept a reformulation of the first part?

MR. BENGZON. Let us hear it.

FR. BERNAS. The reformulation will be essentially the formula of the 1973 Constitution which reads: "THE PARTICIPATION OF
FOREIGN INVESTORS IN THE GOVERNING BODY OF ANY PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED TO THEIR
PROPORTIONATE SHARE IN THE CAPITAL THEREOF AND..."

MR. VILLEGAS. "ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH CORPORATIONS AND ASSOCIATIONS MUST BE
CITIZENS OF THE PHILIPPINES."

MR. BENGZON. Will Commissioner Bernas read the whole thing again?

FR. BERNAS. "THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING BODY OF ANY PUBLIC UTILITY
ENTERPRISE SHALL BE LIMITED TO THEIR PROPORTIONATE SHARE IN THE CAPITAL THEREOF..." I do not have the rest of the
copy.

MR. BENGZON. "AND ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH CORPORATIONS OR ASSOCIATIONS MUST
BE CITIZENS OF THE PHILIPPINES." Is that correct?

MR. VILLEGAS. Yes.

MR. BENGZON. Madam President, I think that was said in a more elegant language. We accept the amendment. Is that all right with
Commissioner Rosario Braid?

MS. ROSARIO BRAID. Yes.

xxxx

MR. DE LOS REYES. The governing body refers to the board of directors and trustees.

MR. VILLEGAS. That is right.

MR. BENGZON. Yes, the governing body refers to the board of directors.

MR. REGALADO. It is accepted.

MR. RAMA. The body is now ready to vote, Madam President.

VOTING

xxxx

The results show 29 votes in favor and none against; so the proposed amendment is approved.

xxxx

THE PRESIDENT. All right. Can we proceed now to vote on Section 15?

MR. RAMA. Yes, Madam President.

THE PRESIDENT. Will the chairman of the committee please read Section 15?

MR. VILLEGAS. The entire Section 15, as amended, reads: "No franchise, certificate, or any other form of authorization for the
operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the
laws of the Philippines at least 60 PERCENT OF WHOSE CAPITAL is owned by such citizens." May I request Commissioner Bengzon
to please continue reading.

MR. BENGZON. "THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING BODY OF ANY PUBLIC UTILITY
ENTERPRISE SHALL BE LIMITED TO THEIR PROPORTIONATE SHARE IN THE CAPITAL THEREOF AND ALL THE EXECUTIVE
AND MANAGING OFFICERS OF SUCH CORPORATIONS OR ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES."
MR. VILLEGAS. "NOR SHALL SUCH FRANCHISE, CERTIFICATE OR AUTHORIZATION BE EXCLUSIVE IN CHARACTER OR FOR
A PERIOD LONGER THAN TWENTY-FIVE YEARS RENEWABLE FOR NOT MORE THAN TWENTY-FIVE YEARS. Neither shall any
such franchise or right be granted except under the condition that it shall be subject to amendment, alteration, or repeal by Congress
when the common good so requires. The State shall encourage equity participation in public utilities by the general public."

VOTING

xxxx

The results show 29 votes in favor and 4 against; Section 15, as amended, is approved. 48 (Emphasis supplied)

The last sentence of Section 11, Article XII of the 1987 Constitution, particularly the provision on the limited participation of foreign
investors in the governing body of public utilities, is a reiteration of the last sentence of Section 5, Article XIV of the 1973
Constitution,49 signifying its importance in reserving ownership and control of public utilities to Filipino citizens.

VIII.
The undisputed facts

There is no dispute, and respondents do not claim the contrary, that (1) foreigners own 64.27% of the common shares of PLDT, which
class of shares exercises the sole right to vote in the election of directors, and thus foreigners control PLDT; (2) Filipinos own only
35.73% of PLDT’s common shares, constituting a minority of the voting stock, and thus Filipinos do not control PLDT; (3) preferred
shares, 99.44% owned by Filipinos, have no voting rights; (4) preferred shares earn only 1/70 of the dividends that common shares
earn;50 (5) preferred shares have twice the par value of common shares; and (6) preferred shares constitute 77.85% of the authorized
capital stock of PLDT and common shares only 22.15%.

Despite the foregoing facts, the Court did not decide, and in fact refrained from ruling on the question of whether PLDT violated the 60-
40 ownership requirement in favor of Filipino citizens in Section 11, Article XII of the 1987 Constitution. Such question indisputably calls
for a presentation and determination of evidence through a hearing, which is generally outside the province of the Court’s jurisdiction,
but well within the SEC’s statutory powers. Thus, for obvious reasons, the Court limited its decision on the purely legal and threshold
issue on the definition of the term "capital" in Section 11, Article XII of the Constitution and directed the SEC to apply such definition in
determining the exact percentage of foreign ownership in PLDT.

IX.
PLDT is not an indispensable party;
SEC is impleaded in this case.

In his petition, Gamboa prays, among others:

xxxx

5. For the Honorable Court to issue a declaratory relief that ownership of common or voting shares is the sole basis in determining
foreign equity in a public utility and that any other government rulings, opinions, and regulations inconsistent with this declaratory relief
be declared unconstitutional and a violation of the intent and spirit of the 1987 Constitution;

6. For the Honorable Court to declare null and void all sales of common stocks to foreigners in excess of 40 percent of the total
subscribed common shareholdings; and

7. For the Honorable Court to direct the Securities and Exchange Commission and Philippine Stock Exchange to require PLDT to
make a public disclosure of all of its foreign shareholdings and their actual and real beneficial owners.

Other relief(s) just and equitable are likewise prayed for. (Emphasis supplied)

As can be gleaned from his prayer, Gamboa clearly asks this Court to compel the SEC to perform its statutory duty to investigate
whether "the required percentage of ownership of the capital stock to be owned by citizens of the Philippines has been complied with
[by PLDT] as required by x x x the Constitution."51 Such plea clearly negates SEC’s argument that it was not impleaded.

Granting that only the SEC Chairman was impleaded in this case, the Court has ample powers to order the SEC’s compliance with its
directive contained in the 28 June 2011 Decision in view of the far-reaching implications of this case. In Domingo v. Scheer,52 the Court
dispensed with the amendment of the pleadings to implead the Bureau of Customs considering (1) the unique backdrop of the case; (2)
the utmost need to avoid further delays; and (3) the issue of public interest involved. The Court held:

The Court may be curing the defect in this case by adding the BOC as party-petitioner. The petition should not be dismissed because
the second action would only be a repetition of the first. In Salvador, et al., v. Court of Appeals, et al., we held that this Court has full
powers, apart from that power and authority which is inherent, to amend the processes, pleadings, proceedings and decisions b y
substituting as party-plaintiff the real party-in-interest. The Court has the power to avoid delay in the disposition of this case, to
order its amendment as to implead the BOC as party-respondent. Indeed, it may no longer be necessary to do so taking into
account the unique backdrop in this case, involving as it does an issue of public interest. After all, the Office of the Solicitor
General has represented the petitioner in the instant proceedings, as well as in the appellate court, and maintained the validity of the
deportation order and of the BOC’s Omnibus Resolution. It cannot, thus, be claimed by the State that the BOC was not afforded its day
in court, simply because only the petitioner, the Chairperson of the BOC, was the respondent in the CA, and the petitioner in the instant
recourse. In Alonso v. Villamor, we had the occasion to state:

There is nothing sacred about processes or pleadings, their forms or contents. Their sole purpose is to facilitate the
application of justice to the rival claims of contending parties. They were created, not to hinder and delay, but to facilitate and
promote, the administration of justice. They do not constitute the thing itself, which courts are always striving to secure to litigants. They
are designed as the means best adapted to obtain that thing. In other words, they are a means to an end. When they lose the character
of the one and become the other, the administration of justice is at fault and courts are correspondingly remiss in the performance of
their obvious duty.53 (Emphasis supplied)

In any event, the SEC has expressly manifested54 that it will abide by the Court’s decision and defer to the Court’s definition of
the term "capital" in Section 11, Article XII of the Constitution. Further, the SEC entered its special appearance in this case
and argued during the Oral Arguments, indicating its submission to the Court’s jurisdiction. It is clear, therefore, that there
exists no legal impediment against the proper and immediate implementation of the Court’s directive to the SEC.

PLDT is an indispensable party only insofar as the other issues, particularly the factual questions, are concerned. In other words, PLDT
must be impleaded in order to fully resolve the issues on (1) whether the sale of 111,415 PTIC shares to First Pacific violates the
constitutional limit on foreign ownership of PLDT; (2) whether the sale of common shares to foreigners exceeded the 40 percent limit on
foreign equity in PLDT; and (3) whether the total percentage of the PLDT common shares with voting rights complies with the 60-40
ownership requirement in favor of Filipino citizens under the Constitution for the ownership and operation of PLDT. These issues
indisputably call for an examination of the parties’ respective evidence, and thus are clearly within the jurisdiction of the SEC. In short,
PLDT must be impleaded, and must necessarily be heard, in the proceedings before the SEC where the factual issues will be
thoroughly threshed out and resolved.

Notably, the foregoing issues were left untouched by the Court. The Court did not rule on the factual issues raised by Gamboa,
except the single and purely legal issue on the definition of the term "capital" in Section 11, Article XII of the Constitution. The Court
confined the resolution of the instant case to this threshold legal issue in deference to the fact-finding power of the SEC.

Needless to state, the Court can validly, properly, and fully dispose of the fundamental legal issue in this case even without the
participation of PLDT since defining the term "capital" in Section 11, Article XII of the Constitution does not, in any way, depend on
whether PLDT was impleaded. Simply put, PLDT is not indispensable for a complete resolution of the purely legal question in this
case.55 In fact, the Court, by treating the petition as one for mandamus, 56 merely directed the SEC to apply the Court’s definition of the
term "capital" in Section 11, Article XII of the Constitution in determining whether PLDT committed any violation of the said
constitutional provision. The dispositive portion of the Court’s ruling is addressed not to PLDT but solely to the SEC, which is
the administrative agency tasked to enforce the 60-40 ownership requirement in favor of Filipino citizens in Section 11, Article
XII of the Constitution.

Since the Court limited its resolution on the purely legal issue on the definition of the term "capital" in Section 11, Article XII of the 1987
Constitution, and directed the SEC to investigate any violation by PLDT of the 60-40 ownership requirement in favor of Filipino citizens
under the Constitution,57 there is no deprivation of PLDT’s property or denial of PLDT’s right to due process, contrary to Pangilinan and
Nazareno’s misimpression. Due process will be afforded to PLDT when it presents proof to the SEC that it complies, as it claims here,
with Section 11, Article XII of the Constitution.

X.
Foreign Investments in the Philippines

Movants fear that the 28 June 2011 Decision would spell disaster to our economy, as it may result in a sudden flight of existing foreign
investors to "friendlier" countries and simultaneously deterring new foreign investors to our country. In particular, the PSE claims that
the 28 June 2011 Decision may result in the following: (1) loss of more than ₱ 630 billion in foreign investments in PSE-listed shares;
(2) massive decrease in foreign trading transactions; (3) lower PSE Composite Index; and (4) local investors not investing in PSE-listed
shares.58

Dr. Bernardo M. Villegas, one of the amici curiae in the Oral Arguments, shared movants’ apprehension. Without providing specific
details, he pointed out the depressing state of the Philippine economy compared to our neighboring countries which boast of growing
economies. Further, Dr. Villegas explained that the solution to our economic woes is for the government to "take-over" strategic
industries, such as the public utilities sector, thus:

JUSTICE CARPIO:
I would like also to get from you Dr. Villegas if you have additional information on whether this high FDI 59 countries in East Asia have
allowed foreigners x x x control [of] their public utilities, so that we can compare apples with apples.

DR. VILLEGAS:

Correct, but let me just make a comment. When these neighbors of ours find an industry strategic, their solution is not to "Filipinize" or
"Vietnamize" or "Singaporize." Their solution is to make sure that those industries are in the hands of state enterprises. So, in
these countries, nationalization means the government takes over. And because their governments are competent and honest
enough to the public, that is the solution. x x x 60 (Emphasis supplied)

If government ownership of public utilities is the solution, then foreign investments in our public utilities serve no purpose. Obviously,
there can never be foreign investments in public utilities if, as Dr. Villegas claims, the "solution is to make sure that those industries are
in the hands of state enterprises." Dr. Villegas’s argument that foreign investments in telecommunication companies like PLDT are
badly needed to save our ailing economy contradicts his own theory that the solution is for government to take over these companies.
Dr. Villegas is barking up the wrong tree since State ownership of public utilities and foreign investments in such industries are
diametrically opposed concepts, which cannot possibly be reconciled.

In any event, the experience of our neighboring countries cannot be used as argument to decide the present case differently for two
reasons. First, the governments of our neighboring countries have, as claimed by Dr. Villegas, taken over ownership and control of their
strategic public utilities like the telecommunications industry. Second, our Constitution has specific provisions limiting foreign ownership
in public utilities which the Court is sworn to uphold regardless of the experience of our neighboring countries.

In our jurisdiction, the Constitution expressly reserves the ownership and operation of public utilities to Filipino citizens, or corporations
or associations at least 60 percent of whose capital belongs to Filipinos. Following Dr. Villegas’s claim, the Philippines appears to be
more liberal in allowing foreign investors to own 40 percent of public utilities, unlike in other Asian countries whose governments own
and operate such industries.

