G.R. No.

L-2598 June 29, 1950

C. ARNOLD HALL and BRADLEY P. HALL, petitioners,

Claro M. Recto for petitioners.

BENGZON, J.:

This is petition to set aside all the proceedings had in civil case No. 381 of the Court of First Instance
of Leyte and to enjoin the respondent judge from further acting upon the same.

Facts: (1) on May 28, 1947, the petitioners C. Arnold Hall and Bradley P. Hall, and the respondents
Fred Brown, Emma Brown, Hipolita D. Chapman and Ceferino S. Abella, signed and acknowledged
in Leyte, the article of incorporation of the Far Eastern Lumber and Commercial Co., Inc., organized
to engage in a general lumber business to carry on as general contractors, operators and managers,
etc. Attached to the article was an affidavit of the treasurer stating that 23,428 shares of stock had
been subscribed and fully paid with certain properties transferred to the corporation described in a
list appended thereto.

(2) Immediately after the execution of said articles of incorporation, the corporation proceeded to do
business with the adoption of by-laws and the election of its officers.

(3) On December 2, 1947, the said articles of incorporation were filed in the office of the Securities
and Exchange Commissioner, for the issuance of the corresponding certificate of incorporation.

(4) On March 22, 1948, pending action on the articles of incorporation by the aforesaid governmental
office, the respondents Fred Brown, Emma Brown, Hipolita D. Chapman and Ceferino S. Abella filed
before the Court of First Instance of Leyte the civil case numbered 381, entitled "Fred Brown et
al. vs. Arnold C. Hall et al.", alleging among other things that the Far Eastern Lumber and
Commercial Co. was an unregistered partnership; that they wished to have it dissolved because of
bitter dissension among the members, mismanagement and fraud by the managers and heavy
financial losses.

(5) The defendants in the suit, namely, C. Arnold Hall and Bradley P. Hall, filed a motion to dismiss,
contesting the court's jurisdiction and the sufficiently of the cause of action.

(6) After hearing the parties, the Hon. Edmund S. Piccio ordered the dissolution of the company; and
at the request of plaintiffs, appointed of the properties thereof, upon the filing of a P20,000 bond.

(7) The defendants therein (petitioners herein) offered to file a counter-bond for the discharge of the
receiver, but the respondent judge refused to accept the offer and to discharge the receiver.
Whereupon, the present special civil action was instituted in this court. It is based upon two main
propositions, to wit:
(a) The court had no jurisdiction in civil case No. 381 to decree the dissolution of the company,
because it being a de facto corporation, dissolution thereof may only be ordered in a quo
warranto proceeding instituted in accordance with section 19 of the Corporation Law.

(b) Inasmuch as respondents Fred Brown and Emma Brown had signed the article of incorporation
but only a partnership.

Discussion: The second proposition may at once be dismissed. All the parties are informed that the
Securities and Exchange Commission has not, so far, issued the corresponding certificate of
incorporation. All of them know, or sought to know, that the personality of a corporation begins to
exist only from the moment such certificate is issued — not before (sec. 11, Corporation Law). The
complaining associates have not represented to the others that they were incorporated any more
than the latter had made similar representations to them. And as nobody was led to believe anything
to his prejudice and damage, the principle of estoppel does not apply. Obviously this is not an
instance requiring the enforcement of contracts with the corporation through the rule of estoppel.

The first proposition above stated is premised on the theory that, inasmuch as the Far Eastern
Lumber and Commercial Co., is a de factocorporation, section 19 of the Corporation Law applies,
and therefore the court had not jurisdiction to take cognizance of said civil case number 381. Section
19 reads as follows:

. . . The due incorporation of any corporations claiming in good faith to be a corporation

There are least two reasons why this section does not govern the situation. Not having obtained the
certificate of incorporation, the Far Eastern Lumber and Commercial Co. — even its stockholders —
may not probably claim "in good faith" to be a corporation.

Under our statue it is to be noted (Corporation Law, sec. 11) that it is the issuance of a
certificate of incorporation by the Director of the Bureau of Commerce and Industry which
calls a corporation into being. The immunity if collateral attack is granted to corporations
"claiming in good faith to be a corporation under this act." Such a claim is compatible with the
existence of errors and irregularities; but not with a total or substantial disregard of the law.
Unless there has been an evident attempt to comply with the law the claim to be a
corporation "under this act" could not be made "in good faith." (Fisher on the Philippine Law
of Stock Corporations, p. 75. See alsoHumphreys vs. Drew, 59 Fla., 295; 52 So., 362.)

