Corpo Case 2.docx

SET 2 CORPO CASES 1.[G.R. No. 131715. December 8, 1999]PHILIPPINE NATIONAL CONSTRUCTION CORPORATION, petitioner, vs. ERNESTO PABION and LOUELLA RAMIRO, respondents.PANGANIBAN, J.:

In a subsequent Resolution dated April 11, 1997,[6] SEC denied reconsideration, clarification and annulment of said Order. The Facts

The Court of Appeals adequately narrates the facts in this wise:

The Securities and Exchange Commission (SEC) has jurisdiction over corporations organized pursuant to the Corporation Code, even if the majority or controlling shares are owned by the government.Hence, it can competently order the holding of a shareholders meeting for the purpose of electing the corporate board of directors. While the SEC may not have authority over government corporations with original charters or those created by special law, it does have jurisdiction over acquired asset corporations as defined in AO 59. Specifically, the Philippine National Construction Company (PNCC) may be ordered by SEC to hold a shareholders meeting to elect its board of directors in accordance with its Articles of Incorporation and By-Laws as well as with the Corporation Code. The chairman and the members of the PNCC Board of Directors hold office by virtue of their election by the shareholders, not by their appointment thereto by the President of the Republic.

On September 16, 1994, private respondents Ernesto Pabion and Louella Ramiro, claiming to be stockholders of the PNCC, filed with the SEC a verified petition, therein alleging that since 1982 or for a period of twelve (12) years, there has been no stockholders meeting of the PNCC to elect the corporations board of directors, thus enabling the incumbent directors to hold on to their position beyond their 1-year term, in violation of PNCCs By-Laws and the Corporation Code. Pabion and Ramiro, therefore, prayed the SEC to issue an order ordering the officers of PNCC or, in the alternative, authorizing petitioners, to call and hold a meeting of the stockholders x x x for the purpose of electing new directors x x x. Docketed as SEC Case No. 0994-4876, the verified petition was assigned to SEC Hearing Officer Manuel Perea.

The Case

The CA effectively affirmed[3] the October 2, 1996 Order issued by the Securities and Exchange Commission,[4] which disposed as follows:

In due time, PNCC filed its answer. Therein, PNCC claimed that it is a government-owned corporation whose organizational and functional management, administration, and supervision are governed by Administrative Order (AO) No. 59, issued by then President Corazon Aquino on February 16, 1988. PNCC asserts that its board of directors does not hold office by virtue of a stockholders election but by appointment of the President of the Philippines, relying on Article IV, Section 16 [1], of AO No. 59, which reads:

WHEREFORE, premises considered, this Petition is hereby GRANTED. The President or the Chairman of the PNCC is hereby ordered to call a special stockholders meeting within thirty (30) days from receipt of this order for the purpose of electing the members of the Board to hold office up to March, 1997 or until the next stockholders meeting will be held. Accordingly, the Corporate Secretary of PNCC is hereby directed to issue required notices to the stockholders.[5]

(1) Governing Boards. - GOCC (government-owned and/or controlled corporation) shall be governed by a Board of Directors or equivalent body composed of an appropriate number of members to be appointed by the President of the Philippines upon the recommendation of the Secretary of whose Department the GOCC is attached. The Chairman of the board shall likewise be appointed by the President upon the recommendation of the Secretary

Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court assailing the Decision of the Court of Appeals[1] (CA) promulgated on October 23, 1997, as well as its subsequent Resolution[2] dated December 2, 1997, denying petitioners Motion for Reconsideration.

1

In the same answer, PNCC expressed the fear that if granted, the prayer in the verified petition would amount to a contravention of AO No. 59 and an interference with the Presidents power of control and appointment over government-owned and/or controlled corporations (GOCCs). PNCC added that under Executive Order No. 399, series of 1951, a GOCC is not required to hold a general meeting of stockholders but, instead, the general manager thereof is merely required to submit an annual report to the President of the Philippines.

incident, either or both of the parties are hereby directed to secure a ruling/opinion from competent authority as to whether or not the PNCC is a government corporation or not, as the matter does not fall within the competence of the Commission to determine. Unless said ruling/opinion is obtained by either or both parties, further proceedings should be held in abeyance. SO ORDERED

In the ensuing pre-trial conference conducted by Hearing Officer Perea, the parties defined the issues, as follows: (a) Whether or not PNCC is a GOCC subject to and governed by LOI 1295 (1983), AO No. 59 (1988) and Executive Order No. 399 (1951), or by its articles-of-incorporation and by-laws only. (b) Whether or not PNCC is required to call a regular annual stockholders meetings on the basis of which the parties agreed to submit the case for resolution after they shall have filed their respective memoranda, which they did. It appears, however, that in a motion dated September 4, 1995, Pabion and Ramiro prayed for the re-opening of the pre-trial conference on the ground that the common assumption on the 75% ownership by several government financial institutions (GFIs) in the PNCC was proved false by their discovery that the GFI[s] are merely a minority among the owners of PNCC. They, therefore, moved that a trial be conducted to determine the extent of ownership by the government in the PNCC. Acting on the aforementioned motion, SEC Hearing Officer Perea issued, on January 30, 1996, the following order: In view of the necessity of a prior determination of whether or not respondent Philippine National Construction Corporation (PNCC) is a government owned or controlled corporation before resolving the instant

Their motion for reconsideration of the aforequoted order having been denied by the same Hearing Officer in his subsequent order of April 10, 1996, Pabion and Ramiro then went to the Commission en banc via a petition for certiorari. Thus came about SEC-EB No. 495 wherein therein petitioners Pabion and Ramiro sought the nullification of Hearing Officer Pereas twin orders of January 30, 1996 and April 10, 1996 for having been allegedly issued with grave abuse of discretion amounting to lack or in excess of jurisdiction. In the same recourse, the two likewise asked the SEC en banc to direct Perea to proceed with the trial on the merits of SEC Case No. 09-94-4876. In its first assailed order of October 2, 1996, the SEC en banc declared Hearing Officer Perea to have acted with grave abuse of discretion in issuing his two (2) questioned orders. The Commission ruled that Perea should have conducted a trial on the merits to resolve the factual issue of whether PNCC is majority or only minority-owned by the government. Explains the Commission en banc in its challenged order: Sec. 5 [b] of P.D. # 902-A confers on SEC original and exclusive jurisdiction to hear and decide intra-corporate controversies. The main issue in the petition is clearly an intra-corporate dispute as it is a controversy between the petitioners as stockholders of PNCC and respondent corporation PNCC regarding the holding of regular stockholders meeting. This matter, therefore, falls within the scope of the jurisdiction of the SEC. In resolving the main issue of whether PNCC should hold regular stockholders meetings, the hearing officer has jurisdiction to resolve the incidental issue of whether PNCC is a GOCC 2

or not. Having validly acquired original and exclusive jurisdiction over the instant petition, the public respondent is mandated to hear and decide all the issues involved in the dispute. In the same order, the Commission en banc, instead of remanding the case to the Hearing Officer to resolve the question of whether PNCC is government-owned or controlled, itself resolved the issue by holding that PNCC, being incorporated under the Corporation Code, is, therefore, subject to Section 50 of the Corporation Code which requires the holding of regular stockholders meeting for the purpose of selecting PNCCs Board of Directors, citing, as basis therefor the ruling in PNOC-EDC vs. NLRC, 20 SCRA 487, to the effect that the determination as to what law governs a corporation is the manner of its creation, adding that PNCC is an acquired asset corporation which, by express provision of Section 2 of AO No. 59, is not considered as a GOCC. And taking judicial notice of PNCCs bylaws thereunder the corporations directors shall be elected at the annual meeting of the stockholders, the Commission en banc concluded that PNCC is, therefore, required to conduct a regular stockholders meeting for the purpose of electing its Board of Directors, considering that the Corporation Code and its own By-Laws require the holding of such meeting. xxx xxx xxx A timely motion for reconsideration was filed by the PNCC but the same was denied by the Commission en banc in its assailed Resolution of April 11, 1997.[7] (citations omitted but bold types and italics found in originial) Ruling of the Court of AppealsUpholding

SEC, the Court of Appeals declared that PNCC, though majority-owned by government financial institutions (GFIs), retained its character as a private corporation. As such, PNCC was required under the Corporation Code to hold regular shareholders meetings to elect its board of directors. The CA ruled: The petition lacks merit.

Although the case reached the SEC en banc through a petition for certiorari, the said body is not helpless to resolve the controversy on its substantive merits. There are indications that PNCC is not a GOCC which the SEC en banc cannot ignore. A trial for the purpose of determining the status of PNCC is unnecessary since the issue can be resolved on the basis of records. A remand will only delay the resolution of the case and frustrate the ends of justice. It may be so, as pointed out by petitioner PNCC, that the rule which allows the SEC en banc to correct instances of grave abuse of discretion is patterned after Rule 65 of the 1997 Rules of Civil Procedure, and therefore, it is only proper that the SEC en banc adhere to the pronouncements of the Supreme Court on the proper treatment of petitions for review on certiorari under Rule 65. It is equally true, however, that the rule enunciated in several cases to the effect that the inquiry in a petition for certiorari is limited only to searching for traces of grave abuse [of] discretion is not cast in stone. For sure, the Supreme Court no less has resolved factual issues in certiorari cases on the basis of the records before it. If the Supreme Court can relax the restriction on the disposition of certiorari cases, We see no reason why a mere quasiadministrative body unsaddled by the stringent rules of procedure, like the SEC en banc, cannot follow the High Courts example, more so when, as rationalized by the same Court in Gokongwei, Jr. vs. Securities and Exchange Commission, et. al., 89 SCRA 336, 360, the underlying justification for the relaxation of the rule applies to the instant case as well. Says the High Court in that case: It is an accepted rule of procedure that the Supreme court should always strive to settle the entire controversy in a single proceeding, leaving no root or branch to bear the seeds of future litigation. Thus, in Francisco v. City of Davao (12 SCRA 682), this Court resolved to decide the case on the merits instead of remanding it to the trial court for further proceedings since the ends of justice would not be subserved by the remand of the case. In Republic v. Security Credit and Acceptance Corporation, et. al. (19 SCRA 58), this Court, finding that the main issue is one of law, resolved to decide the case on the merits because public interest demands an early disposition of the case, and 3

in Republic v. Central Surety and Insurance Company, (25 SCRA 641), this Court denied remand of the third-party complaint to the trial court for further proceedings, citing precedents where this Court, in similar situations, resolved to decide the cases on the merits, instead of remanding them to the trial court where (a) the ends of justice would not be subserved by the remand of the case; or (b) where public interest demand an early disposition of the case; or (c) where the trial court ha[s] already received all the evidence presented by both parties and the Supreme Court is now in a position, based upon said evidence, todecide the case on the merits. xxx Moreover, it cannot be denied that the parties herein are embroiled in an intra-corporate controversy and the question on the identity of PNCC is only an incident of that controversy. Pabion and Ramiro are among the stockholders of PNCC, a circumstance which classifies the dispute as an intra-corporate controversy. The authority of the Commission to determine whether or not PNCC can be compelled to hold a stockholders meeting is unquestioned as even PNCC itself concedes that the issues of the propriety of calling a stockholders meeting is within the competence of the SEC. The source of authority of the SEC over the present case can be found in Section 5(b) of Presidential Decree (PD) No. 902-A, as amended, which empowers the SEC to hear and resolve cases involving 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. The finding of the SEC en banc that PNCC is not a GOCC was made in the exercise of its jurisdiction over an intra-corporate controversy. To disallow the Commission to determine the nature of petitioner PNCC is to deprive it of the power to resolve the intra-corporate controversy between the parties. The jurisdiction of the SEC over intra-corporate controversies emanates from law and PNCC cannot divest the Commission of that jurisdiction. As the body charged with exclusive

authority over intra-corporate controversies, aside from being possessed under Section 3 of PD No. 902-A, as amended, with absolute jurisdiction over all corporations which are grantees of primary franchise from the government, the SEC en banc can be trusted with the competence to distinguish a private corporation from a GOCC. The second assigned error must likewise fall. Administrative Order No. 59 does not consider the so-called acquired asset corporations, although majority owned by the government, as GOCCs. The salient provisions of AO No. 59 read, as follows: SEC. 2. Definition of Terms. - As used in this Administrative Order, the following terms shall mean: (a) Government-owned and/or controlled corporation, hereinafter referred to as GOCC or government corporation, is a corporation which is created by special law or organized under the Corporation Code in which the government, directly or indirectly, has ownership of the majority of the capital or has voting control; Provided, That an acquired asset corporation as defined in the next paragraph shall not be considered as GOCC or government corporation. (b) Acquired asset corporation is a corporation (1) which is under private ownership, the voting or outstanding shares of which (i) were conveyed to the government agency, instrumentality or corporation in satisfaction of debts whether by foreclosure or otherwise, or (ii) were duly acquired by the government through final judgment in a sequestration proceeding; or (2) which is a subsidiary of a government corporation organized exclusively to own and manage, or lease, or operate specific physical assets acquired by a government financial institution in satisfaction of debts incurred therewith, and which in any case by law or by enunciated policy is required to be disposed of to private ownership within a specified period of time. 4

In order to be considered as an acquired asset corporation, the aforequoted provision requires, among other things, that the corporations conveyance of its outstanding shares to the government must be aimed at the satisfaction of its debts. While, on one breath, petitioner admits that the GFIs gained majority ownership of PNCC by converting their loans into equity, on another breath, petitioner denies that the debt-to-equity conversion resulted in the satisfaction of the outstanding debts of PNCC because it did not pay the loans. If the loans remained unpaid as maintained by PNCC, what then was the effect on its debt when the GFIs converted their loans into equity? It would be the height of irresponsibility for PNCC to surrender majority ownership of its voting or outstanding shares without getting something in return.When PNCC ceded the majority ownership to the GFIs, there could be no other motivation behind the action than PNCCs desire to satisfy its obligation to the creditors. PNCCs effort to ward off the exclusionary proviso of AO No. 59 only produces incongruity in its position. The case of Quimpo vs. Tanodbayan, 146 SCRA 137, cannot assist the petitioners cause. There, the Supreme Courts inquiry centered on whether or not Petrophil Corporation is a GOCC because an affirmative answer will affirm the Tanodbayans jurisdiction over the Petrophil employees pursuant to the provisions of the Anti-Graft and Corrupt Practices Act. In declaring that Petrophil is a GOCC, the Supreme Court deemed it crucial to its conclusion that Petrophil was purchased by the government through the Philippine National Oil Corporation, itself a GOCC. The situation of Petrophil bears no parallelism with that of PNCC because the latter was not purchased by the GFIs. The GFIs became majority owners of PNCC because they converted their loans into equity. The manner of partial acquisition of PNCC by the GFIs fits the condition set forth in Section 2, paragraph (b), subparagraph, (1) (i) of AO no. 59, supra. PNCCs position that it cannot be considered as an acquired asset corporation in the absence of law or enunciated policy mandating its privatization within a definite period can only be a product of strained interpretation of AO No. 59. The Administrative Order shows that there are only two (2) classes of acquired asset corporations. Although the

description of each class is compressed in a single paragraph, the disjunctive word or separates the first class from the second class which connotes a variance in their characteristics. The word or is a disjunctive term signifying disassociation and independence of one thing from each of the other things enumerated. It should, as a rule, be construed in the sense in which it ordinarily implies, as a disjunctive word. Each class has its own set of conditions. The conversion by the GFIs of their loans into equity in PNOC is sufficient to transform it as an acquired asset corporation. The requirement for a pretender for the status of an acquired asset corporation to be subject to a law or policy that commands its privatization applies to another class of acquired asset corporations which does not include PNCC.[8] (citations omitted, emphasis in the original)

The Issues

Disagreeing with the appellate court, petitioner lodged this recourse before us[9] and presents these issues: 1. WHETHER OR NOT PNCC IS A GOCC; 2. WHETHER OR NOT THE SEC HAS JURISDICTION TO ORDER PNCC TO HOLD A STOCKHOLDERS MEETING FOR THE PURPOSE OF ELECTING THE MEMBERS OF ITS BOARD OF DIRECTORS; 3. WHETHER OR NOT PNCC IS REQUIRED UNDER THE LAW TO HOLD A STOCKHOLDERS MEETING FOR THIS PURPOSE; AND 4. WHETHER OR NOT THE SEC, IN CERTIORARI PROCEEDINGS, CAN RULE ON THE MERITS OF A CASE EVEN BEFORE THE HEARING OFFICER HAS RECEIVED EVIDENCE.[10] We shall take up the above issues in the following sequence: 1) whether SEC can determine the corporate status of PNCC, 2) whether SEC has jurisdiction over GOCCs, and 3) whether PNCC is an acquired asset corporation. 5

The Courts Ruling

The Petition has no merit. Simply stated, PNCC claims that SEC has no jurisdiction over it and that members of the corporations board of directors hold office, not by virtue of a shareholders election but by appointment of the President of the Philippines. We hold that SEC has authority over PNCC and that the latter's directors owe their offices to their shareholders and not to presidential fiat. To justify these plain conclusions, we need to wade through rather complicated legal processes and reasoning in resolving seriatim the legal issues raised by petitioners. First Issue: May SEC Determine Whether PNCC Is a GOCC?

Underlying this confusing controversy is the misconception that government owned and/or controlled corporations (GOCCs) are beyond the jurisdiction of SEC. From this broad and sweeping assumption, petitioner asserts that SEC is without competence to determine whether PNCC is a GOCC.[11] It insists that such a determination falls solely upon the President of Philippines and is therefore beyond SECs jurisdiction. We disagree. It is certainly absurd to say that SEC is without jurisdiction to determine if PNCC is a GOCC simply because the latter claims to be one. The President does not determine whether a corporation is a GOCC or not. It is the law that does. PNCCs status as a GOCC can be ruled upon by SEC -- as well as by other competent authorities for that matter -- based on law, specifically the Revised Administrative Code of 1987[12] which provides inter alia as follows: 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: xxx xxx xxx (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) per cent of its

capital stock: Provided, That government owned or controlled corporations may be further categorized by the Department of Budget, the Civil Service Commission, and the Commission on Audit for purposes of the exercise and discharge of their respective powers, functions and responsibilities with respect to such corporations. (emphasis ours) Thus, we agree with the CA that the SEC en banc can be trusted with the competence to distinguish a private corporation from a GOCC.[13] Whether such determination is correct would be an altogether different matter. SEC Ruled on the Merits

Petitioner argues that certiorari, which was used by private respondents to challenge the ruling of the hearing officer before the SEC en banc, is generally limited to determining whether or not there has been grave abuse of discretion committed by the officer below. It further claims that the SEC rule[14] used by respondents was patterned after Rule 65 of the 1997 Rules of Court.[15] Hence, the same principles governing the latter should apply to the former. It thus submits that SEC erred when it ruled not only on the issue of jurisdiction but also on the merits of the case. It contends that SEC en banc should have limited itself to the issue of grave abuse and thereafter remanded the case below for further proceedings. Again, we disagree. What petitioner invokes is a general rule that admits of exceptions.[16] As the CA aptly pointed out, this general rule is not cast in stone.[17] Indeed, one chiseled exception arises when the court or administrative agency is in a position to resolve the dispute on the merits based on the records before it.[18] That is, a reviewing court or agency may decide the lis mota of a case on its merits if there are enough undisputed facts to warrant such resolution. Here we stress that SECs ruling was factually based on the judicial admission of petitioner that there was a debt-to-equity conversion of PNCCs obligations to several government financial institutions (GFIs) pursuant to LOI 1295.[19] PNCC admits that at least 76.48 percent of its equity is owned by GFI's.[20] Thus, in view of such admission extant on the records, SEC en banc was in a position to validly dispose of the 6

controversy directly, without need of remanding the matter to the hearing officer. It aptly based its actions on the fact that PNCC was organized pursuant to the general corporation law and is thus subject to SEC regulation. We agree with SEC because a remand would have merely delayed unnecessarily the resolution of the question. As we have said before and say so again: 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.[21] Indeed, justice unnecessarily delayed is justice necessarily denied. Second Issue: Does SEC Have Jurisdiction over GOCCs?

As adverted to above, petitioner proceeds from the erroneous proposition that SECs jurisdiction does not extend to x x x [a] government-owned and controlled corporation or GOCC x x x.[22] This is an inaccurate generalization. GOCCs may either be (1) with original charter or created by special law; or (2) incorporated under general law,[23] via either the Old Corporation Code[24] or the New Corporation Code.[25] We concede that SEC has no jurisdiction over corporations of the first type -- GOCCs with original charter or created by special law -primarily because they are governed by their charters.[26] But even this concession is not absolute, since the Corporation Code may apply suppletorily, either by operation of law[27] or through express provisions in the charter.[28]

On the other hand, we have no doubt that over GOCCs established or organized under the Corporation Code, SEC can exercise jurisdiction. These GOCCs are regarded as private corporations despite common misconceptions.[29] That the government may own the controlling shares in the corporation does not diminish the fact that the latter owes its existence to the Corporation Code. More pointedly, Section 143 of the Corporation Code[30] gives SEC the authority and power to implement its provisions, specifically for the purpose of regulating the entities created pursuant to such provisions. These entities include corporations in which the controlling shares are owned by the government or its agencies. Glaringly erroneous, therefore, is petitioners reliance on Quimpo v. Tanodbayan[31] and its theory that it is immaterial whether a corporation is acquired by purchase or through the conversion of the loans of the GFIs into equity in a corporation [because] such corporation loses its status as a private corporation and attains a new status as a GOCC.[32] First, based on the discussions above, PNCC does not lose its status as a private corporation, even if we were to assume that it is a GOCC. Second, neither would such loss of status prevent it from being further classified into an acquired asset corporation, as will be discussed below. The Controversy Is Within SEC Jurisdiction

SECs assumption of jurisdiction over this case is proper, as the controversy involves the election of PNCCs directors. Petitioner does not really contradict the nature of the question presented and agrees that there is an intra-corporate question involved. However, it emphasizes that the main question to be resolved is the status of PNCC as a GOCC[33] which, it submits, is outside SECs competence to rule on.[34] As already explained, there is no reason why SEC cannot make such determination which, though not final and may be subject to review, is nonetheless made pursuant to its exercise of its original andexclusive jurisdiction over cases involving controversies in the election of directors.[35] SEC May Compel Stockholders' Meeting

Prescinding from the above premises, it necessarily follows that SEC can compel PNCC to hold a stockholders meeting for the purpose 7

of electing members of the latter's board of directors.[36] This is clearly provided for by Section 50 of the Corporation Code, which we quote: Sec. 50. Regular and special meetings of stockholders or members. -- x x x Whenever, for any cause, there is no person authorized to call a meeting, the Securities and Exchange Commission, upon petition of a stockholder or member, and on the showing of good cause therefor, may issue an order to the petitioning stockholder or member directing him to call a meeting of the corporation by giving proper notice required by this Code or by the by-laws. The petitioning stockholder or member shall preside thereat until at least a majority of the stockholders or members present have chosen one of their member[s] as presiding officer. (emphasis ours) As respondents point out, the SECs action is also justified by its regulatory and administrative powers[37] to implement the Corporation Code, specifically to compel the PNCC to hold a stockholders meeting for election purposes. Apropos here is the SECs ruling as follows: The Commission takes judicial notice of the PNCC by-laws as follows: Art. V, Sec. 5 (1) The Board of Directors shall be composed of eleven (11) directors. (2) The directors shall be elected at the annual meeting of the stockholders, each director to hold office for a term on one (1) year and until his successor is duly elected and qualified.

holding of such meeting. The failure of PNCC to call and hold annual stockholders meetings since 1983 or for thirteen (13) years constitutes a gross, continuing violation of its by-laws and the Corporation Code. For the refusal of PNCCs Board of Directors to call said meeting, petitioners, as stockholders of PNCC, can rightfully petition the SEC to order the same. Third Issue: What is the Status of PNCC?