XI.
Prospective Application of Sanctions

In its Motion for Partial Reconsideration, the SEC sought to clarify the reckoning period of the application and imposition of appropriate
sanctions against PLDT if found violating Section 11, Article XII of the Constitution.1avvphi1

As discussed, the Court has directed the SEC to investigate and determine whether PLDT violated Section 11, Article XII of the
Constitution. Thus, there is no dispute that it is only after the SEC has determined PLDT’s violation, if any exists at the time of the
commencement of the administrative case or investigation, that the SEC may impose the statutory sanctions against PLDT. In other
words, once the 28 June 2011 Decision becomes final, the SEC shall impose the appropriate sanctions only if it finds after due hearing
that, at the start of the administrative case or investigation, there is an existing violation of Section 11, Article XII of the Constitution.
Under prevailing jurisprudence, public utilities that fail to comply with the nationality requirement under Section 11, Article XII and the
FIA can cure their deficiencies prior to the start of the administrative case or investigation. 61

XII.
Final Word

The Constitution expressly declares as State policy the development of an economy "effectively controlled" by Filipinos. Consistent
with such State policy, the Constitution explicitly reserves the ownership and operation of public utilities to Philippine nationals, who are
defined in the Foreign Investments Act of 1991 as Filipino citizens, or corporations or associations at least 60 percent of whose
capital with voting rights belongs to Filipinos. The FIA’s implementing rules explain that "[f]or stocks to be deemed owned and held by
Philippine citizens or Philippine nationals, mere legal title is not enough to meet the required Filipino equity. Full beneficial ownership
of the stocks, coupled with appropriate voting rights is essential." In effect, the FIA clarifies, reiterates and confirms the
interpretation that the term "capital" in Section 11, Article XII of the 1987 Constitution refers to shares with voting rights, as well as
with full beneficial ownership. This is precisely because the right to vote in the election of directors, coupled with full beneficial
ownership of stocks, translates to effective control of a corporation.

Any other construction of the term "capital" in Section 11, Article XII of the Constitution contravenes the letter and intent of the
Constitution. Any other meaning of the term "capital" openly invites alien domination of economic activities reserved exclusively to
Philippine nationals. Therefore, respondents’ interpretation will ultimately result in handing over effective control of our national
economy to foreigners in patent violation of the Constitution, making Filipinos second-class citizens in their own country.

Filipinos have only to remind themselves of how this country was exploited under the Parity Amendment, which gave Americans the
same rights as Filipinos in the exploitation of natural resources, and in the ownership and control of public utilities, in the Philippines. To
do this the 1935 Constitution, which contained the same 60 percent Filipino ownership and control requirement as the present 1987
Constitution, had to be amended to give Americans parity rights with Filipinos. There was bitter opposition to the Parity
Amendment62 and many Filipinos eagerly awaited its expiration. In late 1968, PLDT was one of the American-controlled public utilities
that became Filipino-controlled when the controlling American stockholders divested in anticipation of the expiration of the Parity
Amendment on 3 July 1974.63 No economic suicide happened when control of public utilities and mining corporations passed to
Filipinos’ hands upon expiration of the Parity Amendment.

Movants’ interpretation of the term "capital" would bring us back to the same evils spawned by the Parity Amendment, effectively
giving foreigners parity rights with Filipinos, but this time even without any amendment to the present Constitution. Worse,
movants’ interpretation opens up our national economy to effective control not only by Americans but also by all foreigners, be they
Indonesians, Malaysians or Chinese, even in the absence of reciprocal treaty arrangements. At least the Parity Amendment, as
implemented by the Laurel-Langley Agreement, gave the capital-starved Filipinos theoretical parity – the same rights as Americans to
exploit natural resources, and to own and control public utilities, in the United States of America. Here, movants’ interpretation would
effectively mean a unilateral opening up of our national economy to all foreigners, without any reciprocal arrangements. That would
mean that Indonesians, Malaysians and Chinese nationals could effectively control our mining companies and public utilities while
Filipinos, even if they have the capital, could not control similar corporations in these countries.

The 1935, 1973 and 1987 Constitutions have the same 60 percent Filipino ownership and control requirement for public utilities like
PLOT. Any deviation from this requirement necessitates an amendment to the Constitution as exemplified by the Parity Amendment.
This Court has no power to amend the Constitution for its power and duty is only to faithfully apply and interpret the Constitution.

WHEREFORE, we DENY the motions for reconsideration WITH FINALITY. No further pleadings shall be entertained.

CONCEPT BUILDERS, INC., Petitioner, v. THE NATIONAL LABOR RELATIONS, COMMISSION,(First Division);
and Norberto Marabe, Rodolfo Raquel, Cristobal Riego, Manuel Gillego, Palcronio Giducos, Pedro Aboigar,
Norberto Comendador, Rogelio Salut, Emilio Garcia, Jr., Mariano Rio, Paulina Basea, Alfredo Albera,
Paquito Salut, Domingo Guarino, Romeo Galve, Dominador Sabina, Felipe Radiana, Gavino Sualibio,
Moreno Escares, Ferdinand Torres, Felipe Basilan, and Ruben Robalos, Respondents.

The Law Firm of Araullo and Raymundo for Petitioner.

Ciriaco S. Cruz for Private Respondent.

SYLLABUS

1. COMMERCIAL LAW; CORPORATION LAW; DOCTRINE OF PIERCING THE VEIL OF CORPORATE ENTITY; WHEN
APPLICABLE. — It is a fundamental principle of corporation law that a corporation is an entity separate and distinct
from its stockholders and from other corporations to which it may be connected. But, this separate and distinct
personality of a corporation is merely a fiction created by law for convenience and to promote justice. So when the
notion of separate juridical personality is used to defeat public convenience, justify wrong, protect fraud or defend
crime, or is used as a device to defeat the labor laws, this separate personality of the corporation may be disregarded
or the veil of corporate fiction pierced. This is true likewise when the corporation is merely an adjunct, a business
conduit or an alter ego of another corporation.

2. ID.; ID.; ID.; PROBATIVE FACTORS OF IDENTITY THAT WILL JUSTIFY THE APPLICATION THEREOF. — The
conditions under which the juridical entity may be disregarded vary according to the peculiar facts and circumstances
of each case. No hard and fast rule can be accurately laid down, but certainly, there are some probative factors of
identity that will justify the application of the doctrine of piercing the corporate veil, to wit: "1. Stock ownership by
one or common ownership of both corporations. 2. Identity of directors and officers. 3. The manner of keeping
corporate books and records. 4. Methods of conducting the business."cralaw virtua1aw library

3. ID.; ID.; ID.; TEST IN DETERMINING THE APPLICABILITY THEREOF. — The test in determining the applicability of
the doctrine of piercing the veil of corporation fiction is as follows: "1. Control, not mere majority or complete stock
control, but complete domination, not only of finances but of policy and business practice in respect to the transaction
attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its
own; 2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of
a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiff’s legal rights; and 3.
The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of. The absence
of any one of these elements prevent ‘piercing the corporate veil.’ In applying the ‘instrumentality’ or ‘alter ego’
doctrine, the courts are concerned with reality and not form, with how the corporation operated and the individual
defendant’s relationship to that operation."cralaw virtua1aw library

4. ID.; ID.; ID.; APPLICABLE IN CASE AT BAR. — In this case, the NLRC noted that, while petitioner claimed that it
ceased its business operations on April 29, 1986, it filed an Information Sheet with the Securities and Exchange
Commission on May 15, 1987, stating that its office address is at 355 Maysan Road, Valenzuela, Metro Manila. On the
other hand, HPPI, the third-party claimant, submitted on the same day, a similar information sheet stating that its
office address is at 355 Maysan Road, Valenzuela, Metro Manila. Furthermore, the NLRC stated that: "Both information
sheets were filed by the same Virgilio 0. Casiño as the corporate Secretary of both corporations. It would also not be
amiss to note that both corporations had the same president, the same board of directors, the same corporate
officers, and substantially the same subscribers. From the foregoing, it appears that, among other things, the
respondent (herein petitioner-) and the third-party claimant shared the same address an/or premises. Under this
circumstances, (sic) it cannot be said that the property levied upon by the sheriff were not of respondents." Clearly,
petitioner ceased its business operations in order to evade the payment to private respondents of back wages and to
bar their reinstatement to their former positions. HPPI is obviously a business conduit of petitioner corporation and its
emergence was skillfully orchestrated to avoid the financial liability that already attached to petitioner corporation

5. ID.; NATIONAL LABOR RELATIONS COMMISSION MANUAL OF EXECUTION OF JUDGMENT; SECTION 3, RULE VII
THEREOF; PROPERLY OBSERVED IN CASE AT BAR. — In view of the failure of the sheriff, in the case at bar, to effect a
levy upon the property subject of the execution, private respondents had no other recourse but to apply for a break-
open order after the third-party claim of HPPI was dismissed for lack of merit by the NLRC. This is in consonance with
Section 3, Rule VII of the NLRC Manual of Execution of Judgment which provides that: "Should the losing party, his
grant or representative, refuse or prohibit the Sheriff or his representative entry to the place where the property
subject of execution is located or kept, the judgment creditor may apply to the Commissioner or Labor Arbiter
concerned for a break-open order."

DECISION

HERMOSISIMA, JR., J.:

The corporate mask may be lifted and the corporate veil may be pierced when a corporation is just but the alter ego
of a person or of another corporation. Where badges of fraud exist; where public convenience is defeated; where a
wrong is sought to be justified thereby, the corporate fiction or the notion of legal entity should come to naught. The
law in these instances will regard the corporation as a mere association of persons and, in case of two corporations,
merge them into one.

Thus, where a sister corporation is used as a shield to evade a corporation’s subsidiary liability for damages, the
corporation may not be heard to say that it has a personality separate and distinct from the other corporation. The
piercing of the corporate veil comes into play.

This special civil action ostensibly raises the question of whether the National Labor Relations Commission committed
grave abuse of discretion when it issued a "break-open order" to the sheriff to be enforced against personal property
found in the premises of petitioner’s sister company.

Petitioner Concept Builders, Inc., a domestic corporation, with principal office at 355 Maysan Road, Valenzuela, Metro
Manila, is engaged in the construction business. Private respondents were employed by said company as laborers,
carpenters and riggers.

On November, 1981, private respondents were served individual written notices of termination of employment by
petitioner, effective on November 30, 1981. It was stated in the individual notices that their contracts of employment
had expired and the project in which they were hired had been completed.

Public respondent found it to be, the fact, however, that at the time of the termination of private respondent’s
employment, the project in which they were hired had not yet been finished and completed. Petitioner had to engage
the services of sub-contractors whose workers performed the functions of private respondents.

Aggrieved, private respondents filed a complaint for illegal dismissal, unfair labor practice and non-payment of their
legal holiday pay, overtime pay and thirteenth-month pay against petitioner.

On December 19, 1984, the Labor Arbiter rendered judgment 1 ordering petitioner to reinstate private respondents
and to pay them back wages equivalent to one year or three hundred working days.

On November 27, 1985, the National Labor Relations Commission (NLRC) dismissed the motion for reconsideration
filed by petitioner on the ground that the said decision had already become final and executory. 2

On October 16, 1986, the NLRC Research and Information Department made the finding that private respondents’
back wages amounted to P199,800.00. 3

On October 29, 1986, the Labor Arbiter issued a writ of execution directing the sheriff to execute the Decision, dated
December 19, 1984. The writ was partially satisfied through garnishment of sums from petitioner’s debtor, the
Metropolitan Waterworks and Sewerage Authority, in the amount of P81,385.34. Said amount was turned over to the
cashier of the NLRC.

On February 1, 1989, an Alias Writ of Execution was issued by the Labor Arbiter directing the sheriff to collect from
herein petitioner the sum of P117,414.76, representing the balance of the judgment award, and to reinstate private
respondents to their former positions.

On July 13, 1989, the sheriff issued a report stating that he tried to serve the alias writ of execution on petitioner
through the security guard on duty but the service was refused on the ground that petitioner no longer occupied the
premises.

On September 26, 1986, upon motion of private respondents, the Labor Arbiter issued a second alias writ of
execution.

The said writ had not been enforced by the special sheriff because, as stated in his progress report, dated November
2, 1989:chanrob1es virtual 1aw library

1. All the employees inside petitioner’s premises at 355 Maysan Road, Valenzuela, Metro Manila, claimed that they
were employees of Hydro Pipes Philippines, Inc. (HPPI) and not by respondent;

2. Levy was made upon personal properties he found in the premises;

3. Security guards with high-powered guns prevented him from removing the properties he had levied upon. 4

The said special sheriff recommended that a, "break-open order" be issued to enable him to enter petitioner’s
premises so that he could proceed with the public auction sale of the aforesaid personal properties on November 7,
1989.

On November 6, 1989, a certain Dennis Cuyegkeng filed a third-party claim with the Labor Arbiter alleging that the
properties sought to be levied upon by the sheriff were owned by Hydro (Phils.), Inc. (HPPI) of which he is the Vice-
President.

On November 23, 1989, private respondents filed a "Motion for Issuance of a Break-Open Order," alleging that HPPI
and petitioner corporation were owned by the same incorporator/stockholders. They also alleged that petitioner
temporarily suspended its business operations in order to evade its legal obligations to them and that private
respondents were willing to post an indemnity bond to answer for any damages which petitioner and HPPI may suffer
because of the issuance of the break-open order.

In support of their claim against HPPI, private respondents presented duly certified copies of the General Informations
Sheet, dated May 15, 1987, submitted by petition or to the Securities Exchange Commission (SEC) and the General
Information Sheet, dated May 15, 1987, submitted by HPPI to the Securities and Exchange Commission.

The General Information Sheet submitted by the petitioner revealed the following:jgc:chanrobles.com.ph

"1. Breakdown of Subscribed Capital

Name of Stockholder Amount Subscribed

HPPI P6,999,500.00

Antonio W. Lim 2,900,000.00

Dennis S. Cuyegkeng 300.00

Elisa C. Lim 100,000.00

Teodulo R. Dino 100.00

Virgilio O. Casino 100.00

2. Board of Directors

Antonio W. Lim Chairman

Dennis S. Cuyegkeng Member


Elisa C. Lim Member

Teodulo R. Dino Member

Virgilio O. Casino Member

3. Corporate Officers

Antonio W. Lim President

Dennis S. Cuyegkeng Assistant to the President

Elisa O. Lim Treasurer

Virgilio O. Casino Corporate Secretary

4. Principal Office

355 Maysan Road

Valenzuela, Metro Manila." 5

On the other hand, the General Information Sheet of HPPI revealed the following:jgc:chanrobles.com.ph

"1. Breakdown of Subscribed Capital

Name of Stockholder Amount Subscribed

Antonio W. Lim P400,000.00

Elisa C. Lim 57,700.00

AWL Trading 455,000.00

Dennis S. Cuyegkeng 40,100.00

Teodulo R. Dino 100.00

Virgilio O. Casino 100 00

2. Board of Directors

Antonio W. Lim Chairman

Elisa C. Lim Member

Dennis S. Cuyegkeng Member

Virgilio O. Casino Member

Teodulo R. Dino Member

3. Corporate Officers

Antonio W. Lim President

Dennis S. Cuyegkeng Assistant to the President

Elisa C. Lim Treasurer

Virgilio O. Casino Corporate Secretary

4. Principal Office
355 Maysan Road, Valenzuela, Metro Manila." 6

On February 1, 1990, HPPI filed an Opposition to private respondents’ motion for issuance of a break-open order,
contending that HPPI is a corporation which is separate and distinct from petitioner. HPPI also alleged that the two
corporations are engaged in two different kinds of businesses, i.e., HPPI is a manufacturing firm while petitioner was
then engaged in constitution.

