CORPORATION LAW - NAPOCOR disapproved PHIBRO's application for pre-

qualification to bid for not meeting the minimum

1. NATIONAL POWER CORPORATION vs. PHILIPP requirements
BROTHERS OCEANIC, INC. -Upon further inquiry, PHIBRO found that the real reason
G.R. No. 126204 November 20, 2001 for the disapproval was its purported failure to satisfy
NAPOCOR's demand for damages due to the delay in the
FACTS: delivery of the first coal shipment.
- National Power Corporation (NAPOCOR) issued invitations -This prompted PHIBRO to file an action for damages with
to bid for the supply and delivery of 120,000 metric tons of application for injunction against NAPOCOR
imported coal for its Batangas Coal-Fired Thermal Power - In its complaint, PHIBRO alleged that NAPOCOR's act of
Plant disqualifying it in its bidding and in all subsequent biddings
- Philipp Brothers Oceanic, Inc. (PHIBRO) prequalified and was tainted with malice and bad faith
was allowed to participate as one of the bidders -In its answer, NAPOCOR averred that the strikes in
- After the public bidding was conducted, PHIBRO's bid was Australia could not be invoked as reason for the delay in
accepted. NAPOCOR's acceptance was conveyed in a letter the delivery of coal because PHIBRO itself admitted that
-The Bidding Terms and Specifications provide for the those strikes had already ceased.
manner of shipment of coals -And, even assuming that the strikes were still ongoing,
-PHIBRO sent word to NAPOCOR that industrial disputes PHIBRO should have shouldered the burden of a "strike-
might soon plague Australia, the shipment's point of origin, free" clause
which could seriously hamper PHIBRO's ability to supply
the needed coal TC: judgment rendered in favor of PhiBro
-PHIBRO again apprised NAPOCOR of the situation in CA: affirmed in toto the decision of TC
Australia, particularly informing the latter that the ship
owners therein are not willing to load cargo unless a ISSUE:
"strike-free" clause is incorporated in the charter party or a. WON NAPOCOR abuse its right or act unjustly in
the contract of carriage. disqualifying PHIBRO from the public bidding
- In order to hasten the transfer of coal, PHIBRO proposed b. WON a corporation is entitled to moral damages
to NAPOCOR that they equally share the burden of a
"strike-free" clause. NAPOCOR refused. RULING:
- PHIBRO received from NAPOCOR a confirmed and a. No.
workable letter of credit. - NAPOCOR's act of disapproving PHIBRO's application for
-Instead of delivering the coal on or before the thirtieth day pre-qualification to bid was without any intent to injure or a
after receipt of the Letter of Credit, as agreed upon by the purposive motive to perpetrate damage
parties in the July contract, PHIBRO effected its first -Apparently, NAPOCOR acted on the strong conviction that
shipment only on November 17, 1987 (3mons after) PHIBRO had a "seriously-impaired" track record. NAPOCOR
- NAPOCOR once more advertised for the delivery of coal to cannot be faulted from believing so.
its Calaca thermal plant. -At this juncture, it is worth mentioning that at the time
-PHIBRO participated anew in this subsequent bidding. NAPOCOR issued its subsequent Invitation to Bid, i.e.,
October 1987, PHIBRO had not yet delivered the first ("AMEC") and its administrators.
shipment of coal under the July 1987 contract, which was - Claiming that the broadcasts were defamatory, AMEC and
due on or before September 5, 1987. Naturally, NAPOCOR Angelita Ago ("Ago"), as Dean of AMECs College of
is justified in entertaining doubts on PHIBRO's qualification Medicine, filed a complaint for damages against FBNI, Rima
or capability to assume an obligation under a new contract. and Alegre
-The complaint further alleged that AMEC is a reputable
b. No. learning institution. With the supposed exposs, FBNI,
-Basic is the rule that to recover actual damages, the Rima and Alegre "transmitted malicious imputations, and
amount of loss must not only be capable of proof but must as such, destroyed plaintiffs (AMEC and Ago) reputation."
actually be proven with reasonable degree of certainty, AMEC and Ago included FBNI as defendant for allegedly
premised upon competent proof or best evidence failing to exercise due diligence in the selection and
obtainable of the actual amount thereof supervision of its employees, particularly Rima and Alegre.
-The award of moral damages is likewise improper. To -FBNI, Rima and Alegre, through Atty. Rozil Lozares, filed an
reiterate, NAPOCOR did not act in bad faith. Answer10 alleging that the broadcasts against AMEC were
-Moreover, moral damages are not, as a general rule, fair and true.
granted to a corporation.
-While it is true that besmirched reputation is included in TC: decided finding FBNI and Alegre liable for libel
moral damages, it cannot cause mental anguish to a except Rima. The trial court held that the broadcasts are
corporation, unlike in the case of a natural person, for a libelous per se.
corporation has no reputation in the sense that an CA: affirmed the trial courts judgment.
individual has, and besides, it is inherently impossible for a CA made Rima solidarily liable with FBNI and Alegre
corporation to suffer mental anguish.

ISSUE:
2. FILIPINAS BROADCASTING NETWORK, INC., vs. WON AMEC is entitled to moral damages
AGO MEDICAL AND EDUCATIONAL CENTER-BICOL
CHRISTIAN COLLEGE OF MEDICINE, (AMEC-BCCM) RULING:
and ANGELITA F. AGO Yes.
G.R. No. 141994 January 17, 2005 - A juridical person is generally not entitled to moral
damages because, unlike a natural person, it cannot
FACTS: experience physical suffering or such sentiments as
- "Expos" is a radio documentary program hosted by wounded feelings, serious anxiety, mental anguish or
Carmelo Mel Rima and Hermogenes Jun Alegre moral shock
- Expos is aired every morning over DZRC-AM which is - However, the Courts statement in Mambulao that "a
owned by Filipinas Broadcasting Network, Inc corporation may have a good reputation which, if
- Rima and Alegre exposed various alleged complaints besmirched, may also be a ground for the award of moral
from students, teachers and parents against Ago Medical damages" is an obiter dictum
and Educational Center-Bicol Christian College of Medicine - Nevertheless, AMECs claim for moral damages falls
under item 7 of Article 2219 of the Civil Code. This ten (10) titles" they can purchase" among which film
provision expressly authorizes the recovery of moral ''Maging Sino Ka Man."