Petitioner differs from the foregoing conclusion and avers that there is no necessity to hold a stockholders meeting to elect members of the board of directors, because the President of the Philippines is empowered to appoint them, by virtue of Article IV, Section 16 (1) of Administrative Order No. 59[38] (December 5, 1988): xxxxxxxxx (1) Governing Boards. -- A GOCC shall be governed by a Board of Directors or equivalent body composed of an appropriate number of members to be appointed by the President of the Philippines upon the recommendation of the Secretary to whose Department the GOCC is attached. The Chairman of the Board shall likewise be appointed by the President upon the recommendation of the Secretary. Respondents counter that the above-quoted provision is inapplicable, since PNCC is not a GOCC. Instead, it is an acquired asset corporation, based on the definition given in Section 2 (a) of the same law, AO 59: xxxxxxxxx

Art. IV Sec. 4 (1) The annual meeting of the stockholders shall be held at 3:00 P.M. on the fourth (4th) Tuesday of March every year. Respondent PNCC is therefore required to conduct a regular stockholders meeting for the purpose of electing its Board of Directors, considering that the Corporation Code and its own By-Laws require the

(a) Government-owned and/or controlled corporation, hereinafter referred to as GOCC or government corporation, is a corporation which is created by special law or organized under the Corporation Code in which the Government, directly or indirectly, has ownership of the majority of the capital or has voting control; Provided that an acquired asset 8

corporation as defined in the next paragraph shall not be considered as GOCC or government corporation. (b) Acquired asset corporation is a corporation (1) which is under private ownership, the voting or outstanding shares of which (i) were conveyed to the government or to a government agency, instrumentality or corporation in satisfaction of debts whether by foreclosure or otherwise, or (ii) were duly acquired by the government through final judgment in a sequestration proceeding; or (2) which is a subsidiary of a government corporation organized exclusively to own and manage, or lease, or operate specific physical assets acquired by a government financial institution in satisfaction of debts incurred therewith, and which in any case by law or by enunciated policy is required to be disposed of to private ownership within a specified period of time. (emphasis supplied) Thus, at this point these questions arise: (a) Is PNCC an acquired asset corporation? (b) Is Section 2 of AO 59 inconsistent with Section 2 (13) of EO 292? (c) Is Section 16 of AO 59 applicable to PNCC? PNCC Is an Acquired Asset Corporation

We agree with the respondents that PNCC falls under the exception carved out from Section 2 (a and b) above which removes an acquired asset corporation from the category of a GOCC.[39] In the context of the entire administrative order and in relation to presidential issuances,[40] these provisions clearly indicate that PNCC is indeed an acquired asset corporation. This is because PNCC is a corporation that is, to quote said AO, under private ownership, the voting or outstanding shares of which (i) were conveyed to the government financial institutions in satisfaction of debts x x x Petitioner posits the interpretation that an acquired asset corporation is one that is set to be privatized pursuant to a law or an enunciated policy.[41] On this particular point, we agree. It should be noted that under Section 2 (b) of AO 59, there are two kinds of acquired asset corporations: one, a corporation which is under private ownership, the voting or outstanding shares of which were either conveyed to the

government or to a government agency, instrumentality or corporation in satisfaction of debts whether by foreclosure or otherwise, or were duly acquired by the government in a sequestration proceeding; and two, a corporation which is a subsidiary of a government entity organized exclusively to own and manage or lease or operate specific physical assets acquired by a government financial institution in satisfaction of debts incurred therewith. Both kinds of acquired asset corporations are by law or by enunciated policy required to be privatized within a specified period. Such interpretation of AO 59 is supported by Section 18 thereof which provides: SEC. 18. Dissolution of Acquired Asset Corporations. -- All executive agencies, offices and instrumentalities shall take steps to dissolve any acquired asset corporation which has not been disposed of to the private sector within five (5) years from the date of the decision to dissolve the corporation. xxx[42] (emphasis supplied) Reading these sections together, it becomes evident that an acquired asset corporation is singled out for eventual disposition to the private sector or, failing in that, for dissolution.[43] True, respondents failed to show that PNCC was headed either for privatization or for dissolution. However, Article I, Section 1 of Proclamation No. 50,[44] provides the enunciated policy required under AO 59 in this wise: SECTION 1. Statement of Policy. -- It shall be the policy of the State to promote privatization through an orderly, coordinated and efficient program for the prompt disposition of the large number of nonperforming assets of the government financial institutions, and certain government-owned or controlled corporations which have been found unnecessary or inappropriate for the government sector to maintain. Pursuant to this policy, AO 64,[45] which was issued by then President Corazon Aquino, transferred to the national government certain assets held by the Philippine Export and Foreign Loan Guarantee 9

(Philguarantee) and the National Development Company (NDC). Certain shares in PNCC were included. This fact was confirmed by President Fidel V. Ramos who issued AO 397 [46] on May 13, 1998. The said administrative order states that PNCC is one of the corporations slated to be privatized.[47] When confronted with the same question, the Department of Justice (DOJ) in DOJ Opinion No. 37, Series of 1995, stated that PNCC was an acquired asset corporation, as follows: At the outset, we note from the attached papers that in its letter dated May 20, 1991 to the PNCC, the Office of the President already declared that PNCC is an acquired asset corporation as defined in Administrative Order No. 59. (emphasis supplied) DOJ Opinion No. 22, Series of 1998, had a similar tenor: The question whether PNCC is a government-owned or controlled corporation (GOCC) and, therefore, a government entity ha[s] been previously passed upon by the Office of the President. In a letter dated May 20, 1991, Deputy Executive Secretary Sonny Coloma informed the then PNCC President that PNCC is an acquired asset corporation as defined under Section 2 of Administrative Order No. 59. The conclusion, although not explicitly stated in said letter, is that PNCC is not a GOCC. (emphasis supplied) While not controlling, official opinions of the justice secretary are persuasive. We uphold such opinions in the present milieu. There Is No Inconsistency With the Administrative Code

Its earlier posturing notwithstanding, petitioner simultaneously asserts that AO 59 is insufficient in its definition of "GOCC," which is allegedly inconsistent with that found in Executive Order (EO) 292,[48] otherwise known as the Revised Administrative Code (RAC). The inconsistency, according to petitioner, lies in the fact that AO 59 distinguishes between a GOCC and an acquired asset corporation, while EO 292 does not. Petitioner maintains that [s]ince A.O. No. 59 is a mere administrative issuance of the President, it is clear that its

definition of a GOCC cannot prevail over that given by E.O. No. 292, which is a law.[49] We do not find any inconsistency. The definition given in AO 59 explicitly applies only to that particular administrative order. We quote the section in full: Sec. 2. Definition of Terms. --- As used in this Administrative Order, the following terms shall mean: (a) Government-owned and/or controlled corporation, hereinafter referred to as GOCC or government corporation, is a corporation which is created by special law or organized under the Corporation Code in which the Government, directly or indirectly, has ownership of the majority of the capital or has voting control; Provided that an acquired asset corporation as defined in the next paragraph shall not be considered as GOCC or government corporation. (b) Acquired asset corporation is a corporation (1) which is under private ownership, the voting or outstanding shares of which (i) were conveyed to the government or to a government agency, instrumentality or corporation in satisfaction of debts whether by foreclosure or otherwise, or (ii) were duly acquired by the government through final judgment in a sequestration proceeding; or (2) which is a subsidiary of a government corporation organized exclusively to own and manage, or lease, or operate specific physical assets acquired by a government financial institution in satisfaction of debts incurred therewith, and which in any case by law or by enunciated policy is required to be disposed of to private ownership within a specified period of time. (boldface and italics supplied) AO 59 does not purport to have established a new kind of corporation that supersedes EO 292. Neither does the former seek to revise the definition of "GOCC" given in the latter. What AO 59 in fact does is to distinguish GOCCs in general from those that are sought to be privatized. In fact, the definition given in EO 292 itself states that the 10

GOCCs may be further categorized.[50] This caveat suggests that the definition is broad enough to admit distinctions as to the kinds of GOCCs defined under AO 59. Thus, contrary to respondents assertion that PNCC is not a GOCC,[51] we hold that it may be deemed so under EO 292. However, for purposes of AO 59, particularly in the application of Section 16 thereof, PNCC is an acquired asset corporation. In this light, the alleged inconsistency is more apparent than real. It should be emphasized that an acquired asset corporation is a GOCC set to be privatized pursuant to the governments policy[52] as enunciated in Proclamation 50,[53] which defines "assets" to include GOCCs thus: Sec. 2. Definition of Terms. -- As used in this Proclamation and unless the context otherwise requires, the term: (1) Assets shall include xxx (iv) the government institutions themselves, whether as parent or subsidiary corporations. (2) Government institutions shall refer to government-owned or controlled corporations, financial or otherwise, whether organized by special charter as in the case of a parent cooperation, or under general law as in the case of a subsidiary corporation. (emphasis ours) 5[54]

Under Section of same Proclamation thereof, the Committee on Privatization is empowered to identify and transfer these assets for disposition to the private sector. The allusions to an implied repeal by EO 292 of Section 2 (a and b) of AO 59 deserves scant consideration. Suffice it to say that, as respondents pointed out, it would be absurd for an earlier law to impliedly repeal a subsequent one.[55] In any case, implied repeal is generally not favored.[56] Equally important, there is really no inconsistency. Section 16 of AO 59 Is Inapplicable to PNCC

Assuming arguendo that PNCC is a GOCC and not an acquired asset corporation under AO 59, Section 16 thereof is inapplicable. First, the GOCC referred to in Section 16 (1) of AO 59 is that which is attached

to a department of the executive branch vis--vis the inter-departmental supervision announced in the said Administrative Order. Here, the President shall appoint members of the board upon the recommendation of the Secretary to whose Department the GOCC is attached. Second, the GOCC referred to in Section 16 is one with an original charter, and not one created under general corporation law.This is evident from a reading of Section 16 (2) of AO 59: (2) Powers and Functions of the Board. --- Insofar as it is not inconsistent with the charter of a given GOCC, the Board of Directors or equivalent body shall have the following powers and functions: x x x x x x x x x (emphasis supplied) In sum, it is clear that PNCC is an acquired asset corporation under AO 59. Thus, Section 16 (1) of AO 59 is inapplicable. The alleged derogation of the Presidents power over GOCCs is without basis.We note, at this point, petitioners admission that members of the PNCC board of directors are nominated by the GFIs in proportion to their equity ownership therein.[57] Petitioners vacillation in seeking to apply Section 16 (1) of AO 59 while at same time asserting the invalidity of Section 2 (a and b) thereof betrays the stark weakness of its position. One final point. Petitioner is represented in this litigation by private counsel, not by the government corporate counsel or by the solicitor general. In fact, the OSGs Memorandum submitted in representation of SEC debunks the Petition and sides with respondents. Petitioner should not find it strange then that it is rightly adjudged as a private corporation subject to regulation by the SEC, since by its very act of retaining private counsel and by the government's act of opposing its claims, it is indeed a SEC-regulated entity. Epilogue

Lest the focus of our disposition of this case be lost in the maze of arguments strewn before us, we stress that PNCC is a corporation created in accordance with the general corporation statute. Hence, it is essentially a private corporation, notwithstanding the governments interest therein through the debt-to-equity conversion imposed by PD 11

1295. Being a private corporation, PNCC is subject to SEC regulation and jurisdiction. Petitioner contends that Proclamation 50[58] and AO 59[59] limit the exercise of that jurisdiction. But, after wading into the complex issues submitted by the parties, we have shown that such laws and issuances are not applicable to this particular case. We must emphasize also, and this should be clear to all concerned, that our ruling here does not in any way affect the factual issue of whether the government owns a majority of the shares in PNCC. This matter, as can be gleaned from the factual narration of the CA, was not settled below. However, from our painstaking explanation above, it should be obvious that this issue of fact is irrelevant to the disposition of the legal issues herein raised. To repeat, whether PNCC is majority-owned by the government or not is unimportant since our decision is essentially based on the verity that PNCC is a private corporation created pursuant to the general corporation law. WHEREFORE, the Petition is hereby DENIED. The assailed Decision and the Resolution of the Court of Appeals are AFFIRMED. Costs against petitioner. SO ORDERED. 2. [G.R. Nos. 84132-33 : December 10, 1990.]192 SCRA 257 NATIONAL DEVELOPMENT COMPANY AND NEW AGRIX, INC., Petitioners, vs. PHILIPPINE VETERANS BANK, THE EX-OFFICIO SHERIFF and GODOFREDO QUILING, in his capacity as Deputy Sheriff of Calamba, Laguna, Respondents. This case involves the constitutionality of a presidential decree which, like all other issuances of President Marcos during his regime, was at that time regarded as sacrosanct. It is only now, in a freer atmosphere, that his acts are being tested by the touchstone of the fundamental law that even then was supposed to limit presidential action.: rd The particular enactment in question is Pres. Decree No. 1717, which ordered the rehabilitation of the Agrix Group of Companies to be administered mainly by the National Development Company. The law

outlined the procedure for filing claims against the Agrix companies and created a Claims Committee to process these claims. Especially relevant to this case, and noted at the outset, is Sec. 4(1) thereof providing that "all mortgages and other liens presently attaching to any of the assets of the dissolved corporations are hereby extinguished." Earlier, the Agrix Marketing, Inc. (AGRIX) had executed in favor of private respondent Philippine Veterans Bank a real estate mortgage dated July 7, 1978, over three (3) parcels of land situated in Los Baños, Laguna. During the existence of the mortgage, AGRIX went bankrupt. It was for the expressed purpose of salvaging this and the other Agrix companies that the aforementioned decree was issued by President Marcos. Pursuant thereto, the private respondent filed a claim with the AGRIX Claims Committee for the payment of its loan credit. In the meantime, the New Agrix, Inc. and the National Development Company, petitioners herein, invoking Sec. 4 (1) of the decree, filed a petition with the Regional Trial Court of Calamba, Laguna, for the cancellation of the mortgage lien in favor of the private respondent. For its part, the private respondent took steps to extrajudicially foreclose the mortgage, prompting the petitioners to file a second case with the same court to stop the foreclosure. The two cases were consolidated. After the submission by the parties of their respective pleadings, the trial court rendered the impugned decision. Judge Francisco Ma. Guerrero annulled not only the challenged provision, viz., Sec. 4 (1), but the entire Pres. Decree No. 1717 on the grounds that: (1) the presidential exercise of legislative power was a violation of the principle of separation of powers; (2) the law impaired the obligation of contracts; and (3) the decree violated the equal protection clause. The motion for reconsideration of this decision having been denied, the present petition was filed.: rd The petition was originally assigned to the Third Division of this Court but because of the constitutional questions involved it was transferred to the Court en banc. On August 30, 1988, the Court granted the petitioner's prayer for a temporary restraining order and instructed the respondents to cease and desist from conducting a public auction sale of the lands in question. After the Solicitor General and the private 12

respondent had filed their comments and the petitioners their reply, the Court gave due course to the petition and ordered the parties to file simultaneous memoranda. Upon compliance by the parties, the case was deemed submitted. The petitioners contend that the private respondent is now estopped from contesting the validity of the decree. In support of this contention, it cites the recent case of Mendoza v. Agrix Marketing, Inc., 1 where the constitutionality of Pres. Decree No. 1717 was also raised but not resolved. The Court, after noting that the petitioners had already filed their claims with the AGRIX Claims Committee created by the decree, had simply dismissed the petition on the ground of estoppel. The petitioners stress that in the case at bar the private respondent also invoked the provisions of Pres. Decree No. 1717 by filing a claim with the AGRIX Claims Committee. Failing to get results, it sought to foreclose the real estate mortgage executed by AGRIX in its favor, which had been extinguished by the decree. It was only when the petitioners challenged the foreclosure on the basis of Sec. 4 (1) of the decree, that the private respondent attacked the validity of the provision. At that stage, however, consistent with Mendoza, the private respondent was already estopped from questioning the constitutionality of the decree. The Court does not agree that the principle of estoppel is applicable. It is not denied that the private respondent did file a claim with the AGRIX Claims Committee pursuant to this decree. It must be noted, however, that this was done in 1980, when President Marcos was the absolute ruler of this country and his decrees were the absolute law. Any judicial challenge to them would have been futile, not to say foolhardy. The private respondent, no less than the rest of the nation, was aware of that reality and knew it had no choice under the circumstances but to conform.: nad It is true that there were a few venturesome souls who dared to question the dictator's decisions before the courts of justice then. The record will show, however, that not a single act or issuance of President Marcos was ever declared unconstitutional, not even by the highest court, as long as he was in power. To rule now that the private respondent is

estopped for having abided with the decree instead of boldly assailing it is to close our eyes to a cynical fact of life during that repressive time. This case must be distinguished from Mendoza, where the petitioners, after filing their claims with the AGRIX Claims Committee, received in settlement thereof shares of stock valued at P40,000.00 without protest or reservation. The herein private respondent has not been paid a single centavo on its claim, which was kept pending for more than seven years for alleged lack of supporting papers. Significantly, the validity of that claim was not questioned by the petitioner when it sought to restrain the extrajudicial foreclosure of the mortgage by the private respondent. The petitioner limited itself to the argument that the private respondent was estopped from questioning the decree because of its earlier compliance with its provisions. Independently of these observations, there is the consideration that an affront to the Constitution cannot be allowed to continue existing simply because of procedural inhibitions that exalt form over substance. The Court is especially disturbed by Section 4(1) of the decree, quoted above, extinguishing all mortgages and other liens attaching to the assets of AGRIX. It also notes, with equal concern, the restriction in Subsection (ii) thereof that all "unsecured obligations shall not bear interest" and in Subsection (iii) that "all accrued interests, penalties or charges as of date hereof pertaining to the obligations, whether secured or unsecured, shall not be recognized." These provisions must be read with the Bill of Rights, where it is clearly provided in Section 1 that "no person shall be deprived of life, liberty or property without due course of law nor shall any person be denied the equal protection of the law" and in Section 10 that "no law impairing the obligation of contracts shall be passed." In defending the decree, the petitioners argue that property rights, like all rights, are subject to regulation under the police power for the promotion of the common welfare. The contention is that this inherent power of the state may be exercised at any time for this purpose so long as the taking of the property right, even if based on contract, is done with due process of law. 13

This argument is an over-simplification of the problem before us. The police power is not a panacea for all constitutional maladies. Neither does its mere invocation conjure an instant and automatic justification for every act of the government depriving a person of his life, liberty or property. A legislative act based on the police power requires the concurrence of a lawful subject and a lawful method. In more familiar words, a) the interests of the public generally, as distinguished from those of a particular class, should justify the interference of the state; and b) the means employed are reasonably necessary for the accomplishment of the purpose and not unduly oppressive upon individuals. 2 Applying these criteria to the case at bar, the Court finds first of all that the interests of the public are not sufficiently involved to warrant the interference of the government with the private contracts of AGRIX. The decree speaks vaguely of the "public, particularly the small investors," who would be prejudiced if the corporation were not to be assisted. However, the record does not state how many there are of such investors, and who they are, and why they are being preferred to the private respondent and other creditors of AGRIX with vested property rights.:-cralaw The public interest supposedly involved is not identified or explained. It has not been shown that by the creation of the New Agrix, Inc. and the extinction of the property rights of the creditors of AGRIX, the interests of the public as a whole, as distinguished from those of a particular class, would be promoted or protected. The indispensable link to the welfare of the greater number has not been established. On the contrary, it would appear that the decree was issued only to favor a special group of investors who, for reasons not given, have been preferred to the legitimate creditors of AGRIX. Assuming there is a valid public interest involved, the Court still finds that the means employed to rehabilitate AGRIX fall far short of the requirement that they shall not be unduly oppressive. The oppressiveness is patent on the face of the decree. The right to property in all mortgages, liens, interests, penalties and charges owing to the creditors of AGRIX is arbitrarily destroyed. No consideration is paid for the extinction of the mortgage rights. The accrued interests and other

charges are simply rejected by the decree. The right to property is dissolved by legislative fiat without regard to the private interest violated and, worse, in favor of another private interest. A mortgage lien is a property right derived from contract and so comes under the protection of the Bill of Rights. So do interests on loans, as well as penalties and charges, which are also vested rights once they accrue. Private property cannot simply be taken by law from one person and given to another without compensation and any known public purpose. This is plain arbitrariness and is not permitted under the Constitution. And not only is there arbitrary taking, there is discrimination as well. In extinguishing the mortgage and other liens, the decree lumps the secured creditors with the unsecured creditors and places them on the same level in the prosecution of their respective claims. In this respect, all of them are considered unsecured creditors. The only concession given to the secured creditors is that their loans are allowed to earn interest from the date of the decree, but that still does not justify the cancellation of the interests earned before that date. Such interests, whether due to the secured or the unsecured creditors, are all extinguished by the decree. Even assuming such cancellation to be valid, we still cannot see why all kinds of creditors, regardless of security, are treated alike. Under the equal protection clause, all persons or things similarly situated must be treated alike, both in the privileges conferred and the obligations imposed. Conversely, all persons or things differently situated should be treated differently. In the case at bar, persons differently situated are similarly treated, in disregard of the principle that there should be equality only among equals.- nad One may also well wonder why AGRIX was singled out for government help, among other corporations where the stockholders or investors were also swindled. It is not clear why other companies entitled to similar concern were not similarly treated. And surely, the stockholders of the private respondent, whose mortgage lien had been cancelled and legitimate claims to accrued interests rejected, were no less deserving of protection, which they did not get. The decree operated, to use the words of a celebrated case, 3 "with an evil eye and an uneven hand." 14

On top of all this, New Agrix, Inc. was created by special decree notwithstanding the provision of Article XIV, Section 4 of the 1973 Constitution, then in force, that:

contract clauses notwithstanding the argument that the amendment in Section 110 of the Labor Code was a proper exercise of the police power.: nad

SEC. 4. The Batasang Pambansa shall not, except by general law, provide for the formation, organization, or regulation of private corporations, unless such corporations are owned or controlled by the Government or any subdivision or instrumentality thereof. 4

The Court reaffirms and applies that ruling in the case at bar.