On March 2, 1990, the Labor Arbiter issued an Order which denied private respondents’ motion for break-open order.

Private respondents then appealed to the NLRC. On April 23, 1992, the NLRC set aside the order of the Labor Arbiter,
issued a break-open order and directed private respondents to file a bond. Thereafter, it directed the sheriff to
proceed with the auction sale of the properties already levied upon. It dismissed the third-party claim for lack of
merit.

Petitioner moved for reconsideration but the motion was denied by the NLRC in a Resolution, dated December 3,
1992.

Hence, the resort to the present petition.

Petitioner alleges that the NLRC committed grave abuse of discretion when it ordered the execution of its decision
despite a third-party claim on the levied property. Petitioner further contends, that the doctrine of piercing the
corporate veil should not have been applied, in this case, in the absence of any showing that it created HPPI in order
to evade its liability to private respondents. It also contends that HPPI is engaged in the manufacture and sale of
steel, concrete and iron pipes, a business which is distinct and separate from petitioner’s construction business.
Hence, it is of no consequence that petitioner and HPPI shared the same premises, the same President and the same
set of officers and subscribers. 7

We find petitioner’s contention to be unmeritorious.

It is a fundamental principle of corporation law that a corporation is an entity separate and distinct from its
stockholders and from other corporations to which it may be connected. 8 But, this separate and distinct personality
of a corporation is merely a fiction created by law for convenience and to promote justice. 9 So, when the notion of
separate juridical personality is used to defeat public convenience, justify wrong, protect fraud or defend crime, or is
used as a device to defeat the labor laws, 10 this separate personality of the corporation may be disregarded or the
veil of corporate fiction pierced. 11 This is true likewise when the corporation is merely an adjunct, a business conduit
or an alter ego of another corporation. 12

The conditions under which the juridical entity may be disregarded vary according to the peculiar facts and
circumstances of each case. No hard and fast rule can be accurately laid down, but certainly, there are some probative
factors of identity that will justify the application of the doctrine of piercing the corporate veil, to
wit:jgc:chanrobles.com.ph

"1. Stock ownership by one or common ownership of both corporations.

2. Identity of directors and officers.

3. The manner of keeping corporate books and records.

4. Methods of conducting the business." 13

The SEC en banc explained the "instrumentality rule" which the courts have applied in disregarding the separate
juridical personality of corporations as follows:jgc:chanrobles.com.ph

"Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere
instrumentality or adjunct of the other, the fiction of the corporate entity of the ‘instrumentality’ may be disregarded.
The control necessary to invoke the rule is not majority or even complete stock control but such domination of
finances, policies and practices that the controlled corporation has, so to speak, no separate mind, will or existence of
its own, and is but a conduit for its principal. It must be kept in mind that the control must be shown to have been
exercised at the time the acts complained of took place. Moreover, the control and breach of duty must proximately
cause the injury or unjust loss for which the complaint is made."cralaw virtua1aw library

The test in determining the applicability of the doctrine of piercing the veil of corporate fiction is as
follows:jgc:chanrobles.com.ph

"1. Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy
and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at
the time no separate mind, will or existence of its own;

2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a
statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiff’s legal rights; and

3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained
of:chanrob1es virtual 1aw library

The absence of any one of these elements prevents ‘piercing the corporate veil’. In applying the ‘instrumentality’ or
‘alter ego’ doctrine, the courts are concerned with reality and not form, with how the corporation operated and the
individual defendant’s relationship to that operation." 14

Thus, the question of whether a corporation is a mere alter ego, a mere sheet or paper corporation, a sham or a
subterfuge is purely one of fact. 15

In this case, the NLRC noted that, while petitioner claimed that it ceased its business operations on April 29, 1986, it
filed an Information Sheet with the Securities and Exchange Commission on May 15, 1987, stating that its office
address is at 355 Maysan Road, Valenzuela, Metro Manila. On the other hand, HPPI, the third-party claimant,
submitted on the same day, a similar information sheet stating that its office address is at 355 Maysan Road,
Valenzuela, Metro Manila.

Furthermore, the NLRC stated that:jgc:chanrobles.com.ph

"Both information sheets were filed by the same Virgilio O. Casiño as the corporate secretary of both corporations. It
would also not be amiss to note that both corporations had the same president, the same board of directors, the same
corporate officers, and substantially the same subscribers.

From the foregoing, it appears that, among other things, the respondent (herein petitioner) and the third-party
claimant shared the same address and/or premises. Under this circumstances, (sic) it cannot be said that the property
levied upon by the sheriff were not of respondents. 16

Clearly, petitioner ceased its business operations in order to evade the payment to private respondents of back wages
and to bar their reinstatement to their former positions. HPPI is obviously a business conduit of petitioner corporation
and its emergence was skillfully orchestrated to avoid the financial liability that already attached to petitioner
corporation.

The facts in this case are analogous to Claparols v. Court of Industrial Relations, 17 where we had the occasion to
rule:jgc:chanrobles.com.ph

"Respondent court’s findings that indeed the Claparols Steel and Nail Plant, which ceased operation of June 30, 1957,
was SUCCEEDED by the Claparols Steel Corporation effective the next day, July l, 1957, up to December 7, 1962,
when the latter finally ceased to operate, were not disputed by petitioner. It is very clear that the latter corporation
was a continuation and successor of the first entity . . . Both predecessors and successor were owned and controlled
by petitioner Eduardo Claparols and there was no break in the succession and continuity of the same business. This
‘avoiding-the-liability’ scheme is very patent, considering that 90% of the subscribed shares of stock of the Claparols
Steel Corporation (the second corporation) was owned by Respondent. . . Claparols himself, and an the assets of the
dissolved Claparols Steel and Nail Plant were turned over to the emerging Claparols Steel Corporation.

It is very obvious that the second corporation seeks the protective shield of a corporate fiction whose veil in the
present case could, and should, be pierced as it was deliberately and maliciously designed to evade its financial
obligation to its employees."cralaw virtua1aw library

In view of the failure of the sheriff, in the case at bar, to effect a levy upon the property subject of the execution,
private respondents had no other recourse but to apply for a break-open order after the third-party claim of HPPI was
dismissed for lack of merit by the NLRC. This is in consonance with Section 3, Rule VII of the NLRC Manual of
Execution of Judgment which provides that:jgc:chanrobles.com.ph

"Should the losing party, his agent or representative, refuse or prohibit the Sheriff or his representative entry to the
place where the property subject of execution is located or kept, the judgment creditor may apply to the Commission
or Labor Arbiter concerned for a break-open order."cralaw virtua1aw library

Furthermore, our perusal of the records shows that the twin requirements of due notice and hearing were complied
with. Petitioner and the third-party claimant were given the opportunity to submit evidence in support of their claim.
Hence, the NLRC did not commit any grave abuse of discretion when it affirmed the break-open order issued by the
Labor Arbiter.

Finally, we do not find any reason to disturb the rule that factual findings of quasi-judicial agencies supported by
substantial evidence are binding on this Court and are entitled to great respect, in the absence of showing of grave
abuse of a discretion. 18

WHEREFORE, the petition is DISMISSED and the assailed resolutions of the NLRC, dated April 23, 1992 and December
3. 1992. are AFFIRMED.

SO ORDERED.
MARC II MARKETING, INC. AND LUCILA v. JOSON, PETITIONERS, VS. ALFREDO M. JOSON, RESPONDENT.

DECISION

PEREZ, J.:

In this Petition for Review on Certiorari under Rule 45 of the Rules of Court, herein petitioners Marc II Marketing, Inc.
and Lucila V. Joson assailed the Decision [1] dated 20 June 2005 of the Court of Appeals in CA-G.R. SP No. 76624 for
reversing and setting aside the Resolution [2] of the National Labor Relations Commission (NLRC) dated 15 October
2002, thereby affirming the Labor Arbiter's Decision [3] dated 1 October 2001 finding herein respondent Alfredo M.
Joson's dismissal from employment as illegal. In the questioned Decision, the Court of Appeals upheld the Labor
Arbiter's jurisdiction over the case on the basis that respondent was not an officer but a mere employee of petitioner
Marc II Marketing, Inc., thus, totally disregarding the latter's allegation of intra-corporate controversy. Nonetheless,
the Court of Appeals remanded the case to the NLRC for further proceedings to determine the proper amount of
monetary awards that should be given to respondent.cralaw

Assailed as well is the Court of Appeals Resolution [4] dated 7 March 2006 denying their Motion for Reconsideration.

Petitioner Marc II Marketing, Inc. (petitioner corporation) is a corporation duly organized and existing under and by
virtue of the laws of the Philippines. It is primarily engaged in buying, marketing, selling and distributing in retail or
wholesale for export or import household appliances and products and other items. [5] It took over the business
operations of Marc Marketing, Inc. which was made non-operational following its incorporation and registration with
the Securities and Exchange Commission (SEC). Petitioner Lucila V. Joson (Lucila) is the President and majority
stockholder of petitioner corporation. She was also the former President and majority stockholder of the defunct Marc
Marketing, Inc.

Respondent Alfredo M. Joson (Alfredo), on the other hand, was the General Manager, incorporator, director and
stockholder of petitioner corporation.

The controversy of this case arose from the following factual milieu:

Before petitioner corporation was officially incorporated, [6] respondent has already been engaged by petitioner Lucila,
in her capacity as President of Marc Marketing, Inc., to work as the General Manager of petitioner corporation. It was
formalized through the execution of a Management Contract [7] dated 16 January 1994 under the letterhead of Marc
Marketing, Inc. [8] as petitioner corporation is yet to be incorporated at the time of its execution. It was explicitly
provided therein that respondent shall be entitled to 30% of its net income for his work as General
Manager. Respondent will also be granted 30% of its net profit to compensate for the possible loss of opportunity to
work overseas. [9]

Pending incorporation of petitioner corporation, respondent was designated as the General Manager of Marc
Marketing, Inc., which was then in the process of winding up its business. For occupying the said position, respondent
was among its corporate officers by the express provision of Section 1, Article IV [10] of its by-laws. [11]

On 15 August 1994, petitioner corporation was officially incorporated and registered with the SEC. Accordingly, Marc
Marketing, Inc. was made non-operational. Respondent continued to discharge his duties as General Manager but this
time under petitioner corporation.

Pursuant to Section 1, Article IV [12] of petitioner corporation's by-laws, [13] its corporate officers are as follows:
Chairman, President, one or more Vice-President(s), Treasurer and Secretary. Its Board of Directors, however, may,
from time to time, appoint such other officers as it may determine to be necessary or proper.

Per an undated Secretary's Certificate, [14] petitioner corporation's Board of Directors conducted a meeting on 29
August 1994 where respondent was appointed as one of its corporate officers with the designation or title of General
Manager to function as a managing director with other duties and responsibilities that the Board of Directors may
provide and authorized. [15]

Nevertheless, on 30 June 1997, petitioner corporation decided to stop and cease its operations, as evidenced by an
Affidavit of Non-Operation [16] dated 31 August 1998, due to poor sales collection aggravated by the inefficient
management of its affairs. On the same date, it formally informed respondent of the cessation of its business
operation. Concomitantly, respondent was apprised of the termination of his services as General Manager since his
services as such would no longer be necessary for the winding up of its affairs. [17]

Feeling aggrieved, respondent filed a Complaint for Reinstatement and Money Claim against petitioners before the
Labor Arbiter which was docketed as NLRC NCR Case No. 00-03-04102-99.

In his complaint, respondent averred that petitioner Lucila dismissed him from his employment with petitioner
corporation due to the feeling of hatred she harbored towards his family. The same was rooted in the filing by
petitioner Lucila's estranged husband, who happened to be respondent's brother, of a Petition for Declaration of
Nullity of their Marriage. [18]

For the parties'™ failure to settle the case amicably, the Labor Arbiter required them to submit their respective
position papers. Respondent complied but petitioners opted to file a Motion to Dismiss grounded on the Labor
Arbiter's lack of jurisdiction as the case involved an intra-corporate controversy, which jurisdiction belongs to the SEC
[now with the Regional Trial Court (RTC)]. [19] Petitioners similarly raised therein the ground of prescription of
respondent's monetary claim.

On 5 September 2000, the Labor Arbiter issued an Order [20] deferring the resolution of petitioners' Motion to Dismiss
until the final determination of the case. The Labor Arbiter also reiterated his directive for petitioners to submit
position paper. Still, petitioners did not comply. Insisting that the Labor Arbiter has no jurisdiction over the case,
they instead filed an Urgent Motion to Resolve the Motion to Dismiss and the Motion to Suspend Filing of Position
Paper.

In an Order [21] dated 15 February 2001, the Labor Arbiter denied both motions and declared final the Order dated 5
September 2000. The Labor Arbiter then gave petitioners a period of five days from receipt thereof within which to
file position paper, otherwise, their Motion to Dismiss will be treated as their position paper and the case will be
considered submitted for decision.

Petitioners, through counsel, moved for extension of time to submit position paper. Despite the requested extension,
petitioners still failed to submit the same. Accordingly, the case was submitted for resolution.