damages in cases of libel, slander or any other form of - defendant Del Rosario approached ABS-CBN's Ms. Concio,
defamation. Article 2219(7) does not qualify whether the with a list consisting of 52 original movie titles and 104 re-
plaintiff is a natural or juridical person. Therefore, a runs proposing to sell to ABS-CBN airing rights for P60M of
juridical person such as a corporation can validly complain which P30M will be in cash and P30M worth of television
for libel or any other form of defamation and claim for spots
moral damages - defendant Del Rosario and ABS-CBN general manager,
- the record shows that even though the broadcasts were Eugenio Lopez III, met at the Tamarind Grill Restaurant
libelous per se, AMEC has not suffered any substantial or discuss the package proposal of Viva
material damage to its reputation. Therefore, award for - Mr. Lopez offered Del Rosario a counterproposal and such
moral damages was reduced. proposal was written in napkin which was allegedly
accepted by the latter
- Del Rosario and Mr. Graciano Gozon of RBS discussed the
terms and conditions of Viva's offer to sell the 104 films,
after the rejection of the same package by ABS-CBN
- after the rejection of ABS-CBN, Viva granted to RBS the
3. ABS-CBN BROADCASTING CORPORATION vs. exclusive right to air 104 Viva-produced and/or acquired
HONORABLE COURT OF APPEALS, REPUBLIC films
BROADCASTING CORP, VIVA PRODUCTION, INC., and - ABS-CBN filed a complaint against private respondents
VICENTE DEL ROSARIO -ABS-CBN argued that there was a perfected contract
G.R. No. 128690 January 21, 1999 between ABS-CBN and VIVA granting ABS-CBN the
exclusive right to exhibit the subject films
FACTS: - RBS filed a counter suit with prayer for damages
- ABS-CBN and Viva executed a Film Exhibition Agreement
whereby Viva gave ABS-CBN an exclusive right to exhibit TC: ruled in favor of Viva and RBS
some Viva films CA: affirmed TC's decision
-Under the agreement, ABS-CBN shall have the right of first
refusal to the next twenty-four (24) Viva films for TV ISSUE:
telecast under such terms as may be agreed upon by the a. WON there is a perfected contracte
parties, however, that such right shall be exercised by ABS- b. WON a corporation, like RBS, is entitled to an award of
CBN from the actual offer in writing. moral damages upon grounds of debased reputation
-Viva, through defendant Del Rosario, offered ABS-CBN,
through its vice-president Charo Santos-Concio, a list of RULING:
three(3) film packages (36 title) from which ABS-CBN may a. No.
exercise its right of first refusal under the afore-said -Contracts that are consensual in nature are perfected
agreement upon mere meeting of the minds, Once there is
-ABS-CBN, however through Mrs. Concio, "can tick off only concurrence between the offer and the acceptance upon
the subject matter, consideration, and terms of payment a moral suffering he has undergone. It is aimed at the
contract is produced. The offer must be certain. To convert restoration, within the limits of the possible, of the
the offer into a contract, the acceptance must be absolute spiritual status quo ante, and should be proportionate to
and must not qualify the terms of the offer; it must be the suffering inflicted.
plain, unequivocal, unconditional, and without variance of -The award of moral damages cannot be granted in favor
any sort from the proposal. A qualified acceptance, or one of a corporation because, being an artificial person and
that involves a new proposal, constitutes a counter-offer having existence only in legal contemplation, it has no
and is a rejection of the original offer. Consequently, when feelings, no emotions, no senses, It cannot, therefore,
something is desired which is not exactly what is proposed experience physical suffering and mental anguish, which
in the offer, such acceptance is not sufficient to generate call be experienced only by one having a nervous system.
consent because any modification or variation from the -The statement in Mambulao Lumber Co. v. PNB that a
terms of the offer annuls the offer corporation may recover moral damages if it "has a good
-When Mr. Del Rosario of VIVA met with Mr. Lopez of ABS- reputation that is debased, resulting in social humiliation"
CBN at the Tamarind Grill to discuss the package of films, is an obiter dictum. On this score alone the award for
VIVA's offer to ABS-CBN to enter into a new Film Exhibition damages must be set aside, since RBS is a corporation.
Agreement. This counter-proposal could be nothing less
than the counter-offer of Mr. Lopez during his conference 4. MAMBULAO LUMBER COMPANY vs. PHILIPPINE
with Del Rosario at Tamarind Grill Restaurant. Clearly, there NATIONAL BANK and ANACLETO HERALDO Deputy
was no acceptance of VIVA's offer, for it was met by a Provincial Sheriff of Camarines Norte
counter-offer which substantially varied the terms of the G.R. No. L-22973 January 30, 1968
offer.
-n the case at bar, ABS-CBN made no unqualified FACTS:
acceptance of VIVA's offer. Hence, they underwent a period - plaintiff Mambulao Lumber applied for an industrial loan
of bargaining. ABS-CBN then formalized its counter- in the amount of P150K with defendant PNB and the
proposals or counter-offer in a draft contract, VIVA through former offered real estate, machinery, logging and
its Board of Directors, rejected such counter-offer, Even if it transportation equipments as collaterals.
be conceded arguendo that Del Rosario had accepted the -The application, however, was approved for a loan of
counter-offer, the acceptance did not bind VIVA, as there P100K only.
was no proof whatsoever that Del Rosario had the specific -o secure the payment of the loan, the plaintiff mortgaged
authority to do so. to defendant PNB a parcel of land, together with the
buildings and improvements existing thereon
b. No -PNB released from the approved loan for which the
-Moral damages are in the category of an award designed plaintiff signed a promissory note wherein it promised to
to compensate the claimant for actual injury suffered. and pay to the PNB the said sum in five equal yearly
not to impose a penalty on the wrongdoer. 62 The award is installments
not meant to enrich the complainant at the expense of the - plaintiff failed to pay the amortization on the amounts
defendant, but to enable the injured party to obtain means, released to and received by it.
diversion, or amusements that will serve to obviate then -Repeated demands were made upon the plaintiff to pay its
obligation but it failed or otherwise refused to do so. at Jose Panganiban, Camarines Norte, or in Manila which is
-Upon inspection and verification made by employees of the place agreed upon by the parties in the mortgage
the PNB, it was found that the plaintiff had already stopped contract
operation
- PNB sent a letter to the Provincial Sheriff of Camarines 5. FRANCISCO MOTORS CORPORATION vs. COURT OF
Norte requesting him to take possession of the parcel of APPEALS and SPOUSES GREGORIO and LIBRADA
land, together with the improvements existing thereon MANUEL
and to sell it at public auction for the satisfaction of the G.R. No. 100812 June 25, 1999
unpaid obligation of the plaintiff
- the mortgaged property was sold at public auction and FACTS:
was sold to PNB as highest bidder - petitioner filed a complaint against private respondents
to recover the balance of the jeep body purchased by the
Manuels from petitioner
TC: rendered decision against Mambulao Lumbber - In their answer, private respondents interposed a
counterclaim for unpaid legal services by Gregorio Manuel
ISSUE: in the amount of fifty thousand pesos (P50,000) which was
WON plaintiff Mambulao Lumber, who already ceased its not paid by the incorporators, directors and officers of the
opetion, may claim moral damages as a result of the petitioner
foreclosure sale of the mortgaged chattels/ - Private respondent Gregorio Manuel alleged as an
affirmative defense that, while he was petitioners Assistant
RULING: Legal Officer, he represented members of the Francisco
No. family in the intestate estate proceedings of the late
- Herein appellant's claim for moral damages, however, Benita Trinidad.