The new corporation is neither owned nor controlled by the government. The National Development Corporation was merely required to extend a loan of not more than P10,000,000.00 to New Agrix, Inc. Pending payment thereof, NDC would undertake the management of the corporation, but with the obligation of making periodic reports to the Agrix board of directors. After payment of the loan, the said board can then appoint its own management. The stocks of the new corporation are to be issued to the old investors and stockholders of AGRIX upon proof of their claims against the abolished corporation. They shall then be the owners of the new corporation. New Agrix, Inc. is entirely private and so should have been organized under the Corporation Law in accordance with the above-cited constitutional provision. The Court also feels that the decree impairs the obligation of the contract between AGRIX and the private respondent without justification. While it is true that the police power is superior to the impairment clause, the principle will apply only where the contract is so related to the public welfare that it will be considered congenitally susceptible to change by the legislature in the interest of the greater number. 5 Most present-day contracts are of that nature. But as already observed, the contracts of loan and mortgage executed by AGRIX are purely private transactions and have not been shown to be affected with public interest. There was therefore no warrant to amend their provisions and deprive the private respondent of its vested property rights. It is worth noting that only recently in the case of the Development Bank of the Philippines v. NLRC, 6 we sustained the preference in payment of a mortgage creditor as against the argument that the claims of laborers should take precedence over all other claims, including those of the government. In arriving at this ruling, the Court recognized the mortgage lien as a property right protected by the due process and

Our finding, in sum, is that Pres. Decree No. 1717 is an invalid exercise of the police power, not being in conformity with the traditional requirements of a lawful subject and a lawful method. The extinction of the mortgage and other liens and of the interest and other charges pertaining to the legitimate creditors of AGRIX constitutes taking without due process of law, and this is compounded by the reduction of the secured creditors to the category of unsecured creditors in violation of the equal protection clause. Moreover, the new corporation, being neither owned nor controlled by the Government, should have been created only by general and not special law. And insofar as the decree also interferes with purely private agreements without any demonstrated connection with the public interest, there is likewise an impairment of the obligation of the contract. With the above pronouncements, we feel there is no more need to rule on the authority of President Marcos to promulgate Pres. Decree No. 1717 under Amendment No. 6 of the 1973 Constitution. Even if he had such authority, the decree must fall just the same because of its violation of the Bill of Rights. WHEREFORE, the petition is DISMISSED. Pres. Decree No. 1717 is declared UNCONSTITUTIONAL. The temporary restraining order dated August 30, 1988, is LIFTED. Costs against the petitioners.- nad SO ORDERED. 3. G.R. No. 136374

February 9, 2000

FRANCISCA S. BALUYOT, petitioner, vs.PAUL E. HOLGANZA and the OFFICE OF THE OMBUDSMAN (VISAYAS) represented by its Deputy Ombudsman for the Visayas ARTURO C. MOJICA, Director VIRGINIA PALANCA-SANTIAGO, and Graft Investigation Officer I ANNA MARIE P. MILITANTE, respondents. 15

Before us is a special civil action for certiorari, seeking the reversal of the Orders dated August 21, 1998 and October 28, 1998 issued by the Office of the Ombudsman, which denied petitioner's motion to dismiss and motion for reconsideration, respectively.1âwphi1.nêt The facts are: During a spot audit conducted on March 21, 1977 by a team of auditors from the Philippine National Red Cross (PNRC) headquarters, a cash shortage of P154,350.13 was discovered in the funds of its Bohol chapter. The chapter administrator, petitioner Francisca S. Baluyot, was held accountable for the shortage. Thereafter, on January 8, 1998, private respondent Paul E. Holganza, in his capacity as a member of the board of directors of the Bohol chapter, filed an affidavitcomplaint1 before the Office of the Ombudsman charging petitioner of malversation under Article 217 of the Revised Penal Code. The complaint was docketed as OMB-VIS-CRIM-98-0022. However, upon recommendation by respondent Anna Marie P. Militante, Graft Investigation Officer I, an administrative docket for dishonesty was also opened against petitioner; hence, OMB-VIS-ADM-98-0063.2 On February 6, 1998, public respondent issued an Order 3 requiring petitioner to file her counter-affidavit to the charges of malversation and dishonesty within ten days from notice, with a warning that her failure to comply would be construed as a waiver on her part to refute the charges, and that the case would be resolved based on the evidence on record. On March 14, 1998, petitioner filed her counter-affidavit,4 raising principally the defense that public respondent had no jurisdiction over the controversy. She argued that the Ombudsman had authority only over government-owned or controlled corporations, which the PNRC was not, or so she claimed. On August 21, 1998, public respondent issued the first assailed Order5 denying petitioner's motion to dismiss. It further scheduled a clarificatory hearing on the criminal aspect of the complaint and a preliminary conference on its administrative aspect on September 2,

1998. Petitioner received the order on August 26, 1998 and she filed a motion for reconsideration6 the next day. On October 28, 1998, public respondent issued the second assailed Order7 denying petitioner's motion for reconsideration. Hence, this recourse. We dismiss the petition. Petitioner contends that the Ombudsman has no jurisdiction over the subject matter of the controversy since the PNRC is allegedly a private voluntary organization. The following circumstances, she insists, are indicative of the private character of the organization: (1) the PNRC does not receive any budgetary support from the government, and that all money given to it by the latter and its instrumentalities become private funds of the organization; (2) funds for the payment of personnel's salaries and other emoluments come from yearly fund campaigns, private contributions and rentals from its properties; and (3) it is not audited by the Commission on Audit. Petitioner states that the PNRC falls under the International Federation of Red Cross, a Switzerlandbased organization, and that the power to discipline employees accused of misconduct, malfeasance, or immorality belongs to the PNRC Secretary General by virtue of Section "G", Article IX of its by-laws.8 She threatens that "to classify the PNRC as a government-owned or controlled corporation would create a dangerous precedent as it would lose its neutrality, independence and impartiality . . . .9 Practically the same issue was addressed in Camporedondo v. National Labor Relations Commission, et. al.,10where an almost identical set of facts obtained. Petitioner therein was the administrator of the Surigao del Norte chapter of the PNRC. An audit conducted by a field auditor revealed a shortage in the chapter funds in the sum of P109,000.00. When required to restitute the amount of P135,927.78, petitioner therein instead applied for early retirement, which was denied by the Secretary General of the PNRC. Subsequently, the petitioner filed a complaint for illegal dismissal and damages against PNRC before the National Labor Relations Commission. In turn, PNRC moved to dismiss the complaint 16

on the ground of lack of jurisdiction, averring that PNRC was a government corporation whose employees are embraced by civil service regulation. The labor arbiter dismissed the complaint, and the Commission sustained his order. The petitioner assailed the dismissal of his complaint via a petition for certiorari, contending that the PNRC is a private organization and not a government-owned or controlled corporation. In dismissing the petition, we ruled thus:

and criminal liability in ever case where the evidence warrants in order to promote efficient service by the Government to the people. 11

Resolving the issue set out in the opening paragraph of this opinion, we rule that the Philippine National Red Cross (PNRC) is a government owned and controlled corporation, with an original charter under Republic Act No. 95, as amended. The test to determine whether a corporation is government owned or controlled, or private in nature is simple. Is it created by its own charter for the exercise of a public function, or by incorporation under the general corporation law? Those with special charters are government corporations subject to its provisions, and its employees are under the jurisdiction of the Civil Service Commission, and are compulsory members of the Government Service Insurance System. The PNRC was not "impliedly converted to a private corporation" simply because its charter was amended to vest in it the authority to secure loans, be exempted from payment of all duties, taxes, fees and other charges of all kinds on all importations and purchases for its exclusive use, on donations for its disaster relief work and other services and in its benefits and fund raising drives, and be allotted one lottery draw a year by the Philippine Charity Sweepstakes Office for the support of its disaster relief operation in addition to its existing lottery draws for blood program.

4. G.R. No. L-61259 April 26, 1983

Clearly then, public respondent has jurisdiction over the matter, pursuant to Section 13, of Republic Act No. 6770, otherwise known as "The Ombudsman Act of 1989", to wit: Sec. 13. Mandate. — The Ombudsman and his Deputies, as protectors of the people, shall act promptly on complaints filed in any form or manner against officers or employees of the Government, or of any subdivision, agency or instrumentality thereof, including governmentowned or controlled corporations, and enforce their administrative, civil

WHEREFORE, the petition for certiorari is hereby DISMISSED. Costs against petitioner. SO ORDERED.

LIONS CLUBS INTERNATIONAL and JAMES L. SO, petitioners, vs.HON. AUGUSTO M. AMORES, Presiding Judge of the Court of First Instance of Manila, Branch XXIV, COURT OF APPEALS and VICENTE JOSEFA, respondents. GUERRERO, J.: Where the Constitution of petitioner association, the Lions Clubs International, specifically provides that all Lions Clubs so organized shall be under the exclusive jurisdiction of the International Board of Directors (Sec. 5, Art. III) and that all District Governor election results shall be adopted by the International Board of Directors and thereby become effective, except in the case of an election protest filed or legal action resulting therefrom, in which event the appointment or election of such District Governor shall be subject to action by the International Board of Directors [Sec. 8(a), (1) 2nd par., Art. VII] and in accordance therewith, the election protest between petitioner So and respondent Josefa for the position of District Governor of District 301-Al Philippines for the fiscal year 1982-1983 was filed and elevated to the International Board of Directors through its Constitution and By-Laws Committee following the prescribed Constitutional Complaints Procedure and said Committee conducted a hearing therein attended by the parties, each claiming to be duly elected to the disputed position, the decision of the International Board of Directors adopting the Committee's Report and approving the election of petitioner James L. So to server as District Governor of District 301-Al for the fiscal year 1982-1983 is final, binding, and conclusive, it being a question of policy, discipline, and internal 17

government in the relation of the mother organization with local clubs organized, chartered and supervised exclusively thereunder, absent any clear showing of mistake, fraud, conclusion or arbitrariness and, therefore, the basic matter in dispute in the instant petition as to who has the right to the contested office presents no justiciable controversy that necessitates judicial interference or intervention. The case at bar is a special civil action for certiorari, mandamus and prohibition with prayer to lift the restraining order issued by the Court of Appeals, (now the Intermediate Appellate Court) in CA-G.R. No. 14599SP entitled "Vicente Josefa. Petitioner, versus Hon. Judge Augusto M. Amores, Lions Clubs International, and James L. So. Respondents." The principal adversaries in this controversy are respondent Vicente Josefa of the Manila Traders Lions Club and petitioner James L. So of the Manila Centrum Lions Club, which Lions clubs are duly organized, chartered, and affiliated with Lions Clubs International having its International offices at 300 22nd Street, Oakbrook, Illinois 60570, U.S.A. The Manila Traders Lions Club and the Manila Centrum Lions Club, together with other Lions clubs, are embraced and constituted into the newly organized District 301-Al. The Lions districts in the country form the so-called Multiple District 301,Philippines. All clubs so organized and chartered under the Constitution of Lions Clubs International are under the exclusive supervision of the International Board of Directors. The records show that on July 1, 1982, Vicente Josefa filed a complaint for Quo Warranto, Injunction, Damages with writ of preliminary injunction and prayer for temporary restraining order docketed as Civil Case No. 82-10588 in the Court of First Instance of Manila against Lions Clubs International and James L. So, defendants. alleging inter aliathe following material and pertinent allegations: that Josefa and So filed their certificates of candidacy for the position of District Governor of District 301-Al for the fiscal year 1982-83; that before the elections, or on April 22, 1982, an agreement was executed between Josefa and So for the purpose of avoiding an expensive, full-blown election contest, whereby the latter withdrew his certificate of candidacy in favor of Josefa; that said withdrawal of So was duly accepted by District 301-A through

Governor Huang who affixed his signature to the aforesaid agreement; that however, news items were published conveying the Idea that So had not withdrawn from the gubernatorial race; that Gov. Huang informed Josefa that So had not filed a new certificate of candidacy and that the District did not recognize So as a candidate to any position; that a telex was sent to Lions Clubs International requesting information whether So was still a candidate after his withdrawal and Lions International admonished incumbent Governor Huang to enforce the Constitution and By-Laws of Multiple District 301 if the withdrawal was in fact made and accepted by the District. It was further alleged that on the day of the election, June 6, 1982, the Chairman of the Nominations Committee reported at the Plenary Session of the 33rd Multiple District Convention held at the Little Theater of the Olongapo High School, Olongapo City, that because of So's failure to file another certificate of candidacy, the District recognized only one candidate, Vicente Josefa, for Governor; that, however, some members of the Council of Past District Governors arbitrarily set aside said report and proclaimed So as a qualified candidate, which action was vigorously objected to by some Lions present in the Plenary Session on the ground that the session was not the proper quorum to deliberate and decide on the matter as some of those present were Lions and Lionesses who were not qualified to vote; that the Past District Governors dismissed the members of the Nomination Committee, Election Committee, and other committees incharge of the accreditation of votes and unlawfully appointed new members thereof. The complaint likewise alleged that during all this time, armed men by force and intimidation prevented known leaders and followers of Josefa from entering the Plenary Session; that forced by the deteriorated peace and order in the convention hall and by virtue of the powers vested in him by the State Council of Governors, as well as the Rules of Procedure, Gov. Huang through his Cabinet Secretary announced in the Plenary Session that he has changed the venue of the election from the Little Theater of the Olongapo High School to its new site at the ground floor of Admiral Hotel, also at Olongapo City; that to this transfer, Vice Chairman of the State Council of Governors, Gov. Ramon Beleno and 18

the Secretary General of the hosting clubs Estanislao Cesa, Jr. made no objections, provided the cost of facilities of new venue is not shouldered by them.

On July 26, 1982, the Court of First Instance issued an Order denying defendants' motion to dismiss. Finding the Motion to lift restraining order to be meritorious, the Court set aside said restraining order.

Plaintiff Josefa also alleged that So and some members of the Council of Past District Governors continued to hold and supervise an illegal election at the old site where voting and non-voting delegates and alternates were allowed to cast their votes without ballots, without ballot boxes and without the issuance of valid accreditation papers of the registered voting delegates; that in the meantime, at the election held at the Admiral Hotel Supervised by Gov. Huang, Josefa obtained 115 votes, a majority of the qualified voting delegates duly accredited, and was duly proclaimed as the Governor-elect of District 301-Al by the State Council of Governors; that, however, defendant Lions Clubs International unlawfully recognized So as the winner.

Before the hearing on the application for a writ of preliminary injunction, Josefa filed in the Court of Appeals on July 29, 1982 a petition docketed as CA-G.R. No. 14599-SP for certiorari with preliminary and mandatory injunction and a prayer for a temporary restraining order, assailing that portion of the Order of the Court of First Instance dated July 26, 1982 lifting the restraining order. Josefa contended that by lifting said restraining order without awaiting the evidence on his petition for a writ of injunction, So would immediately assume the contested position, the very act sought to be enjoined, thereby making the action moot and academic and whatever favorable judgment may be rendered in the main action would be rendered useless and nugatory.

And finally alleging that So would assume the powers and prerogatives of Governor of District 301-Al at the closing program of the International Convention on July 3, 1982, Josefa prayed for the issuance of a writ of preliminary injunction or at least a temporary restraining order. He likewise asked for moral damages and for attorney's fees.

The appellate court in a Resolution dated July 29, 1982 issued a temporary restraining order "restraining and prohibiting the respondents (Hon. Judge Augusto M. Amores, Lions Clubs International and James L. So) from implementing the questioned Order of July 26, 1982 issued in Civil Case No. 82-10588 particularly the portion thereof lifting the temporary restraining order issued by the respondent Judge on July 1, 1982 until further orders ... "

Finding the foregoing allegations of the complaint to be sufficient in form and substance, the Court of First Instance on the same date, July 1, 1982, issued a temporary restraining order enjoining So from assuming the powers and prerogatives of the office of Governor of District 301-Al, and Lions Clubs International, represented by Antonio Ramos, from recognizing and proclaiming So as the Governor of District 301-Al for the fiscal year 1982- 1983. On July 8, 1982, defendants So and Lions Club International filed a Motion to Dismiss and to Lift Restraining Order on the grounds that: (1) the Court of First Instance had no jurisdiction over the person of the defendants or over the subject of the action or suit; (2) venue is improperly laid; and (3) there is another action pending between the same parties for the same cause. Plaintiff Josefa filed his Opposition, to which defendants filed a Reply.

Herein petitioners Lions Clubs International and James L. So now come to this Court attributing grave abuse of discretion to the Court of First Instance of Manila for the denial of their Motion to Dismiss dated July 6, 1982, and contending that the Court of Appeals acted in excess of its jurisdiction in issuing its temporary restraining order of July 29, 1982. As prayed for by said petitioners, We issued on August 4, 1982 a temporary restraining order enjoining the enforcement of the assailed temporary restraining order of the Court of Appeals. The basic issue posed for Our determination is the justiciability of the election dispute between herein petitioner James L. So and private respondent Vicente Josefa for the position of District Governor of District 301-Al Philippines. It is petitioners' submission that the subject matter of 19

the instant case is purely an internal affair of the Lions organization and, therefore, is beyond judicial review. On the other hand, private respondent maintains that court intervention is warranted when, as he alleges in this case, there is fraud, oppression. bad faith, when the proceedings in question are violative of the laws of the association, or where the proceedings are illegal. We find for the petitioners and in finding so, We adopt the general rule that "... the courts will not interfere with the internal affairs of an unincorporated association so as to settle disputes between the members, or questions of policy, discipline, or internal government, so long as the government of the society is fairly and honestly administered in conformity with its laws and the law of the land, and no property or civil rights are invaded. Under such circumstances, the decision of the governing body or established private tribunal of the association is binding and conclusive and not subject to review or collateral attack in the courts. " (7 C.J.S. pp. 38- 39). The general rule of non-interference in the internal affairs of associations is, however, subject to exceptions, but the power of review is extremely limited. Accordingly, the courts have and will exercise power to interfere in the internal affairs of an association where law and justice so require, and the proceedings of the association are subject to judicial review where there is fraud, oppression, or bad faith, or where the action complained of is capricious, arbitrary, or unjustly discriminatory. Also, the courts will usually entertain jurisdiction to grant relief in case property or civil rights are invaded, although it has also been held that the involvement of property rights does not necessarily authorize judicial intervention, in the absence of arbitrariness, fraud or collusion. Moreover, the courts will intervene where the proceedings in question are violative of the laws of the society, or the law of the land, as by depriving a person of due process of law. Similarly, judicial intervention is warranted where there is a lack of jurisdiction on the part of the tribunal conducting the proceedings, where the organization exceeds its powers, or where the proceedings are otherwise illegal. (7 C.J.S., pp. 39-41).

In accordance with the general rules as to judicial interference cited above, the decision of an unincorporated association on the question of an election to office is a matter peculiarly and exclusively to be determined by the association, and, in the absence of fraud, is final and binding on the courts. (7 C.J.S., p. 44). The instant controversy between petitioner So and respondent Josefa falls squarely within the ambit of the rule of judicial non-intervention or non- interference. The elections in dispute, the manner by which it was conducted and the results thereof, is strictly the internal affair that concerns only the Lions association and/or its members, and We find from the records that the same was resolved within the organization of Lions Clubs International in accordance with the Constitution and ByLaws which are not immoral, unreasonable, contrary to public policy, or in contravention of the laws of the land. It is of judicial notice that a Lions club is a voluntary association of civicminded men whose general purpose and aim is to serve the people and the community. It appears from the records that duly organized and chartered Lions clubs all over the world are under the supervision of the mother club known as The International Association of Lions Clubs for Lions Clubs International) which holds international offices in Illinois, U.S.A., and is governed by its constitution and by-laws. The objects of this worldwide organization are: (a) To create and foster a spirit of understanding among the peoples of the world. (b) To promote the principles of good government and good citizenship. (c) To take an active interest in the civil, cultural, social and moral welfare of the community. (d) To unite the clubs in the bonds of friendship, good fellowship and mutual understanding. 20

(e) To provide a forum for the open discussion of all matters of public interest provided, however, that partisan politics and secretarian religon shall not be debated by club members.

time, by the International Board of Directors." (Constitution, Art. XI, Sec. 1). The International Board of Directors is composed of the President, Immediate Past President, First and Second and Third Vice Presidents and 28 Directors. (Art. V, Sec. 1, Constitution).

(f) To encourage service-minded men to serve their community without personal financial reward, and to encourage efficiency and -promote high ethical standards in commerce, industry, professions, public works and private endeavors. (Constitution of the International Association of Lions Clubs, Article II, Section 2.)

In the matter of the election for the office of District Governor, the Constitution of Lions International provides:

Member clubs are chartered in accordance with the provisions of its constitution which provide that:

An election for the office of District Governor shall be conducted in accordance with the provisions of the respective District (Single, Sub or Multiple) Constitution and By-Laws. The results of each District Governor election shall be reported to the International Office by the respective current District Governor and/or the Association's Extension Representative. The results so reported shall be presented to the International Board of Directors. All District Governor election results shall be adopted by the International Board of Directors and thereby become effective, except in the case of an election protest filed or legal action resulting therefrom in which event the appointment or election of such District Governor shall be subject to action by the International Board of Directors, (Emphasis supplied)

Section 4. ... A Lions club shall be considered chartered when its charter has been officially issued. The acceptance of a charter by a Lions Club shall be a ratification of, and agreement on its part to be bound by, the Constitution and By-Laws of this Association and a submission by said Lions Club to have its relationship with this Association interpreted and governed by this Constitution and By-Laws according to the laws in effect, from time to time, in the State of Incorporation of The International Association of Lions Clubs. Section 5. Except as otherwise provided herein, the International Board of Directors shall have full power and authority to sanction the organization and chartering of all clubs, under such rules and regulations as it may prescribe.

Section 8 (a) Subject to the provisions of Sec. 2 of this Article VII: (1) ...

Subject to the provisions of this Constitution and By-Laws, all club so organized shall be under the exclusive jurisdiction of said Board of Directors."

The records disclose that the election dispute between petitioner James L. So and respondent Vicente Josefa was brought before and elevated to the International Board of Directors through the Constitution and ByLaws Committee of Lions Clubs International, 300 22nd Street, Oakbrook, Illinois 60570, U.S.A. (See Letter Protest of petitioner So marked Annex "20", pp. 187-190, Records and Answer of Gov. Huang marked Annex "21 ", pp. 191-196, Records).

Aside from the obligation to carry on activities for the advancement of the civic, cultural, social or moral welfare of the community and for the promotion of international understanding, a chartered Lions club shall "(j) abide by the policies and requirements as determined, from time to

In his formal protest dated June 11, 1982, petitioner So assailed the validity of the "alleged election and proclamation" of Lion Vicente Josefa as District Governor of District 301-Al for the Lions fiscal year 1982-1983 and called attention to the "blatant display of oppressive conduct of Gov. 21

James T. Huang of District 301-Al before, during, and after the just concluded convention in the hope that the mistakes and miscarriage of justice be rectified." Narrating the sequence of events, petitioner claimed that Gov. Huang failed to constitute and present within the prescribed periods, the District Nominations and Elections Committee in violation of the Multiple District 301 Constitution and By-Laws; that duly registered delegates were deliberately disenfranchised; that Gov. Huang arbitrarily transferred the venue of election from the Little Theater, Olongapo City National High School, to the Admiral Hotel which was the headquarters of his opponent, Vicente Josefa, without the sanction and authority of the State Council of Governors and the Convention.

contended that the election in the Little Theater was never legally convened as there were no ballots, no accreditation papers, no ballot boxes and other important papers relative to an honest election. And since the election of Josefa was proclaimed by the State Council of Governors, Gov. Huang prayed that the election of Governor-elect Vicente Josefa be sustained and affirmed. Filed and attached to the Answer of Gov. Huang is the Report of the Governor to Lions Clubs International including reports of the Election Committee, the Board of Canvassers, Minutes of the Election Proceedings, Certification of the Proclamation of Governor-elect Josefa and Resolution of the State Council of Governors confirming the proclamation. (See Annex "22", pp.197-203).

Petitioner So pointed out that he was duly nominated by the District Nominations Committee as well as respondent Vicente Josefa and in the elections duly conducted by the Election Committee at the official venue at the Little Theater, he received 147 votes as against 3 votes in favor of Josefa and that the 147 votes he received is a clear majority of the total number of registered delegates of District 301-Al which was 251, or a clear majority of 59%. The election results were duly certified by the Convention Chairman and by the official representative of the State Council of Governors, District Gov. Ramon Beleno of District 301E. Petitioner, therefore, prayed that he be recognized as the duly elected District Governor of District 301-Al for the Lion fiscal year 1982-1983.