On 1 October 2001, the Labor Arbiter rendered his Decision in favor of respondent. Its decretal portion reads as
follows:

WHEREFORE, premises considered, judgment is hereby rendered declaring [respondent's] dismissal from
employment illegal. Accordingly, [petitioners] are hereby ordered:

1. To reinstate [respondent] to his former or equivalent position without loss of seniority rights, benefits, and
privileges;
2. Jointly and severally liable to pay [respondent's] unpaid wages in the amount of P450,000.00 per month from
[26 March 1996] up to time of dismissal in the total amount of P6,300,000.00;
3. Jointly and severally liable to pay [respondent's] full backwages in the amount of P450,000.00 per month
from date of dismissal until actual reinstatement which at the time of promulgation amounted to
P21,600,000.00;
4. Jointly and severally liable to pay moral damages in the amount of P100,000.00 and attorney's fees in the
amount of 5% of the total monetary award. [22] [Emphasis supplied.

In the aforesaid Decision, the Labor Arbiter initially resolved petitioners' Motion to Dismiss by finding the ground of
lack of jurisdiction to be without merit. The Labor Arbiter elucidated that petitioners failed to adduce evidence to
prove that the present case involved an intra-corporate controversy. Also, respondent's money claim did not arise
from his being a director or stockholder of petitioner corporation but from his position as being its General
Manager. The Labor Arbiter likewise held that respondent was not a corporate officer under petitioner corporation's
by-laws. As such, respondent's complaint clearly arose from an employer-employee relationship, thus, subject to the
Labor Arbiter's jurisdiction.
The Labor Arbiter then declared respondent's dismissal from employment as illegal. Respondent, being a regular
employee of petitioner corporation, may only be dismissed for a valid cause and upon proper compliance with the
requirements of due process. The records, though, revealed that petitioners failed to present any evidence to justify
respondent's dismissal.

Aggrieved, petitioners appealed the aforesaid Labor Arbiter's Decision to the NLRC.

In its Resolution dated 15 October 2002, the NLRC ruled in favor of petitioners by giving credence to the Secretary's
Certificate, which evidenced petitioner corporation's Board of Directors'™ meeting in which a resolution was approved
appointing respondent as its corporate officer with designation as General Manager. Therefrom, the NLRC reversed
and set aside the Labor Arbiter's Decision dated 1 October 2001 and dismissed respondent's Complaint for want of
jurisdiction. [23]

The NLRC enunciated that the validity of respondent's appointment and termination from the position of General
Manager was made subject to the approval of petitioner corporation's Board of Directors. Had respondent been an
ordinary employee, such board action would not have been required. As such, it is clear that respondent was a
corporate officer whose dismissal involved a purely intra-corporate controversy. The NLRC went further by stating
that respondent's claim for 30% of the net profit of the corporation can only emanate from his right of ownership
therein as stockholder, director and/or corporate officer. Dividends or profits are paid only to stockholders or
directors of a corporation and not to any ordinary employee in the absence of any profit sharing scheme. In addition,
the question of remuneration of a person who is not a mere employee but a stockholder and officer of a corporation is
not a simple labor problem. Such matter comes within the ambit of corporate affairs and management and is an
intra-corporate controversy in contemplation of the Corporation Code. [24]

When respondent's Motion for Reconsideration was denied in another Resolution [25] dated 23 January 2003, he filed a
Petition for Certiorari with the Court of Appeals ascribing grave abuse of discretion on the part of the NLRC.

On 20 June 2005, the Court of Appeals rendered its now assailed Decision declaring that the Labor Arbiter has
jurisdiction over the present controversy. It upheld the finding of the Labor Arbiter that respondent was a mere
employee of petitioner corporation, who has been illegally dismissed from employment without valid cause and
without due process. Nevertheless, it ordered the records of the case remanded to the NLRC for the determination of
the appropriate amount of monetary awards to be given to respondent. The Court of Appeals, thus, decreed:

WHEREFORE, the petition is by us PARTIALLY GRANTED. The Labor Arbiter is DECLARED to have jurisdiction over the
controversy. The records are REMANDED to the NLRC for further proceedings to determine the appropriate amount of
monetary awards to be adjudged in favor of [respondent]. Costs against the [petitioners] in solidum. [26]

Petitioners moved for its reconsideration but to no avail. [27]

Petitioners are now before this Court with the following assignment of errors:

I.

THE COURT OF APPEALS ERRED AND COMMITTED GRAVE ABUSE OF DISCRETION IN DECIDING THAT THE NLRC HAS
THE JURISDICTION IN RESOLVING A PURELY INTRA-CORPORATE MATTER WHICH IS COGNIZABLE BY THE
SECURITIES AND EXCHANGE COMMISSION/REGIONAL TRIAL COURT.

II.

ASSUMING, GRATIS ARGUENDO, THAT THE NLRC HAS JURISDICTION OVER THE CASE, STILL THE COURT OF
APPEALS SERIOUSLY ERRED IN NOT RULING THAT THERE IS NO EMPLOYER-EMPLOYEE RELATIONSHIP BETWEEN
[RESPONDENT] ALFREDO M. JOSON AND MARC II MARKETING, INC. [PETITIONER CORPORATION].

III.

ASSUMING GRATIS ARGUENDO THAT THE NLRC HAS JURISDICTION OVER THE CASE, THE COURT OF APPEALS
ERRED IN NOT RULING THAT THE LABOR ARBITER COMMITTED GRAVE ABUSE OF DISCRETION IN AWARDING
MULTI-MILLION PESOS IN COMPENSATION AND BACKWAGES BASED ON THE PURPORTED GROSS INCOME OF
[PETITIONER CORPORATION].

IV.

THE COURT OF APPEALS SERIOUSLY ERRED AND COMMITTED GRAVE ABUSE OF DISCRETION IN NOT MAKING ANY
FINDINGS AND RULING THAT [PETITIONER LUCILA] SHOULD NOT BE HELD SOLIDARILY LIABLE IN THE ABSENCE OF
EVIDENCE OF MALICE AND BAD FAITH ON HER PART. [28]
Petitioners fault the Court of Appeals for having sustained the Labor Arbiter's finding that respondent was not a
corporate officer under petitioner corporation's by-laws. They insist that there is no need to amend the corporate by-
laws to specify who its corporate officers are. The resolution issued by petitioner corporation's Board of Directors
appointing respondent as General Manager, coupled with his assumption of the said position, positively made him its
corporate officer. More so, respondent's position, being a creation of petitioner corporation's Board of Directors
pursuant to its by-laws, is a corporate office sanctioned by the Corporation Code and the doctrines previously laid
down by this Court. Thus, respondent's removal as petitioner corporation's General Manager involved a purely intra-
corporate controversy over which the RTC has jurisdiction.

Petitioners further contend that respondent's claim for 30% of the net profit of petitioner corporation was anchored on
the purported Management Contract dated 16 January 1994. It should be noted, however, that said Management
Contract was executed at the time petitioner corporation was still nonexistent and had no juridical personality
yet. Such being the case, respondent cannot invoke any legal right therefrom as it has no legal and binding effect on
petitioner corporation. Moreover, it is clear from the Articles of Incorporation of petitioner corporation that
respondent was its director and stockholder. Indubitably, respondent's claim for his share in the profit of petitioner
corporation was based on his capacity as such and not by virtue of any employer-employee relationship.

Petitioners further avow that even if the present case does not pose an intra-corporate controversy, still, the Labor
Arbiter's multi-million peso awards in favor of respondent were erroneous. The same was merely based on the latter's
self-serving computations without any supporting documents.

Finally, petitioners maintain that petitioner Lucila cannot be held solidarily liable with petitioner corporation. There
was neither allegation nor iota of evidence presented to show that she acted with malice and bad faith in her dealings
with respondent. Moreover, the Labor Arbiter, in his Decision, simply concluded that petitioner Lucila was jointly and
severally liable with petitioner corporation without making any findings thereon. It was, therefore, an error for the
Court of Appeals to hold petitioner Lucila solidarily liable with petitioner corporation.

From the foregoing arguments, the initial question is which between the Labor Arbiter or the RTC, has jurisdiction over
respondent's dismissal as General Manager of petitioner corporation. Its resolution necessarily entails the
determination of whether respondent as General Manager of petitioner corporation is a corporate officer or a mere
employee of the latter.

While Article 217(a)2 [29] of the Labor Code, as amended, provides that it is the Labor Arbiter who has the original and
exclusive jurisdiction over cases involving termination or dismissal of workers when the person dismissed or
terminated is a corporate officer, the case automatically falls within the province of the RTC. The dismissal of a
corporate officer is always regarded as a corporate act and/or an intra-corporate controversy. [30]

Under Section 5 [31] of Presidential Decree No. 902-A, intra-corporate controversies are those controversies arising out
of intra-corporate or partnership relations, between and among stockholders, members or associates; between any or
all of them and the corporation, partnership or association of which they are stockholders, members or associates,
respectively; and between such corporation, partnership or association and the State insofar as it concerns their
individual franchise or right to exist as such entity. It also includes controversies in the election or
appointments of directors, trustees, officers or managers of such corporations, partnerships or
associations. [32]

Accordingly, in determining whether the SEC (now the RTC) has jurisdiction over the controversy, the status or
relationship of the parties and the nature of the question that is the subject of their controversy must be taken into
consideration. [33]

In Easycall Communications Phils., Inc. v. King, this Court held that in the context of Presidential Decree No. 902-A,
corporate officers are those officers of a corporation who are given that character either by the Corporation
Code or by the corporation's by-laws. Section 25 [34] of the Corporation Code specifically enumerated who are
these corporate officers, to wit: (1) president; (2) secretary; (3) treasurer; and (4) such other officers as may be
provided for in the by-laws. [35]

The aforesaid Section 25 of the Corporation Code, particularly the phrase 'œsuch other officers as may be provided for
in the by-laws,'• has been clarified and elaborated in this Court'™s recent pronouncement in Matling Industrial and
Commercial Corporation v. Coros, where it held, thus:

Conformably with Section 25, a position must be expressly mentioned in the [b]y-[l]aws in order to be
considered as a corporate office. Thus, the creation of an office pursuant to or under a [b]y-[l]aw
enabling provision is not enough to make a position a corporate office. [In] Guerrea v. Lezama [citation
omitted] the first ruling on the matter, held that the only officers of a corporation were those given that
character either by the Corporation Code or by the [b]y-[l]aws; the rest of the corporate officers could be
considered only as employees or subordinate officials. Thus, it was held in Easycall Communications Phils., Inc.
v. King [citation omitted]:

An "office" is created by the charter of the corporation and the officer is elected by the directors or
stockholders. On the other hand, an employee occupies no office and generally is employed not by the action of
the directors or stockholders but by the managing officer of the corporation who also determines the
compensation to be paid to such employee.

xxxx

This interpretation is the correct application of Section 25 of the Corporation Code, which plainly states that
the corporate officers are the President, Secretary, Treasurer and such other officers as may be provided for in the
[b]y-[l]aws. Accordingly, the corporate officers in the context of PD No. 902-A are exclusively those who
are given that character either by the Corporation Code or by the corporation's [b]y[l]aws.

A different interpretation can easily leave the way open for the Board of Directors to circumvent the
constitutionally guaranteed security of tenure of the employee by the expedient inclusion in the [b]y-
[l]aws of an enabling clause on the creation of just any corporate officer position.

It is relevant to state in this connection that the SEC, the primary agency administering the Corporation Code,
adopted a similar interpretation of Section 25 of the Corporation Code in its Opinion dated November 25,
1993 [citation omitted], to wit:

Thus, pursuant to the above provision (Section 25 of the Corporation Code), whoever are the corporate officers
enumerated in the by-laws are the exclusive Officers of the corporation and the Board has no power to
create other Offices without amending first the corporate [b]y-laws. However, the Board may create
appointive positions other than the positions of corporate Officers, but the persons occupying such
positions are not considered as corporate officers within the meaning of Section 25 of the Corporation
Code and are not empowered to exercise the functions of the corporate Officers, except those functions lawfully
delegated to them. Their functions and duties are to be determined by the Board of Directors/Trustees. [36] [Emphasis
supplied.]

A careful perusal of petitioner corporation's by-laws, particularly paragraph 1, Section 1, Article IV, [37] would explicitly
reveal that its corporate officers are composed only of: (1) Chairman; (2) President; (3) one or more Vice-President;
(4) Treasurer; and (5) Secretary. [38] The position of General Manager was not among those enumerated.

Paragraph 2, Section 1, Article IV of petitioner corporation's by-laws, empowered its Board of Directors to appoint
such other officers as it may determine necessary or proper. [39] It is by virtue of this enabling provision that
petitioner corporation's Board of Directors allegedly approved a resolution to make the position of General Manager a
corporate office, and, thereafter, appointed respondent thereto making him one of its corporate officers. All of these
acts were done without first amending its by-laws so as to include the General Manager in its roster of corporate
officers.

With the given circumstances and in conformity with Matling Industrial and Commercial Corporation v. Coros, this
Court rules that respondent was not a corporate officer of petitioner corporation because his position as General
Manager was not specifically mentioned in the roster of corporate officers in its corporate by-laws. The enabling
clause in petitioner corporation's by-laws empowering its Board of Directors to create additional officers, i.e., General
Manager, and the alleged subsequent passage of a board resolution to that effect cannot make such position a
corporate office. Matling clearly enunciated that the board of directors has no power to create other corporate offices
without first amending the corporate by-laws so as to include therein the newly created corporate office. Though the
board of directors may create appointive positions other than the positions of corporate officers, the persons
occupying such positions cannot be viewed as corporate officers under Section 25 of the Corporation Code. [40] In
view thereof, this Court holds that unless and until petitioner corporation's by-laws is amended for the inclusion of
General Manager in the list of its corporate officers, such position cannot be considered as a corporate office within
the realm of Section 25 of the Corporation Code.