seems to have no legal or factual basis. Obviously, an -However, even after the termination of the proceedings,
artificial person like herein appellant corporation cannot his services were not paid
experience physical sufferings, mental anguish, fright, -
serious anxiety, wounded feelings, moral shock or social
humiliation which are basis of moral damages TC: decided in favor of petitioner in regard to the
- A corporation may have a good reputation which, if petitioners claim for money, but also allowed the counter-
besmirched, may also be a ground for the award of moral claim of private respondents
damages. The same cannot be considered under the facts CA: sustained the trial courts decision
of this case, however, not only because it is admitted that
herein appellant had already ceased in its business ISSUE:
operation at the time of the foreclosure sale of the WON the Doctrine of Piercing the Corporate Veil be applied
chattels, but also for the reason that whatever adverse
effects of the foreclosure sale of the chattels could have RULING:
upon its reputation or business standing would No.
undoubtedly be the same whether the sale was conducted -Basic in corporation law is the principle that a corporation
has a separate personality distinct from its stockholders G.R. No. 142616 July 31, 2001
and from other corporations to which it may be connected
- However, under the doctrine of piercing the veil of FACTS:
corporate entity, the corporations separate juridical - PNB International Finance Ltd. (PNB-IFL) a subsidiary
personality may be disregarded, for example, when the company of PNB, organized and doing business in Hong
corporate identity is used to defeat public convenience, Kong, extended a letter of credit in favor of the
justify wrong, protect fraud, or defend crime respondents Secured by real estate mortgages
- In these circumstances, the courts will treat the - Respondents made repayments of the loan incurred by
corporation as a mere aggrupation of persons and the remitting those amounts to their loan account with PNB-IFL
liability will directly attach to them in Hong Kong.
-In our view, however, given the facts and circumstances of - their outstanding obligations stood at US$1,497,274.70.
this case, the doctrine of piercing the corporate veil has no - Pursuant to the terms of the real estate mortgages, PNB-
relevant application here IFL, through its attorney-in-fact PNB, notified the
- Respondent court erred in permitting the trial courts respondents of the foreclosure of all the real estate
resort to this doctrine. The rationale behind piercing a mortgages and that the properties subject thereof were to
corporations identity in a given case is to remove the be sold at a public auction
barrier between the corporation from the persons -In their complaint, respondents admit that petitioner is a
comprising it to thwart the fraudulent and illegal schemes mere attorney-in-fact for the PNB-IFL with full power and
of those who use the corporate personality as a shield for authority to, inter alia, foreclose on the properties
undertaking certain proscribed activities mortgaged to secure their loan obligations with PNB-IFL.
- However, in the case at bar, instead of holding certain -respondents filed a complaint for injunction with prayer
individuals or persons responsible for an alleged corporate for the issuance of a writ of preliminary injunction and/or
act, the situation has been reversed temporary restraining order before the RTC
- It is the petitioner as a corporation which is being ordered
to answer for the personal liability of certain individual TC: issued temporary restraining order.
directors, officers and incorporators concerned applied the doctrine of piercing the veil of corporate
-The personality of the corporation and those of its entity
incorporators, directors and officers in their personal ruled that since PNB-IFL, is a wholly owned
capacities ought to be kept separate in this case. The claim subsidiary of defendant Philippine National Bank, the
for legal fees against the concerned individual suit against the defendant PNB is a suit against PNB-IFL
incorporators, officers and directors could not be properly CA: affirmed TC's decision
directed against the corporation without violating basic
principles governing corporations. ISSUE:
WON the Doctrine of Piercing the Corporate Veil is
applicable in the instant case
6. PHILIPPINE NATIONAL BANK vs. RITRATTO GROUP
INC., RIATTO INTERNATIONAL, INC., and DADASAN RULING:
GENERAL MERCHANDISE No.
-The general rule is that as a legal entity, a corporation has policy and business practice in respect to the
a personality distinct and separate from its individual transaction attacked so that the corporate entity as
stockholders or members, and is not affected by the to this transaction had at the time no separate
personal rights, obligations and transactions of the latter mind, will or existence of its own.
-The mere fact that a corporation owns all of the stocks of 2. Such control must have been used by the
another corporation, taken alone is not sufficient to justify defendant to commit fraud or wrong, to perpetuate
their being treated as one entity. the violation of a statutory or other positive legal
- If used to perform legitimate functions, a subsidiary's duty, or dishonest and, unjust act in contravention
separate existence may be respected, and the liability of of plaintiffs legal rights; and,
the parent corporation as well as the subsidiary will be 3. The aforesaid control and breach of duty must
confined to those arising in their respective business. proximately cause the injury or unjust loss complained of.
-The courts may in the exercise of judicial discretion step in -The absence of any one of these elements prevents
to prevent the abuses of separate entity privilege and "piercing the corporate veil."
pierce the veil of corporate entity. -Aside from the fact that PNB-IFL is a wholly owned
-We find, however, that the ruling in Koppel finds no subsidiary of petitioner PNB, there is no showing of the
application in the case at bar. In said case, this Court indicative factors that the former corporation is a mere
disregarded the separate existence of the parent and the instrumentality of the latter are present.
subsidiary on the ground that the latter was formed merely -the doctrine of piercing the corporate veil based on the
for the purpose of evading the payment of higher taxes. In alter ego or instrumentality doctrine finds no application in
the case at bar, respondents fail to show any cogent the case at bar.
reason why the separate entities of the PNB and PNB-IFL
should be disregarded.
- the doctrine of piercing the corporate veil is an equitable 7. LAND BANK OF THE PHILIPPINES vs. THE COURT
doctrine developed to address situations where the OF APPEALS, ECO MANAGEMENT CORPORATION and
separate corporate personality of a corporation is abused EMMANUEL C. OATE
or used for wrongful purposes. G.R. No. 127181 September 4, 2001
-The doctrine applies when the corporate fiction is used to
defeat public convenience, justify wrong, protect fraud or FACTS:
defend crime, or when it is made as a shield to confuse the - appellant Land Bank of the Philippines (LBP) extended a
legitimate issues, or where a corporation is the mere alter series of credit accommodations to appellee ECO using the
ego or business conduit of a person, or where the trust funds of the Philippine Virginia Tobacco
corporation is so organized and controlled and its affairs Administration (PVTA)
are so conducted as to make it merely an instrumentality, - The proceeds of the credit accommodations were
agency, conduit or adjunct of another corporation received on behalf of ECO by appellee Oate
- test in determining the applicability of the doctrine of -On the respective maturity dates of the loans, ECO failed
piercing the veil of corporate fiction, to wit: to pay the same.
1. Control, not mere majority or complete control, - Oral and written demands were made, but ECO was
but complete domination, not only of finances but of unable to pay.
- ECO claims that the company was in financial difficulty for persons composing it as well as from any other legal entity
it was unable to collect its investments with companies to which it may be related
which were affected by the financial crisis brought about - By this attribute, a stockholder may not, generally, be
by the Dewey Dee scandal made to answer for acts or liabilities of the said
-ECO proposed and submitted to LBP a "Plan of Payment" corporation, and vice versa
whereby the former would set up a financing company -This separate and distinct personality is, however, merely
which would absorb the loan obligations. a fiction created by law for convenience and to promote
-It was proposed that LBP would participate in the scheme the ends of justice
through the conversion of P9,000,000.00 which was part of -For this reason, it may not be used or invoked for ends
the total loan, into equity. subversive to the policy and purpose behind its creation or
- LBP agreed to the Plan Payment provided that it shall not which could not have been intended by law to which it
participate in the undertaking owes its being
-ECO submitted to LBP a "Revised Plan of Payment" -The burden is on petitioner to prove that the corporation
deleting the latters participation in the proposed financing and its stockholders are, in fact, using the personality of
company. the corporation as a means to perpetrate fraud and/or
- The Trust Committee deliberated on the "Revised Plan of escape a liability and responsibility demanded by law.