Thereafter, the Constitution and by-Laws Committee, through Joseph D. Stone, General Counsel of the International Association of Lions Clubs, submitted to the International Board of Directors the following Report:

Answering the letter-protest of petitioner So and as directed by Lions Clubs International, Gov. Huang in his letter dated June 17, 1982 denied the assertions of the protestant, petitioner So, and maintained that he had faithfully performed all the duties and responsibilities of his office in accordance With the Constitution and By-Laws, of the Multiple District, citing incidents wherein followers of petitioner So allegedly created trouble by booing, shouting and uttering invectives and armed men intimidated followers of Josefa from entering the Little Theater. In changing the venue of elections, Huang said he wanted "a democratic and peaceful election which could not be achieved in the old site because of the unruly and deteriorated atmosphere caused by the agitations from the camp of James L. So." Gov. Huang, moreover,

The International Board of Directors has received a complaint filed by Lion James L. So. This complaint has been filed in accordance with the Constitutional Complaints Procedure of the International Board of Directors. All parties have been given the opportunity to respond and have filed their official response with the International Association. Your Committee has examined the evidence submitted by the parties and has conducted a hearing attended by Lion So, District Governor of District 301-A Lion James Huang Lion Vicente Josefa and Multiple District 301 Council Chairman Lion Antonio Ramos. Your Committee hereby makes the following finding of facts and recommendations respecting the election for the office of District Governor in District 301-Al for the fiscal year 1982-83: 1. That there were two properly nominated candidates for the office of District Governor, District 301-Al, for the fiscal year 1982-83: Lion James L. So and Lion Vicente Josefa.

22

2. That one hour after the designated convening time, District Governor Huang transferred the election meeting from the designated site to the Admiral Royal Hotel. 3. That after the announcement of District Governor Huang transferring the election meeting, a majority of the delegates of the newly authorized District 301-Al remained at the designated site and convened an election for District Governor between the two candidates, Lion So and Lion Josefa. 4. That there were two elections held on June 6, 1982 for the office of District Governor of District 301-Al. 5. That one election was held as a part of the official District Convention at the designated election meeting site, the Little Theater Olongapo National High School, at which Lion So received 147 votes and Lion Josefa received 3 votes. 6. That the other election was held at the Admiral Royale Hotel at which Lion Josefa received 115 votes. 7. That the action of District Governor Huang in transferring the election meeting away from the convention site was without approval of a majority of the delegates and was without any clear authority and justification. 8. That the said election meeting held at the Little Theatre Olongapo National High School was properly conducted and resulted in the election of Lion So. 9. That said election of Lion So was duly certified by the official Election Committee Chairman Lion Ernesto Castañeda, appointed by District Governor Huang and District Governor Beleno of District 301-E, the official Multiple District Council representative. Based upon the above finding of facts your Committee is of the opinion that Lion James L. So was duly elected as District Governor,

District 301- Al for the fiscal year 1982-83 and that said election should be recognized by the International Board of Directors. Your Committee is also of the opinion that the election conducted by District Governor Huang, 301-A, at the Admiral Royale Hotel was unauthorized and improper and is thereby null and void. Your Committee recommends that the Board concur in said finding of facts and recommendations by the adoption of RESOLUTION III-A hereinafter." (Annexes "O" and "O1", Reply, pp. 237-238, Records). At the meeting of the International Board of Directors held on June 27, 1982, the election of petitioner James L. So to serve as District Governor of District 301-Al for the fiscal year 1982-83 was approved and said petitioner was duly informed thereof by Richard G. Rice, Manager, District Operations Department, Lions Clubs International in his letter dated July 8, 1982 and marked Annex "K" to the petition, p. 79, Records. Petitioner attended and completed the District Governors' Executive Seminar as District Governor of 301-Al (see Annex "L", P. 80, Records). On June 29, 1982, petitioner So was proclaimed, sworn to and installed to office as District Governor of District 301-Al by the President of Lions International at the close of the 65th Lions Clubs International Convention held in Atlanta, Georgia, U.S.A. The Report of the Constitution and By-laws Committee duly approved and adopted by the International Board of Directors clearly belies the claim of injustice alleged by respondent Josefa in his complaint in Civil Case No. 82-10588 that petitioner So was illegally and arbitrarily nominated; that the latter's election was illegal and that he (Josefa) was legally elected in a valid election held at the new venue and was duly proclaimed by the State Council of Governors and that Lions International unlawfully recognized So as the winner on the basis of his illegal election. These findings upon the evidence submitted and examined at the hearing of the election protest before the Committee personally attended by both petitioner So and respondent Josefa may not be disturbed by the courts. The decision of the Association's tribunal, the International Board of Directors, is controlling since respondent Josefa alleges no invasion of this property or civil rights and neither is it 23

claimed that the government of the Association is not fairly and honestly administered in conformity with its laws and the law of the land. It is clear that under the Constitution of Lions International, Art. IV, Section, 8, the District Governor serves without compensation. Lionism prides itself in that its motto is: "We serve", and "Liberty, Intelligence, Our Nation's Safety" its slogan or credo. (Secs. 2 and 3, Art. 1, Constitution). There is, therefore, no proprietary or pecuniary interest involved in the membership of the Lions and in the offices they seek and hold in the club and district levels. Being merely a member or officer of the Lions Clubs or District is only a privilege and an opportunity for service to the community that is not enforceable at law. And since the disputed election to the position of District Governor is within the peculiar province and function of Lions International through its established tribunal to decide and determine in accordance with its governing laws, its resolution may not be questioned elsewhere, much less in the courts. Thus, in Our jurisprudence in U.S. vs. Cañete 38 Phil. 253, the Supreme Court held that in matters purely ecclesiastical, the decision of the proper church tribunals are conclusive upon the civil tribunals and that a church member who is expelled from membership by the church authorities or a priest or minister who is by then deprived of his sacred office, is without remedy in the civil court, which will not inquire into the correctness of the decision of the ecclesiastical tribunals. So also in Felipe vs. Leuterio, et al, 91 Phil. 482, We held that the judiciary has no power to reverse the award of the Board of Judges of an oratorical contest and for that matter, it would not interfere in literary contests, beauty contests, and similar competitions. In essence, the courts, considering the nature of the action or suit at bar, are without jurisdiction and authority to review and reverse the decision of the International Board of Directors, Lions Clubs International, approving and recognizing the petitioner as duly elected District Governor of District 301-A1 for the fiscal year 1982-1983. WHEREFORE, IN VIEW OF THE FOREGOING, Civil Case No. 8210588 entitled "Vicente Josefa vs. Lions Clubs International, Antonio

Ramos and Lion James L. So", Court of First Instance of Manila, Branch XXIV (now Regional Trial Court, National Capital Region) and the petition entitled "Vicente Josefa vs. Hon. Judge Augusto M. Amores, Lions Clubs International and James L. So", CA-G.R. No. 14599-SP (now Intermediate Appellate Court) are hereby DISMISSED. No costs. 5G.R. No. 149110 April 9, 2003 CORPORATION, petitioner, vs.CITY OF CABANATUAN, respondent.

NATIONAL

POWER

This is a petition for review1 of the Decision2 and the Resolution3 of the Court of Appeals dated March 12, 2001 and July 10, 2001, respectively, finding petitioner National Power Corporation (NPC) liable to pay franchise tax to respondent City of Cabanatuan. Petitioner is a government-owned and controlled corporation created under Commonwealth Act No. 120, as amended.4 It is tasked to undertake the "development of hydroelectric generations of power and the production of electricity from nuclear, geothermal and other sources, as well as, the transmission of electric power on a nationwide basis."5 Concomitant to its mandated duty, petitioner has, among others, the power to construct, operate and maintain power plants, auxiliary plants, power stations and substations for the purpose of developing hydraulic power and supplying such power to the inhabitants.6 For many years now, petitioner sells electric power to the residents of Cabanatuan City, posting a gross income of P107,814,187.96 in 1992.7 Pursuant to section 37 of Ordinance No. 165-92,8 the respondent assessed the petitioner a franchise tax amounting to P808,606.41, representing 75% of 1% of the latter's gross receipts for the preceding year.9 Petitioner, whose capital stock was subscribed and paid wholly by the Philippine Government,10 refused to pay the tax assessment. It argued that the respondent has no authority to impose tax on government entities. Petitioner also contended that as a non-profit organization, it is exempted from the payment of all forms of taxes, charges, duties or 24

fees11 in accordance with sec. 13 of Rep. Act No. 6395, as amended, viz: "Sec.13. Non-profit Character of the Corporation; Exemption from all Taxes, Duties, Fees, Imposts and Other Charges by Government and Governmental Instrumentalities.- The Corporation shall be non-profit and shall devote all its return from its capital investment, as well as excess revenues from its operation, for expansion. To enable the Corporation to pay its indebtedness and obligations and in furtherance and effective implementation of the policy enunciated in Section one of this Act, the Corporation is hereby exempt: (a) From the payment of all taxes, duties, fees, imposts, charges, costs and service fees in any court or administrative proceedings in which it may be a party, restrictions and duties to the Republic of the Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities; (b) From all income taxes, franchise taxes and realty taxes to be paid to the National Government, its provinces, cities, municipalities and other government agencies and instrumentalities; (c) From all import duties, compensating taxes and advanced sales tax, and wharfage fees on import of foreign goods required for its operations and projects; and (d) From all taxes, duties, fees, imposts, and all other charges imposed by the Republic of the Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities, on all petroleum products used by the Corporation in the generation, transmission, utilization, and sale of electric power."12 The respondent filed a collection suit in the Regional Trial Court of Cabanatuan City, demanding that petitioner pay the assessed tax due,

plus a surcharge equivalent to 25% of the amount of tax, and 2% monthly interest.13Respondent alleged that petitioner's exemption from local taxes has been repealed by section 193 of Rep. Act No. 7160,14 which reads as follows: "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 the effectivity of this Code." On January 25, 1996, the trial court issued an Order15 dismissing the case. It ruled that the tax exemption privileges granted to petitioner subsist despite the passage of Rep. Act No. 7160 for the following reasons: (1) Rep. Act No. 6395 is a particular law and it may not be repealed by Rep. Act No. 7160 which is a general law; (2) section 193 of Rep. Act No. 7160 is in the nature of an implied repeal which is not favored; and (3) local governments have no power to tax instrumentalities of the national government. Pertinent portion of the Order reads: "The question of whether a particular law has been repealed or not by a subsequent law is a matter of legislative intent. The lawmakers may expressly repeal a law by incorporating therein repealing provisions which expressly and specifically cite(s) the particular law or laws, and portions thereof, that are intended to be repealed. A declaration in a statute, usually in its repealing clause, that a particular and specific law, identified by its number or title is repealed is an express repeal; all others are implied repeal. Sec. 193 of R.A. No. 7160 is an implied repealing clause because it fails to identify the act or acts that are intended to be repealed. It is a well-settled rule of statutory construction that repeals of statutes by implication are not favored. The presumption is against inconsistency and repugnancy for the 25

legislative is presumed to know the existing laws on the subject and not to have enacted inconsistent or conflicting statutes. It is also a well-settled rule that, generally, general law does not repeal a special law unless it clearly appears that the legislative has intended by the latter general act to modify or repeal the earlier special law. Thus, despite the passage of R.A. No. 7160 from which the questioned Ordinance No. 165-92 was based, the tax exemption privileges of defendant NPC remain. Another point going against plaintiff in this case is the ruling of the Supreme Court in the case of Basco vs. Philippine Amusement and Gaming Corporation, 197 SCRA 52, where it was held that: 'Local governments have no power to tax instrumentalities of the National Government. PAGCOR is a government owned or controlled corporation with an original charter, PD 1869. All of its shares of stocks are owned by the National Government. xxx Being an instrumentality of the government, PAGCOR should be and actually is exempt from local taxes. Otherwise, its operation might be burdened, impeded or subjected to control by mere local government.' Like PAGCOR, NPC, being a government owned and controlled corporation with an original charter and its shares of stocks owned by the National Government, is beyond the taxing power of the Local Government. Corollary to this, it should be noted here that in the NPC Charter's declaration of Policy, Congress declared that: 'xxx (2) the total electrification of the Philippines through the development of power from all services to meet the needs of industrial development and dispersal and needs of rural electrification are primary objectives of the nations which shall be pursued coordinately and supported by all instrumentalities and agencies of the government, including its financial institutions.' (underscoring supplied). To allow plaintiff to subject defendant to

its tax-ordinance would be to impede the avowed goal of this government instrumentality. Unlike the State, a city or municipality has no inherent power of taxation. Its taxing power is limited to that which is provided for in its charter or other statute. Any grant of taxing power is to be construed strictly, with doubts resolved against its existence. From the existing law and the rulings of the Supreme Court itself, it is very clear that the plaintiff could not impose the subject tax on the defendant."16 On appeal, the Court of Appeals reversed the trial court's Order17 on the ground that section 193, in relation to sections 137 and 151 of the LGC, expressly withdrew the exemptions granted to the petitioner.18 It ordered the petitioner to pay the respondent city government the following: (a) the sum of P808,606.41 representing the franchise tax due based on gross receipts for the year 1992, (b) the tax due every year thereafter based in the gross receipts earned by NPC, (c) in all cases, to pay a surcharge of 25% of the tax due and unpaid, and (d) the sum of P 10,000.00 as litigation expense.19 On April 4, 2001, the petitioner filed a Motion for Reconsideration on the Court of Appeal's Decision. This was denied by the appellate court, viz: "The Court finds no merit in NPC's motion for reconsideration. Its arguments reiterated therein that the taxing power of the province under Art. 137 (sic) of the Local Government Code refers merely to private persons or corporations in which category it (NPC) does not belong, and that the LGC (RA 7160) which is a general law may not impliedly repeal the NPC Charter which is a special law—finds the answer in Section 193 of the LGC to the effect that 'tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical, including governmentowned or controlled corporations except local water districts xxx are hereby withdrawn.' The repeal is direct and unequivocal, not implied. 26

IN VIEW WHEREOF, the motion for reconsideration is hereby DENIED.

receipts for the preceding calendar year based on the incoming receipt, or realized, within its territorial jurisdiction.

SO ORDERED."20

In the case of a newly started business, the tax shall not exceed one-twentieth (1/20) of one percent (1%) of the capital investment. In the succeeding calendar year, regardless of when the business started to operate, the tax shall be based on the gross receipts for the preceding calendar year, or any fraction thereof, as provided herein." (emphasis supplied)

In this petition for review, petitioner raises the following issues: "A. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT NPC, A PUBLIC NON-PROFIT CORPORATION, IS LIABLE TO PAY A FRANCHISE TAX AS IT FAILED TO CONSIDER THAT SECTION 137 OF THE LOCAL GOVERNMENT CODE IN RELATION TO SECTION 131 APPLIES ONLY TO PRIVATE PERSONS OR CORPORATIONS ENJOYING A FRANCHISE. B. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT NPC'S EXEMPTION FROM ALL FORMS OF TAXES HAS BEEN REPEALED BY THE PROVISION OF THE LOCAL GOVERNMENT CODE AS THE ENACTMENT OF A LATER LEGISLATION, WHICH IS A GENERAL LAW, CANNOT BE CONSTRUED TO HAVE REPEALED A SPECIAL LAW. C. THE COURT OF APPEALS GRAVELY ERRED IN NOT CONSIDERING THAT AN EXERCISE OF POLICE POWER THROUGH TAX EXEMPTION SHOULD PREVAIL OVER THE LOCAL GOVERNMENT CODE."21 It is beyond dispute that the respondent city government has the authority to issue Ordinance No. 165-92 and impose an annual tax on "businesses enjoying a franchise," pursuant to section 151 in relation to section 137 of the LGC, viz: "Sec. 137. Franchise Tax. - Notwithstanding any exemption granted by any law or other special law, the province may impose a tax on businesses enjoying a franchise, at a rate not exceeding fifty percent (50%) of one percent (1%) of the gross annual

x

x

x

Sec. 151. Scope of Taxing Powers.- Except as otherwise provided in this Code, the city, may levy the taxes, fees, and charges which the province or municipality may impose: Provided, however, That the taxes, fees and charges levied and collected by highly urbanized and independent component cities shall accrue to them and distributed in accordance with the provisions of this Code. The rates of taxes that the city may levy may exceed the maximum rates allowed for the province or municipality by not more than fifty percent (50%) except the rates of professional and amusement taxes." Petitioner, however, submits that it is not liable to pay an annual franchise tax to the respondent city government. It contends that sections 137 and 151 of the LGC in relation to section 131, limit the taxing power of the respondent city government to private entities that are engaged in trade or occupation for profit.22 Section 131 (m) of the LGC defines a "franchise" as "a right or privilege, affected with public interest which is conferred upon private persons or corporations, under such terms and conditions as the government and its political subdivisions may impose in the interest of the public welfare, security and safety." From the phraseology of this provision, the petitioner claims that the word "private" modifies the terms "persons" 27

and "corporations." Hence, when the LGC uses the term "franchise," petitioner submits that it should refer specifically to franchises granted to private natural persons and to private corporations.23 Ergo, its charter should not be considered a "franchise" for the purpose of imposing the franchise tax in question. On the other hand, section 131 (d) of the LGC defines "business" as "trade or commercial activity regularly engaged in as means of livelihood or with a view to profit." Petitioner claims that it is not engaged in an activity for profit, in as much as its charter specifically provides that it is a "non-profit organization." In any case, petitioner argues that the accumulation of profit is merely incidental to its operation; all these profits are required by law to be channeled for expansion and improvement of its facilities and services.24 Petitioner also alleges that it is an instrumentality of the National Government,25 and as such, may not be taxed by the respondent city government. It cites the doctrine in Basco vs. Philippine Amusement and Gaming Corporation26where this Court held that local governments have no power to tax instrumentalities of the National Government, viz: "Local governments have no power to tax instrumentalities of the National Government. PAGCOR has a dual role, to operate and regulate gambling casinos. The latter role is governmental, which places it in the category of an agency or instrumentality of the Government. Being an instrumentality of the Government, PAGCOR should be and actually is exempt from local taxes. Otherwise, its operation might be burdened, impeded or subjected to control by a mere local government. '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 seriously burden it from accomplishment of them.' (Antieau, Modern Constitutional Law, Vol. 2, p. 140, italics 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 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."27 Petitioner contends that section 193 of Rep. Act No. 7160, withdrawing the tax privileges of government-owned or controlled corporations, is in the nature of an implied repeal. A special law, its charter cannot be amended or modified impliedly by the local government code which is a general law. Consequently, petitioner claims that its exemption from all taxes, fees or charges under its charter subsists despite the passage of the LGC, viz:

28

"It is a well-settled rule of statutory construction that repeals of statutes by implication are not favored and as much as possible, effect must be given to all enactments of the legislature. Moreover, it has to be conceded that the charter of the NPC constitutes a special law. Republic Act No. 7160, is a general law. It is a basic rule in statutory construction that the enactment of a later legislation which is a general law cannot be construed to have repealed a special law. Where there is a conflict between a general law and a special statute, the special statute should prevail since it evinces the legislative intent more clearly than the general statute."28 Finally, petitioner submits that the charter of the NPC, being a valid exercise of police power, should prevail over the LGC. It alleges that the power of the local government to impose franchise tax is subordinate to petitioner's exemption from taxation; "police power being the most pervasive, the least limitable and most demanding of all powers, including the power of taxation."29 The petition is without merit. Taxes are the lifeblood of the government, 30 for without taxes, the government can neither exist nor endure. A principal attribute of sovereignty,31 the exercise of taxing power derives its source from the very existence of the state whose social contract with its citizens obliges it to promote public interest and common good. The theory behind the exercise of the power to tax emanates from necessity; 32 without taxes, government cannot fulfill its mandate of promoting the general welfare and well-being of the people. In recent years, the increasing social challenges of the times expanded the scope of state activity, and taxation has become a tool to realize social justice and the equitable distribution of wealth, economic progress and the protection of local industries as well as public welfare and similar objectives.33 Taxation assumes even greater significance with the ratification of the 1987 Constitution. Thenceforth, the power to tax is no longer vested exclusively on Congress; local legislative bodies are now

given direct authority to levy taxes, fees and other charges34 pursuant to Article X, section 5 of the 1987 Constitution, viz: "Section 5.- Each Local Government unit shall have the power to create its own sources of revenue, to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees and charges shall accrue exclusively to the Local Governments." This paradigm shift results from the realization that genuine development can be achieved only by strengthening local autonomy and promoting decentralization of governance. For a long time, the country's highly centralized government structure has bred a culture of dependence among local government leaders upon the national leadership. It has also "dampened the spirit of initiative, innovation and imaginative resilience in matters of local development on the part of local government leaders."35 The only way to shatter this culture of dependence is to give the LGUs a wider role in the delivery of basic services, and confer them sufficient powers to generate their own sources for the purpose. To achieve this goal, section 3 of Article X of the 1987 Constitution mandates Congress to enact a local government code that will, consistent with the basic policy of local autonomy, set the guidelines and limitations to this grant of taxing powers, viz: "Section 3. The Congress shall enact a local government code which shall provide for a more responsive and accountable local government structure instituted through a system of decentralization with effective mechanisms of recall, initiative, and referendum, allocate among the different local government units their powers, responsibilities, and resources, and provide for the qualifications, election, appointment and removal, term, salaries, powers and functions and duties of local officials, and all other matters relating to the organization and operation of the local units."