This Court considers that the interpretation of Section 25 of the Corporation Code laid down in Matling safeguards the
constitutionally enshrined right of every employee to security of tenure. To allow the creation of a corporate officer
position by a simple inclusion in the corporate by-laws of an enabling clause empowering the board of directors to do
so can result in the circumvention of that constitutionally well-protected right. [41]

It is also of no moment that respondent, being petitioner corporation's General Manager, was given the functions of a
managing director by its Board of Directors. As held in Matling, the only officers of a corporation are those given that
character either by the Corporation Code or by the corporate by-laws. It follows then that the corporate officers
enumerated in the by-laws are the exclusive officers of the corporation while the rest could only be regarded as mere
employees or subordinate officials. [42] Respondent, in this case, though occupying a high ranking and vital position in
petitioner corporation but which position was not specifically enumerated or mentioned in the latter's by-laws, can
only be regarded as its employee or subordinate official. Noticeably, respondent's compensation as petitioner
corporation's General Manager was set, fixed and determined not by the latter's Board of Directors but simply by its
President, petitioner Lucila. The same was not subject to the approval of petitioner corporation's Board of
Directors. This is an indication that respondent was an employee and not a corporate officer.

To prove that respondent was petitioner corporation's corporate officer, petitioners presented before the NLRC an
undated Secretary's Certificate showing that corporation's Board of Directors approved a resolution making
respondent's position of General Manager a corporate office. The submission, however, of the said undated
Secretary's Certificate will not change the fact that respondent was an employee. The certification does not amount
to an amendment of the by-laws which is needed to make the position of General Manager a corporate office.

Moreover, as has been aptly observed by the Court of Appeals, the board resolution mentioned in that undated
Secretary's Certificate and the latter itself were obvious fabrications, a mere afterthought. Here we quote with
conformity the Court of Appeals findings on this matter stated in this wise:

The board resolution is an obvious fabrication. Firstly, if it had been in existence since [29 August 1994], why did not
[herein petitioners] attach it to their [M]otion to [D]ismiss filed on [26 August 1999], when it could have been the
best evidence that [herein respondent] was a corporate officer? Secondly, why did they report the [respondent]
instead as [herein petitioner corporation's] employee to the Social Security System [(SSS)] on [11 October 1994] or a
later date than their [29 August 1994] board resolution? Thirdly, why is there no indication that the [respondent], the
person concerned himself, and the [SEC] were furnished with copies of said board resolution? And, lastly, why is the
corporate [S]ecretary's [C]ertificate not notarized in keeping with the customary procedure? That is why we called it
manipulative evidence as it was a shameless sham meant to be thrown in as a wild card to muddle up the [D]ecision
of the Labor Arbiter to the end that it be overturned as the latter had firmly pointed out that [respondent] is not a
corporate officer under [petitioner corporation's by-laws]. Regrettably, the [NLRC] swallowed the bait hook-line-and
sinker. It failed to see through its nature as a belatedly manufactured evidence. And even on the assumption
that it were an authentic board resolution, it did not make [respondent] a corporate officer as the board
did not first and properly create the position of a [G]eneral [M]anager by amending its by-laws.

(2) The scope of the term "officer"• in the phrase "and such other officers as may be provided for in the by-laws"]
(Sec. 25, par. 1), would naturally depend much on the provisions of the by-laws of the corporation. (SEC Opinion, [4
December 1991.]) If the by-laws enumerate the officers to be elected by the board, the provision is conclusive, and
the board is without power to create new offices without amending the by-laws. (SEC Opinion, [19 October 1971.])

(3) If, for example, the general manager of a corporation is not listed as an officer, he is to be classified as an
employee although he has always been considered as one of the principal officers of a corporation [citing De Leon, H.
S., The Corporation Code of the Philippines Annotated, 1993 Ed., p. 215.] [43] [Emphasis supplied.]

That respondent was also a director and a stockholder of petitioner corporation will not automatically make the case
fall within the ambit of intra-corporate controversy and be subjected to RTC's jurisdiction. To reiterate, not all
conflicts between the stockholders and the corporation are classified as intra-corporate. Other factors such as the
status or relationship of the parties and the nature of the question that is the subject of the controversy [44] must be
considered in determining whether the dispute involves corporate matters so as to regard them as intra-corporate
controversies. [45] As previously discussed, respondent was not a corporate officer of petitioner corporation but a
mere employee thereof so there was no intra-corporate relationship between them. With regard to the subject of the
controversy or issue involved herein, i.e., respondent's dismissal as petitioner corporation's General Manager, the
same did not present or relate to an intra-corporate dispute. To note, there was no evidence submitted to show that
respondent's removal as petitioner corporation's General Manager carried with it his removal as its director and
stockholder. Also, petitioners' allegation that respondent's claim of 30% share of petitioner corporation's net profit
was by reason of his being its director and stockholder was without basis, thus, self-serving. Such an allegation was
tantamount to a mere speculation for petitioners' failure to substantiate the same.

In addition, it was not shown by petitioners that the position of General Manager was offered to respondent on
account of his being petitioner corporation's director and stockholder. Also, in contrast to NLRC's findings, neither
petitioner corporation's by-laws nor the Management Contract stated that respondent's appointment and termination
from the position of General Manager was subject to the approval of petitioner corporation's Board of Directors. If,
indeed, respondent was a corporate officer whose termination was subject to the approval of its Board of Directors,
why is it that his termination was effected only by petitioner Lucila, President of petitioner corporation? The records
are bereft of any evidence to show that respondent's dismissal was done with the conformity of petitioner
corporation's Board of Directors or that the latter had a hand on respondent's dismissal. No board resolution
whatsoever was ever presented to that effect.

With all the foregoing, this Court is fully convinced that, indeed, respondent, though occupying the General Manager
position, was not a corporate officer of petitioner corporation rather he was merely its employee occupying a high-
ranking position.

Accordingly, respondent's dismissal as petitioner corporation's General Manager did not amount to an intra-corporate
controversy. Jurisdiction therefor properly belongs with the Labor Arbiter and not with the RTC.

Having established that respondent was not petitioner corporation's corporate officer but merely its employee, and
that, consequently, jurisdiction belongs to the Labor Arbiter, this Court will now determine if respondent's dismissal
from employment is illegal.

It was not disputed that respondent worked as petitioner corporation's General Manager from its incorporation on 15
August 1994 until he was dismissed on 30 June 1997. The cause of his dismissal was petitioner corporation's
cessation of business operations due to poor sales collection aggravated by the inefficient management of its affairs.

In termination cases, the burden of proving just and valid cause for dismissing an employee from his employment
rests upon the employer. The latter's failure to discharge that burden would necessarily result in a finding that the
dismissal is unjustified. [46]

Under Article 283 of the Labor Code, as amended, one of the authorized causes in terminating the employment
of an employee is the closing or cessation of operation of the establishment or undertaking. Article 283 of
the Labor Code, as amended, reads, thus:

ART. 283. Closure of establishment and reduction of personnel. '“ The employer may also terminate the
employment of any employee due to the installation of labor saving-devices, redundancy, retrenchment to prevent
losses or the closing or cessation of operation of the establishment or undertaking unless the closing is for
the purpose of circumventing the provisions of this Title, by serving a written notice on the workers and the
Department of Labor and Employment at least one (1) month before the intended date thereof. x x x In case of
retrenchment to prevent losses and in cases of closures or cessation of operations of establishment or
undertaking not due to serious business losses or financial reverses, the separation pay shall be
equivalent to one (1) month pay or to at least one-half (1/2) month pay for every year of service,
whichever is higher. A fraction of at least six (6) months shall be considered one (1) whole
year. [Emphasis supplied.]

From the afore-quoted provision, the closure or cessation of operations of establishment or undertaking may
either be due to serious business losses or financial reverses or otherwise. If the closure or cessation was
due to serious business losses or financial reverses, it is incumbent upon the employer to sufficiently and convincingly
prove the same. If it is otherwise, the employer can lawfully close shop anytime as long as it was bona fide in
character and not impelled by a motive to defeat or circumvent the tenurial rights of employees and as long as the
terminated employees were paid in the amount corresponding to their length of service. [47]

Accordingly, under Article 283 of the Labor Code, as amended, there are three requisites for a valid cessation of
business operations: (a) service of a written notice to the employees and to the Department of Labor and
Employment (DOLE) at least one month before the intended date thereof; (b) the cessation of business must
be bona fide in character; and (c) payment to the employees of termination pay amounting to one month pay
or at least one-half month pay for every year of service, whichever is higher.

In this case, it is obvious that petitioner corporation's cessation of business operations was not due to serious
business losses. Mere poor sales collection, coupled with mismanagement of its affairs does not amount to serious
business losses. Nonetheless, petitioner corporation can still validly cease or close its business operations because
such right is legally allowed, so long as it was not done for the purpose of circumventing the provisions on termination
of employment embodied in the Labor Code. [48] As has been stressed by this Court in Industrial Timber Corporation
v. Ababon, thus:

Just as no law forces anyone to go into business, no law can compel anybody to continue the same. It would be
stretching the intent and spirit of the law if a court interferes with management's prerogative to close or cease its
business operations just because the business is not suffering from any loss or because of the desire to provide the
workers continued employment. [49]cralaw

A careful perusal of the records revealed that, indeed, petitioner corporation has stopped and ceased business
operations beginning 30 June 1997. This was evidenced by a notarized Affidavit of Non-Operation dated 31 August
1998. There was also no showing that the cessation of its business operations was done in bad faith or to circumvent
the Labor Code. Nevertheless, in doing so, petitioner corporation failed to comply with the one-month prior written
notice rule. The records disclosed that respondent, being petitioner corporation's employee, and the DOLE were not
given a written notice at least one month before petitioner corporation ceased its business operations. Moreover, the
records clearly show that respondent's dismissal was effected on the same date that petitioner corporation decided to
stop and cease its operation. Similarly, respondent was not paid separation pay upon termination of his employment.

As respondent's dismissal was not due to serious business losses, respondent is entitled to payment of separation pay
equivalent to one month pay or at least one-half month pay for every year of service, whichever is higher. The
rationale for this was laid down in Reahs Corporation v. National Labor Relations Commission, [50] thus:

The grant of separation pay, as an incidence of termination of employment under Article 283, is a
statutory obligation on the part of the employer and a demandable right on the part of the employee,
except only where the closure or cessation of operations was due to serious business losses or financial reverses and
there is sufficient proof of this fact or condition. In the absence of such proof of serious business losses or
financial reverses, the employer closing his business is obligated to pay his employees and workers their
separation pay.

The rule, therefore, is that in all cases of business closure or cessation of operation or undertaking of the
employer, the affected employee is entitled to separation pay. This is consistent with the state policy of
treating labor as a primary social economic force, affording full protection to its rights as well as its
welfare. The exception is when the closure of business or cessation of operations is due to serious business losses or
financial reverses duly proved, in which case, the right of affected employees to separation pay is lost for obvious
reasons. [51] [Emphasis supplied.]

As previously discussed, respondent's dismissal was due to an authorized cause, however, petitioner corporation failed
to observe procedural due process in effecting such dismissal. In Culili v. Eastern Telecommunications Philippines,
Inc., [52] this Court made the following pronouncements, thus:

x x x there are two aspects which characterize the concept of due process under the Labor Code: one is substantive '”
whether the termination of employment was based on the provision of the Labor Code or in accordance with the
prevailing jurisprudence; the other is procedural '” the manner in which the dismissal was effected.

Section 2(d), Rule I, Book VI of the Rules Implementing the Labor Code provides:

(d) In all cases of termination of employment, the following standards of due process shall be substantially observed:

xxxx

For termination of employment as defined in Article 283 of the Labor Code, the requirement of due process shall
be deemed complied with upon service of a written notice to the employee and the appropriate Regional
Office of the Department of Labor and Employment at least thirty days before effectivity of the
termination, specifying the ground or grounds for termination.

In Mayon Hotel & Restaurant v. Adana, [citation omitted] we observed:

The requirement of law mandating the giving of notices was intended not only to enable the employees to look for
another employment and therefore ease the impact of the loss of their jobs and the corresponding income, but more
importantly, to give the Department of Labor and Employment (DOLE) the opportunity to ascertain the verity of the
alleged authorized cause of termination. [53] [Emphasis supplied].

The records of this case disclosed that there was absolutely no written notice given by petitioner corporation to the
respondent and to the DOLE prior to the cessation of its business operations. This is evident from the fact that
petitioner corporation effected respondent's dismissal on the same date that it decided to stop and cease its business
operations. The necessary consequence of such failure to comply with the one-month prior written notice rule, which
constitutes a violation of an employee's right to statutory due process, is the payment of indemnity in the form of
nominal damages. [54] In Culili v. Eastern Telecommunications Philippines, Inc., this Court further held:

In Serrano v. National Labor Relations Commission [citation omitted], we noted that 'œa job is more than the salary
that it carries.'• There is a psychological effect or a stigma in immediately finding one'™s self laid off from work. This
is exactly why our labor laws have provided for mandating procedural due process clauses. Our laws, while
recognizing the right of employers to terminate employees it cannot sustain, also recognize the
employee's right to be properly informed of the impending severance of his ties with the company he is
working for. x x x.

x x x Over the years, this Court has had the opportunity to reexamine the sanctions imposed upon employers who fail
to comply with the procedural due process requirements in terminating its employees. In Agabon v. National Labor
Relations Commission [citation omitted], this Court reverted back to the doctrine in Wenphil Corporation v. National
Labor Relations Commission [citation omitted] and held that where the dismissal is due to a just or authorized
cause, but without observance of the due process requirements, the dismissal may be upheld but the
employer must pay an indemnity to the employee. The sanctions to be imposed however, must be stiffer than
those imposed in Wenphil to achieve a result fair to both the employers and the employees.

In Jaka Food Processing Corporation v. Pacot [citation omitted], this Court, taking a cue from Agabon, held that since
there is a clear-cut distinction between a dismissal due to a just cause and a dismissal due to an authorized cause, the
legal implications for employers who fail to comply with the notice requirements must also be treated differently:

Accordingly, it is wise to hold that: (1) if the dismissal is based on a just cause under Article 282 but the employer
failed to comply with the notice requirement, the sanction to be imposed upon him should be tempered because the
dismissal process was, in effect, initiated by an act imputable to the employee; and (2) if the dismissal is based on an
authorized cause under Article 283 but the employer failed to comply with the notice requirement, the sanction should
be stiffer because the dismissal process was initiated by the employer's exercise of his management
prerogative. [55] [Emphasis supplied.]

