G.R. No. L-37331 March 18, 1933

FRED M. HARDEN, J.D. HIGHSMITH, and JOHN C. HART, in their own behalf and in that all

other stockholders of the Balatoc Mining Company, etc., plaintiffs-appellants,

vs.

BENGUET CONSOLIDATED MINING COMPANY, BALATOC MINING COMPANY, H. E.

RENZ, JOHN W. JAUSSERMANN, and A. W. BEAM, defendants-appellees.

Gibbs and McDonough and Roman Ozaeta for appellants.

DeWitt, Perkins and Brady for appellees.

Ross, Lawrence and Selph for appellee Balatoc Mining Company.

STREET, J.:

This action was originally instituted in the Court of First Instance of the City of Manila by F. M. Harden,

acting in his own behalf and that of all other stockholders of the Balatoc Mining Co. who might join in

the action and contribute to the expense of the suit. With the plaintiff Harden two others, J. D. Highsmith

and John C. Hart, subsequently associated themselves. The defendants are the Benguet Consolidated

Mining Co., the Balatoc Mining Co., H. E. Renz, John W. Haussermann, and A. W. Beam. The principal

purpose of the original action was to annul a certificate covering 600,000 shares of the stock of the

Balatoc Mining Co., which have been issued to the Benguet Consolidated Mining Co., and to secure to

the Balatoc Mining Co., the restoration of a large sum of money alleged to have been unlawfully collected

by the Benguet Consolidated Mining Co., with legal interest, after deduction therefrom of the amount

expended by the latter company under a contract between the two companies, bearing date of March 9,

1927. The complaint was afterwards amended so as to include a prayer for the annulment of this contract.

Shortly prior to the institution of this lawsuit, the Benguet Consolidated Mining Co., transferred to H. E.

Renz, as trustee, the certificate for 600,000 shares of the Balatoc Mining Co. which constitute the

principal subject matter of the action. This was done apparently to facilitate the splitting up to the shares

in the course of the sale or distribution. To prevent this the plaintiffs, upon filing their original complaint,

procured a preliminary injunction restraining the defendants, their agents and servants, from selling,

assigning or transferring the 600,000 shares of the Balatoc Mining Co., or any part thereof, and from

removing said shares from the Philippine Islands. This explains the connection of Renz with the case. The

other individual defendants are made merely as officials of the Benguet Consolidated Mining Co. Upon

hearing the cause the trial court dismissed the complaint and dissolved the preliminary injunction, with

costs against the plaintiffs. From this judgment the plaintiffs appealed.

The facts which have given rise this lawsuit are simple, as the financial interests involve are immense.

Briefly told these facts are as follows: The Benguet Consolidated Mining Co. was organized in June,

1903, as a sociedad anonima in conformity with the provisions of Spanish law; while the Balatoc Mining

Co. was organized in December 1925, as a corporation, in conformity with the provisions of the

Corporation Law (Act No. 1459). Both entities were organized for the purpose of engaging in the mining

of gold in the Philippine Islands, and their respective properties are located only a few miles apart in the

subprovince of Benguet. The capital stock of the Balatoc Mining Co. consists of one million shares of the

par value of one peso (P1) each.

When the Balatoc Mining Co. was first organized the properties acquired by it were largely undeveloped;

and the original stockholders were unable to supply the means needed for profitable operation. For this

reason, the board of directors of the corporation ordered a suspension of all work, effective July 31, 1926.

In November of the same year a general meeting of the company's stockholders appointed a committee

for the purpose of interesting outside capital in the mine. Under the authority of this resolution the

committee approached A. W. Beam, then president and general manager of the Benguet Company, to

secure the capital necessary to the development of the Balatoc property. As a result of the negotiations

thus begun, a contract, formally authorized by the management of both companies, was executed on

March 9, 1927, the principal features of which were that the Benguet Company was to proceed with the

development and construct a milling plant for the Balatoc mine, of a capacity of 100 tons of ore per day,

and with an extraction of at least 85 per cent of the gold content. The Benguet Company also agreed to

erect an appropriate power plant, with the aerial tramlines and such other surface buildings as might be

needed to operate the mine. In return for this it was agreed that the Benguet Company should receive

from the treasurer of the Balatoc Company shares of a par value of P600,000, in payment for the first

P600,000 be thus advanced to it by the Benguet Company.