29

To recall, prior to the enactment of the Rep. Act No. 7160,36 also known as the Local Government Code of 1991 (LGC), various measures have been enacted to promote local autonomy. These include the Barrio Charter of 1959,37 the Local Autonomy Act of 1959,38 the Decentralization Act of 196739 and the Local Government Code of 1983.40 Despite these initiatives, however, the shackles of dependence on the national government remained. Local government units were faced with the same problems that hamper their capabilities to participate effectively in the national development efforts, among which are: (a) inadequate tax base, (b) lack of fiscal control over external sources of income, (c) limited authority to prioritize and approve development projects, (d) heavy dependence on external sources of income, and (e) limited supervisory control over personnel of national line agencies.41 Considered as the most revolutionary piece of legislation on local autonomy,42 the LGC effectively deals with the fiscal constraints faced by LGUs. It widens the tax base of LGUs to include taxes which were prohibited by previous laws such as the imposition of taxes on forest products, forest concessionaires, mineral products, mining operations, and the like. The LGC likewise provides enough flexibility to impose tax rates in accordance with their needs and capabilities. It does not prescribe graduated fixed rates but merely specifies the minimum and maximum tax rates and leaves the determination of the actual rates to the respective sanggunian.43 One of the most significant provisions of the LGC is the removal of the blanket exclusion of instrumentalities and agencies of the national government from the coverage of local taxation. Although as a general rule, LGUs cannot impose taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities, this rule now admits an exception, i.e., when specific provisions of the LGC authorize the LGUs to impose taxes, fees or charges on the aforementioned entities, viz: "Section 133. Common Limitations on the Taxing Powers of the 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: x

x

x

(o) Taxes, fees, or charges of any kind on the National Government, its agencies and instrumentalities, and local government units." (emphasis supplied) In view of the afore-quoted provision of the LGC, the doctrine in Basco vs. Philippine Amusement and Gaming Corporation44 relied upon by the petitioner to support its claim no longer applies. To emphasize, the Basco case was decided prior to the effectivity of the LGC, when no law empowering the local government units to tax instrumentalities of the National Government was in effect. However, as this Court ruled in the case of Mactan Cebu International Airport Authority (MCIAA) vs. Marcos,45 nothing prevents Congress from decreeing that even instrumentalities or agencies of the government performing governmental functions may be subject to tax.46 In enacting the LGC, Congress exercised its prerogative to tax instrumentalities and agencies of government as it sees fit. Thus, after reviewing the specific provisions of the LGC, this Court held that MCIAA, although an instrumentality of the national government, was subject to real property tax, viz: "Thus, reading together sections 133, 232, and 234 of the LGC, we conclude that as a general rule, as laid down in section 133, the taxing power of local governments cannot extend to the levy of inter alia, 'taxes, fees and charges of any kind on the national government, its agencies and instrumentalities, and local government units'; however, pursuant to section 232, provinces, cities and municipalities in the Metropolitan Manila Area may impose the real property tax except on, inter alia, '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 as provided in the item (a) of the first paragraph of section 12.'"47 30

In the case at bar, section 151 in relation to section 137 of the LGC clearly authorizes the respondent city government to impose on the petitioner the franchise tax in question. In its general signification, a franchise is a privilege conferred by government authority, which does not belong to citizens of the country generally as a matter of common right.48 In its specific sense, a franchise may refer to a general or primary franchise, or to a special or secondary franchise. The former relates to the right to exist as a corporation, by virtue of duly approved articles of incorporation, or a charter pursuant to a special law creating the corporation.49 The right under a primary or general franchise is vested in the individuals who compose the corporation and not in the corporation itself.50 On the other hand, the latter refers to the right or privileges conferred upon an existing corporation such as the right to use the streets of a municipality to lay pipes of tracks, erect poles or string wires.51 The rights under a secondary or special franchise are vested in the corporation and may ordinarily be conveyed or mortgaged under a general power granted to a corporation to dispose of its property, except such special or secondary franchises as are charged with a public use.52 In section 131 (m) of the LGC, Congress unmistakably defined a franchise in the sense of a secondary or special franchise. This is to avoid any confusion when the word franchise is used in the context of taxation. As commonly used, a franchise tax is "a tax on the privilege of transacting business in the state and exercising corporate franchises granted by the state."53 It is not levied on the corporation simply for existing as a corporation, upon its property54 or its income,55 but on its exercise of the rights or privileges granted to it by the government. Hence, a corporation need not pay franchise tax from the time it ceased to do business and exercise its franchise.56 It is within this context that the phrase "tax on businesses enjoying a franchise" in section 137 of the LGC should be interpreted and understood. Verily, to determine whether the petitioner is covered by the franchise tax in question, the following requisites should concur: (1) that petitioner has a "franchise" in the sense of a secondary or special franchise; and (2) that it is

exercising its rights or privileges under this franchise within the territory of the respondent city government. Petitioner fulfills the first requisite. Commonwealth Act No. 120, as amended by Rep. Act No. 7395, constitutes petitioner's primary and secondary franchises. It serves as the petitioner's charter, defining its composition, capitalization, the appointment and the specific duties of its corporate officers, and its corporate life span.57 As its secondary franchise, Commonwealth Act No. 120, as amended, vests the petitioner the following powers which are not available to ordinary corporations, viz: "x x x (e) To conduct investigations and surveys for the development of water power in any part of the Philippines; (f) To take water from any public stream, river, creek, lake, spring or waterfall in the Philippines, for the purposes specified in this Act; to intercept and divert the flow of waters from lands of riparian owners and from persons owning or interested in waters which are or may be necessary for said purposes, upon payment of just compensation therefor; to alter, straighten, obstruct or increase the flow of water in streams or water channels intersecting or connecting therewith or contiguous to its works or any part thereof: Provided, That just compensation shall be paid to any person or persons whose property is, directly or indirectly, adversely affected or damaged thereby; (g) To construct, operate and maintain power plants, auxiliary plants, dams, reservoirs, pipes, mains, transmission lines, power stations and substations, and other works for the purpose of developing hydraulic power from any river, creek, lake, spring and waterfall in the Philippines and supplying such power to the inhabitants thereof; to acquire, construct, install, maintain, operate, and improve gas, oil, or steam engines, and/or other prime movers, generators and machinery in plants and/or 31

auxiliary plants for the production of electric power; to establish, develop, operate, maintain and administer power and lighting systems for the transmission and utilization of its power generation; to sell electric power in bulk to (1) industrial enterprises, (2) city, municipal or provincial systems and other government institutions, (3) electric cooperatives, (4) franchise holders, and (5) real estate subdivisions x x x;

determination by the Corporation of the areas required for watersheds for a specific project, the Bureau of Forestry, the Reforestation Administration and the Bureau of Lands shall, upon written advice by the Corporation, forthwith surrender jurisdiction to the Corporation of all areas embraced within the watersheds, subject to existing private rights, the needs of waterworks systems, and the requirements of domestic water supply;

(h) To acquire, promote, hold, transfer, sell, lease, rent, mortgage, encumber and otherwise dispose of property incident to, or necessary, convenient or proper to carry out the purposes for which the Corporation was created: Provided, That in case a right of way is necessary for its transmission lines, easement of right of way shall only be sought: Provided, however, That in case the property itself shall be acquired by purchase, the cost thereof shall be the fair market value at the time of the taking of such property;

(o) In the prosecution and maintenance of its projects, the Corporation shall adopt measures to prevent environmental pollution and promote the conservation, development and maximum utilization of natural resources xxx " 58

(i) To construct works across, or otherwise, any stream, watercourse, canal, ditch, flume, street, avenue, highway or railway of private and public ownership, as the location of said works may require xxx; (j) To exercise the right of eminent domain for the purpose of this Act in the manner provided by law for instituting condemnation proceedings by the national, provincial and municipal governments; x

x

x

(m) To cooperate with, and to coordinate its operations with those of the National Electrification Administration and public service entities; (n) To exercise complete jurisdiction and control over watersheds surrounding the reservoirs of plants and/or projects constructed or proposed to be constructed by the Corporation. Upon

With these powers, petitioner eventually had the monopoly in the generation and distribution of electricity. This monopoly was strengthened with the issuance of Pres. Decree No. 40, 59 nationalizing the electric power industry. Although Exec. Order No. 215 60 thereafter allowed private sector participation in the generation of electricity, the transmission of electricity remains the monopoly of the petitioner. Petitioner also fulfills the second requisite. It is operating within the respondent city government's territorial jurisdiction pursuant to the powers granted to it by Commonwealth Act No. 120, as amended. From its operations in the City of Cabanatuan, petitioner realized a gross income of P107,814,187.96 in 1992. Fulfilling both requisites, petitioner is, and ought to be, subject of the franchise tax in question. Petitioner, however, insists that it is excluded from the coverage of the franchise tax simply because its stocks are wholly owned by the National Government, and its charter characterized it as a "non-profit" organization. These contentions must necessarily fail. To stress, a franchise tax is imposed based not on the ownership but on the exercise by the corporation of a privilege to do business. The taxable entity is the corporation which exercises the franchise, and not the 32

individual stockholders. By virtue of its charter, petitioner was created as a separate and distinct entity from the National Government. It can sue and be sued under its own name,61 and can exercise all the powers of a corporation under the Corporation Code.62 To be sure, the ownership by the National Government of its entire capital stock does not necessarily imply that petitioner is not engaged in business. Section 2 of Pres. Decree No. 202963 classifies governmentowned or controlled corporations (GOCCs) into those performing governmental functions and those performing proprietary functions, viz: "A government-owned or controlled corporation is a stock or a non-stock corporation, whether performing governmental or proprietary functions, which is directly chartered by special law or if organized under the general corporation law is owned or controlled by the government directly, or indirectly through a parent corporation or subsidiary corporation, to the extent of at least a majority of its outstanding voting capital stock x x x." (emphases supplied) Governmental functions are those pertaining to the administration of government, and as such, are treated as absolute obligation on the part of the state to perform while proprietary functions are those that are undertaken only by way of advancing the general interest of society, and are merely optional on the government.64 Included in the class of GOCCs performing proprietary functions are "business-like" entities such as the National Steel Corporation (NSC), the National Development Corporation (NDC), the Social Security System (SSS), the Government Service Insurance System (GSIS), and the National Water Sewerage Authority (NAWASA),65 among others. Petitioner was created to "undertake the development of hydroelectric generation of power and the production of electricity from nuclear, geothermal and other sources, as well as the transmission of electric power on a nationwide basis."66 Pursuant to this mandate, petitioner generates power and sells electricity in bulk. Certainly, these activities do not partake of the sovereign functions of the government. They are

purely private and commercial undertakings, albeit imbued with public interest. The public interest involved in its activities, however, does not distract from the true nature of the petitioner as a commercial enterprise, in the same league with similar public utilities like telephone and telegraph companies, railroad companies, water supply and irrigation companies, gas, coal or light companies, power plants, ice plant among others; all of which are declared by this Court as ministrant or proprietary functions of government aimed at advancing the general interest of society.67 A closer reading of its charter reveals that even the legislature treats the character of the petitioner's enterprise as a "business," although it limits petitioner's profits to twelve percent (12%), viz:68 "(n) When essential to the proper administration of its corporate affairs or necessary for the proper transaction of its business or to carry out the purposes for which it was organized, to contract indebtedness and issue bonds subject to approval of the President upon recommendation of the Secretary of Finance; (o) To exercise such powers and do such things as may be reasonably necessary to carry out the business and purposes for which it was organized, or which, from time to time, may be declared by the Board to be necessary, useful, incidental or auxiliary to accomplish the said purpose xxx."(emphases supplied) It is worthy to note that all other private franchise holders receiving at least sixty percent (60%) of its electricity requirement from the petitioner are likewise imposed the cap of twelve percent (12%) on profits. 69 The main difference is that the petitioner is mandated to devote "all its returns from its capital investment, as well as excess revenues from its operation, for expansion"70 while other franchise holders have the option to distribute their profits to its stockholders by declaring dividends. We do not see why this fact can be a source of difference in tax treatment. In both instances, the taxable entity is the corporation, which exercises the franchise, and not the individual stockholders. 33

We also do not find merit in the petitioner's contention that its tax exemptions under its charter subsist despite the passage of the LGC. As a rule, tax exemptions are construed strongly against the claimant. Exemptions must be shown to exist clearly and categorically, and supported by clear legal provisions.71 In the case at bar, the petitioner's sole refuge is section 13 of Rep. Act No. 6395 exempting from, among others, "all income taxes, franchise taxes and realty taxes to be paid to the National Government, its provinces, cities, municipalities and other government agencies and instrumentalities." However, section 193 of the LGC withdrew, subject to limited exceptions, the sweeping tax privileges previously enjoyed by private and public corporations. Contrary to the contention of petitioner, section 193 of the LGC is an express, albeit general, repeal of all statutes granting tax exemptions from local taxes.72 It reads: "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 the effectivity of this Code." (emphases supplied)

provision of the LGC does not admit any exception. In City Government of San Pablo, Laguna v. Reyes,74 MERALCO's exemption from the payment of franchise taxes was brought as an issue before this Court. The same issue was involved in the subsequent case of Manila Electric Company v. Province of Laguna.75 Ruling in favor of the local government in both instances, we ruled that the franchise tax in question is imposable despite any exemption enjoyed by MERALCO under special laws, viz: "It is our view that petitioners correctly rely on provisions of Sections 137 and 193 of the LGC to support their position that MERALCO's tax exemption has been withdrawn. The explicit language of section 137 which authorizes the province to impose franchise tax 'notwithstanding any exemption granted by any law or other special law' is all-encompassing and clear. The franchise tax is imposable despite any exemption enjoyed under special laws.

It is a basic precept of statutory construction that the express mention of one person, thing, act, or consequence excludes all others as expressed in the familiar maxim expressio unius est exclusio alterius.73 Not being a local water district, a cooperative registered under R.A. No. 6938, or a non-stock and non-profit hospital or educational institution, petitioner clearly does not belong to the exception. It is therefore incumbent upon the petitioner to point to some provisions of the LGC that expressly grant it exemption from local taxes.

Section 193 buttresses the withdrawal of extant tax exemption privileges. By stating that 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 (1) local water districts, (2) cooperatives duly registered under R.A. 6938, (3) non-stock and non-profit hospitals and educational institutions, are withdrawn upon the effectivity of this code, the obvious import is to limit the exemptions to the three enumerated entities. It is a basic precept of statutory construction that the express mention of one person, thing, act, or consequence excludes all others as expressed in the familiar maxim expressio unius est exclusio alterius. In the absence of any provision of the Code to the contrary, and we find no other provision in point, any existing tax exemption or incentive enjoyed by MERALCO under existing law was clearly intended to be withdrawn.

But this would be an exercise in futility. Section 137 of the LGC clearly states that the LGUs can impose franchise tax "notwithstanding any exemption granted by any law or other special law." This particular

Reading together sections 137 and 193 of the LGC, we conclude that under the LGC the local government unit may now impose a local tax at a rate not exceeding 50% of 1% of the gross annual receipts for the 34

preceding calendar based on the incoming receipts realized within its territorial jurisdiction. The legislative purpose to withdraw tax privileges enjoyed under existing law or charter is clearly manifested by the language used on (sic) Sections 137 and 193 categorically withdrawing such exemption subject only to the exceptions enumerated. Since it would be not only tedious and impractical to attempt to enumerate all the existing statutes providing for special tax exemptions or privileges, the LGC provided for an express, albeit general, withdrawal of such exemptions or privileges. No more unequivocal language could have been used."76(emphases supplied).

6. [G.R. No. 119002. October 19, 2000]

It is worth mentioning that section 192 of the LGC empowers the LGUs, through ordinances duly approved, to grant tax exemptions, initiatives or reliefs.77 But in enacting section 37 of Ordinance No. 165-92 which imposes an annual franchise tax "notwithstanding any exemption granted by law or other special law," the respondent city government clearly did not intend to exempt the petitioner from the coverage thereof.

Petitioner secured the airline tickets for the trips of the athletes and officials of the Federation to the South East Asian Games in Kuala Lumpur as well as various other trips to the People's Republic of China and Brisbane. The total cost of the tickets amounted to P449,654.83. For the tickets received, the Federation made two partial payments, both in September of 1989, in the total amount of P176,467.50.[2]

Doubtless, the power to tax is the most effective instrument to raise needed revenues to finance and support myriad activities of the local government units for the delivery of basic services essential to the promotion of the general welfare and the enhancement of peace, progress, and prosperity of the people. As this Court observed in the Mactan case, "the original reasons for the withdrawal of tax exemption privileges granted to government-owned or controlled corporations and all other units of government were that such privilege resulted in serious tax base erosion and distortions in the tax treatment of similarly situated enterprises."78 With the added burden of devolution, it is even more imperative for government entities to share in the requirements of development, fiscal or otherwise, by paying taxes or other charges due from them. IN VIEW WHEREOF, the instant petition is DENIED and the assailed Decision and Resolution of the Court of Appeals dated March 12, 2001 and July 10, 2001, respectively, are hereby AFFIRMED. SO ORDERED.

INTERNATIONAL EXPRESS TRAVEL & TOUR SERVICES, INC., petitioner, vs. HON. COURT OF APPEALS, HENRI KAHN, PHILIPPINE FOOTBALL FEDERATION, respondents. On June 30 1989, petitioner International Express Travel and Tour Services, Inc., through its managing director, wrote a letter to the Philippine Football Federation (Federation), through its president private respondent Henri Kahn, wherein the former offered its services as a travel agency to the latter.[1] The offer was accepted.

On 4 October 1989, petitioner wrote the Federation, through the private respondent a demand letter requesting for the amount of P265,894.33.[3] On 30 October 1989, the Federation, through the Project Gintong Alay, paid the amount of P31,603.00.[4] On 27 December 1989, Henri Kahn issued a personal check in the amount of P50,000 as partial payment for the outstanding balance of the Federation.[5] Thereafter, no further payments were made despite repeated demands. This prompted petitioner to file a civil case before the Regional Trial Court of Manila. Petitioner sued Henri Kahn in his personal capacity and as President of the Federation and impleaded the Federation as an alternative defendant. Petitioner sought to hold Henri Kahn liable for the unpaid balance for the tickets purchased by the Federation on the ground that Henri Kahn allegedly guaranteed the said obligation.[6] Henri Kahn filed his answer with counterclaim. While not denying the allegation that the Federation owed the amount P207,524.20, representing the unpaid balance for the plane tickets, he averred that 35

the petitioner has no cause of action against him either in his personal capacity or in his official capacity as president of the Federation. He maintained that he did not guarantee payment but merely acted as an agent of the Federation which has a separate and distinct juridical personality.[7] On the other hand, the Federation failed to file its answer, hence, was declared in default by the trial court.[8] In due course, the trial court rendered judgment and ruled in favor of the petitioner and declared Henri Kahn personally liable for the unpaid obligation of the Federation. In arriving at the said ruling, the trial court rationalized: Defendant Henri Kahn would have been correct in his contentions had it been duly established that defendant Federation is a corporation. The trouble, however, is that neither the plaintiff nor the defendant Henri Kahn has adduced any evidence proving the corporate existence of the defendant Federation. In paragraph 2 of its complaint, plaintiff asserted that "Defendant Philippine Football Federation is a sports association xxx." This has not been denied by defendant Henri Kahn in his Answer. Being the President of defendant Federation, its corporate existence is within the personal knowledge of defendant Henri Kahn. He could have easily denied specifically the assertion of the plaintiff that it is a mere sports association, if it were a domestic corporation. But he did not. xxx A voluntary unincorporated association, like defendant Federation has no power to enter into, or to ratify, a contract. The contract entered into by its officers or agents on behalf of such association is not binding on, or enforceable against it. The officers or agents are themselves personally liable. x x x[9] The dispositive portion of the trial court's decision reads:

WHEREFORE, judgment is rendered ordering defendant Henri Kahn to pay the plaintiff the principal sum of P207,524.20, plus the interest thereon at the legal rate computed from July 5, 1990, the date the complaint was filed, until the principal obligation is fully liquidated; and another sum of P15,000.00 for attorney's fees. The complaint of the plaintiff against the Philippine Football Federation and the counterclaims of the defendant Henri Kahn are hereby dismissed. With the costs against defendant Henri Kahn.[10] Only Henri Kahn elevated the above decision to the Court of Appeals. On 21 December 1994, the respondent court rendered a decision reversing the trial court, the decretal portion of said decision reads: WHEREFORE, premises considered, the judgment appealed from is hereby REVERSED and SET ASIDE and another one is rendered dismissing the complaint against defendant Henri S. Kahn.[11] In finding for Henri Kahn, the Court of Appeals recognized the juridical existence of the Federation. It rationalized that since petitioner failed to prove that Henri Kahn guaranteed the obligation of the Federation, he should not be held liable for the same as said entity has a separate and distinct personality from its officers. Petitioner filed a motion for reconsideration and as an alternative prayer pleaded that the Federation be held liable for the unpaid obligation. The same was denied by the appellate court in its resolution of 8 February 1995, where it stated that: As to the alternative prayer for the Modification of the Decision by expressly declaring in the dispositive portion thereof the Philippine Football Federation (PFF) as liable for the unpaid obligation, it should be remembered that the trial court dismissed the complaint against the Philippine Football Federation, and the plaintiff did not appeal from this decision. Hence, the Philippine Football Federation is not a party to this 36

appeal and consequently, no judgment may be pronounced by this Court against the PFF without violating the due process clause, let alone the fact that the judgment dismissing the complaint against it, had already become final by virtue of the plaintiff's failure to appeal therefrom. The alternative prayer is therefore similarly DENIED.[12] Petitioner now seeks recourse to this Court and alleges that the respondent court committed the following assigned errors:[13] A. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER HAD DEALT WITH THE PHILIPPINE FOOTBALL FEDERATION (PFF) AS A CORPORATE ENTITY AND IN NOT HOLDING THAT PRIVATE RESPONDENT HENRI KAHN WAS THE ONE WHO REPRESENTED THE PFF AS HAVING A CORPORATE PERSONALITY. B. THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING PRIVATE RESPONDENT HENRI KAHN PERSONALLY LIABLE FOR THE OBLIGATION OF THE UNINCORPORATED PFF, HAVING NEGOTIATED WITH PETITIONER AND CONTRACTED THE OBLIGATION IN BEHALF OF THE PFF, MADE A PARTIAL PAYMENT AND ASSURED PETITIONER OF FULLY SETTLING THE OBLIGATION. C. ASSUMING ARGUENDO THAT PRIVATE RESPONDENT KAHN IS NOT PERSONALLY LIABLE, THE HONORABLE COURT OF APPEALS ERRED IN NOT EXPRESSLY DECLARING IN ITS DECISION THAT THE PFF IS SOLELY LIABLE FOR THE OBLIGATION. The resolution of the case at bar hinges on the determination of the existence of the Philippine Football Federation as a juridical person. In the assailed decision, the appellate court recognized the existence of the Federation. In support of this, the CA cited Republic Act 3135, otherwise known as the Revised Charter of the Philippine Amateur Athletic Federation, and Presidential Decree No. 604 as the laws from which said Federation derives its existence.

As correctly observed by the appellate court, both R.A. 3135 and P.D. No. 604 recognized the juridical existence of national sports associations. This may be gleaned from the powers and functions granted to these associations. Section 14 of R.A. 3135 provides: SEC. 14. Functions, powers and duties of Associations. - The National Sports' Association shall have the following functions, powers and duties: 1. To adopt a constitution and by-laws for their internal organization and government; 2. To raise funds by donations, benefits, and other means for their purposes. 3. To purchase, sell, lease or otherwise encumber property both real and personal, for the accomplishment of their purpose; 4. To affiliate with international or regional sports' Associations after due consultation with the executive committee; xxx 13. To perform such other acts as may be necessary for the proper accomplishment of their purposes and not inconsistent with this Act. Section 8 of P.D. 604, grants similar functions to these sports associations: SEC. 8. Functions, Powers, and Duties of National Sports Association. - The National sports associations shall have the following functions, powers, and duties: 1. Adopt a Constitution and By-Laws for their internal organization and government which shall be submitted to the Department and any amendment thereto shall take effect upon approval by the Department:Provided, however, That no team, school, club, 37

organization, or entity shall be admitted as a voting member of an association unless 60 per cent of the athletes composing said team, school, club, organization, or entity are Filipino citizens; 2. Raise funds by donations, benefits, and other means for their purpose subject to the approval of the Department; 3. Purchase, sell, lease, or otherwise encumber property, both real and personal, for the accomplishment of their purpose; 4. Conduct local, interport, and international competitions, other than the Olympic and Asian Games, for the promotion of their sport; 5. Affiliate with international or regional sports associations after due consultation with the Department; xxx 13. Perform such other functions as may be provided by law. The above powers and functions granted to national sports associations clearly indicate that these entities may acquire a juridical personality. The power to purchase, sell, lease and encumber property are acts which may only be done by persons, whether natural or artificial, with juridical capacity. However, while we agree with the appellate court that national sports associations may be accorded corporate status, such does not automatically take place by the mere passage of these laws. It is a basic postulate that before a corporation may acquire juridical personality, the State must give its consent either in the form of a special law or a general enabling act. We cannot agree with the view of the appellate court and the private respondent that the Philippine Football Federation came into existence upon the passage of these laws. Nowhere can it be found in R.A. 3135 or P.D. 604 any provision creating the Philippine Football Federation. These laws merely recognized the existence of national sports associations and provided

the manner by which these entities may personality. Section 11 of R.A. 3135 provides:

acquire

juridical

SEC. 11. National Sports' Association; organization and recognition. - A National Association shall be organized for each individual sports in the Philippines in the manner hereinafter provided to constitute the Philippine Amateur Athletic Federation. Applications for recognition as a National Sports' Association shall be filed with the executive committee together with, among others, a copy of the constitution and by-laws and a list of the members of the proposed association, and a filing fee of ten pesos. The Executive Committee shall give the recognition applied for if it is satisfied that said association will promote the purposes of this Act and particularly section three thereof. No application shall be held pending for more than three months after the filing thereof without any action having been taken thereon by the executive committee. Should the application be rejected, the reasons for such rejection shall be clearly stated in a written communication to the applicant. Failure to specify the reasons for the rejection shall not affect the application which shall be considered as unacted upon: Provided, however, That until the executive committee herein provided shall have been formed, applications for recognition shall be passed upon by the duly elected members of the present executive committee of the Philippine Amateur Athletic Federation. The said executive committee shall be dissolved upon the organization of the executive committee herein provided: Provided, further, That the functioning executive committee is charged with the responsibility of seeing to it that the National Sports' Associations are formed and organized within six months from and after the passage of this Act. Section 7 of P.D. 604, similarly provides: SEC. 7. National Sports Associations. - Application for accreditation or recognition as a national sports association for each individual sport in the Philippines shall be filed with the Department together with, among 38