Thus, in addition to separation pay, respondent is also entitled to an award of nominal damages. In conformity with
this Court's ruling in Culili v. Eastern Telecommunications Philippines, Inc. and Shimizu Phils. Contractors, Inc. v.
Callanta, both citing Jaka Food Processing Corporation v. Pacot, [56]this Court fixed the amount of nominal damages to
P50,000.00.

With respect to petitioners' contention that the Management Contract executed between respondent and petitioner
Lucila has no binding effect on petitioner corporation for having been executed way before its incorporation, this Court
finds the same meritorious.

Section 19 of the Corporation Code expressly provides:

Sec. 19. Commencement of corporate existence. - A private corporation formed or organized under this
Code commences to have corporate existence and juridical personality and is deemed incorporated from
the date the Securities and Exchange Commission issues a certificate of incorporation under its official
seal; and thereupon the incorporators, stockholders/members and their successors shall constitute a body politic and
corporate under the name stated in the articles of incorporation for the period of time mentioned therein, unless said
period is extended or the corporation is sooner dissolved in accordance with law. [Emphasis supplied.]

Logically, there is no corporation to speak of prior to an entity'™s incorporation. And no contract entered into before
incorporation can bind the corporation.

As can be gleaned from the records, the Management Contract dated 16 January 1994 was executed between
respondent and petitioner Lucila months before petitioner corporation's incorporation on 15 August 1994. Similarly, it
was done when petitioner Lucila was still the President of Marc Marketing, Inc. Undeniably, it cannot have any binding
and legal effect on petitioner corporation. Also, there was no evidence presented to prove that petitioner corporation
adopted, ratified or confirmed the Management Contract. It is for the same reason that petitioner corporation cannot
be considered estopped from questioning its binding effect now that respondent was invoking the same against it. In
no way, then, can it be enforced against petitioner corporation, much less, its provisions fixing respondent's
compensation as General Manager to 30% of petitioner corporation's net profit. Consequently, such percentage
cannot be the basis for the computation of respondent's separation pay. This finding, however, will not affect the
undisputed fact that respondent was, indeed, the General Manager of petitioner corporation from its incorporation up
to the time of his dismissal.

Accordingly, this Court finds it necessary to still remand the present case to the Labor Arbiter to conduct further
proceedings for the sole purpose of determining the compensation that respondent was actually receiving during the
period that he was the General Manager of petitioner corporation, this, for the proper computation of his separation
pay.

As regards petitioner Lucila's solidary liability, this Court affirms the same.

As a rule, corporation has a personality separate and distinct from its officers, stockholders and members such
that corporate officers are not personally liable for their official acts unless it is shown that they have
exceeded their authority. However, this corporate veil can be pierced when the notion of the legal entity is used as
a means to perpetrate fraud, an illegal act, as a vehicle for the evasion of an existing obligation, and to confuse
legitimate issues. Under the Labor Code, for instance, when a corporation violates a provision declared to be penal in
nature, the penalty shall be imposed upon the guilty officer or officers of the corporation. [57]

Based on the prevailing circumstances in this case, petitioner Lucila, being the President of petitioner corporation,
acted in bad faith and with malice in effecting respondent's dismissal from employment. Although petitioner
corporation has a valid cause for dismissing respondent due to cessation of business operations, however, the latter's
dismissal therefrom was done abruptly by its President, petitioner Lucila. Respondent was not given the required one-
month prior written notice that petitioner corporation will already cease its business operations. As can be gleaned
from the records, respondent was dismissed outright by petitioner Lucila on the same day that petitioner corporation
decided to stop and cease its business operations. Worse, respondent was not given separation pay considering that
petitioner corporation's cessation of business was not due to business losses or financial reverses.cralaw

WHEREFORE, premises considered, the Decision and Resolution dated 20 June 2005 and 7 March 2006, respectively,
of the Court of Appeals in CA-G.R. SP No. 76624 are hereby AFFIRMED with the MODIFICATION finding
respondent's dismissal from employment legal but without proper observance of due process. Accordingly, petitioner
corporation, jointly and solidarily liable with petitioner Lucila, is hereby ordered to pay respondent the following; (1)
separation pay equivalent to one month pay or at least one-half month pay for every year of service, whichever is
higher, to be computed from the commencement of employment until termination; and (2) nominal damages in the
amount of P50,000.00.

This Court, however, finds it proper to still remand the records to the Labor Arbiter to conduct further proceedings for
the sole purpose of determining the compensation that respondent was actually receiving during the period that he
was the General Manager of petitioner corporation for the proper computation of his separation pay.

Costs against petitioners.

SO ORDERED.

LIM TONG LIM, Petitioner, v. PHILIPPINE FISHING GEAR INDUSTRIES, INC., respondent.

DECISION

PANGANIBAN, J.:

A partnership may be deemed to exist among parties who agree to borrow money to pursue a business and to divide
the profits or losses that may arise therefrom, even if it is shown that they have not contributed any capital of their
own to a "common fund." Their contribution may be in the form of credit or industry, not necessarily cash or fixed
assets. Being partners, they are all liable for debts incurred by or on behalf of the partnership. The liability for a
contract entered into on behalf of an unincorporated association or ostensible corporation may lie in a person who
may not have directly transacted on its behalf, but reaped benefits from that contract.

The Case

In the Petition for Review on Certiorari before us, Lim Tong Lim assails the November 26, 1998 Decision of the Court
of Appeals in CA-GR CV 41477,1 which disposed as follows:

WHEREFORE, [there being] no reversible error in the appealed decision, the same is hereby affirmed.2

The decretal portion of the Quezon City Regional Trial Court (RTC) ruling, which was affirmed by the CA, reads as
follows:

WHEREFORE, the Court rules:

1. That plaintiff is entitled to the writ of preliminary attachment issued by this Court on September 20, 1990;

2. That defendants are jointly liable to plaintiff for the following amounts, subject to the modifications as hereinafter
made by reason of the special and unique facts and circumstances and the proceedings that transpired during the trial
of this case;

a. P532,045.00 representing [the] unpaid purchase price of the fishing nets covered by the Agreement
plus P68,000.00 representing the unpaid price of the floats not covered by said Agreement;

b. 12% interest per annum counted from date of plaintiffs invoices and computed on their respective amounts as
follows:

i. Accrued interest of P73,221.00 on Invoice No. 14407 for P385,377.80 dated February 9, 1990;

ii. Accrued interest of P27,904.02 on Invoice No. 14413 for P146,868.00 dated February 13, 1990;
iii. Accrued interest of P12,920.00 on Invoice No. 14426 for P68,000.00 dated February 19, 1990;

c. P50,000.00 as and for attorneys fees, plus P8,500.00 representing P500.00 per appearance in court;

d. P65,000.00 representing P5,000.00 monthly rental for storage charges on the nets counted from September 20,
1990 (date of attachment) to September 12, 1991 (date of auction sale);

e. Cost of suit.

With respect to the joint liability of defendants for the principal obligation or for the unpaid price of nets and floats in
the amount of P532,045.00 and P68,000.00, respectively, or for the total amount of P600,045.00, this Court noted
that these items were attached to guarantee any judgment that may be rendered in favor of the plaintiff but, upon
agreement of the parties, and, to avoid further deterioration of the nets during the pendency of this case, it was
ordered sold at public auction for not less than P900,000.00 for which the plaintiff was the sole and winning bidder.
The proceeds of the sale paid for by plaintiff was deposited in court. In effect, the amount of P900,000.00 replaced
the attached property as a guaranty for any judgment that plaintiff may be able to secure in this case with the
ownership and possession of the nets and floats awarded and delivered by the sheriff to plaintiff as the highest bidder
in the public auction sale. It has also been noted that ownership of the nets [was] retained by the plaintiff until full
payment [was] made as stipulated in the invoices; hence, in effect, the plaintiff attached its own properties. It [was]
for this reason also that this Court earlier ordered the attachment bond filed by plaintiff to guaranty damages to
defendants to be cancelled and for the P900,000.00 cash bidded and paid for by plaintiff to serve as its bond in favor
of defendants.

From the foregoing, it would appear therefore that whatever judgment the plaintiff may be entitled to in this case will
have to be satisfied from the amount of P900,000.00 as this amount replaced the attached nets and floats.
Considering, however, that the total judgment obligation as computed above would amount to only P840,216.92, it
would be inequitable, unfair and unjust to award the excess to the defendants who are not entitled to damages and
who did not put up a single centavo to raise the amount of P900,000.00 aside from the fact that they are not the
owners of the nets and floats. For this reason, the defendants are hereby relieved from any and all liabilities arising
from the monetary judgment obligation enumerated above and for plaintiff to retain possession and ownership of the
nets and floats and for the reimbursement of the P900,000.00 deposited by it with the Clerk of Court.

SO ORDERED. 3

The Facts

On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao entered into a Contract dated February
7, 1990, for the purchase of fishing nets of various sizes from the Philippine Fishing Gear Industries, Inc. (herein
respondent). They claimed that they were engaged in a business venture with Petitioner Lim Tong Lim, who however
was not a signatory to the agreement. The total price of the nets amounted to P532,045. Four hundred pieces of
floats worth P68,000 were also sold to the Corporation.4cräläwvirtualibräry

The buyers, however, failed to pay for the fishing nets and the floats; hence, private respondent filed a collection suit
against Chua, Yao and Petitioner Lim Tong Lim with a prayer for a writ of preliminary attachment. The suit was
brought against the three in their capacities as general partners, on the allegation that Ocean Quest Fishing
Corporation was a nonexistent corporation as shown by a Certification from the Securities and Exchange
Commission.5 On September 20, 1990, the lower court issued a Writ of Preliminary Attachment, which the sheriff
enforced by attaching the fishing nets on board F/B Lourdes which was then docked at the Fisheries Port, Navotas,
Metro Manila.

Instead of answering the Complaint, Chua filed a Manifestation admitting his liability and requesting a reasonable time
within which to pay. He also turned over to respondent some of the nets which were in his possession. Peter Yao filed
an Answer, after which he was deemed to have waived his right to cross-examine witnesses and to present evidence
on his behalf, because of his failure to appear in subsequent hearings. Lim Tong Lim, on the other hand, filed an
Answer with Counterclaim and Crossclaim and moved for the lifting of the Writ of Attachment. 6 The trial court
maintained the Writ, and upon motion of private respondent, ordered the sale of the fishing nets at a public auction.
Philippine Fishing Gear Industries won the bidding and deposited with the said court the sales proceeds
of P900,000.7cräläwvirtualibräry

On November 18, 1992, the trial court rendered its Decision, ruling that Philippine Fishing Gear Industries was entitled
to the Writ of Attachment and that Chua, Yao and Lim, as general partners, were jointly liable to pay
respondent.8cräläwvirtualibräry
The trial court ruled that a partnership among Lim, Chua and Yao existed based (1) on the testimonies of the
witnesses presented and (2) on a Compromise Agreement executed by the three 9 in Civil Case No. 1492-MN which
Chua and Yao had brought against Lim in the RTC of Malabon, Branch 72, for (a) a declaration of nullity of commercial
documents; (b) a reformation of contracts; (c) a declaration of ownership of fishing boats; (d) an injunction and (e)
damages.10 The Compromise Agreement provided:

a) That the parties plaintiffs & Lim Tong Lim agree to have the four (4) vessels sold in the amount of P5,750,000.00
including the fishing net. This P5,750,000.00 shall be applied as full payment for P3,250,000.00 in favor of JL Holdings
Corporation and/or Lim Tong Lim;

b) If the four (4) vessel[s] and the fishing net will be sold at a higher price than P5,750,000.00 whatever will be the
excess will be divided into 3: 1/3 Lim Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao;

c) If the proceeds of the sale the vessels will be less than P5,750,000.00 whatever the deficiency shall be shouldered
and paid to JL Holding Corporation by 1/3 Lim Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao.11

The trial court noted that the Compromise Agreement was silent as to the nature of their obligations, but that joint
liability could be presumed from the equal distribution of the profit and loss.12cräläwvirtualibräry

Lim appealed to the Court of Appeals (CA) which, as already stated, affirmed the RTC.

Ruling of the Court of Appeals

In affirming the trial court, the CA held that petitioner was a partner of Chua and Yao in a fishing business and may
thus be held liable as a such for the fishing nets and floats purchased by and for the use of the partnership. The
appellate court ruled:

The evidence establishes that all the defendants including herein appellant Lim Tong Lim undertook a partnership for a
specific undertaking, that is for commercial fishing x x x. Obviously, the ultimate undertaking of the defendants was to
divide the profits among themselves which is what a partnership essentially is x x x. By a contract of partnership, two
or more persons bind themselves to contribute money, property or industry to a common fund with the intention of
dividing the profits among themselves (Article 1767, New Civil Code).13

Hence, petitioner brought this recourse before this Court.14

The Issues

In his Petition and Memorandum, Lim asks this Court to reverse the assailed Decision on the following grounds:

I THE COURT OF APPEALS ERRED IN HOLDING, BASED ON A COMPROMISE AGREEMENT THAT CHUA, YAO AND
PETITIONER LIM ENTERED INTO IN A SEPARATE CASE, THAT A PARTNERSHIP AGREEMENT EXISTED AMONG THEM.

II SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT HE WAS ACTING FOR OCEAN QUEST FISHING CORPORATION
WHEN HE BOUGHT THE NETS FROM PHILIPPINE FISHING, THE COURT OF APPEALS WAS UNJUSTIFIED IN IMPUTING
LIABILITY TO PETITIONER LIM AS WELL.

III THE TRIAL COURT IMPROPERLY ORDERED THE SEIZURE AND ATTACHMENT OF PETITIONER LIMS GOODS.

In determining whether petitioner may be held liable for the fishing nets and floats purchased from respondent, the
Court must resolve this key issue: whether by their acts, Lim, Chua and Yao could be deemed to have entered into a
partnership.

This Courts Ruling

The Petition is devoid of merit.