The performance of this contract was speedily begun, and by May 31, 1929, the Benguet Company had

spent upon the development the sum of P1,417,952.15. In compensation for this work a certificate for six

hundred thousand shares of the stock of the Balatoc Company has been delivered to the Benguet

Company, and the excess value of the work in the amount of P817,952.15 has been returned to the

Benguet Company in cash. Meanwhile dividends of the Balatoc Company have been enriching its

stockholders, and at the time of the filing of the complaint the value of its shares had increased in the

market from a nominal valuation to more than eleven pesos per share. While the Benguet Company was

pouring its million and a half into the Balatoc property, the arrangements made between the two

companies appear to have been viewed by the plaintiff Harden with complacency, he being the owner of

many thousands of the shares of the Balatoc Company. But as soon as the success of the development had

become apparent, he began this litigation in which he has been joined by two others of the eighty

shareholders of the Balatoc Company.

Briefly, the legal point upon which the action is planted is that it is unlawful for the Benguet Company to

hold any interest in a mining corporation and that the contract by which the interest here in question was

acquired must be annulled, with the consequent obliteration of the certificate issued to the Benguet

Company and the corresponding enrichment of the shareholders of the Balatoc Company.

When the Philippine Islands passed to the sovereignty of the United States, in the attention of the

Philippine Commission was early drawn to the fact that there is no entity in Spanish law exactly

corresponding to the notion of the corporation in English and American law; and in the Philippine Bill,

approved July 1, 1902, the Congress of the United States inserted certain provisions, under the head of

Franchises, which were intended to control the lawmaking power in the Philippine Islands in the matter of

granting of franchises, privileges and concessions. These provisions are found in section 74 and 75 of the

Act. The provisions of section 74 have been superseded by section 28 of the Act of Congress of August

29, 1916, but in section 75 there is a provision referring to mining corporations, which still remains the

law, as amended. This provisions, in its original form, reads as follows: "... it shall be unlawful for any

member of a corporation engaged in agriculture or mining and for any corporation organized for any

purpose except irrigation to be in any wise interested in any other corporation engaged in agriculture or in

mining."

Under the guidance of this and certain other provisions thus enacted by Congress, the Philippine

Commission entered upon the enactment of a general law authorizing the creation of corporations in the

Philippine Islands. This rather elaborate piece of legislation is embodied in what is called our Corporation

Law (Act No. 1459 of the Philippine Commission). The evident purpose of the commission was to

introduce the American corporation into the Philippine Islands as the standard commercial entity and to

hasten the day when the sociedad anonima of the Spanish law would be obsolete. That statute is a sort of

codification of American corporate law.

For the purposes general description only, it may be stated that the sociedad anonima is something very

much like the English joint stock company, with features resembling those of both the partnership is

shown in the fact that sociedad, the generic component of its name in Spanish, is the same word that is

used in that language to designate other forms of partnership, and in its organization it is constructed

along the same general lines as the ordinary partnership. It is therefore not surprising that for purposes of

loose translation the expression sociedad anonima has not infrequently the other hand, the affinity of this

entity to the American corporation has not escaped notice, and the expression sociedad anonima is now

generally translated by the word corporation. But when the word corporation is used in the sense

of sociedad anonima and close discrimination is necessary, it should be associated with the Spanish

expression sociedad anonima either in a parenthesis or connected by the word "or". This latter device was

adopted in sections 75 and 191 of the Corporation Law.

In drafting the Corporation Law the Philippine Commission inserted bodily, in subsection (5) of section

13 of that Act (No. 1459) the words which we have already quoted from section 75 of the Act of

Congress of July 1, 1902 (Philippine Bill); and it is of course obvious that whatever meaning originally

attached to this provision in the Act of Congress, the same significance should be attached to it in section

13 of our Corporation Law.

As it was the intention of our lawmakers to stimulate the introduction of the American Corporation into

Philippine law in the place of the sociedad anonima, it was necessary to make certain adjustments

resulting from the continued co-existence, for a time, of the two forms of commercial entities.

Accordingly, in section 75 of the Corporation Law, a provision is found making the sociedad

anonima subject to the provisions of the Corporation Law "so far as such provisions may be applicable",

and giving to the sociedades anonimas previously created in the Islands the option to continue business as

such or to reform and organize under the provisions of the Corporation Law. Again, in section 191 of the

Corporation Law, the Code of Commerce is repealed in so far as it relates to sociedades anonimas. The

purpose of the commission in repealing this part of the Code of Commerce was to compel commercial

entities thereafter organized to incorporate under the Corporation Law, unless they should prefer to adopt

some form or other of the partnership. To this provision was added another to the effect that

existing sociedades anonimas, which elected to continue their business as such, instead of reforming and

reorganizing under the Corporation Law, should continue to be governed by the laws that were in force

prior to the passage of this Act "in relation to their organization and method of transacting business and to

the rights of members thereof as between themselves, but their relations to the public and public officials

shall be governed by the provisions of this Act."