Payment" and resolved to reject it. -In order to disregard the separate juridical personality of a
- LBP then sent a letter to the PVTA for the latters corporation, the wrongdoing must be clearly and
comments. The letter stated that if LBP did not hear from convincingly established.
PVTA within five (5) days from the latters receipt of the -In the absence of any malice or bad faith, a stockholder or
letter, such silence would be construed to be an approval an officer of a corporation cannot be made personally
of LBPs intention to file suit against ECO and its corporate liable for corporate liabilities
officers. PVTA did not respond to the letter. -The mere fact that Oate owned the majority of the
- Landbank filed a complaint for Collection of Sum of Money shares of ECO is not a ground to conclude that Oate and
against ECO and Emmanuel C. Oate ECO is one and the same. Mere ownership by a single
stockholder of all or nearly all of the capital stock of a
TC: judgment was rendered in favor of LBP; however, corporation is not by itself sufficient reason for
appellee Oate was absolved from personal liability for disregarding the fiction of separate corporate personalities
insufficiency of evidence -That respondent corporation in this case was being used
CA: affirmed the decision of TC in toto as a mere alter ego of Oate to obtain the loans had not
been shown. Bad faith or fraud on the part of ECO and
ISSUE: Oate was not also shown.
WON the corporate veil of ECO Management Corporation
should be pierced

RULING:
- A corporation, upon coming into existence, is invested by 8. ADALIA B. FRANCISCO and MERRYLAND
law with a personality separate and distinct from those DEVELOPMENT CORPORATION vs. RITA C. MEJIA, as
Executrix of Testate Estate of ANDREA CORDOVA presentation of its evidence and the case lapsed into
VDA. DE GUTERREZ inactive status for a period of about fourteen years
G.R. No. 141617 August 14, 2001 - In the meantime, the mortgaged parcels of land became
delinquent in the payment of real estate taxes which
FACTS: culminated in their levy and auction sale in satisfaction of
-Andrea Cordova Vda. de Gutierrez (Gutierrez) was the the tax arrears.
registered owner of a parcel of land in Camarin, Caloocan - The highest bidder for the three parcels of land was
City known as Lot 861 of the Tala Estate petitioner Merryland Development Corporation
- The land had an aggregate area of twenty-five (25) (Merryland), whose President and majority stockholder is
hectares Francisco.
- The property was later subdivided into five lots with an - before the expiration of the one year redemption period,
area of five hectares each and five new transfer certificates Mejia filed a Motion for Decision with the trial court.
of title were issued in the name of Gutierrez - The hearing of said motion was deferred, however, due to
- Gutierrez and Cardale Financing and Realty Corporation a Motion for Postponement filed by Cardale through
(Cardale) executed a Deed of Sale with Mortgage to the 4 Francisco, who signed the motion in her capacity as
out of 5 lots "officer-in-charge," claiming that Cardale needed time to
- Upon the execution of the deed, Cardale partially paid hire new counsel.
Gutierrez - However, Francisco did not mention the tax delinquencies
- It was agreed that the balance would be paid in several and sale in favor of Merryland.
installments within five years from the date of the deed, at - Subsequently, the redemption period expired and
an interest of nine percent per annum Merryland, acting through Francisco, filed petitions for
- Thereafter, the titles of Gutierrez were cancelled and new consolidation of title, which culminated in the issuance of
TCT were issued in favor of Cardale certain orders decreeing the cancellation of Cardales' TCT
-To secure payment of the balance of the purchase price, and the issuance of new TCT "free from any encumbrance
Cardale constituted a mortgage on three of the four parcels or third-party claim whatsoever" in favor of Merryland.
of land - Pursuant to such orders, the Register of Deeds issued
-The encumbrance was annotated upon the certificates of new TCT's in the name of Merryland which did not bear a
title and the owner's duplicate certificates. The owner's memorandum of the mortgage liens in favor of Gutierrez
duplicates were retained by Gutierrez. - Mejia, in her capacity as executrix of the Estate of
- owing to Cardale's failure to settle its mortgage Gutierrez, filed with the RTC a complaint for damages with
obligation, Gutierrez filed a complaint for rescission of the prayer for preliminary attachment against Francisco,
contract Merryland and the Register of Deeds of Caloocan City
- during the pendency of the rescission case, Gutierrez
died and was substituted by her executrix, respondent Rita TC: rendered a decision in favor of the defendants,
C. Mejia dismissing the complaint for damages filed by Mejia
- Cardale, which was represented by petitioner Adalia B. CA: reversed the trial court, holding that the corporate
Francisco (Francisco) in her capacity as Vice-President and veil of Cardale and Merryland must be pierced in order to
Treasurer of Cardale, lost interest in proceeding with the hold Francisco and Merryland solidarily liable since these
two corporations were used as dummies by Francisco only serves to shed more light upon Francisco's fraudulent
purposes.
ISSUE: -Thus, aside from the instrumental role she played as an
WON the corporate veil of Merryland should be pierced officer of Cardale, in evading that corporation's legitimate
obligations to Gutierrez, it appears that Francisco's actions
RULING: were also oriented towards securing advantages for
another corporation in which she had a substantial
-It is dicta in corporation law that a corporation is a juridical interest.