First and Second Issues: Existence of a Partnership and Petitioner's Liability

In arguing that he should not be held liable for the equipment purchased from respondent, petitioner controverts the
CA finding that a partnership existed between him, Peter Yao and Antonio Chua. He asserts that the CA based its
finding on the Compromise Agreement alone. Furthermore, he disclaims any direct participation in the purchase of the
nets, alleging that the negotiations were conducted by Chua and Yao only, and that he has not even met the
representatives of the respondent company. Petitioner further argues that he was a lessor, not a partner, of Chua and
Yao, for the "Contract of Lease" dated February 1, 1990, showed that he had merely leased to the two the main asset
of the purported partnership -- the fishing boat F/B Lourdes. The lease was for six months, with a monthly rental
of P37,500 plus 25 percent of the gross catch of the boat.

We are not persuaded by the arguments of petitioner. The facts as found by the two lower courts clearly showed that
there existed a partnership among Chua, Yao and him, pursuant to Article 1767 of the Civil Code which provides:

Article 1767 - By the contract of partnership, two or more persons bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing the profits among themselves.

Specifically, both lower courts ruled that a partnership among the three existed based on the following factual
findings:15cräläwvirtualibräry

(1) That Petitioner Lim Tong Lim requested Peter Yao who was engaged in commercial fishing to join him, while
Antonio Chua was already Yaos partner;

(2) That after convening for a few times, Lim Chua, and Yao verbally agreed to acquire two fishing boats, the FB
Lourdes and the FB Nelson for the sum of P3.35 million;

(3) That they borrowed P3.25 million from Jesus Lim, brother of Petitioner Lim Tong Lim, to finance the venture.

(4) That they bought the boats from CMF Fishing Corporation, which executed a Deed of Sale over these two (2) boats
in favor of Petitioner Lim Tong Lim only to serve as security for the loan extended by Jesus Lim;

(5) That Lim, Chua and Yao agreed that the refurbishing , re-equipping, repairing, dry docking and other expenses for
the boats would be shouldered by Chua and Yao;

(6) That because of the unavailability of funds, Jesus Lim again extended a loan to the partnership in the amount of
P1 million secured by a check, because of which, Yao and Chua entrusted the ownership papers of two other boats,
Chuas FB Lady Anne Mel and Yaos FB Tracy to Lim Tong Lim.

(7) That in pursuance of the business agreement, Peter Yao and Antonio Chua bought nets from Respondent Philippine
Fishing Gear, in behalf of "Ocean Quest Fishing Corporation," their purported business name.

(8) That subsequently, Civil Case No. 1492-MN was filed in the Malabon RTC, Branch 72 by Antonio Chua and Peter
Yao against Lim Tong Lim for (a) declaration of nullity of commercial documents; (b) reformation of contracts; (c)
declaration of ownership of fishing boats; (4) injunction; and (e) damages.

(9) That the case was amicably settled through a Compromise Agreement executed between the parties-litigants the
terms of which are already enumerated above.

From the factual findings of both lower courts, it is clear that Chua, Yao and Lim had decided to engage in a fishing
business, which they started by buying boats worth P3.35 million, financed by a loan secured from Jesus Lim who was
petitioners brother. In their Compromise Agreement, they subsequently revealed their intention to pay the loan with
the proceeds of the sale of the boats, and to divide equally among them the excess or loss. These boats, the purchase
and the repair of which were financed with borrowed money, fell under the term common fund under Article 1767.
The contribution to such fund need not be cash or fixed assets; it could be an intangible like credit or industry. That
the parties agreed that any loss or profit from the sale and operation of the boats would be divided equally among
them also shows that they had indeed formed a partnership.

Moreover, it is clear that the partnership extended not only to the purchase of the boat, but also to that of the nets
and the floats. The fishing nets and the floats, both essential to fishing, were obviously acquired in furtherance of their
business. It would have been inconceivable for Lim to involve himself so much in buying the boat but not in the
acquisition of the aforesaid equipment, without which the business could not have proceeded.

Given the preceding facts, it is clear that there was, among petitioner, Chua and Yao, a partnership engaged in the
fishing business. They purchased the boats, which constituted the main assets of the partnership, and they agreed
that the proceeds from the sales and operations thereof would be divided among them.
We stress that under Rule 45, a petition for review like the present case should involve only questions of law. Thus,
the foregoing factual findings of the RTC and the CA are binding on this Court, absent any cogent proof that the
present action is embraced by one of the exceptions to the rule.16 In assailing the factual findings of the two lower
courts, petitioner effectively goes beyond the bounds of a petition for review under Rule 45.

Compromise Agreement Not the Sole Basis of Partnership

Petitioner argues that the appellate courts sole basis for assuming the existence of a partnership was the Compromise
Agreement. He also claims that the settlement was entered into only to end the dispute among them, but not to
adjudicate their preexisting rights and obligations. His arguments are baseless. The Agreement was but an
embodiment of the relationship extant among the parties prior to its execution.

A proper adjudication of claimants rights mandates that courts must review and thoroughly appraise all relevant facts.
Both lower courts have done so and have found, correctly, a preexisting partnership among the parties. In implying
that the lower courts have decided on the basis of one piece of document alone, petitioner fails to appreciate that the
CA and the RTC delved into the history of the document and explored all the possible consequential combinations in
harmony with law, logic and fairness. Verily, the two lower courts factual findings mentioned above nullified
petitioners argument that the existence of a partnership was based only on the Compromise Agreement.

Petitioner Was a Partner, Not a Lessor

We are not convinced by petitioners argument that he was merely the lessor of the boats to Chua and Yao, not a
partner in the fishing venture. His argument allegedly finds support in the Contract of Lease and the registration
papers showing that he was the owner of the boats, including F/B Lourdes where the nets were found.

His allegation defies logic. In effect, he would like this Court to believe that he consented to the sale of his own boats
to pay a debt of Chua and Yao, with the excess of the proceeds to be divided among the three of them. No lessor
would do what petitioner did. Indeed, his consent to the sale proved that there was a preexisting partnership among
all three.

Verily, as found by the lower courts, petitioner entered into a business agreement with Chua and Yao, in which debts
were undertaken in order to finance the acquisition and the upgrading of the vessels which would be used in their
fishing business. The sale of the boats, as well as the division among the three of the balance remaining after the
payment of their loans, proves beyond cavil that F/B Lourdes, though registered in his name, was not his own
property but an asset of the partnership. It is not uncommon to register the properties acquired from a loan in the
name of the person the lender trusts, who in this case is the petitioner himself. After all, he is the brother of the
creditor, Jesus Lim.

We stress that it is unreasonable indeed, it is absurd -- for petitioner to sell his property to pay a debt he did not
incur, if the relationship among the three of them was merely that of lessor-lessee, instead of partners.

Corporation by Estoppel

Petitioner argues that under the doctrine of corporation by estoppel, liability can be imputed only to Chua and Yao,
and not to him. Again, we disagree.

Section 21 of the Corporation Code of the Philippines provides:

Sec. 21. Corporation by estoppel. - All persons who assume to act as a corporation knowing it to be without authority
to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result
thereof: Provided however, That when any such ostensible corporation is sued on any transaction entered by it as a
corporation or on any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate
personality.

One who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground
that there was in fact no corporation.

Thus, even if the ostensible corporate entity is proven to be legally nonexistent, a party may be estopped from
denying its corporate existence. The reason behind this doctrine is obvious - an unincorporated association has no
personality and would be incompetent to act and appropriate for itself the power and attributes of a corporation as
provided by law; it cannot create agents or confer authority on another to act in its behalf; thus, those who act or
purport to act as its representatives or agents do so without authority and at their own risk. And as it is an elementary
principle of law that a person who acts as an agent without authority or without a principal is himself regarded as the
principal, possessed of all the right and subject to all the liabilities of a principal, a person acting or purporting to act
on behalf of a corporation which has no valid existence assumes such privileges and obligations and becomes
personally liable for contracts entered into or for other acts performed as such agent. 17cräläwvirtualibräry

The doctrine of corporation by estoppel may apply to the alleged corporation and to a third party. In the first instance,
an unincorporated association, which represented itself to be a corporation, will be estopped from denying its
corporate capacity in a suit against it by a third person who relied in good faith on such representation. It cannot
allege lack of personality to be sued to evade its responsibility for a contract it entered into and by virtue of which it
received advantages and benefits.

On the other hand, a third party who, knowing an association to be unincorporated, nonetheless treated it as a
corporation and received benefits from it, may be barred from denying its corporate existence in a suit brought
against the alleged corporation. In such case, all those who benefited from the transaction made by the ostensible
corporation, despite knowledge of its legal defects, may be held liable for contracts they impliedly assented to or took
advantage of.

There is no dispute that the respondent, Philippine Fishing Gear Industries, is entitled to be paid for the nets it sold.
The only question here is whether petitioner should be held jointly18 liable with Chua and Yao. Petitioner contests such
liability, insisting that only those who dealt in the name of the ostensible corporation should be held liable. Since his
name does not appear on any of the contracts and since he never directly transacted with the respondent corporation,
ergo, he cannot be held liable.

Unquestionably, petitioner benefited from the use of the nets found inside F/B Lourdes, the boat which has earlier
been proven to be an asset of the partnership. He in fact questions the attachment of the nets, because the Writ has
effectively stopped his use of the fishing vessel.

It is difficult to disagree with the RTC and the CA that Lim, Chua and Yao decided to form a corporation. Although it
was never legally formed for unknown reasons, this fact alone does not preclude the liabilities of the three as
contracting parties in representation of it. Clearly, under the law on estoppel, those acting on behalf of a corporation
and those benefited by it, knowing it to be without valid existence, are held liable as general partners.

Technically, it is true that petitioner did not directly act on behalf of the corporation. However, having reaped the
benefits of the contract entered into by persons with whom he previously had an existing relationship, he is deemed
to be part of said association and is covered by the scope of the doctrine of corporation by estoppel. We reiterate the
ruling of the Court in Alonso v. Villamor:19cräläwvirtualibräry

A litigation is not a game of technicalities in which one, more deeply schooled and skilled in the subtle art of
movement and position , entraps and destroys the other. It is, rather, a contest in which each contending party fully
and fairly lays before the court the facts in issue and then, brushing aside as wholly trivial and indecisive all
imperfections of form and technicalities of procedure, asks that justice be done upon the merits. Lawsuits, unlike
duels, are not to be won by a rapiers thrust. Technicality, when it deserts its proper office as an aid to justice and
becomes its great hindrance and chief enemy, deserves scant consideration from courts. There should be no vested
rights in technicalities.

Third Issue: Validity of Attachment

Finally, petitioner claims that the Writ of Attachment was improperly issued against the nets. We agree with the Court
of Appeals that this issue is now moot and academic. As previously discussed, F/B Lourdes was an asset of the
partnership and that it was placed in the name of petitioner, only to assure payment of the debt he and his partners
owed. The nets and the floats were specifically manufactured and tailor-made according to their own design, and were
bought and used in the fishing venture they agreed upon. Hence, the issuance of the Writ to assure the payment of
the price stipulated in the invoices is proper. Besides, by specific agreement, ownership of the nets remained with
Respondent Philippine Fishing Gear, until full payment thereof.

WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against petitioner.

SO ORDERED.

GRACE CHRISTIAN HIGH SCHOOL, Petitioner, v. THE COURT OF APPEALS, GRACE VILLAGE ASSOCIATION,
INC., ALEJANDRO G. BELTRAN, and ERNESTO L. GO, Respondents.
DECISION

MENDOZA, J.:

The question for decision in this case is the right of petitioner’s representative to sit in the board of directors of
respondent Grace Village Association, Inc. as a permanent member thereof. For fifteen years — from 1975 until 1989
— petitioner’s representative had been recognized as a "permanent director" of the association. But on February 13,
1990, petitioner received notice from the association’s committee on election that the latter was "reexamining"
(actually, reconsidering) the right of petitioner’s representative to continue as an unelected member of the board. As
the board denied petitioner’s request to be allowed representation without election, petitioner brought an action for
mandamus in the Home Insurance and Guaranty Corporation. Its action was dismissed by the hearing officer whose
decision was subsequently affirmed by the appeals board. Petitioner appealed to the Court of Appeals, which in turn
upheld the decision of the HIGC’s appeals board. Hence this petition for review based on the following
contentions:chanrob1es virtual 1aw library

1. The Petitioner herein has already acquired a vested right to a permanent seat in the Board of Directors of Grace
Village Association;

2. The amended By-laws of the Association drafted and promulgated by a Committee on December 20, 1975 is valid
and binding; and

3. The Practice of tolerating the automatic inclusion of petitioner as a permanent member of the Board of Directors of
the Association without the benefit of election is allowed under the law. 1

Briefly stated, the facts are as follows:chanrob1es virtual 1aw library

Petitioner Grace Christian High School is an educational institution offering preparatory, kindergarten and secondary
courses at the Grace Village in Quezon City. Private respondent Grace Village Association, Inc., on the other hand, is
an organization of lot and/or building owners, lessees and residents at Grace Village, while private respondents
Alejandro G. Beltran and Ernesto L. Go were its president and chairman of the committee on election, respectively, in
1990, when this suit was brought.

As adopted in 1968, the by-laws of the association provided in Article IV, as follows:chanrob1es virtual 1aw library

The annual meeting of the members of the Association shall be held on the first Sunday of January in each calendar
year at the principal office of the Association at 2:00 P.M. where they shall elect by plurality vote and by secret
balloting, the Board of Directors, composed of eleven (11) members to serve for one year until their successors are
duly elected and have qualified. 2

It appears, that on December 20, 1975, a committee of the board of directors prepared a draft of an amendment to
the by-laws, reading as follows: 3

VI. ANNUAL MEETING

The Annual Meeting of the members of the Association shall be held on the second Thursday of January of each year.
Each Charter or Associate Member of the Association is entitled to vote. He shall be entitled to as many votes as he
has acquired thru his monthly membership fees only computed on a ratio of TEN (P10.00) PESOS for one vote.

The Charter and Associate Members shall elect the Directors of the Association. The candidates receiving the first
fourteen (14) highest number of votes shall be declared and proclaimed elected until their successors are elected and
qualified. GRACE CHRISTIAN HIGH SCHOOL representative is a permanent Director of the ASSOCIATION.