As already observed, the provision above quoted from section 75 of the Act Congress of July 1, 1902

(Philippine Bill), generally prohibiting corporations engaged in mining and members of such from being

interested in any other corporation engaged in mining, was amended by section 7 of Act No. 3518 of the

Philippine Legislature, approved by Congress March 1, 1929. The change in the law effected by this

amendment was in the direction of liberalization. Thus, the inhibition contained in the original provision

against members of a corporation engaged in agriculture or mining from being interested in other

corporations engaged in agriculture or in mining was so modified as merely to prohibit any such member

from holding more than fifteen per centum of the outstanding capital stock of another such corporation.

Moreover, the explicit prohibition against the holding by any corporation (except for irrigation) of an

interest in any other corporation engaged in agriculture or in mining was so modified as to limit the

restriction to corporations organized for the purpose of engaging in agriculture or in mining.

As originally drawn, our Corporation Law (Act No. 1459) did not contain any appropriate clause directly

penalizing the act of a corporation, a member of a corporation , in acquiring an interest contrary to

paragraph (5) of section 13 of the Act. The Philippine Legislature undertook to remedy this situation in

section 3 of Act No. 2792 of the Philippine Legislature, approved on February 18, 1919, but this

provision was declared invalid by this court in Government of the Philippine Islands vs. El Hogar

Filipino (50 Phil., 399), for lack of an adequate title to the Act. Subsequently the Legislature reenacted

substantially the same penal provision in section 21 of Act No. 3518, under a title sufficiently broad to

comprehend the subject matter. This part of Act No. 3518 became effective upon approval by the

Governor-General, on December 3, 1928, and it was therefore in full force when the contract now in

question was made.

This provision was inserted as a new section in the Corporation Law, forming section 1990 (A) of said

Act as it now stands. Omitting the proviso, which seems not to be pertinent to the present controversy,

said provision reads as follows:

SEC. 190 (A). Penalties. The violation of any of the provisions of this Act and its amendments not otherwise penalized therein, shall be punished by a fine of not more than five thousand pesos

and by imprisonment for not more than five years, in the discretion of the court. If the violation is

committed by a corporation, the same shall, upon such violation being proved, be dissolved

by quo warranto proceedings instituted by the Attorney-General or by any provincial fiscal by

order of said Attorney-General: . . . .

Upon a survey of the facts sketched above it is obvious that there are two fundamental questions involved

in this controversy. The first is whether the plaintiffs can maintain an action based upon the violation of

law supposedly committed by the Benguet Company in this case. The second is whether, assuming the

first question to be answered in the affirmative, the Benguet Company, which was organized as

a sociedad anonima, is a corporation within the meaning of the language used by the Congress of the

United States, and later by the Philippine Legislature, prohibiting a mining corporation from becoming

interested in another mining corporation. It is obvious that, if the first question be answered in the

negative, it will be unnecessary to consider the second question in this lawsuit.

Upon the first point it is at once obvious that the provision referred to was adopted by the lawmakers with

a sole view to the public policy that should control in the granting of mining rights. Furthermore, the

penalties imposed in what is now section 190 (A) of the Corporation Law for the violation of the

prohibition in question are of such nature that they can be enforced only by a criminal prosecution or by

an action of quo warranto. But these proceedings can be maintained only by the Attorney-General in

representation of the Government.

What room then is left for the private action which the plaintiffs seek to assert in this case? The defendant

Benguet Company has committed no civil wrong against the plaintiffs, and if a public wrong has been

committed, the directors of the Balatoc Company, and the plaintiff Harden himself, were the active

inducers of the commission of that wrong. The contract, supposing it to have been unlawful in fact, has

been performed on both sides, by the building of the Balatoc plant by the Benguet Company and the

delivery to the latter of the certificate of 600,000 shares of the Balatoc Company. There is no possibility

of really undoing what has been done. Nobody would suggest the demolition of the mill. The Balatoc

Company is secure in the possession of that improvement, and talk about putting the parties in status quo

ante by restoring the consideration with interest, while the Balatoc Company remains in possession of

what it obtained by the use of that money, does not quite meet the case. Also, to mulct the Benguet

Company in many millions of dollars in favor of individuals who have not the slightest equitable right to

that money in a proposition to which no court can give a ready assent.