person with a separate and distinct personality from mat of - Adalia Francisco is solely liable to the estate of Gutierrez
the stockholders or members who compose it and Merryland hereby absolved from all liability
- However, when the legal fiction of the separate corporate - The only act imputable to Merryland in relation to the
personality is abused, such as when the same is used for mortgaged properties is that it purchased the same and
fraudulent or wrongful ends, the courts have not hesitated this by itself is not a fraudulent or wrongful act
to pierce the corporate veil
-With specific regard to corporate officers, the general rule
is that the officer cannot be held personally liable with the 9. PHILIPPINE NATIONAL BANK & NATIONAL SUGAR
corporation, whether civilly or otherwise, for the DEVELOPMENT CORPORATION vs. ANDRADA
consequences of his acts, if he acted for and in behalf of ELECTRIC & ENGINEERING COMPANY
the corporation, within the scope of his authority and in G.R. No. 142936 April 17, 2002
good faith
-In such cases, the officer's acts are properly attributed to FACTS:
the corporation. - respondent Andrada Electric & Engineering Company
- However, if it is proven that the officer has used the (AEEC) alleged that it is a partnership duly organized,
corporate fiction to defraud a third party, or that he has existing, and operating under the laws of the Philippines
acted negligently, maliciously or in bad faith, then the - petitioner PNB is a semi-government corporation duly
corporate veil shall be lifted and he shall be held personally organized, existing and operating under the laws of the
liable for the particular corporate obligation involved Philippines
-The Court, after an assiduous study of this case, is - other petitioner, the National Sugar Development
convinced that the totality of the circumstances Corporation (NASUDECO), is also a semi-government
appertaining conduce to the inevitable conclusion that corporation and the sugar arm of the PNB
petitioner Francisco acted in bad faith. The events leading - Pampanga Sugar Mills (PASUMIL in short), is a corporation
up to the loss by the Gutierrez estate of its mortgage organized, existing and operating under the 1975 laws of
security attest to this. the Philippine
-It is exceedingly apparent to the Court that the totality of - AEEC is engaged in the business of general construction
Francisco's actions clearly betray an intention to conceal for the repairs and/or construction of different kinds of
the tax delinquencies, levy and public auction of the machineries and buildings
subject properties from the estate of Gutierrez - PNB acquired the assets of the defendant PASUMIL that
-That Merryland acquired the property at the public auction were earlier foreclosed by the Development Bank of the
Philippines (DBP) committed against another, in disregard of its rights
- PNB organized NASUDECO to take ownership and - The question of whether a corporation is a mere alter ego
possession of the assets and ultimately to nationalize and is one of fact
consolidate its interest in other PNB controlled sugar mills - Piercing the veil of corporate fiction may be allowed only
- PASUMIL engaged the services of plaintiff for electrical if the following elements concur: (1) control -- not mere
rewinding and repair, most of which were partially paid by stock control, but complete domination -- not only of
the defendant PASUMIL, leaving several unpaid accounts finances, but of policy and business practice in respect to
with the plaintiff the transaction attacked, must have been such that the
- PASUMIL, PNB and NASUDECO failed and refused to pay corporate entity as to this transaction had at the time no
the plaintiff their just, valid and demandable obligation separate mind, will or existence of its own; (2) such control
- that the President of the NASUDECO is also the Vice- must have been used by the defendant to commit a fraud
President of the PNB or a wrong to perpetuate the violation of a statutory or
- AEEC filed a complaint against PNB, NASUDECO and other positive legal duty, or a dishonest and an unjust act
PASUMIL in contravention of plaintiffs legal right; and (3) the said
- PNB and NASUDECO filed a motion to dismiss control and breach of duty must have proximately caused
the injury or unjust loss complained of
TC: rendered decision in favor of plaintiff - We believe that the absence of the foregoing elements in
CA: affirmed the TC the present case precludes the piercing of the corporate
veil
ISSUE: - First, other than the fact that petitioners acquired the
a. WON the Doctrine of Piercing the Corporate Veil may be assets of PASUMIL, there is no showing that their control
applied over it warrants the disregard of corporate
b. WON there is merger or consilidation of companies personalities. Second, there is no evidence that their
juridical personality was used to commit a fraud or to do a
RULING: wrong; or that the separate corporate entity was farcically
a. No. used as a mere alter ego, business conduit or
- the principle that the corporate mask may be removed or instrumentality of another entity or person. Third,
the corporate veil pierced when the corporation is just an respondent was not defrauded or injured when petitioners
alter ego of a person or of another corporation. acquired the assets of PASUMIL
- For reasons of public policy and in the interest of justice, - The CA did not point to any fact evidencing bad faith on
the corporate veil will justifiably be impaled only when it the part of PNB and its transferee
becomes a shield for fraud, illegality or inequity committed - The corporate fiction was not used to defeat public
against third persons. convenience, justify a wrong, protect fraud or defend crime
- It must be certain that the corporate fiction was misused
to such an extent that injustice, fraud, or crime was b. No.
committed against another, in disregard of its rights - Respondent further claims that petitioners should be held
- It must be certain that the corporate fiction was misused liable for the unpaid obligations of PASUMIL by virtue of LOI
to such an extent that injustice, fraud, or crime was Nos. 189-A and 311, which expressly authorized PASUMIL
and PNB to merge or consolidate. Lipat, owned Belas Export Trading (BET), a single
- On the other hand, petitioners contend that their takeover proprietorship
of the operations of PASUMIL did not involve any corporate - BET was engaged in the manufacture of garments for
merger or consolidation, because the latter had never lost domestic and foreign consumption
its separate identity as a corporation - The Lipats also owned the Mystical Fashions in the
- A consolidation is the union of two or more existing United States, which sells goods imported from the
entities to form a new entity called the consolidated Philippines through BET
corporation. - Mrs. Lipat designated her daughter, Teresita B. Lipat, to
- A merger, on the other hand, is a union whereby one or manage BET in the Philippines while she was managing
more existing corporations are absorbed by another Mystical Fashions in the United States
corporation that survives and continues the combined - In order to facilitate the convenient operation of BET,
business Estelita Lipat executed an SPA appointing Teresita Lipat as
- the merger, however, does not become effective upon the her attorney-in-fact to obtain loans and other credit
mere agreement of the constituent corporations. accommodations from respondent Pacific Banking
- Since a merger or consolidation involves fundamental Corporation
changes in the corporation, as well as in the rights of - She likewise authorized Teresita to execute mortgage
stockholders and creditors, there must be an express contracts on properties owned or co-owned by her as
provision of law authorizing them security for the obligations to be extended by Pacific Bank
- For a valid merger or consolidation, the approval by the including any extension or renewal thereof
Securities and Exchange Commission (SEC) of the articles - Teresita, by virtue of the special power of attorney, was
of merger or consolidation is required able to secure for and in behalf of her mother, Mrs. Lipat
-These articles must likewise be duly approved by a and BET, a loan from Pacific Bank
majority of the respective stockholders of the constituent - to buy fabrics to be manufactured by BET and exported
corporations to Mystical Fashions in the United States
- In the case at bar, we hold that there is no merger or - As security therefor, the Lipat spouses, as represented
consolidation with respect to PASUMIL and PNB. by Teresita, executed a Real Estate Mortgage over their
- The procedure prescribed under Title IX of the property
Corporation Code was not followed - Said property was likewise made to secure other
additional or new loans
- In 1979, BET was incorporated into a family corporation
10. ESTELITA BURGOS LIPAT and ALFREDO LIPAT vs. named Belas Export Corporation (BEC) in order to facilitate
PACIFIC BANKING CORPORATION, REGISTER OF the management of the business
DEEDS, RTC EX-OFFICIO SHERIFF OF QUEZON CITY - BEC was engaged in the business of manufacturing and
and the Heirs of EUGENIO D. TRINIDAD exportation of all kinds of garments of whatever kind and
G.R. No. 142435. April 30, 2003 description and utilized the same machineries and
equipment previously used by BET
FACTS: - Eventually, the loan was later restructured in the name of
- Petitioners, the spouses Alfredo Lipat and Estelita Burgos BEC and subsequent loans were obtained by BEC with the
corresponding promissory notes duly executed by Teresita WON the doctrine of piercing the veil of corporate fiction is
on behalf of the corporation applicable in this case
- A letter of credit was also opened by Pacific Bank in favor
of A. O. Knitting Manufacturing Co., Inc., upon the request RULING:
of BEC after BEC executed the corresponding trust receipt - When the corporation is the mere alter ego or business
therefor conduit of a person, the separate personality of the
- These transactions were all secured by the real estate corporation may be disregarded
mortgage over the Lipats property. - This is commonly referred to as the instrumentality rule
-The promissory notes, export bills, and trust receipt or the alter ego doctrine, which the courts have applied in
eventually became due and demandable. disregarding the separate juridical personality of
- Unfortunately, BEC defaulted in its payments. corporations.