others, a copy of the Constitution and By-Laws and a list of the members of the proposed association. The Department shall give the recognition applied for if it is satisfied that the national sports association to be organized will promote the objectives of this Decree and has substantially complied with the rules and regulations of the Department: Provided, That the Department may withdraw accreditation or recognition for violation of this Decree and such rules and regulations formulated by it. The Department shall supervise the national sports association: Provided, That the latter shall have exclusive technical control over the development and promotion of the particular sport for which they are organized. Clearly the above cited provisions require that before an entity may be considered as a national sports association, such entity must be recognized by the accrediting organization, the Philippine Amateur Athletic Federation under R.A. 3135, and the Department of Youth and Sports Development under P.D. 604. This fact of recognition, however, Henri Kahn failed to substantiate. In attempting to prove the juridical existence of the Federation, Henri Kahn attached to his motion for reconsideration before the trial court a copy of the constitution and bylaws of the Philippine Football Federation. Unfortunately, the same does not prove that said Federation has indeed been recognized and accredited by either the Philippine Amateur Athletic Federation or the Department of Youth and Sports Development. Accordingly, we rule that the Philippine Football Federation is not a national sports association within the purview of the aforementioned laws and does not have corporate existence of its own. Thus being said, it follows that private respondent Henry Kahn should be held liable for the unpaid obligations of the unincorporated Philippine Football Federation. It is a settled principal in corporation law that any person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and becomes personally liable for contract entered into or for other acts performed as such agent.[14] As president of the Federation, Henri Kahn is presumed

to have known about the corporate existence or non-existence of the Federation. We cannot subscribe to the position taken by the appellate court that even assuming that the Federation was defectively incorporated, the petitioner cannot deny the corporate existence of the Federation because it had contracted and dealt with the Federation in such a manner as to recognize and in effect admit its existence.[15] The doctrine of corporation by estoppel is mistakenly applied by the respondent court to the petitioner. The application of the doctrine applies to a third party only when he tries to escape liability on a contract from which he has benefited on the irrelevant ground of defective incorporation.[16] In the case at bar, the petitioner is not trying to escape liability from the contract but rather is the one claiming from the contract. WHEREFORE, the decision appealed from is REVERSED and SET ASIDE. The decision of the Regional Trial Court of Manila, Branch 35, in Civil Case No. 90-53595 is hereby REINSTATED. SO ORDERED. 7. [G.R. No. 144476. April 8, 2003] ONG YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L. ONG, WILLIAM T. ONG, WILLIE T. ONG, and JULIE ONG ALONZO, petitioners, vs. DAVID S. TIU, CELY Y. TIU, MOLY YU GAW, BELEN SEE YU, D. TERENCE Y. TIU, JOHN YU, LOURDES C. TIU, INTRALAND RESOURCES DEVELOPMENT CORP., MASAGANA TELAMART, INC., REGISTER OF DEEDS OF PASAY CITY, and the SECURITIES AND EXCHANGE COMMISSION, respondents. [G.R. No. 144629. April 8, 2003] DAVID S. TIU, CELY Y. TIU, MOLY YU GAW, BELEN SEE YU, D. TERENCE Y. TIU, JOHN YU, LOURDES C. TIU, and INTRALAND RESOURCES DEVELOPMENT CORP., petitioners, vs. ONG YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L. ONG, WILLIAM T. ONG, WILLIE T. ONG, and JULIA ONG ALONZO, respondents. Before us are the (1) motion for reconsideration, dated March 15, 2002, of petitioner movants Ong Yong, Juanita Tan Ong, Wilson Ong, Anna Ong, William Ong, Willie Ong and Julia Ong Alonzo (the Ongs); (2) motion for partial reconsideration, dated March 15, 2002, of petitioner 39

movant Willie Ong seeking a reversal of this Courts Decision,[1] dated February 1, 2002, in G.R. Nos. 144476 and 144629 affirming with modification the decision[2] of the Court of Appeals, dated October 5, 1999, which in turn upheld, likewise with modification, the decision of the SEC en banc, dated September 11, 1998; and (3) motion for issuance of writ of execution of petitioners David S. Tiu, Cely Y. Tiu, Moly Yu Gow, Belen See Yu, D. Terence Y. Tiu, John Yu and Lourdes C. Tiu (the Tius) of our February 1, 2002 Decision. A brief recapitulation of the facts shows that: In 1994, the construction of the Masagana Citimall in Pasay City was threatened with stoppage and incompletion when its owner, the First Landlink Asia Development Corporation (FLADC), which was owned by the Tius, encountered dire financial difficulties. It was heavily indebted to the Philippine National Bank (PNB) for P190 million. To stave off foreclosure of the mortgage on the two lots where the mall was being built, the Tius invited Ong Yong, Juanita Tan Ong, Wilson T. Ong, Anna L. Ong, William T. Ong and Julia Ong Alonzo (the Ongs), to invest in FLADC. Under the Pre-Subscription Agreement they entered into, the Ongs and the Tius agreed to maintain equal shareholdings in FLADC: the Ongs were to subscribe to 1,000,000 shares at a par value of P100.00 each while the Tius were to subscribe to an additional 549,800 shares at P100.00 each in addition to their already existing subscription of 450,200 shares. Furthermore, they agreed that the Tius were entitled to nominate the Vice-President and the Treasurer plus five directors while the Ongs were entitled to nominate the President, the Secretary and six directors (including the chairman) to the board of directors of FLADC. Moreover, the Ongs were given the right to manage and operate the mall. Accordingly, the Ongs paid P100 million in cash for their subscription to 1,000,000 shares of stock while the Tius committed to contribute to FLADC a four-storey building and two parcels of land respectively valued at P20 million (for 200,000 shares), P30 million (for 300,000 shares) and P49.8 million (for 49,800 shares) to cover their additional 549,800 stock subscription therein. The Ongs paid in another P70 million[3] to FLADC and P20 million to the Tius over and above their P100 million investment, the total sum of which (P190

million) was used to settle the P190 million mortgage indebtedness of FLADC to PNB. The business harmony between the Ongs and the Tius in FLADC, however, was shortlived because the Tius, on February 23, 1996, rescinded the Pre-Subscription Agreement. The Tius accused the Ongs of (1) refusing to credit to them the FLADC shares covering their real property contributions; (2) preventing David S. Tiu and Cely Y. Tiu from assuming the positions of and performing their duties as Vice-President and Treasurer, respectively, and (3) refusing to give them the office spaces agreed upon. According to the Tius, the agreement was for David S. Tiu and Cely S. Tiu to assume the positions and perform the duties of Vice-President and Treasurer, respectively, but the Ongs prevented them from doing so. Furthermore, the Ongs refused to provide them the space for their executive offices as Vice-President and Treasurer. Finally, and most serious of all, the Ongs refused to give them the shares corresponding to their property contributions of a four-story building, a 1,902.30 squaremeter lot and a 151 square-meter lot. Hence, they felt they were justified in setting aside their Pre-Subscription Agreement with the Ongs who allegedly refused to comply with their undertakings. In their defense, the Ongs said that David S. Tiu and Cely Y. Tiu had in fact assumed the positions of Vice-President and Treasurer of FLADC but that it was they who refused to comply with the corporate duties assigned to them. It was the contention of the Ongs that they wanted the Tius to sign the checks of the corporation and undertake their management duties but that the Tius shied away from helping them manage the corporation. On the issue of office space, the Ongs pointed out that the Tius did in fact already have existing executive offices in the mall since they owned it 100% before the Ongs came in. What the Tius really wanted were new offices which were anyway subsequently provided to them. On the most important issue of their alleged failure to credit the Tius with the FLADC shares commensurate to the Tius property contributions, the Ongs asserted that, although the Tius executed a deed of assignment for the 1,902.30 square-meter lot in favor of FLADC, they (the Tius) refused to pay P 570,690 for capital gains tax and documentary stamp tax. Without the payment thereof, the 40

SEC would not approve the valuation of the Tius property contribution (as opposed to cash contribution). This, in turn, would make it impossible to secure a new Transfer Certificate of Title (TCT) over the property in FLADCs name. In any event, it was easy for the Tius to simply pay the said transfer taxes and, after the new TCT was issued in FLADCs name, they could then be given the corresponding shares of stocks. On the 151 square-meter property, the Tius never executed a deed of assignment in favor of FLADC. The Tius initially claimed that they could not as yet surrender the TCT because it was still being reconstituted by the Lichaucos from whom the Tius bought it. The Ongs later on discovered that FLADC had in reality owned the property all along, even before their Pre-Subscription Agreement was executed in 1994. This meant that the 151 square-meter property was at that time already the corporate property of FLADC for which the Tius were not entitled to the issuance of new shares of stock. The controversy finally came to a head when this case was commenced[4] by the Tius on February 27, 1996 at the Securities and Exchange Commission (SEC), seeking confirmation of their rescission of the Pre-Subscription Agreement. After hearing, the SEC, through then Hearing Officer Rolando G. Andaya, Jr., issued a decision on May 19, 1997 confirming the rescission sought by the Tius, as follows: WHEREFORE, judgment is hereby rendered confirming the rescission of the Pre-Subscription Agreement, and consequently ordering: (a) The cancellation of the 1,000,000 shares subscription of the individual defendants in FLADC; (b) FLADC to pay the amount of P170,000,000.00 to the individual defendants representing the return of their contribution for 1,000,000 shares of FLADC; ( c) The plaintiffs to submit with (sic) the Securities and Exchange Commission amended articles of incorporation of FLADC to conform with this decision; (d) The defendants to surrender to the plaintiffs TCT Nos. 132493, 132494, 134066 (formerly 15587), 135325 and

134204 and any other title or deed in the name of FLADC, failing in which said titles are declared void; (e) The Register of Deeds to issue new certificates of titles in favor of the plaintiffs and to cancel the annotation of the PreSubscription Agreement dated 15 August 1994 on TCT No. 134066 (formerly 15587); (f) The individual defendants, individually and collectively, their agents and representatives, to desist from exercising or performing any and all acts pertaining to stockholder, director or officer of FLADC or in any manner intervene in the management and affairs of FLADC; (g) The individual defendants, jointly and severally, to return to FLADC interest payment in the amount of P8,866,669.00 and all interest payments as well as any payments on principal received from the P70,000,000.00 inexistent loan, plus the legal rate of interest thereon from the date of their receipt of such payment until fully paid; (h) The plaintiff David Tiu to pay individual defendants the sum of P20,000,000.00 representing his loan from said defendants plus legal interest from the date of receipt of such amount. SO ORDERED.[5] On motion of both parties, the above decision was partially reconsidered but only insofar as the Ongs P70 million was declared not as a premium on capital stock but an advance (loan) by the Ongs to FLADC and that the imposition of interest on it was correct.[6] Both parties appealed[7] to the SEC en banc which rendered a decision on September 11, 1998, affirming the May 19, 1997 decision of the Hearing Officer. The SEC en banc confirmed the rescission of the Pre-Subscription Agreement but reverted to classifying the P70 million paid by the Ongs as premium on capital and not as a loan or advance to FLADC, hence, not entitled to earn interest.[8] 41

On appeal, the Court of Appeals (CA) rendered a decision on October 5, 1999, thus:

P30,000,000.00 for 300,000 shares in First Landlink Asia Development Corporation at a par value of P100.00 per share.

WHEREFORE, the Order dated September 11, 1998 issued by the Securities and Exchange Commission En Banc in SEC AC CASE NOS. 598 and 601 confirming the rescission of the Pre-Subscription Agreement dated August 15, 1994 is hereby AFFIRMED, subject to the following MODIFICATIONS:

2) Whatever remains of the assets of the First Landlink Asia Development Corporation and the management thereof is (sic) hereby ordered transferred to the Tiu Group.

1. The Ong and Tiu Groups are ordered to liquidate First Landlink Asia Development Corporation in accordance with the following cash and property contributions of the parties therein.

3) First Landlink Asia Development Corporation is hereby ordered to pay the amount of P70,000,000.00 that was advanced to it by the Ong Group upon the finality of this decision. Should the former incur in delay in the payment thereof, it shall pay the legal interest thereon pursuant to Article 2209 of the New Civil Code.

(a) Ong Group P100,000,000.00 cash contribution for one (1) million shares in First Landlink Asia Development Corporation at a par value of P100.00 per share; (b) Tiu Group: 1) P45,020,000.00 original cash contribution for 450,200 shares in First Landlink Asia Development Corporation at a par value of P100.00 per share; 2) A four-storey building described in Transfer Certificate of Title No. 15587 in the name of Intraland Resources and Development Corporation valued at P20,000,000.00 for 200,000 shares in First Landlink Asia Development Corporation at a par value of P100.00 per share; 3) A 1,902.30 square-meter parcel of land covered by Transfer Certificate of Title No. 15587 in the name of Masagana Telamart, Inc. valued at

4) The Tius are hereby ordered to pay the amount of P20,000,000.00 loaned them by the Ongs upon the finality of this decision. Should the former incur in delay in the payment thereof, it shall pay the legal interest thereon pursuant to Article 2209 of the New Civil Code. SO ORDERED.[9] An interesting sidelight of the CA decision was its description of the rescission made by the Tius as the height of ingratitude and as pulling a fast one on the Ongs. The CA moreover found the Tius guilty of withholding FLADC funds from the Ongs and diverting corporate income to their own MATTERCO account.[10] These were findings later on affirmed in our own February 1, 2002 Decision which is the subject of the instant motion for reconsideration.[11] But there was also a strange aspect of the CA decision. The CA concluded that both the Ongs and the Tius were in pari delicto (which would not have legally entitled them to rescission) but, for practical considerations, that is, their inability to work together, it was best to separate the two groups by rescinding the Pre-Subscription Agreement, returning the original investment of the Ongs and awarding practically everything else to the Tius. 42

Their motions for reconsideration having been denied, both parties filed separate petitions for review before this Court. In their petition docketed as G.R. No. 144476, Ong et al. vs. Tiu et al., the Ongs argued that the Tius may not properly avail of rescission under Article 1191 of the Civil Code considering that the PreSubscription Agreement did not provide for reciprocity of obligations; that the rights over the subject matter of the rescission (capital assets and properties) had been acquired by a third party (FLADC); that they did not commit a substantial and fundamental breach of their agreement since they did not prevent the Tius from assuming the positions of VicePresident and Treasurer of FLADC, and that the failure to credit the 300,000 shares corresponding to the 1,902.30 square-meter property covered by TCT No. 134066 (formerly 15587) was due to the refusal of the Tius to pay the required transfer taxes to secure the approval of the SEC for the property contribution and, thereafter, the issuance of title in FLADCs name. They also argued that the liquidation of FLADC may not legally be ordered by the appellate court even for so called practical considerations or even to prevent further squabbles and numerous litigations, since the same are not valid grounds under the Corporation Code. Moreover, the Ongs bewailed the failure of the CA to grant interest on their P70 million and P20 million advances to FLADC and David S. Tiu, respectively, and to award costs and damages. In their petition docketed as G.R. No. 144629, Tiu et al. vs. Ong et al., the Tius, on the other hand, contended that the rescission should have been limited to the restitution of the parties respective investments and not the liquidation of FLADC based on the erroneous perception by the court that: the Masagana Citimall was threatened with incompletion since FLADC was in financial distress; that the Tius invited the Ongs to invest in FLADC to settle its P190 million loan from PNB; that they violated the Pre-Subscription Agreement when it was the Lichaucos and not the Tius who executed the deed of assignment over the 151 square-meter property commensurate to 49,800 shares in FLADC thereby failing to pay the price for the said shares;that they did not turn over to the Ongs the entire amount of FLADC funds; that they were diverting rentals from lease contracts due to FLADC to their own MATTERCO account; that the P70 million paid by the Ongs was an

advance and not a premium on capital; and that, by rescinding the PreSubscription Agreement, they wanted to wrestle away the management of the mall and prevent the Ongs from enjoying the profits of their P190 million investment in FLADC. On February 1, 2002, this Court promulgated its Decision (the subject of the instant motions), affirming the assailed decision of the Court of Appeals but with the following modifications: 1. the P20 million loan extended by the Ongs to the Tius shall earn interest at twelve percent (12%) per annum to be computed from the time of judicial demand which is from April 23, 1996; 2. the P70 million advanced by the Ongs to the FLADC shall earn interest at ten percent (10%) per annum to be computed from the date of the FLADC Board Resolution which is June 19, 1996; and 3. the Tius shall be credited with 49,800 shares in FLADC for their property contribution, specifically, the 151 sq. m. parcel of land. This Court affirmed the fact that both the Ongs and the Tius violated their respective obligations under the Pre-Subscription Agreement. The Ongs prevented the Tius from assuming the positions of Vice-President and Treasurer of the corporation. On the other hand, the Decision established that the Tius failed to turn over FLADC funds to the Ongs and that the Tius diverted rentals due to FLADC to their MATTERCO account. Consequently, it held that rescission was not possible since both parties were in pari delicto. However, this Court agreed with the Court of Appeals that the remedy of specific performance, as espoused by the Ongs, was not practical and sound either and would only lead to further squabbles and numerous litigations between the parties. On March 15, 2002, the Tius filed before this Court a Motion for Issuance of a Writ of Execution on the grounds that: (a) the SEC order had become executory as early as September 11, 1998 pursuant to Sections 1 and 12, Rule 43 of the Rules of Court; (b) any further delay would be injurious to the rights of the Tius since the case had been 43

pending for more than six years; and (c) the SEC no longer had quasijudicial jurisdiction under RA 8799 (Securities Regulation Code). The Ongs filed their opposition, contending that the Decision dated February 1, 2002 was not yet final and executory; that no good reason existed to issue a warrant of execution; and that, pursuant to Section 5.2 of RA 8799, the SEC retained jurisdiction over pending cases involving intracorporate disputes already submitted for final resolution upon the effectivity of the said law. Aside from their opposition to the Tius Motion for Issuance of Writ of Execution, the Ongs filed their own Motion for Reconsideration; Alternatively, Motion for Modification (of the February 1, 2002 Decision) on March 15, 2002, raising two main points: (a) that specific performance and not rescission was the proper remedy under the premises; and (b) that, assuming rescission to be proper, the subject decision of this Court should be modified to entitle movants to their proportionate share in the mall.

space for the two corporate officers was no more than an inconsequential infringement. For rescission to be justified, the law requires that the breach of contract should be so substantial or fundamental as to defeat the primary objective of the parties in making the agreement. At any rate, the Ongs claim that it was the Tius who were guilty of fundamental violations in failing to remit funds due to FLADC and diverting the same to their MATTERCO account. The Ongs also allege that, in view of the findings of the Court that both parties were guilty of violating the Pre-Subscription Agreement, neither of them could resort to rescission under the principle of pari delicto. In addition, since the cash and other contributions now sought to be returned already belong to FLADC, an innocent third party, said remedy may no longer be availed of under the law.

On their first point (specific performance and not rescission was the proper remedy), movants Ong argue that their alleged breach of the PreSubscription Agreement was, at most, casual which did not justify the rescission of the contract. They stress that providing appropriate offices for David S. Tiu and Cely Y. Tiu as Vice-President and Treasurer, respectively, had no bearing on their obligations under the PreSubscription Agreement since the said obligation (to provide executive offices) pertained to FLADC itself. Such obligation arose from the relations between the said officers and the corporation and not any of the individual parties such as the Ongs. Likewise, the alleged failure of the Ongs to credit shares of stock in favor of the Tius for their property contributions also pertained to the corporation and not to the Ongs. Just the same, it could not be done in view of the Tius refusal to pay the necessary transfer taxes which in turn resulted in the inability to secure SEC approval for the property contributions and the issuance of a new TCT in the name of FLADC.

On their second point (assuming rescission to be proper, the Ongs should be given their proportionate share of the mall), movants Ong vehemently take exception to the second item in the dispositive portion of the questioned Decision insofar as it decreed that whatever remains of the assets of FLADC and the management thereof (after liquidation) shall be transferred to the Tius. They point out that the mall itself, which would have been foreclosed by PNB if not for their timely investment of P190 million in 1994 and which is now worth about P1 billion mainly because of their efforts, should be included in any partition and distribution. They (the Ongs) should not merely be given interest on their capital investments. The said portion of our Decision, according to them, amounted to the unjust enrichment of the Tius and ran contrary to our own pronouncement that the act of the Tius in unilaterally rescinding the agreement was the height of ingratitude and an attempt to pull a fast one as it would prevent the Ongs from enjoying the fruits of their P190 million investment in FLADC. It also contravenes this Courts assurance in the questioned Decision that the Ongs and Tius will have a bountiful return of their respective investments derived from the profits of the corporation.