The most plausible presentation of the case of the plaintiffs proceeds on the assumption that only one of

the contracting parties has been guilty of a misdemeanor, namely, the Benguet Company, and that the

other party, the Balatoc Company, is wholly innocent to participation in that wrong. The plaintiffs would

then have us apply the second paragraph of article 1305 of the Civil Code which declares that an innocent

party to an illegal contract may recover anything he may have given, while he is not bound to fulfill any

promise he may have made. But, supposing that the first hurdle can be safely vaulted, the general remedy

supplied in article 1305 of the Civil Code cannot be invoked where an adequate special remedy is

supplied in a special law. It has been so held by this court in Go Chioco vs. Martinez (45 Phil., 256, 280),

where we refused to apply that article to a case of nullity arising upon a usurious loan. The reason given

for the decision on this point was that the Usury Act, as amended, contains all the provisions necessary

for the effectuation of its purposes, with the result that the remedy given in article 1305 of the Civil Code

is unnecessary. Much more is that idea applicable to the situation now before us, where the special

provisions give ample remedies for the enforcement of the law by action in the name of the Government,

and where no civil wrong has been done to the party here seeking redress.

The view of the case presented above rest upon considerations arising upon our own statutes; and it would

seem to be unnecessary to ransack the American decisions for analogies pertinent to the case. We may

observe, however, that the situation involved is not unlike that which has frequently arisen in the United

States under provisions of the National Bank Act prohibiting banks organized under that law from

holding real property. It has been uniformly held that a trust deed or mortgaged conveying property of this

kind to a bank, by way of security, is valid until the transaction is assailed in a direct proceeding instituted

by the Government against the bank, and the illegality of such tenure supplies no basis for an action by

the former private owner, or his creditor, to annul the conveyance. (National Bank vs. Matthews, 98 U. S.,

621; Kerfootvs. Farmers & M. Bank, 218 U. S., 281.) Other analogies point in the same direction. (South

& Ala. R. Ginniss vs. B. & M. Consol. etc. Mining Co., 29 Mont., 428; Holmes & Griggs Mfg. Co. vs.

Holmes & Wessell Metal Co., 127 N. Y., 252; Oelbermann vs. N. Y. & N. R. Co., 77 Hun., 332.)

Most suggestive perhaps of all the cases in Compaia Azucarera de Carolina vs. Registrar (19 Porto Rico,

143), for the reason that this case arose under a provision of the Foraker Act, a law analogous to our

Philippine Bill. It appears that the registrar had refused to register two deeds in favor of the Compaia

Azucarera on the ground that the land thereby conveyed was in excess of the area permitted by law to the

company. The Porto Rican court reversed the ruling of the registrar and ordered the registration of the

deeds, saying:

Thus it may be seen that a corporation limited by the law or by its charter has until the State acts

every power and capacity that any other individual capable of acquiring lands, possesses. The

corporation may exercise every act of ownership over such lands; it may sue in ejectment or

unlawful detainer and it may demand specific performance. It has an absolute title against all the

world except the State after a proper proceeding is begun in a court of law. ... The Attorney

General is the exclusive officer in whom is confided the right to initiate proceedings for escheat

or attack the right of a corporation to hold land.

Having shown that the plaintiffs in this case have no right of action against the Benguet Company for the

infraction of law supposed to have been committed, we forego cny discussion of the further question

whether a sociedad anonima created under Spanish law, such as the Benguet Company, is a corporation

within the meaning of the prohibitory provision already so many times mentioned. That important

question should, in our opinion, be left until it is raised in an action brought by the Government.

The judgment which is the subject of his appeal will therefore be affirmed, and it is so ordered, with costs

against the appellants.

G.R. No. 125469 October 27, 1997

PHILIPPINE STOCK EXCHANGE, INC., petitioner,

vs.

THE HONORABLE COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION

and PUERTO AZUL LAND, INC., respondents.