- After receipt of Pacific Banks demand letters, Estelita - Incidentally, Teresita was designated as executive-vice
Lipat went to the office of the banks liquidator and asked president and general manager of both BET and BEC,
for additional time to enable her to personally settle BECs respectively.[17] We note further that: (1) Estelita and
obligations. Alfredo Lipat are the owners and majority shareholders of
- The bank acceded to her request but Estelita failed to BET and BEC, respectively;[18] (2) both firms were managed
fulfill her promise. by their daughter, Teresita;[19] (3) both firms were engaged
- Consequently, the real estate mortgage was foreclosed in the garment business, supplying products to Mystical
and after compliance with the requirements of the law the Fashion, a U.S. firm established by Estelita Lipat; (4) both
mortgaged property was sold at public auction as Eugenio firms held office in the same building owned by the Lipats;
[20]
D. Trinidad as the highest bidder. (5) BEC is a family corporation with the Lipats as its
- the spouses Lipat filed before the Quezon City RTC a majority stockholders; (6) the business operations of the
complaint for annulment of the real estate mortgage, BEC were so merged with those of Mrs. Lipat such that
extrajudicial foreclosure and the certificate of sale issued they were practically indistinguishable; (7) the corporate
over the property against Pacific Bank and Eugenio D. funds were held by Estelita Lipat and the corporation itself
Trinidad had no visible assets; (8) the board of directors of BEC was
- The complaint alleged that contracts were all ultra composed of the Burgos and Lipat family members; [21] (9)
vires acts of Teresita as they were executed without the Estelita had full control over the activities of and decided
requisite board resolution of the Board of Directors of BEC. business matters of the corporation; [22] and that (10)
- The Lipats also averred that assuming said acts were Estelita Lipat had benefited from the loans secured from
valid and binding on BEC, the same were the corporations Pacific Bank to finance her business abroad [23] and from the
sole obligation, it having a personality distinct and export bills secured by BEC for the account of Mystical
separate from spouses Lipat Fashion
- In our view, BEC is a mere continuation and successor of
TC: dismissed the complaint BET, and petitioners cannot evade their obligations in the
CA: also dismissed the appealed mortgage contract secured under the name of BEC on the
pretext that it was signed for the benefit and under the
ISSUE: name of BET
 ISSUE:
11. PHILIPPINE STOCK EXCHANGE, INC vs. THE WON the denial of PALI's application is properly
HONORABLE COURT OF APPEALS, SECURITIES AND
EXCHANGE COMMISSION and PUERTO AZUL LAND, RULING:
INC Yes.
G.R. No. 125469 October 27, 1997 - SEC is the entity with the primary say as to whether or
not securities, including shares of stock of a corporation,
FACTS: may be traded or not in the stock exchange.
- Puerto Azul Land, Inc. (PALI), a domestic real estate - Paramount policy also supports the authority of the public
corporation, had sought to offer its shares to the public in respondent to review petitioners denial of the listing. Being
order to raise funds allegedly to develop its properties and a stock exchange, the petitioner performs a function that is
pay its loans with several banking institutions vital to the national economy, as the business is affected
- PALI was issued a Permit to Sell its shares to the public by with public interest.
the Securities and Exchange Commission (SEC) - This is not to say, however, that the PSE's management
- To facilitate the trading of its shares among investors, prerogatives are under the absolute control of the SEC
PALI sought to course the trading of its shares through the - The PSE is, after all, a corporation authorized by its
Philippine Stock Exchange, Inc. (PSE), for which purpose it corporate franchise to engage in its proposed and duly
filed with the said stock exchange an application to list its approved business
shares, with supporting documents attached - One of the PSEs main concerns, as such, is still the
- Said application was recommended for approval generation of profit for its stockholders. Moreover, the PSE
- before it could act upon PALIs application, the Board of has all the rights pertaining to corporations
Governors of PSE received a letter from the heirs of - A corporation is but an association of individuals, allowed
Ferdinand E. Marcos, claiming that the late President to transact under an assumed corporate name, and with a
Marcos was the legal and beneficial owner of certain distinct legal personality.
properties forming part of PALI's assets - In organizing itself as a collective body, it waives no
- As a result, PSE denied PALIs application, citing the constitutional immunities and perquisites appropriate to
existence of serious claims, issues and circumstances such body
surrounding PALIs ownership over its assets that adversely -As to its corporate and management decisions, therefore,
affect the suitability of listing PALIs shares in the stock the state will generally not interfere with the same.
exchange. - Questions of policy and of management are left to the
- PALI wrote a letter to the SEC asking to review PSE's honest decision of the officers and directors of a
decision corporation, and the courts are without authority to
- the SEC reversed PSE's decision and ordered to substitute their judgment for the judgment of the board of
immediately cause the listing of the PALI shares in the directors.
Exchange - The board is the business manager of the corporation,
- PSE filed with the CA a Petition for Review and so long as it acts in good faith, its orders are not
- CA dismissed petition reviewable by the courts.
- Thus, notwithstanding the regulatory power of the SEC
over the PSE, and the resultant authority to reverse the shares originally issued
PSEs decision in matters of application for listing in the - ANSCOR's authorized capital stock was increased to
market, the SEC may exercise such power only if the PSEs P2,500,000.00 divided into 25,000 common shares with
judgment is attended by bad faith the same par value
- it was held that bad faith does not simply connote bad - of the additional 15,000 shares, only 10,000 was issued
judgment or negligence. It imports a dishonest purpose or which were all subscribed by Don Andres, after the other
some moral obliquity and conscious doing of wrong. It stockholders waived in favor of the former their pre-
means a breach of a known duty through some motive or emptive rights to subscribe to the new issues
interest of ill will, partaking of the nature of fraud - ANSCOR declared stock dividends.
- In any case, for the purpose of determining whether PSE - Don Andres died.
acted correctly in refusing the application of PALI, the true - In the same year (December 1966), stock dividends
ownership of the properties of PALI need not be determined worth 46,290 and 46,287 shares were respectively
as an absolute fact. received by the Don Andres estate and Doa Carmen from
- What is material is that the uncertainty of the properties ANSCOR
ownership and alienability exists, and this puts to question - Doa Carmen requested a ruling from the United States
the qualification of PALIs public offering Internal Revenue Service (IRS), inquiring if an exchange of
- This is in accord with the business judgment rule common with preferred shares may be considered as a tax
whereby the SEC and the courts are barred from intruding avoidance scheme
into business judgments of corporations, when the same - ANSCOR reclassified its existing 300,000 common shares
are made in good faith. into 150,000 common and 150,000 preferred shares.
- The said rule precludes the reversal of the decision of the - the IRS opined that the exchange is only a
PSE to deny PALIs listing application, absent a showing a recapitalization scheme and not tax avoidance
bad faith on the part of the PSE - pursuant to a Board Resolution, ANSCOR redeemed
28,000 common shares from the Don Andres' estate.