This draft was never presented to the general membership for approval. Nevertheless, from 1975, after it was
presumably submitted to the board, up to 1990, petitioner was given a permanent seat in the board of directors of the
association. On February 13, 1990, the association’s committee on election in a letter informed James Tan, principal of
the school, that "it was the sentiment that all directors should be elected by members of the association" because "to
make a person or entity a permanent Director would deprive the right of voters to vote for fifteen (15) members of
the Board," and "it is undemocratic for a person or entity to hold office in perpetuity." 4 For this reason, Tan was told
that "the proposal to make the Grace Christian High School representative as a permanent director of the association,
although previously tolerated in the past elections should be reexamined." Following this advice, notices were sent to
the members of the association that the provision on election of directors of the 1968 by-laws of the association would
be observed.

Petitioner requested the chairman of the election committee to change the notice of election by following the
procedure in previous elections, claiming that the notice issued for the 1990 elections ran "counter to the practice in
previous years" and was "in violation of the by-laws (of 1975)" and "unlawfully deprive[d] Grace Christian High School
of its vested right [to] a permanent seat in the board." 5

As the association denied its request, the school brought suit for mandamus in the Home Insurance and Guaranty
Corporation to compel the board of directors of the association to recognize its right to a permanent seat in the board.
Petitioner based its claim on the following portion of the proposed amendment which, it contended, had become part
of the by-laws of the association as Article VI, paragraph 2, thereof:chanrob1es virtual 1aw library

The Charter and Associate Members shall elect the Directors of the Association. The candidates receiving the first
fourteen (14) highest number of votes shall be declared and proclaimed elected until their successors are elected and
qualified. GRACE CHRISTIAN HIGH SCHOOL representative is a permanent Director of the ASSOCIATION.

It appears that the opinion of the Securities and Exchange Commission on the validity of this provision was sought by
the association and that in reply to the query, the SEC rendered an opinion to the effect that the practice of allowing
unelected members in the board was contrary to the existing by-laws of the association and to §92 of the Corporation
Code (B.P. Blg. 68).

Private respondent association cited the SEC opinion in its answer. Additionally, the association contended that the
basis of the petition for mandamus was merely "a proposed by-laws which has not yet been approved by competent
authority nor registered with the SEC or HIGC." It argued that "the by-laws which was registered with the SEC on
January 16, 1969 should be the prevailing by-laws of the association and not the proposed amended by-laws." 6

In reply, petitioner maintained that the "amended by-laws is valid and binding" and that the association was estopped
from questioning the by-laws. 7

A preliminary conference was held on March 29, 1990 but nothing substantial was agreed upon. The parties merely
agreed that the board of directors of the association should meet on April 17, 1990 and April 24, 1990 for the purpose
of discussing the amendment of the by-laws and a possible amicable settlement of the case. A meeting was held on
April 17, 1990, but the parties failed to reach an agreement. Instead, the board adopted a resolution declaring the
1975 provision null and void for lack of approval by members of the association and the 1968 by-laws to be
effective.chanroblesvirtuallawlibrary

On June 20, 1990, the hearing officer of the HIGC rendered a decision dismissing petitioner’s action. The hearing
officer held that the amended by-laws, upon which petitioner based its claim," [was] merely a proposed by-laws
which, although implemented in the past, had not yet been ratified by the members of the association nor approved
by competent authority" ; that, on the contrary, in the meeting held on April 17, 1990, the directors of the association
declared ‘the proposed by-law dated December 20, 1975 prepared by the committee on by-laws . . . null and void"
and the by-laws of December 17, 1968 as the "prevailing by-laws under which the association is to operate until such
time that the proposed amendments to the by-laws are approved and ratified by a majority of the members of the
association and duly filed and approved by the pertinent government agency." The hearing officer rejected petitioner’s
contention that it had acquired a vested right to a permanent seat in the board of directors. He held that past practice
in election of directors could not give rise to a vested right and that departure from such practice was justified
because it deprived members of association of their right to elect or to be voted in office, not to say that "allowing the
automatic inclusion of a member representative of petitioner as permanent director [was] contrary to law and the
registered by-laws of respondent association." 8

The appeals board of the HIGC affirmed the decision of the hearing officer in its resolution dated September 13, 1990.
It cited the opinion of the SEC based on §92 of the Corporation Code which reads:chanrob1es virtual 1aw library

§92. Election and term of trustees. — Unless otherwise provided in the articles of incorporation or the by-laws, the
board of trustees of non-stock corporations, which may be more than fifteen (15) in number as may be fixed in their
articles of incorporation or by-laws, shall, as soon as organized, so classify themselves that the term of office of one-
third (1/3) of the number shall expire every year; and subsequent elections of trustees comprising one-third (1/3) of
the board of trustees shall be held annually and trustees so elected shall have a term of three (3) years. Trustees
thereafter elected to fill vacancies occurring before the expiration of a particular term shall hold office only for the
unexpired period.

The HIGC appeals board denied claims that the school" [was] being deprived of its right to be a member of the Board
of Directors of respondent association," because the fact was that "it may nominate as many representatives to the
Association’s Board as it may deem appropriate." It said that "what is merely being upheld is the act of the incumbent
directors of the Board of correcting a long standing practice which is not anchored upon any legal basis." 9
Petitioner appealed to the Court of Appeals but petitioner again lost as the appellate court on February 9, 1993,
affirmed the decision of the HIGC. The Court of Appeals held that there was no valid amendment of the association’s
by-laws because of failure to comply with the requirement of its existing by-laws, prescribing the affirmative vote of
the majority of the members of the association at a regular or special meeting called for the adoption of amendment
to the by-laws. Article XIX of the by-laws provides: 10

The members of the Association by an affirmative vote of the majority at any regular or special meeting called for the
purpose, may alter, amend, change or adopt any new by-laws.

This provision of the by-laws actually implements §22 of the Corporation Law (Act No. 1459) which
provides:chanrob1es virtual 1aw library

§22. The owners of a majority of the subscribed capital stock, or a majority of the members if there be no capital
stock, may, at a regular or special meeting duly called for the purpose, amend or repeal any by-law or adopt new by-
laws. The owners of two-thirds of the subscribed capital stock, or two-thirds of the members if there be no capital
stock, may delegate to the board of directors the power to amend or repeal any by-law or to adopt new by-laws:
Provided, however, That any power delegated to the board of directors to amend or repeal any by-law or adopt new
by-laws shall be considered as revoked whenever a majority of the stockholders or of the members of the corporation
shall so vote at a regular or special meeting. And provided, further, That the Director of the Bureau of Commerce and
Industry shall not hereafter file an amendment to the by-laws of any bank, banking institution or building and loan
association, unless accompanied by certificate of the Bank Commissioner to the effect that such amendments are in
accordance with law.

The proposed amendment to the by-laws was never approved by the majority of the members of the association as
required by these provisions of the law and by-laws. But petitioner contends that the members of the committee
which prepared the proposed amendment were duly authorized to do so and that because the members of the
association thereafter implemented the provision for fifteen years, the proposed amendment for all intents and
purposes should be considered to have been ratified by them. Petitioner contends: 11

Considering, therefore, that the "agents" or committee were duly authorized to draft the amended by-laws and the
acts done by the "agents" were in accordance with such authority, the acts of the "agents" from the very beginning
were lawful and binding on the homeowners (the principals) per se without need of any ratification or adoption. The
more has the amended by-laws become binding on the homeowners when the homeowners followed and implemented
the provisions of the amended by-laws. This is not merely tantamount to tacit ratification of the acts done by duly
authorized "agents" but express approval and confirmation of what the "agents" did pursuant to the authority granted
to them.

Corollarily, petitioner claims that it has acquired a vested right to a permanent seat in the board. Says
petitioner:chanrob1es virtual 1aw library

The right of the petitioner to an automatic membership in the board of the Association was granted by the members
of the Association themselves and this grant has been implemented by members of the board themselves all through
the years. Outside the present membership of the board, not a single member of the Association has registered any
desire to remove the right of herein petitioner to an automatic membership in the board. If there is anybody who has
the right to take away such right of the petitioner, it would be the individual members of the Association through a
referendum and not the present board some of the members of which are motivated by personal interest.

Petitioner disputes the ruling that the provision in question, giving petitioner’s representative a permanent seat in the
board of the association, is contrary to law. Petitioner claims that that is not so because there is really no provision of
law prohibiting unelected members of boards of directors of corporations. Referring to §92 of the present Corporation
Code, petitioner says:chanrob1es virtual 1aw library

It is clear that the above provision of the Corporation Code only provides for the manner of election of the members of
the board of trustees of non-stock corporations which may be more than fifteen in number and which manner of
election is even subject to what is provided in the articles of incorporation or by-laws of the association thus showing
that the above provisions [are] not even mandatory.

Even a careful perusal of the above provision of the Corporation Code would not show that it prohibits a non-stock
corporation or association from granting one of its members a permanent seat in its board of directors or trustees. If
there is no such legal prohibition then it is allowable provided it is so provided in the Articles of Incorporation or in the
by-laws as in the instant case.

x x x
If fact, the truth is that this is allowed and is being practiced by some corporations duly organized and existing under
the laws of the Philippines.

One example is the Pius XII Catholic Center, Inc. Under the by-laws of this corporation, that whoever is the
Archbishop of Manila is considered a member of the board of trustees without benefit of election. And not only that.
He also automatically sits as the Chairman of the Board of Trustees, again without need of any election.

Another concrete example is the Cardinal Santos Memorial Hospital, Inc. It is also provided in the by-laws of this
corporation that whoever is the Archbishop of Manila is considered a member of the board of trustees year after year
without benefit of any election and he also sits automatically as the Chairman of the Board of Trustees.

It is actually §§28 and 29 of the Corporation Law — not §92 of the present law or §29 of the former one — which
require members of the boards of directors of corporations to be elected. These provisions read:chanrob1es virtual
1aw library

§28. Unless otherwise provided in this Act, the corporate powers of all corporations formed under this Act shall be
exercised, all business conducted and all property of such corporations controlled and held by a board of not less than
five nor more than eleven directors to be elected from among the holders of stock or, where there is no stock, from
the members of the corporation: Provided, however, That in corporations, other than banks, in which the United
States has or may have a vested interest, pursuant to the powers granted or delegated by the Trading with the
Enemy Act, as amended, and similar Acts of Congress of the United States relating to the same subject, or by
Executive Order No. 9095 of the President of the United States, as heretofore or hereafter amended, or both, the
directors need not be elected from among the holders of the stock, or, where there is no stock from the members of
the corporation. (emphasis added)

§29. At the meeting for the adoption of the original by-laws, or at such subsequent meeting as may be then
determined, directors shall be elected to hold their offices for one year and until their successors are elected and
qualified. Thereafter the directors of the corporation shall be elected annually by the stockholders if it be a stock
corporation or by the members if it be a nonstock corporation, and if no provision is made in the by-laws for the time
of election the same shall be held on the first Tuesday after the first Monday in January. Unless otherwise provided in
the by-laws, two weeks’ notice of the election of directors must be given by publication in some newspaper of general
circulation devoted to the publication of general news at the place where the principal office of the corporation is
established or located, and by written notice deposited in the post-office, postage pre-paid, addressed to each
stockholder, or, if there be no stockholders, then to each member, at his last known place of residence. If there be no
newspaper published at the place where the principal office of the corporation is established or located, a notice of the
election of directors shall be posted for a period of three weeks immediately preceding the election in at least three
public places, in the place where the principal office of the corporation is established or located. (Emphasis added)

The present Corporation Code (B.P. Blg. 68), which took effect on May 1, 1980, 12 similarly provides:chanrob1es
virtual 1aw library

§23. The Board of Directors or Trustees. — Unless otherwise provided in this Code, the corporate powers of all
corporations formed under this Code shall be exercised, all business conducted and all property of such corporations
controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where
there is no stock, from among the members of the corporation, who shall hold office for one (1) year and until their
successors are elected and qualified. (Emphasis added)

These provisions of the former and present corporation law leave no room for doubt as to their meaning: the board of
directors of corporations must be elected from among the stockholders or members. There may be corporations in
which there are unelected members in the board but it is clear that in the examples cited by petitioner the unelected
members sit as ex officio members, i.e., by virtue of and for as long as they hold a particular office. But in the case of
petitioner, there is no reason at all for its representative to be given a seat in the board. Nor does petitioner claim a
right to such seat by virtue of an office held. In fact it was not given such seat in the beginning. It was only in 1975
that a proposed amendment to the by-laws sought to give it one.

Since the provision in question is contrary to law, the fact that for fifteen years it has not been questioned or
challenged but, on the contrary, appears to have been implemented by the members of the association cannot
forestall a later challenge to its validity. Neither can it attain validity through acquiescence because, if it is contrary to
law, it is beyond the power of the members of the association to waive its invalidity. For that matter the members of
the association may have formally adopted the provision in question, but their action would be of no avail because no
provision of the by-laws can be adopted if it is contrary to law. 13

It is probable that, in allowing petitioner’s representative to sit on the board, the members of the association were not
aware that this was contrary to law. It should be noted that they did not actually implement the provision in question
except perhaps insofar as it increased the number of directors from 11 to 15, but certainly not the allowance of
petitioner’s representative as an unelected member of the board of directors. It is more accurate to say that the
members merely tolerated petitioner’s representative and tolerance cannot be considered
ratification.chanroblesvirtual|awlibrary

Nor can petitioner claim a vested right to sit in the board on the basis of "practice." Practice, no matter how long
continued, cannot give rise to any vested right if it is contrary to law. Even less tenable is petitioner’s claim that its
right is "coterminus with the existence of the association." 14

Finally, petitioner questions the authority of the SEC to render an opinion on the validity of the provision in question.
It contends that jurisdiction over this case is exclusively vested in the HIGC.

But this case was not decided by the SEC but by the HIGC. The HIGC merely cited as authority for its ruling the
opinion of the SEC chairman. The HIGC could have cited any other authority for the view that under the law members
of the board of directors of a corporation must be elected and it would be none the worse for doing so.

WHEREFORE, the decision of the Court of Appeals is AFFIRMED.