Besides, according to the Ongs, the principal objective of both parties in entering into the Pre-Subscription Agreement in 1994 was to raise the P190 million desperately needed for the payment of FLADCs loan to PNB. Hence, in this light, the alleged failure to provide office

Willie Ong filed a separate Motion for Partial Reconsideration dated March 8, 2002, pointing out that there was no violation of the PreSubscription Agreement on the part of the Ongs;that, after more than seven years since the mall began its operations, rescission had become 44

not only impractical but would also adversely affect the rights of innocent parties; and that it would be highly inequitable and unfair to simply return the P100 million investment of the Ongs and give the remaining assets now amounting to about P1 billion to the Tius. The Tius, in their opposition to the Ongs motion for reconsideration, counter that the arguments therein are a mere re-hash of the contentions in the Ongs petition for review and previous motion for reconsideration of the Court of Appeals decision. The Tius compare the arguments in said pleadings to prove that the Ongs do not raise new issues, and, based on well-settled jurisprudence,[12] the Ongs present motion is therefore pro-forma and did not prevent the Decision of this Court from attaining finality. On January 29, 2003, the Special Second Division of this Court held oral arguments on the respective positions of the parties. On February 27, 2003, Dr. Willie Ong and the rest of the movants Ong filed their respective memoranda. On February 28, 2003, the Tius submitted their memorandum. We grant the Ongs motions for reconsideration. This is not the first time that this Court has reversed itself on a motion for reconsideration. In Philippine Consumers Foundation, Inc. vs. National Telecommunications Commission,[13]this Court, through then Chief Justice Felix V. Makasiar, said that its members may and do change their minds, after a re-study of the facts and the law, illuminated by a mutual exchange of views.[14] After a thorough re-examination of the case, we find that our Decision of February 1, 2002 overlooked certain aspects which, if not corrected, will cause extreme and irreparable damage and prejudice to the Ongs, FLADC and its creditors. The procedural rule on pro-forma motions pointed out by the Tius should not be blindly applied to meritorious motions for reconsideration. As long as the same adequately raises a valid ground [15] (i.e., the decision or final order is contrary to law), this Court has to evaluate the merits of the arguments to prevent an unjust decision from attaining finality. In Security Bank and Trust Company vs. Cuenca,[16] we ruled that a motion for reconsideration is not pro-forma for the reason alone that it reiterates the arguments earlier passed upon and rejected by the

appellate court. We explained there that a movant may raise the same arguments, if only to convince this Court that its ruling was erroneous. Moreover, the rule (that a motion is pro-forma if it only repeats the arguments in the previous pleadings) will not apply if said arguments were not squarely passed upon and answered in the decision sought to be reconsidered. In the case at bar, no ruling was made on some of the petitioner Ongs arguments. For instance, no clear ruling was made on why an order distributing corporate assets and property to the stockholders would not violate the statutory preconditions for corporate dissolution or decrease of authorized capital stock. Thus, it would serve the ends of justice to entertain the subject motion for reconsideration since some important issues therein, although mere repetitions, were not considered or clearly resolved by this Court. Going now to the merits, we resolve whether the Tius could legally rescind the Pre-Subscription Agreement. We rule that they could not. FLADC was originally incorporated with an authorized capital stock of 500,000 shares with the Tius owning 450,200 shares representing the paid-up capital. When the Tius invited the Ongs to invest in FLADC as stockholders, an increase of the authorized capital stock became necessary to give each group equal (50-50) shareholdings as agreed upon in the Pre-Subscription Agreement. The authorized capital stock was thus increased from 500,000 shares to 2,000,000 shares with a par value of P100 each, with the Ongs subscribing to 1,000,000 shares and the Tius to 549,800 more shares in addition to their 450,200 shares to complete 1,000,000 shares. Thus, the subject matter of the contract was the 1,000,000 unissued shares of FLADC stock allocated to the Ongs. Since these were unissued shares, the parties Pre-Subscription Agreement was in fact a subscription contract as defined under Section 60, Title VII of the Corporation Code: Any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed shall be deemed a subscription within the meaning of this Title, notwithstanding the fact that the parties refer to it as a purchase or some other contract (Italics supplied). 45

A subscription contract necessarily involves the corporation as one of the contracting parties since the subject matter of the transaction is property owned by the corporation its shares of stock. Thus, the subscription contract (denominated by the parties as a Pre-Subscription Agreement) whereby the Ongs invested P100 million for 1,000,000 shares of stock was, from the viewpoint of the law, one between the Ongs and FLADC, not between the Ongs and the Tius. Otherwise stated, the Tius did not contract in their personal capacities with the Ongs since they were not selling any of their own shares to them. It was FLADC that did. Considering therefore that the real contracting parties to the subscription agreement were FLADC and the Ongs alone, a civil case for rescission on the ground of breach of contract filed by the Tius in their personal capacities will not prosper. Assuming it had valid reasons to do so, only FLADC (and certainly not the Tius) had the legal personality to file suit rescinding the subscription agreement with the Ongs inasmuch as it was the real party in interest therein. Article 1311 of the Civil Code provides that contracts take effect only between the parties, their assigns and heirs Therefore, a party who has not taken part in the transaction cannot sue or be sued for performance or for cancellation thereof, unless he shows that he has a real interest affected thereby. [17] In their February 28, 2003 Memorandum, the Tius claim that there are two contracts embodied in the Pre-Subscription Agreement: a shareholders agreement between the Tius and the Ongs defining and governing their relationship and a subscription contract between the Tius, the Ongs and FLADC regarding the subscription of the parties to the corporation. They point out that these two component parts form one whole agreement and that their terms and conditions are intrinsically related and dependent on each other. Thus, the breach of the shareholders agreement, which was allegedly the consideration for the subscription contract, was also a breach of the latter. Aside from the fact that this is an entirely new angle never raised in any of their previous pleadings until after the oral arguments on January 29, 2003, we find this argument too strained for comfort. It is obviously intended to remedy and cover up the Tius lack of legal personality to

rescind an agreement in which they were personally not parties-ininterest. Assuming arguendo that there were two sub-agreements embodied in the Pre-Subscription Agreement, this Court fails to see how the shareholders agreement between the Ongs and Tius can, within the bounds of reason, be interpreted as the consideration of the subscription contract between FLADC and the Ongs. There was nothing in the PreSubscription Agreement even remotely suggesting such alleged interdependence. Be that as it may, however, the Tius are nevertheless not the proper parties to raise this point because they were not parties to the subscription contract between FLADC and the Ongs. Thus, they are not in a position to claim that the shareholders agreement between them and the Ongs was what induced FLADC and the Ongs to enter into the subscription contract. It is the Ongs alone who can say that. Though FLADC was represented by the Tius in the subscription contract, FLADC had a separate juridical personality from the Tius. The case before us does not warrant piercing the veil of corporate fiction since there is no proof that the corporation is being used as a cloak or cover for fraud or illegality, or to work injustice.[18] The Tius also argue that, since the Ongs represent FLADC as its management, breach by the Ongs is breach by FLADC. This must also fail because such an argument disregards the separate juridical personality of FLADC. The Tius allege that they were prevented from participating in the management of the corporation. There is evidence that the Ongs did prevent the rightfully elected Treasurer, Cely Tiu, from exercising her function as such. The records show that the President, Wilson Ong, supervised the collection and receipt of rentals in the Masagana Citimall;[19] that he ordered the same to be deposited in the bank;[20] and that he held on to the cash and properties of the corporation.[21] Section 25 of the Corporation Code prohibits the President from acting concurrently as Treasurer of the corporation. The rationale behind the provision is to ensure the effective monitoring of each officers separate functions. However, although the Tius were adversely affected by the Ongs unwillingness to let them assume their positions, rescission due to breach of contract is definitely the wrong remedy for their personal 46

grievances. The Corporation Code, SEC rules and even the Rules of Court provide for appropriate and adequate intra-corporate remedies, other than rescission, in situations like this. Rescission is certainly not one of them, specially if the party asking for it has no legal personality to do so and the requirements of the law therefor have not been met.A contrary doctrine will tread on extremely dangerous ground because it will allow just any stockholder, for just about any real or imagined offense, to demand rescission of his subscription and call for the distribution of some part of the corporate assets to him without complying with the requirements of the Corporation Code.

The distribution of corporate assets and property cannot be made to depend on the whims and caprices of the stockholders, officers or directors of the corporation, or even, for that matter, on the earnest desire of the court a quo to prevent further squabbles and future litigations unless the indispensable conditions and procedures for the protection of corporate creditors are followed. Otherwise, the corporate peace laudably hoped for by the court will remain nothing but a dream because this time, it will be the creditors turn to engage in squabbles and litigations should the court order an unlawful distribution in blatant disregard of the Trust Fund Doctrine.

Hence, the Tius, in their personal capacities, cannot seek the ultimate and extraordinary remedy of rescission of the subject agreement based on a less than substantial breach of subscription contract. Not only are they not parties to the subscription contract between the Ongs and FLADC; they also have other available and effective remedies under the law.

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.

All this notwithstanding, granting but not conceding that the Tius possess the legal standing to sue for rescission based on breach of contract, said action will nevertheless still not prosper since rescission will violate the Trust Fund Doctrine and the procedures for the valid distribution of assets and property under the Corporation Code.

Contrary to the Tius allegation, rescission will, in the final analysis, result in the premature liquidation of the corporation without the benefit of prior dissolution in accordance with Sections 117, 118, 119 and 120 of the Corporation Code.[28] The Tius maintain that rescinding the subscription contract is not synonymous to corporate liquidation because all rescission will entail would be the simple restoration of the status quo ante and a return to the two groups of their cash and property contributions. We wish it were that simple. Very noticeable is the fact that the Tius do not explain why rescission in the instant case will not effectively result in liquidation. The Tius merely refer in cavalier fashion to the end-result of rescission (which incidentally is 100% favorable to them) but turn a blind eye to its unfair, inequitable and disastrous effect on the corporation, its creditors and the Ongs.

The Trust Fund Doctrine, first enunciated by this Court in the 1923 case of Philippine Trust Co. vs. Rivera,[22] provides that subscriptions to the capital stock of a corporation constitute a fund to which the creditors have a right to look for the satisfaction of their claims.[23] 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,[24] (2) purchase of redeemable shares by the corporation, regardless of the existence of unrestricted retained earnings,[25] 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[26] and in Section 122 on the prohibition against the distribution of corporate assets and property unless the stringent requirements therefor are complied with.[27]

In their Memorandum dated February 28, 2003, the Tius claim that rescission of the agreement will not result in an unauthorized liquidation of the corporation because their case is actually a petition to decrease capital stock pursuant to Section 38 of the Corporation Code. Section 122 of the law provides that (e)xcept by decrease of capital stock, no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities. The 47

Tius claim that their case for rescission, being a petition to decrease capital stock, does not violate the liquidation procedures under our laws. All that needs to be done, according to them, is for this Court to order (1) FLADC to file with the SEC a petition to issue a certificate of decrease of capital stock and (2) the SEC to approve said decrease. This new argument has no merit. The Tius case for rescission cannot validly be deemed a petition to decrease capital stock because such action never complied with the formal requirements for decrease of capital stock under Section 33 of the Corporation Code. No majority vote of the board of directors was ever taken. Neither was there any stockholders meeting at which the approval of stockholders owning at least two-thirds of the outstanding capital stock was secured. There was no revised treasurers affidavit and no proof that said decrease will not prejudice the creditors rights. On the contrary, all their pleadings contained were alleged acts of violations by the Ongs to justify an order of rescission. Furthermore, it is an improper judicial intrusion into the internal affairs of the corporation to compel FLADC to file at the SEC a petition for the issuance of a certificate of decrease of stock. Decreasing a corporations authorized capital stock is an amendment of the Articles of Incorporation. It is a decision that only the stockholders and the directors can make, considering that they are the contracting parties thereto. In this case, the Tius are actually not just asking for a review of the legality and fairness of a corporate decision. They want this Court to make a corporate decision for FLADC. We decline to intervene and order corporate structural changes not voluntarily agreed upon by its stockholders and directors. Truth to tell, a judicial order to decrease capital stock without the assent of FLADCs directors and stockholders is a violation of the business judgment rule which states that: xxx xxx xxx (C)ontracts intra vires entered into by the board of directors are binding upon the corporation and courts will not interfere unless such contracts are so unconscionable and oppressive as to amount to wanton destruction to the rights of the minority, as when plaintiffs aver that the defendants (members of the board), have concluded a transaction

among themselves as will result in serious injury to the plaintiffs stockholders.[29] The reason behind the rule is aptly explained by Dean Cesar L. Villanueva, an esteemed author in corporate law, thus: Courts and other tribunals are wont to override the business judgment of the board mainly because, courts are not in the business of business, and the laissez faire rule or the free enterprise system prevailing in our social and economic set-up dictates that it is better for the State and its organs to leave business to the businessmen; especially so, when courts are ill-equipped to make business decisions. More importantly, the social contract in the corporate family to decide the course of the corporate business has been vested in the board and not with courts.[30] Apparently, the Tius do not realize the illegal consequences of seeking rescission and control of the corporation to the exclusion of the Ongs. Such an act infringes on the law on reduction of capital stock. Ordering the return and distribution of the Ongs capital contribution without dissolving the corporation or decreasing its authorized capital stock is not only against the law but is also prejudicial to corporate creditors who enjoy absolute priority of payment over and above any individual stockholder thereof. Stripped to its barest essentials, the issue of rescission in this case is not difficult to understand. If rescission is denied, will injustice be inflicted on any of the parties? The answer is no because the financial interests of both the Tius and the Ongs will remain intact and safe within FLADC. On the other hand, if rescission is granted, will any of the parties suffer an injustice?Definitely yes because the Ongs will find themselves out in the streets with nothing but the money they had in 1994 while the Tius will not only enjoy a windfall estimated to be anywhere from P450 million to P900 million[31] but will also take over an extremely profitable business without much effort at all. Another very important point follows. The Court of Appeals and, later on, our Decision dated February 1, 2002, stated that both groups were in pari delicto, meaning, that both the Tius and the Ongs 48

committed breaches of the Pre-Subscription Agreement. This may be true to a certain extent but, judging from the comparative gravity of the acts separately committed by each group, we find that the Ongs acts were relatively tame vis--vis those committed by the Tius in not surrendering FLADC funds to the corporation and diverting corporate income to their own MATTERCO account. The Ongs were right in not issuing to the Tius the shares corresponding to the four-story building and the 1,902.30 square-meter lot because no title for it could be issued in FLADCs name, owing to the Tius refusal to pay the transfer taxes. And as far as the 151 square-meter lot was concerned, why should FLADC issue additional shares to the Tius for property already owned by the corporation and which, in the final analysis, was already factored into the shareholdings of the Tius before the Ongs came in? We are appalled by the attempt by the Tius, in the words of the Court of Appeals, to pull a fast one on the Ongs because that was where the problem precisely started. It is clear that, when the finances of FLADC improved considerably after the equity infusion of the Ongs, the Tius started planning to take over the corporation again and exclude the Ongs from it. It appears that the Tius refusal to pay transfer taxes might not have really been at all unintentional because, by failing to pay that relatively small amount which they could easily afford, the Tius should have expected that they were not going to be given the corresponding shares. It was, from every angle, the perfect excuse for blackballing the Ongs. In other words, the Tius created a problem then used that same problem as their pretext for showing their partners the door. In the process, they stood to be rewarded with a bonanza of anywhere between P450 million to P900 million in assets (from an investment of only P45 million which was nearly foreclosed by PNB), to the extreme and irreparable damage of the Ongs, FLADC and its creditors. After all is said and done, no one can close his eyes to the fact that the Masagana Citimall would not be what it has become today were it not for the timely infusion of P190 million by the Ongs in 1994. There are no ifs or buts about it. Without the Ongs, the Tius would have lost everything they originally invested in said mall. If only for this and the fact that this Resolution can truly pave the way for both groups to enjoy the fruits of their investments

assuming good faith and honest intentions we cannot allow the rescission of the subject subscription agreement. The Ongs shortcomings were far from serious and certainly less than substantial; they were in fact remediable and correctable under the law. It would be totally against all rules of justice, fairness and equity to deprive the Ongs of their interests on petty and tenuous grounds. WHEREFORE, the motion for reconsideration, dated March 15, 2002, of petitioners Ong Yong, Juanita Tan Ong, Wilson Ong, Anna Ong, William Ong, Willie Ong and Julie Ong Alonzo and the motion for partial reconsideration, dated March 15, 2002, of petitioner Willie Ong are hereby GRANTED. The Petition for Confirmation of the Rescission of the Pre-Subscription Agreement docketed as SEC Case No. 02-965269 is hereby DISMISSED for lack of merit. The unilateral rescission by the Tius of the subject Pre-Subscription Agreement, dated August 15, 1994, is hereby declared as null and void. The motion for the issuance of a writ of execution, dated March 15, 2002, of petitioners David S. Tiu, Cely Y. Tiu, Moly Yu Gow, Belen See Yu, D. Terence Y. Tiu, John Yu and Lourdes C. Tiu is hereby DENIED for being moot. Accordingly, the Decision of this Court, dated February 1, 2002, affirming with modification the decision of the Court of Appeals, dated October 5, 1999, and the SEC en banc, dated September 11, 1998, is hereby REVERSED. Costs against the petitioner Tius. 8. G.R. No. 86738 November 13, 1991 NESTLE PHILIPPINES, INC., petitioner, vs.COURT OF APPEALS and SECURITIES AND EXCHANGE COMMISSION, respondents. Sometime in February 1983, the authorized capital stock of petitioner Nestle Philippines Inc. ("Nestle") was increased from P300 million divided into 3 million shares with a par value of P100.00 per share, to P600 million divided into 6 million shares with a par value of P100.00 per share. Nestle underwent the necessary procedures involving Board 49

and stockholders approvals and effected the necessary filings to secure the approval of the increase of authorized capital stock by respondent Securities and Exchange Commission ("SEC"), which approval was in fact granted. Nestle also paid to the SEC the amount of P50,000.00 as filing fee in accordance with the Schedule of Fees and Charges being implemented by the SEC under the Corporation Code. 1 Nestle has only two (2) principal stockholders: San Miguel Corporation and Nestle S.A. The other stockholders, who are individual natural persons, own only one (1) share each, for qualifying purposes, i.e., to qualify them as members of the Board of Directors being elected thereto on the strength of the votes of one or the other principal shareholder. On 16 December 1983, the Board of Directors and stockholders of Nestle approved resolutions authorizing the issuance of 344,500 shares out of the previously authorized but unissued capital stock of Nestle, exclusively to San Miguel Corporation and to Nestle S.A. San Miguel Corporation subscribed to and completely paid up 168,800 shares, while Nestle S.A. subscribed to and paid up the balance of 175,700 shares of stock. On 28 March 1985, petitioner Nestle filed a letter signed by its Corporate Secretary, M.L. Antonio, with the SEC seeking exemption of its proposed issuance of additional shares to its existing principal shareholders, from the registration requirement of Section 4 of the Revised Securities Act and from payment of the fee referred to in Section 6(c) of the same Act. In that letter, Nestle requested confirmation of the correctness of two (2) propositions submitted by it: 1. That there is no need to file a petition for exemption under Section 6(b) of the Revised Securities Act with respect to the issuance of the said 344,600 additional shares to our existing stockholders out of our unissued capital stock; and

2. That the fee provided in Section 6(c) of [the Revised Securities] Act is not applicable to the said issuance of additional shares. 2

The principal, indeed the only, argument presented by Nestlewas that Section 6(a) (4) of the Revised Securities Act which provides as follows: Sec. 6. Exempt transactions. — a) The requirement of registration under subsection (a) of Section four of this Act shall not apply to the sale of any security in any of the following transactions: xxx

xxx

xxx

(4) The distribution by a corporation, actively engaged in the business authorized by its articles of incorporation, of securities to its stockholders or other security holders as a stock dividend or other distribution out of surplus; or the issuance of securities to the security holder or other creditors of a corporation in the process of a bona fide reorganization of such corporation made in good faith and not for the purpose of avoiding the provisions of this Act, either in exchange for the securities of such security holders or claims of such creditors or partly for cash and partly in exchange for the securities or claims of such security holders or creditors; or the issuance of additional capital stock of a corporation sold or distributed by it among its own stockholders exclusively, where no commission or other remuneration is paid or given directly or indirectly in connection with the sale or distribution of such increased capital stock. (Emphasis supplied)

embraces "not only an increase in the authorized capital stock but also the issuance of additional shares to existing stockholders of the unissued portion of the unissued capital stock". 3 Nestle urged that interpretation upon the following argument. The use of the term "increased capital stock" should be interpreted to refer to additional capital stock or equity 50

participation of the existing stockholders as a consequence of either an increase of the authorized capital stock or the issuance of unissued capital stock. If the intention of the pertinent legal provision [were] to limit the exemption to subscription to proposed increases in the authorized capital stock of a corporation, we see no reason why the law should not have been more specific or accurate about it. It certainly should have mentioned "increase in the authorized capital stock of the corporation" rather than merely the expression "the issuance of additional capital stock 4 (Emphasis supplied)

Nestle expressly represented in the same letter that all the additional shares proposed to be issued would be issued only to San Miguel Corporation and Nestle S.A. and that no commission or other form of remuneration had been given, directly or indirectly, in connection with the issuance or distribution of such additional shares of stock. In respect of its claimed exemption from the fee provided for in Section 6(c) of the Revised Securities Act, Nestle contended that since Section 6 (a) (4) of the statute declares (in Nestle's view) the proposed issuance of 344,500 previously authorized but unissued shares of Nestle's capital stock to its existing shareholders as an exempt transaction, the SEC could not collect fees for "the same transaction" twice. Nestle adverted to its payment back in 21 February 1983 of the amount of P50,000.00 as filing fees to the SEC when it applied for and eventually received approval of the increase of its authorized capital stock effected by Board and shareholder action last 16 December 1983. In a letter dated 26 June 1986, the SEC through its then Chairman Julio A. Sulit, Jr. responded adversely to petitioner's requests and ruled that the proposed issuance of shares did not fall under Section 6 (a) (4) of the Revised Securities Act, since Section 6 (a) (4) is applicable only where there is an increase in the authorized capital stock of a corporation. Chairman Sulit held, however, that the proposed transaction could be considered by the Commission under the provisions of Section 6 (b) of the Revised Securities Act which reads as follows:

(b) The Commission may, from time to time and subject to such terms and conditions as it may prescribe, exempt transactions other than those provided in the preceding paragraph, if it finds that the enforcement of the requirements of registration under this Act with respect to such transactions is not necessary in the public interest and for the protection of the investors by reason of the small amount involved or the limited character of the public offering. The Commission then advised petitioner to file the appropriate request for exemption and to pay the fee required under Section 6 (c) of the statute, which provides: (c) A fee equivalent to one-tenth of one per centum of the maximum aggregate price or issued value of the securities shall be collected by the Commission for granting a general or particular exemption from the registration requirements of this Act. Petitioner moved for reconsideration of the SEC ruling, without success. On 3 July 1987, petitioner sought review of the SEC ruling before this Court which, however, referred the petition to the Court of Appeals. In a decision dated 13 January 1989, the Court of Appeals sustained the ruling of the SEC. Dissatisfied with the Decision of the Court of Appeals, Nestle is now before this Court on a Petition for Review, raising the very same issues that it had raised before the SEC and the Court of Appeals. Examining the words actually used in Section 6 (a) (4) of the Revised Securities Act, and bearing in mind common corporate usage in this jurisdiction, it will be seen that the statutory phrase "issuance of additional capital stock" is indeed infected with a certain degree of ambiguity. This phrase may refer either to: a) the issuance of capital stock as part of and in the course of increasing the authorized capital 51

stock of a corporation; or (b) issuance of already authorized but still unissued capital stock. By the same token, the phrase "increased capital stock" found at the end of Section 6 (a) (4), may refer either: 1) to newly or contemporaneously authorized capital stock issued in the course of increasing the authorized capital stock of a corporation; or 2) to previously authorized but unissued capital stock. Under Section 38 of the Corporation Code, a corporation engaged in increasing its authorized capital stock, with the required vote of its Board of Directors and of its stockholders, must file a sworn statement of the treasurer of the corporation showing that at least twenty-five percent (25%) of "such increased capital stock" has been subscribed and that at least twenty-five percent (25%) of the amount subscribed has been paid either in actual cash or in property transferred to the corporation. In other words, the corporation must issue at least twenty-five percent (25%) of the newly or contemporaneously authorized capital stock in the course of complying with the requirements of the Corporation Code for increasing its authorized capital stock.

In contrast, after approval by the SEC of the increase of its authorized capital stock, and from time to time thereafter, the corporation, by a vote of its Board of Directors, and without need of either stockholder or SEC approval, may issue and sell shares of its already authorized but still unissued capital stock to existing shareholders or to members of the general public. 5

to be further increased, the SEC and the Court of Appeals rejected Nestle's petition. We believe and so hold that the construction thus given by the SEC and the Court of Appeals to Section 6 (a) (4) of the Revised Securities Act must be upheld.