12. COMMISSIONER OF INTERNAL REVENUE vs. - About a year later, ANSCOR again redeemed 80,000
THE COURT OF APPEALS, COURT OF TAX APPEALS common shares from the Don Andres' estate
and A. SORIANO CORP. - after examining ANSCOR's books of account and records,
G.R. No. 108576 January 20, 1999 Revenue examiners issued a report proposing that
ANSCOR be assessed for deficiency withholding tax-at-
FACTS: source
- Don Andres Soriano, a citizen and resident of the United - The Bureau of Internal Revenue (BIR) made the
States, formed the corporation "A. Soriano Y Cia", corresponding assessments despite the claim of ANSCOR
predecessor of ANSCOR, with a P1,000,000.00 that it availed of the tax amnesty under Presidential
capitalization divided into 10,000 common shares at a par Decree (P.D.) 23
value of P100/share - ANSCOR's subsequent protest on the assessments was
- ANSCOR is wholly owned and controlled by the family of denied by petitioner
Don Andres, who are all non-resident aliens - Subsequently, ANSCOR filed a petition for review with the
- Don Andres subscribed to 4,963 shares of the 5,000 CTA assailing the tax assessments on the redemptions and
exchange of stocks. estate. 25,247.5 of that was original issue from the capital
- In its decision, the Tax Court reversed petitioner's ruling, of ASC.
after finding sufficient evidence to overcome the prima - The rest (82,752.5) of the shares are deemed to have
facie correctness of the questioned assessments been from stock dividend shares. Sale of stock dividends is
- CA affirmed the ruling of the CTA taxable.
- Petitioner contends that the exchange transaction a - It is also to be noted that in the absence of evidence to
tantamount to "cancellation" under Section 83(b) making the contrary, the Tax Code presumes that every
the proceeds thereof taxable. It also argues that the distribution of corporate property, in whole or in part, is
Section applies to stock dividends which is the bulk of made out of corporate profits such as stock dividends.
stocks that ANSCOR redeemed. Further, petitioner claims - It cannot be argued that all the 108,000 shares were
that under the "net effect test," the estate of Don Andres distributed from the capital of ASC and that the latter is
gained from the redemption merely redeeming them as such.
- ANSCOR, however, avers that it has no duty to withhold - The capital cannot be distributed in the form of
any tax either from the Don Andres estate or from Doa redemption of stock dividends without violating the
Carmen based on the two transactions, because the same trust fund doctrine wherein the capital stock,
were done for legitimate business purposes which are (a) property and other assets of the corporation are
to reduce its foreign exchange remittances in the event the regarded as equity in trust for the payment of the
company would declare cash dividends, 40 and to (b) corporate creditors.
subsequently "filipinized" ownership of ANSCOR, as - Once capital, it is always capital.
allegedly, envisioned by Don Andres - That doctrine was intended for the protection of
corporate creditors.
ISSUE:
WON ASC's arguments are tenable
13. CENTRAL TEXTILE MILLS, INC. vs. NATIONAL
RULING: WAGES AND PRODUCTIVITY COMMISSION, REGIONAL
No. TRIPARTITE WAGES AND PRODUCTIVITY BOARD-
- The issuance of stock dividends and its subsequent NATIONAL CAPITAL REGION, and UNITED CMC
redemption must be separate, distinct, and not related, for TEXTILE WORKERS UNION
the redemption to be considered a legitimate tax scheme. G.R. No. 104102 August 7, 1996
Redemption cannot be used as a cloak to distribute
corporate earnings.
- The reason behind the redemption is not material. FACTS:
- The proceeds from a redemption is taxable and ASC is - respondent Regional Tripartite Wages and Productivity
duty bound to withhold the tax at source. Board-National Capital Region (the Board) issued Wage
- The Soriano Estate definitely profited from the Order No. NCR-02
redemption and such profit is taxable, and again, ASC had - Said wage order mandated a P12.00 increase in the
the duty to withhold the tax. minimum daily wage of all employees and workers in the
- There was a total of 108,000 shares redeemed from the private sector in the NCR, but exempted from its
application distressed employers whose capital has been
impaired by at least twenty-five percent (25%) in the ISSUE:
preceding year. WON the argument of petitioner is valid
- the Guidelines under the WO No. NCR-02 defined "capital"
as the "paid-up capital at the end of the last full accounting RULING:
period (in case of corporations)
- Under said guidelines, "(a)n applicant firm may be - The guidelines on exemption specifically refer to paid-up
granted exemption from payment of the prescribed capital, not authorized capital stock, as the basis of capital
increase in wage/cost-of-living allowance for a period not to impairment for exemption from WO No. NCR-02.
exceed one (1) year from effectivity of the order, when - The records reveal, however, that petitioner included in
accumulated losses at the end of the period under review its total paid-up capital payments on advance
have impaired by at least 25 percent the paid-up capital at subscriptions, although the proposed increase in its
the end of the last full accounting period preceding the capitalization had not yet been approved by, let alone
application presented for the approval of, the SEC
- By virtue of these provisions, petitioner filed its - Although no petition to that effect was ever submitted to
application for exemption from compliance with WO No. the SEC for its approval, petitioner already started
NCR-02 due to financial losses. receiving subscriptions and payments on the proposed
- the Board disapproved petitioner's application for increase, which it allegedly held conditionally, that is,
exemption after concluding from the documents submitted pending approval of the same by the SEC. In its
that petitioner sustained an impairment of only 22.41% Memorandum, however, petitioner admitted, without
- petitioner's motion for reconsideration was dismissed by giving any reason therefor, that it indeed "received
the Board for lack of merit. 'subscriptions' and 'payments' to the said proposed
- The Board, opined that according to the audited financial increase in capital stock, even in the absence of SEC
statements submitted by petitioner to them, to the SEC approval of the increase as required by the Corporation
and to the BIR, petitioner had a total paid-up capital of Code
P305,767,900.00 as of December 31, 1990, which amount - Thus, by the end of 1990, the corporation had a
should be the basis for determining the capital impairment subscribed capital stock of P482,748,900.00 and, after
of petitioner, instead of the authorized capital stock of deducting P176,981,000.00 in subscriptions receivables, a
P128,000,000.00 which it insists should be the basis of total paid-up capital of P305,767,900.00. P177,767,900.00
computation of this sum constituted the unauthorized increase in its
- Petitioner maintains in the instant action that its subscribed capital stock, which are actually payments on
authorized capital stock, not its unauthorized paid-up future issues of shares.