Second, this is not a suit in which the corporation is a party. This is a litigation between stockholders
of the alleged corporation, for the purpose of obtaining its dissolution. Even the existence of a de
jure corporation may be terminated in a private suit for its dissolution between stockholders, without
the intervention of the state.

There might be room for argument on the right of minority stockholders to sue for dissolution;1 but
that question does not affect the court's jurisdiction, and is a matter for decision by the judge, subject
to review on appeal. Whkch brings us to one principal reason why this petition may not prosper,
namely: the petitioners have their remedy by appealing the order of dissolution at the proper time.

There is a secondary issue in connection with the appointment of a receiver. But it must be admitted
that receivership is proper in proceedings for dissolution of a company or corporation, and it was no
error to reject the counter-bond, the court having declared the dissolution. As to the amount of the
bond to be demanded of the receiver, much depends upon the discretion of the trial court, which in
this instance we do not believe has been clearly abused.

Judgment: The petition will, therefore, be dismissed, with costs. The preliminary injunction heretofore
issued will be dissolved.

Ozaeta, Pablo, Tuason, Montemayor, and Reyes, JJ., concur.

Footnotes

1
Cf. Thompson on Corporations, 3rd. ed., secs. 6455-6457. But the suit might be viewed as
one of the rescission of contract, the agreement between incorporators being contractual in
nature. Fisher op. cit., p. 14.

The Lawphil Project - Arellano Law FoundationHall vs. Piccio

Facts: On 28 May 1947, C. Arnold Hall and Bradley P. Hall, and Fred Brown, Emma Brown, Hipolita D.
Chapman and Ceferino S. Abella, signed and acknowledged in Leyte, the article of incorporation of the
Far Eastern Lumber and Commercial Co., Inc., organized to engage in a general lumber business to carry
on as general contractors, operators and managers, etc. Attached to the article was an affidavit of the
treasurer stating that 23,428 shares of stock had been subscribed and fully paid with certain properties
transferred to the corporation described in a list appended thereto. Immediately after the execution of said
articles of incorporation, the corporation proceeded to do business with the adoption of by-laws and the
election of its officers. On 2 December 1947, the said articles of incorporation were filed in the office of
the Securities and Exchange Commissioner, for the issuance of the corresponding certificate of
incorporation. On 22 March 1948, pending action on the articles of incorporation by the aforesaid
governmental office, Fred Brown, Emma Brown, Hipolita D. Chapman and Ceferino S. Abella filed before
the Court of First Instance of Leyte the civil case, alleging among other things that the Far Eastern
Lumber and Commercial Co. was an unregistered partnership; that they wished to have it dissolved
because of bitter dissension among the members, mismanagement and fraud by the managers and
heavy financial losses. C. Arnold Hall and Bradley P. Hall, filed a motion to dismiss, contesting the court's
jurisdiction and the sufficiently of the cause of action. After hearing the parties, the Hon. Edmund S.
Piccio ordered the dissolution of the company; and at the request of Brown, et. al., appointed Pedro A.
Capuciong as the receiver of the properties thereof, upon the filing of a P20,000 bond. Hall and Hall
offered to file a counter-bond for the discharge of the receiver, but Judge Piccio refused to accept the
offer and to discharge the receiver. Whereupon, Hall and Hall instituted the present special civil action
with the Supreme Court.

Issue: Whether Brown, et. al. may file an action to cause the dissolution of the Far Eastern Lumber and
Commercial Co., without State intervention.

Held: The Securities and Exchange Commission has not issued the corresponding certificate of
incorporation. The personality of a corporation begins to exist only from the moment such certificate is
issued — not before. Not having obtained the certificate of incorporation, the Far Eastern Lumber and
Commercial Co. — even its stockholders — may not probably claim "in good faith" to be a corporation.
Under the statue it is to be noted that it is the issuance of a certificate of incorporation by the Director of
the Bureau of Commerce and Industry which calls a corporation into being. The immunity if collateral
attack is granted to corporations "claiming in good faith to be a corporation under this act." Such a claim is
compatible with the existence of errors and irregularities; but not with a total or substantial disregard of
the law. Unless there has been an evident attempt to comply with the law the claim to be a corporation
"under this act" could not be made "in good faith."

This is not a suit in which the corporation is a party. This is a litigation between stockholders of the
alleged corporation, for the purpose of obtaining its dissolution. Even the existence of a de jure
corporation may be terminated in a private suit for its dissolution between stockholders, without the
intervention of the state.