In the first place, it is a principle too well established to require extensive documentation that the construction given to a statute by an administrative agency charged with the interpretation and application of that statute is entitled to great respect and should be accorded great weight by the courts, unless such construction is clearly shown to be in sharp conflict with the governing statute or the Constitution and other laws. As long ago as 1903, this Court said in In re Allen 6 that [t]he principle that the contemporaneous construction of a statute by the executive officers of the government, whose duty is to execute it, is entitled to great respect, and should ordinarily control the construction of the statute by the courts, is so firmly embedded in our jurisdiction that no authorities need be cited to support it. 7 The rationale for this rule relates not only to the emergence of the multifarious needs of a modern or modernizing society and the establishment of diverse administrative agencies for addressing and satisfying those needs; it also relates to accumulation of experience and growth of specialized capabilities by the administrative agency charged with implementing a particular statute. 8

Both the SEC and the Court of Appeals resolved the ambiguity by construing Section 6 (a) (4) as referring only to the issuance of shares of stock as part of and in the course of increasing the authorized capital stock of Nestle. In the case at bar, since the 344,500 shares of Nestle capital stock are proposed to be issued from already authorized but still unissued capital stock and since the present authorized capital stock of 6,000,000 shares with a par value of P100.00 per share is not proposed

In Asturias Sugar Central, Inc. v. Commissioner of Customs 9 the Court stressed that executive officials are presumed to have familiarized themselves with all the considerations pertinent to the meaning and purpose of the law, and to have formed an independent, conscientious and competent expert opinion thereon. The courts give much weight to contemporaneous construction because of the respect due the government agency or officials charged with the implementation of the law, their competence, expertness, experience and informed judgment, and the fact that they frequently are the drafters of the law they interpret. 10 52

In the second place, and more importantly, consideration of the underlying statutory purpose of Section 6(a) (4) compels us to sustain the view taken by the SEC and the Court of Appeals. The reading by the SEC of the scope of application of Section 6(a) (4) permits greater opportunity for the SEC to implement the statutory objective of protecting the investing public by requiring proposed issuers of capital stock to inform such public of the true financial conditions and prospects of the corporation. By limiting the class of exempt transactions contemplated by the last clause of Section 6(a) (4) to issuances of stock done in the course of and as part of the process of increasing the authorized capital stock of a corporation, the SEC is enabled to examine issuances by a corporation of previously authorized but theretofore unissued capital stock, on a case-to-case basis, under Section 6(b); and thereunder, to grant or withhold exemption from the normal registration requirements depending upon the perceived level of need for protection by the investing public in particular cases. When capital stock is issued in the course of and in compliance with the requirements of increasing its authorized capital stock under Section 38 of the Corporation Code, the SEC as a matter of course examines the financial condition of the corporation, and hence there is no real need for exercise of SEC authority under the Revised Securities Act. Thus, one of the multiple documentation requirements under the current regulations of the SEC in respect of filing a certificate of increase of authorized capital stock, is submission of "a financial statement duly certified by an independent Certified Public Accountant (CPA) as of the latest date possible or as of the date of the meeting when stockholders approved the increase/decrease in capital stock or thereabouts. 11 When all or part of the newly authorized capital stock is proposed to be issued as stock dividends, the SEC requirements are even more exacting; they require, in addition to the regular audited financial statements, the submission by the corporation of a "detailed or Long Form Report of the certifying Auditor." Moreover, since approval of an increase in authorized capital stock by the stockholders holding twothirds (2/3) of the outstanding capital stock is required by Section 38 of

the Corporation Code, at a stockholders meeting held for that purpose, the directors and officers of the corporation may be expected to take pains to inform the shareholders of the financial condition and prospects of the corporation and of the proposed utilization of the fresh capital sought to be raised. Upon the other hand, as already noted, issuance of previously authorized but theretofore unissued capital stock by the corporation requires only Board of Directors approval. Neither notice to nor approval by the shareholders or the SEC is required for such issuance. There would, accordingly, under the view taken by petitioner Nestle, no opportunity for the SEC to see to it that shareholders (especially the small stockholders) have a reasonable opportunity to inform themselves about the very fact of such issuance and about the condition of the corporation and the potential value of the shares of stock being offered. Under the reading urged by petitioner Nestle of the reach and scope of the third clause of Section 6(a) (4), the issuance of previously authorized but unissued capital stock would automatically constitute an exempt transaction,without regard to the length of time which may have intervened between the last increase in authorized capital stock and the proposed issuance during which time the condition of the corporation may have substantially changed, and without regard to whether the existing stockholders to whom the shares are proposed to be issued are only two giant corporations as in the instant case, or are individuals numbering in the hundreds or thousands. In contrast, under the ruling issued by the SEC, an issuance of previously authorized but still unissued capital stock may, in a particular instance, be held to be an exempt transaction by the SEC under Section 6(b) so long as the SEC finds that the requirements of registration under the Revised Securities Act are "not necessary in the public interest and for the protection of the investors" by reason, inter alia, of the small amount of stock that is proposed to be issued or because the potential buyers are very limited in number and are in a position to protect themselves. In fine, petitioner Nestle's proposed construction of Section 6(a) (4) would establish an inflexible rule of automatic exemption of 53

issuances of additional, previously authorized but unissued, capital stock. We must reject an interpretation which may disable the SEC from rendering protection to investors, in the public interest, precisely when such protection may be most needed. Petitioner Nestle's second claim for exemption is from payment of the fee provided for in Section 6 (c) of the Revised Securities Act, a claim based upon petitioner's contention that Section 6 (a) (4) covers both issuance of stock in the course of complying with the statutory requirements of increase of authorized capital stock and issuance of previously authorized and unissued capital stock. Petitioner claims that to require it now to pay one-tenth of one percent (1%) of the issued value of the 344,500 shares of stock proposed to be issued, is to require it to pay a second time for the same service on the part of the SEC. Since we have above rejected petitioner's reading of Section 6 (a) (4), last clause, petitioner's claim about the additional fee of one-tenth of one percent (1%) of the issue value of the proposed issuance of stock (amounting to P34,450 plus P344.50 for other fees or a total of P37,794.50) need not detain us for long. We think it clear that the fee collected in 21 February 1983 by the SEC was assessed in connection with the examination and approval of the certificate of increase of authorized capital stock then submitted by petitioner. The fee, upon the other hand, provided for in Section 6 (c) which petitioner will be required to pay if it does file an application for exemption under Section 6 (b), is quite different; this is a fee specifically authorized by the Revised Securities Act, (not the Corporation Code) in connection with the grant of an exemption from normal registration requirements imposed by that Act. We do not find such fee either unreasonable or exorbitant. WHEREFORE, for all the foregoing, the Petition for Review on Certiorari is hereby DENIED for lack of merit and the Decision of the Court of Appeals dated 13 January 1989 in C.A.-G.R. No. SP-13522, is hereby AFFIRMED. Costs against petitioner. 9. G.R. No. L-56655 BENITO, petitioner, vs.

July

25,

1983

DATU

TAGORANAO

SECURITIES AND EXCHANGE COMMISSION and JAMIATUL PHILIPPINE-AL ISLAMIA, INC., respondents. On February 6, 1959, the Articles of Incorporation of respondent Jamiatul Philippine-Al Islamia, Inc. (originally Kamilol Islam Institute, Inc.) were filed with the Securities and Exchange Commission (SEC) and were approved on December 14, 1962. The corporation had an authorized capital stock of P200,000.00 divided into 20,000 shares at a par value of P10.00 each. Of the authorized capital stock, 8,058 shares worth P80,580.00 were subscribed and fully paid for. Herein petitioner Datu Tagoranao Benito subscribed to 460 shares worth P4,600.00. On October 28, 1975, the respondent corporation filed a certificate of increase of its capital stock from P200,000.00 to P1,000,000.00. It was shown in said certificate that P191,560.00 worth of shares were represented in the stockholders' meeting held on November 25, 1975 at which time the increase was approved. Thus, P110,980.00 worth of shares were subsequently issued by the corporation from the unissued portion of the authorized capital stock of P200,000.00. Of the increased capital stock of P1,000,000.00, P160,000.00 worth of shares were subscribed by Mrs. Fatima A. Ramos, Mrs. Tarhata A. Lucman and Mrs. Moki-in Alonto. On November 18, 1976, petitioner Datu Tagoranao filed with respondent Securities and Exchange Commission a petition alleging that the additional issue (worth P110,980.00) of previously subscribed shares of the corporation was made in violation of his pre-emptive right to said additional issue and that the increase in the authorized capital stock of the corporation from P200,000.00 to P1,000,000.00 was illegal considering that the stockholders of record were not notified of the meeting wherein the proposed increase was in the agenda. Petitioner prayed that the additional issue of shares of previously authorized capital stock as well as the shares issued from the increase in capital stock of respondent corporation be cancelled; that the secretary of respondent corporation be ordered to register the 2,540 shares acquired by him (petitioner) from Domocao Alonto and Moki-in Alonto; and that 54

the corporation be ordered to render an accounting of funds to the stockholders. In their answer, respondents denied the material allegations of the petition and, by way of special defense, claimed that petitioner has no cause of action and that the stock certificates covering the shares alleged to have been sold to petitioner were only given to him as collateral for the loan of Domocao Alonto and Moki-in Alonto. On July 11, 1980, Hearing Officer Ledor E. Macalalag of the Securities and Exchange Commission, after due proceedings, rendered a decision which was affirmed by the Commission En Banc during its executive session held on March 9, 1981, as follows: RESOLVED, That the decision of the hearing Officer in SEC Case No. 1392, dated July 11, 1980, the dispositive portion of which reads as follows: WHEREFORE, in view of the foregoing considerations, this Commission hereby rules: (a) That the issuance by the corporation of its unissued shares was validly made and was not subject to the preemptive rights of stockholders, including the petitioner, herein; (b) That there is no sufficient legal basis to set aside the certificate issued by this Commission authorizing the increase in capital stock of respondent corporation from P200,000.00 to Pl,000,000.00. Considering, however, that petitioner has not waived his pre-emptive right to subscribe to the increased capitalization, respondent corporation is hereby directed to allow petitioner to subscribe thereto, at par value, proportionate to his present shareholdings, adding thereto the 2,540 shares transferred to him by Mr. Domocao Alonto and Mrs. Moki-in Alonto; (c) To direct as it hereby directs, the respondent corporation to immediately cancel Certificates of Stock Nos. 216, 223, 302, all in the name of Domocao Alonto, and Certificate of Stock No. 217, in the name of Moki-in Alonto, upon their presentation by the petitioner and to issue new certificates corresponding thereto in the name of petitioner herein; (d) To direct, as it hereby directs, respondent corporation to religiously comply with the requirement of filing annual financial statements under pain of a more

drastic action; (e) To declare, as it hereby declares, as irregular, the election of the nine (9) members of the Board of Trustees of respondent corporation on October 30, 1976, for which reason, respondent corporation is hereby ordered to call a stockholders' meeting to elect a new set of five (5) members of the Board of Trustees, unless in the meantime the said number is accordingly increased and the requirement of law to make such increase effective have been complied with. It is understood that the said stockholders' meeting be called within thirty (30) days from the time petitioner shall have subscribed to the increased capitalization.' be, as the same is hereby AFFIRMED, the same being in accordance with law and the facts of the case. (pp. 28-29, Reno) Hence, this petition for review by way of appeal from the aforementioned decision of the Securities and Exchange Commission, petitioner contending that (1) the issuance of the 11,098 shares without the consent of the stockholders or of the Board of Directors, and in the absence of consideration, is null and void; (2) the increase in the authorized capital stock from P200,000.00 to P1,000,000.00 without the consent or express waiver of the stockholders, is null and void; (3) he is entitled to attorneys' fees, damages and expenses of litigation in filing this suit against the directors of respondent corporation. We are not persuaded. As aptly stated by the Securities and Exchange Commission in its decision: xxx xxx xxx .. the questioned issuance of the unsubscribed portion of the capital stock worth P110,980.00 is ' not invalid even if assuming that it was made without notice to the stockholders as claimed by petitioner. The power to issue shares of stocks in a corporation is lodged in the board of directors and no stockholders' meeting is necessary to consider it because additional issuance of shares of stocks does not need approval of the stockholders. The by-laws of the corporation itself states that 'the 55

Board of Trustees shall, in accordance with law, provide for the issue and transfer of shares of stock of the Institute and shall prescribe the form of the certificate of stock of the Institute. (Art. V, Sec. 1). Petitioner bewails the fact that in view of the lack of notice to him of such subsequent issuance, he was not able to exercise his right of preemption over the unissued shares. However, the general rule is that preemptive right is recognized only with respect to new issue of shares, and not with respect to additional issues of originally authorized shares. This is on the theory that when a corporation at its inception offers its first shares, it is presumed to have offered all of those which it is authorized to issue. An original subscriber is deemed to have taken his shares knowing that they form a definite proportionate part of the whole number of authorized shares. When the shares left unsubscribed are later reoffered, he cannot therefore claim a dilution of interest. (Campos and Lopez-Campos Selected Notes and Cases on Corporation Law, p. 855, citing Yasik V. Wachtel 25 Del. Ch. 247,17A. 2d 308 (1941). (pp. 33-34, Rollo) With respect to the claim that the increase in the authorized capital stock was without the consent, expressed or implied, of the stockholders, it was the finding of the Securities and Exchange Commission that a stockholders' meeting was held on November 25,1975, presided over by Mr. Ahmad Domocao Alonto, Chairman of the Board of Trustees and, among the many items taken up then were the change of name of the corporation from Kamilol Islam Institute Inc. to Jamiatul Philippine-Al Islamia, Inc., the increase of its capital stock from P200,000.00 to P1,000,000.00, and the increase of the number of its Board of Trustees from five to nine. "Despite the insistence of petitioner, this Commission is inclined to believe that there was a stockholders' meeting on November 25, 1975 which approved the increase. The petitioner had not sufficiently overcome the evidence of respondents that such meeting was in fact held. What petitioner successfully proved, however, was the fact that he was not notified of said meeting and that he never attended the same as he was out of the country at the time. The documentary evidence of petitioner conclusively proved that he was attending the Mecca pilgrimage when the meeting was held on November 25, 1975.

(Exhs. 'Q', 'Q-14', 'R', 'S' and 'S-l'). While petitioner doubts the authenticity of the alleged minutes of the proceedings (Exh. '4'), the Commission notes with significance that said minutes contain numerous details of various items taken up therein that would negate any claim that it was not authentic. Another thing that petitioner was able to disprove was the allegation in the certificate of increase (Exh. 'E-l') that all stockholders who did not subscribe to the increase of capital stock have waived their pre-emptive right to do so. As far as the petitioner is concerned, he had not waived his pre-emptive right to subscribe as he could not have done so for the reason that he was not present at the meeting and had not executed a waiver, thereof. Not having waived such right and for reasons of equity, he may still be allowed to subscribe to the increased capital stock proportionate to his present shareholdings." (pp. 36-37, Rollo) Well-settled is the rule that the findings of facts of administrative bodies will not be interfered with by the courts in the absence of grave abuse of discretion on the part of said agencies, or unless the aforementioned findings are not supported by substantial evidence. (Gokongwei, Jr. vs. SEC, 97 SCRA 78). In a long string of cases, the Supreme Court has consistently adhered to the rule that decisions of administrative officers are not to be disturbed by the courts except when the former have acted without or in excess of their jurisdiction or with grave abuse of discretion (Sichangco vs. Board of Commissioners of Immigration, 94 SCRA 61). Thus, in the case of Deluao vs. Casteel ( L-21906, Dec. 24, 1968, 26 SCRA 475, 496, citing Pajo vs. Ago, et al., L-15414, June 30, 1960) and Genitano vs. Secretary of Agriculture and Natural Resources, et al. (L-2ll67, March 31, 1966), the Supreme Court held that: ... Findings of fact by an administrative board or official, following a hearing, are binding upon the courts and win not be disturbed except where the board or official has gone beyond his statutory authority, exercised unconstitutional powers or clearly acted arbitrarily and without regard to his duty or with grave abuse of discretion. ... ACCORDINGLY, this petition is hereby dismissed for lack of merit. SO ORDERED. 56

10.[G.R. No. L-17009. September 13, 1966.] BRITISH-AMERICAN ENGINEERING CORPORATION, PlaintiffAppellee, v. ALTO SURETY and INSURANCE COMPANY, INC., ANTONIO QUIRINO, ET AL., Defendants-Appellants. R.C. Gianzon and R.A. Aristorenas, for Defendants-Appellants. Juan T. David and M.C. Gunigundo for plaintiff and appellee. 1. CORPORATIONS; ILLEGAL ISSUANCE OF CERTIFICATES OF STOCK; CASE AT BAR. — Appellee paid to appellant company, thru its Secretary- Treasurer, sums of money totalling P250,000.00. Receipt of the amount was acknowledged by means of vouchers ostensibly in payment of 2,500 shares of appellant company subscribed or purchased by appellee. The amount, however, was actually credited as payment of the subscriptions of the original subscribers to the capital stock of appellant company. Not having received any certificate evidencing its interest in the capital stock, appellee filed the present action, and the lower court, granting its prayer, ordered appellant company to issue in favor of appellee the certificates of stock corresponding to the 2,500 shares of capital stock appellee had allegedly purchased. Held: The judgment below, if carried out, would result in an anomalous and illegal situation. As it did not provide for the nullification and cancellation of the 2,500 shares of appellant company in the name of the original subscribers, such number of shares in their name would remain outstanding, and another 2,500 shares would be issued in appellee’s name, all with a total par value of P500,000.00, while what had been actually paid for them was only one-half of said amount. 2. ID.; ID.; RIGHT TO RELIEF OF PURCHASER OF SHARES; CASE AT BAR. — It appearing from the record that the issuance of the certificates in the name of the original subscribers was, if not consented to by appellee, impliedly ratified by it, appellant company had no further obligation to perform in the premises, appellee’s right to relief being against the said subscribers. This relief, however, could not have been granted by the lower court - as in fact it was not — because the Quirino spouses were made parties in this case in their capacity as officers of

appellant company and not as holders of some of the disputed certificates of stock, and other persons in whose names a few such certificates were issued were not made parties at all. Appeal taken by the Alto Surety and Insurance Co., Inc. — hereinafter referred to merely as Alto — Antonio Quirino and Aleli R. GuzmanQuirino, in their respective capacity as President and SecretaryTreasurer of said company, from the final judgment of the Court of First Instance of Manila in Civil Case No. 32209 entitled "British-American Engineering Corporation v. Alto Surety & Insurance Co., Inc., Et. Al."cralaw virtua1aw library On April 1, 1957, British-American Engineering Corporation — hereinafter referred to as appellee — filed the present action in the Court of First Instance of Manila to compel appellants to issue in its favor certificates of stock corresponding to 2,500 shares of the capital stock of Alto, to refund the amount of P99,769.48 representing cash advances and payments which appellee had allegedly made, with legal interest from the respective dates they were advanced, plus 30% of the total amount involved therein as attorney’s fees, and the costs of suit. Appellee’s claim was that on April 1, 1947, it paid Alto through its Secretary-Treasurer, Mrs. Aleli P. Guzman-Quirino, the sum of P150,000.00 as purchase price of 1,500 shares of its capital stock at P100.00 per share (Exhibit A); that again on November 19, 1947, appellee paid Alto through the same officer, the sum of P100,084.42 for 1,000 shares of its capital stock at the same par value (Exhibit B); that despite repeated demands made by appellee, appellants failed or otherwise refused to issue the corresponding certificates of stock in its favor. On the other hand, besides contending that appellee’s cause of action, if any, had prescribed, appellants claimed that the documents Exhibits A and B do not represent the true agreement of the parties; that the amounts mentioned therein were in fact paid for the account of Antonio Quirino chargeable to his share in the profits realized in his joint venture 57

with appellee corporation and/or N. P. Lynevitche, its President and Managing Director, involving the importation and exportation of heavy equipment and other merchandise done in the name of appellee in 1946 and 1947.

to the capital stock of Alto, and that the certificates of stock corresponding to the additional 1,000 shares mentioned heretofore were issued in the name of the Quirino spouses, within a reasonable time after April 1, 1947 and November 19 of the same year, respectively.

As far as the record discloses, Alto was formally incorporated on April 8, 1947. One week prior to that date Mrs. Quirino, acting already as Secretary-Treasurer of Alto, issued the voucher Exhibit A acknowledging receipt of the sum of P150,000.00 ostensibly in payment of 1,500 shares of Alto subscribed or purchased by appellee. The amount, however, was actually credited as payment of the subscriptions of the original subscribers to the capital stock of Alto as follows:chanrob1es virtual 1aw library

It appears that Nicolas Lynevitche was not only the President but also the Managing Director of appellee corporation — virtually the corporation itself. It is not denied — in fact, it was admitted by Lynevitche — that appellee, through him, and Antonio Quirino had embarked upon a joint venture dealing in the importation and exportation of heavy equipment and other merchandise in which they realized profits. So closely they worked together that appellee and Alto — in other words, Lynevitche and Antonio Quirino — held offices in the same building and had other transactions with each other: Alto, on different occasions, loaned several amounts to appellee and/or Lynevitche.

Name

No.

Antonio Aleli

of Quirino

R.

6,000

5,200

Quirino

Petronila

——

Amount

Guzman-Quirino

Tomas

Angela

Shares

A.

P520,000.00 400

200

Syquia

100

Guzman

Amount

100

40,000.00

Paid

Up

P130,000.00 10,000.00

20,000.00

5,000.00

10,000.00

2,500.00

10,000.00

2,500.00

————

————

P600,000.00

P150,000.00

Again, on November 19, 1947, a similar voucher Exhibit B was issued by the Secretary-Treasurer of Alto acknowledging receipt of the sum of P100,000.00 in payment of 1,000 shares of the capital stock of the corporation, subscribed or purchased by appellee. It is not disputed that the certificates of stock for the initial 1,500 shares mentioned above were issued in the names of the original subscribers

On the other hand, it appears undisputed that appellee never received any certificate evidencing its alleged considerable and controlling interest in the capital stock of Alto. Moreover, its first alleged investment appears to be precisely the total amount subscribed and paid by the original subscribers to the capital stock of Alto, to whom, naturally, the corresponding certificates of stock were issued. And yet, the record discloses that, for a period of almost ten years, appellee made no inquiry as to why no certificate of stock had been issued in its name; much less did it demand issuance thereof in its name or an accounting in connection with the business of Alto and the profits derived therefrom. The record shows in this connection that it was only on October 25, 1956 when Lynevitche made a personal demand upon the Quirinos, while appellee corporation made a similar demand only on December 24, 1956. In fact, the present action was filed only on April 1, 1957 the very last day of the period of prescription. The foregoing, We believe, affords more than sufficient ground for concluding that during that period of almost ten years, appellee knew that certificates corresponding to the shares of stock of Alto allegedly purchased by it had been issued in the name of the Quirino spouses and other parties. Whether or not its apparent acquiescence to this situation 58

was due to the fact that the total sum of P250,000.00 covered by the vouchers mentioned heretofore really represented a partial payment of the shares of Antonio Quirino in the profits realized by his joint venture with appellee — profits admitted unconditionally by Lynevitche himself — is a matter we do not here decide because the Quirinos are not parties in their personal capacity. This appeal, therefore, must be decided upon another ground. As stated heretofore, appellee commenced this action to compel Alto to issue in its favor certificates of stock corresponding to the 2,500 shares it had allegedly purchased. Its complaint said so (prayer for relief, paragraph A); its representation said so during the trial (transcript of September 1, 1959 pp. 16-17), and the trial court, in the opening paragraph of its decision quoted in appellee’s brief submitted by Attys. David and Gunigundo, says exactly the same thing: that the action was for judgment against Alto ordering it to issue in favor of appellee certificates of stock corresponding to 2,500 shares of its capital stock. Finally, because the action was precisely for that purpose, the appealed judgment is as follows:jgc:chanrobles.com.ph

to the P250,000.00 paid into its coffers, and the issuance of the corresponding certificates in the name of the Quirinos and other parties was, if not consented to by appellee, impliedly ratified by it, it is clear that Alto had no further obligation to perform in the premises, appellee’s cause of action, if any, being exclusively against the parties in whose names the certificates of stock in question were issued. As a matter of fact, if no certificate had been issued at all by Alto and the right to the shares had been the subject of adverse claims on the part of appellee and the Quirinos, the matter could have been a proper subject of interpleading. But upon the facts before us, appellee’s right to relief could be only against the parties in whose names the certificates were issued. This relief could not have been granted by the lower court — as in fact it was not — because the Quirinos were made parties in this case in their capacity as officers of Alto, and other persons in whose names a few certificates of share were issued were not made parties at all. Wherefore, the decision appealed from is reversed, with the result that the present case is dismissed, with costs. Concepcion, C.J., Reyes, J.B.L., Barrera, Makalintal, Bengzon, J.P., Zaldivar, Sanchez and Castro, JJ., concur.

"WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants ordering the defendant Alto Surety & Insurance Co., Inc. to issue in favor of the plaintiff the certificates of stock corresponding to TWO THOUSAND FIVE HUNDRED (2,500) shares of its capital stock."cralaw virtua1aw library It is once obvious that the judgment quoted above, if carried out, would result in a situation anomalous and illegal because it would give rise to a situation where 2,500 shares of Alto in the name of the Quirinos would remain outstanding — because said judgment did not provide for their nullification and cancellation — and another 2,500 shares would be in the name of appellee, all of them of a total par value of P500,000.00 while what had been actually paid for them was only one-half of said amount. Moreover, as Alto had actually issued certificates of stock corresponding 59