capital, should be used in arriving at its capital impairment - These payments cannot as yet be deemed part of
for 1990. petitioner's paid-up capital, technically speaking, because
- it claims that "the capital stock of a corporation stand(s) its capital stock has not yet been legally increased
increased or decreased only from and after approval and - Thus, its authorized capital stock in the year when
the issuance of the certificate of filing of increase of capital exemption from WO No. NCR-02 was sought stood at
stock." P128,000,000.00, which was impaired by losses of nearly
50%. Such payments constitute deposits on future was threatened with stoppage and incompletion when its
subscriptions, money which the corporation will hold in owner, the First Landlink Asia Development Corporation
trust for the subscribers until it files a petition to increase (FLADC), which was owned by the Tius, encountered dire
its capitalization and a certificate of filing of increase of financial difficulties
capital stock is approved and issued by the SEC - It was heavily indebted to the Philippine National Bank
- As a trust fund, this money is still withdrawable by any of (PNB) for P190 million
the subscribers at any time before the issuance of the - To stave off foreclosure of the mortgage on the two lots
corresponding shares of stock, unless there is a pre- where the mall was being built, the Tius invited Ong Yong,
subscription agreement to the contrary, which apparently Juanita Tan Ong, Wilson T. Ong, Anna L. Ong, William T. Ong
is not present in the instant case. Consequently, if a and Julia Ong Alonzo (the Ongs), to invest in FLADC
certificate of increase has not yet been issued by the SEC, - Under the Pre-Subscription Agreement they entered into,
the subscribers to the unauthorized issuance are not to be the Ongs and the Tius agreed to maintain equal
deemed as stockholders possessed of such legal rights as shareholdings in FLADC
the rights to vote and dividends - the Ongs were to subscribe to 1,000,000 shares at a par
- In the case at hand, petitioner's capital held answerable value of P100.00 each while the Tius were to subscribe to
for the additional wages would include funds it only holds an additional 549,800 shares at P100.00 each in addition
in trust, which to reiterate may not be deemed par of its to their already existing subscription of 450,200 shares
paid-up capital, the losses of which shall be the basis of the - Furthermore, they agreed that the Tius were entitled to
25% referred to above. To include such funds in the paid-up nominate the Vice-President and the Treasurer plus five
capital would be prejudicial to the corporation as an directors while the Ongs were entitled to nominate the
employer considering that the records clearly show that it President, the Secretary and six directors (including the
is entitled to exemption, even as the anomaly was brought chairman) to the board of directors of FLADC.
about by an auditing error - Moreover, the Ongs were given the right to manage and
operate the mall
- Accordingly, the Ongs paid P100 million in cash for their
14. ONG YONG, JUANITA TAN ONG, WILSON T. ONG, subscription to 1,000,000 shares of stock while the Tius
ANNA L. ONG, WILLIAM T. ONG, WILLIE T. ONG, and committed to contribute to FLADC a four-storey building
JULIE ONG ALONZO vs. DAVID S. TIU, CELY Y. TIU, and two parcels of land to cover their additional 549,800
MOLY YU GAW, BELEN SEE YU, D. TERENCE Y. TIU, stock subscription therein
JOHN YU, LOURDES C. TIU, INTRALAND RESOURCES - he Ongs paid in another P70 million to FLADC and P20
DEVELOPMENT CORP., MASAGANA TELAMART, INC., million to the Tius over and above their P100 million
REGISTER OF DEEDS OF PASAY CITY, and the investment, the total sum of which (P190 million) was used
SECURITIES AND EXCHANGE COMMISSION to settle the P190 million mortgage indebtedness of FLADC
G.R. No. 144476 April 8, 2003 to PNB
- The business harmony between the Ongs and the Tius in
FLADC, however, was shortlived because the Tius,
FACTS: rescinded the Pre-Subscription Agreement.
- the construction of the Masagana Citimall in Pasay City - The Tius accused the Ongs of (1) refusing to credit to
them the FLADC shares covering their real property Since these were unissued shares, the parties' Pre-
contributions; (2) preventing David S. Tiu and Cely Y. Tiu Subscription Agreement was in fact a subscription contract
from assuming the positions of and performing their duties as defined under Section 60, Title VII of the Corporation
as Vice-President and Treasurer, respectively, and (3) Code:
refusing to give them the office spaces agreed upon Any contract for the acquisition of unissued stock in
- In their defense, the Ongs said that David S. Tiu and Cely an existing corporation or a corporation still to be formed
Y. Tiu had in fact assumed the positions of Vice-President shall be deemed a subscription within the meaning of
and Treasurer of FLADC but that it was they who refused to this Title, notwithstanding the fact that the parties
comply with the corporate duties assigned to them. It was refer to it as a purchase or some other contract
the contention of the Ongs that they wanted the Tius to - A subscription contract necessarily involves the
sign the checks of the corporation and undertake their corporation as one of the contracting parties since the
management duties but that the Tius shied away from subject matter of the transaction is property owned by the
helping them manage the corporation corporation its shares of stock. Thus, the subscription
- On the most important issue of their alleged failure to contract (denominated by the parties as a Pre-Subscription
credit the Tius with the FLADC shares commensurate to the Agreement) whereby the Ongs invested P100 million for
Tius' property contributions, the Ongs asserted that, 1,000,000 shares of stock was, from the viewpoint of the
although the Tius executed a deed of assignment for the law, one between the Ongs and FLADC, not between the
1,902.30 square-meter lot in favor of FLADC, they (the Ongs and the Tius. Otherwise stated, the Tius did not
Tius) refused to pay P 570,690 for capital gains tax and contract in their personal capacities with the Ongs since
documentary stamp tax. Without the payment thereof, the they were not selling any of their own shares to them. It
SEC would not approve the valuation of the Tius' property was FLADC that did
contribution (as opposed to cash contribution). This, in - Considering therefore that the real contracting parties to
turn, would make it impossible to secure a new Transfer the subscription agreement were FLADC and the Ongs
Certificate of Title (TCT) over the property in FLADC's name alone, a civil case for rescission on the ground of breach of
- The Tiu's filed a petition for rescission of the Pre- contract filed by the Tius in their personal capacities will
Subscription Agreement with the SEC not prosper. Assuming it had valid reasons to do so, only
FLADC (and certainly not the Tius) had the legal
SEC: confirmed the petition for rescission personality to file suit rescinding the subscription
CA: affirmed the decision of SEC agreement with the Ongs inasmuch as it was the real party
in interest therein.
ISSUE: - All this notwithstanding, granting but not conceding that
WON the pre-subscription agreement executed by Ongs is the Tius possess the legal standing to sue for rescission
actually a subscription contract based on breach of contract, said action will nevertheless
still not prosper since rescission will violate the Trust Fund
RULING: Doctrine and the procedures for the valid distribution of
Yes assets and property under the Corporation Code.
- the subject matter of the contract was the 1,000,000 - The Trust Fund Doctrine provides that subscriptions to the
unissued shares of FLADC stock allocated to the Ongs. capital stock of a corporation constitute a fund to which
the creditors have a right to look for the satisfaction of
their claims.
- This doctrine is the underlying principle in the procedure
for the distribution of capital assets, embodied in the
Corporation Code, which allows the distribution of
corporate capital only in three instances: (1) amendment of
the Articles of Incorporation to reduce the authorized
capital stock, (2) purchase of redeemable shares by the
corporation, regardless of the existence of unrestricted
retained earnings, and (3) dissolution and eventual
liquidation of the corporation.
- Furthermore, the doctrine is articulated in Section 41 on
the power of a corporation to acquire its own shares and in
Section 122 on the prohibition against the distribution of
corporate assets and property unless the stringent
requirements therefor are complied with.
- In the instant case, the rescission of the Pre-Subscription
Agreement will effectively result in the unauthorized
distribution of the capital assets and property of the
corporation, thereby violating the Trust Fund Doctrine and
the Corporation Code, since rescission of a subscription
agreement is not one of the instances when distribution of
capital assets and property of the corporation is allowed