TORRES, JR., J.:

The Securities and Exchange Commission is the government agency, under the direct general supervision

of the Office of the President, 1 with the immense task of enforcing the Revised Securities Act, and all

other duties assigned to it by pertinent laws. Among its inumerable functions, and one of the most

important, is the supervision of all corporations, partnerships or associations, who are grantees of primary

franchise and/or a license or permit issued by the government to operate in the Philippines. 2 Just how far

this regulatory authority extends, particularly, with regard to the Petitioner Philippine Stock Exchange,

Inc. is the issue in the case at bar.

In this Petition for Review on Certiorari, petitioner assails the resolution of the respondent Court of

Appeals, dated June 27, 1996, which affirmed the decision of the Securities and Exchange Commission

ordering the petitioner Philippine Stock Exchange, Inc. to allow the private respondent Puerto Azul Land,

Inc. to be listed in its stock market, thus paving the way for the public offering of PALI's shares.

The facts of the case are undisputed, and are hereby restated in sum.

The Puerto Azul Land, Inc. (PALI), a domestic real estate corporation, had sought to offer its shares to the

public in order to raise funds allegedly to develop its properties and pay its loans with several banking

institutions. In January, 1995, PALI was issued a Permit to Sell its shares to the public by the Securities

and Exchange Commission (SEC). To facilitate the trading of its shares among investors, PALI sought to

course the trading of its shares through the Philippine Stock Exchange, Inc. (PSE), for which purpose it

filed with the said stock exchange an application to list its shares, with supporting documents attached.

On February 8, 1996, the Listing Committee of the PSE, upon a perusal of PALI's application,

recommended to the PSE's Board of Governors the approval of PALI's listing application.

On February 14, 1996, before it could act upon PALI's application, the Board of Governors of the PSE

received a letter from the heirs of Ferdinand E. Marcos, claiming that the late President Marcos was the

legal and beneficial owner of certain properties forming part of the Puerto Azul Beach Hotel and Resort

Complex which PALI claims to be among its assets and that the Ternate Development Corporation,

which is among the stockholders of PALI, likewise appears to have been held and continue to be held in

trust by one Rebecco Panlilio for then President Marcos and now, effectively for his estate, and requested

PALI's application to be deferred. PALI was requested to comment upon the said letter.

PALI's answer stated that the properties forming part of the Puerto Azul Beach Hotel and Resort Complex

were not claimed by PALI as its assets. On the contrary, the resort is actually owned by Fantasia Filipina

Resort, Inc. and the Puerto Azul Country Club, entities distinct from PALI. Furthermore, the Ternate

Development Corporation owns only 1.20% of PALI. The Marcoses responded that their claim is not

confined to the facilities forming part of the Puerto Azul Hotel and Resort Complex, thereby implying

that they are also asserting legal and beneficial ownership of other properties titled under the name of

PALI.

On February 20, 1996, the PSE wrote Chairman Magtanggol Gunigundo of the Presidential Commission

on Good Government (PCGG) requesting for comments on the letters of the PALI and the Marcoses. On

March 4, 1996, the PSE was informed that the Marcoses received a Temporary Restraining Order on the

same date, enjoining the Marcoses from, among others, "further impeding, obstructing, delaying or

interfering in any manner by or any means with the consideration, processing and approval by the PSE of

the initial public offering of PALI." The TRO was issued by Judge Martin S. Villarama, Executive Judge

of the RTC of Pasig City in Civil Case No. 65561, pending in Branch 69 thereof.

In its regular meeting held on March 27, 1996, the Board of Governors of the PSE reached its decision to

reject PALI's application, citing the existence of serious claims, issues and circumstances surrounding

PALI's ownership over its assets that adversely affect the suitability of listing PALI's shares in the stock

exchange.

On April 11, 1996, PALI wrote a letter to the SEC addressed to the then Acting Chairman, Perfecto R.

Yasay, Jr., bringing to the SEC's attention the action taken by the PSE in the application of PALI for the

listing of its shares with the PSE, and requesting that the SEC, in the exercise of its supervisory and

regulatory powers over stock exchanges under Section 6(j) of P.D. No. 902-A, review the PSE's action on

PALI's listing application and institute such measures as are just and proper under the circumstances.

On the same date, or on April 11, 1996, the SEC wrote to the PSE, attaching thereto the letter of PALI

and directing the PSE to file its comments thereto within five days from its receipt and for its authorized

representative to appear for an "inquiry" on the matter. On April 22, 1996, the PSE submitted a letter to

the SEC containing its comments to the April 11, 1996 letter of PALI.

On April 24, 1996, the SEC rendered its Order, reversing the PSE's decision. The dispositive portion of

the said order reads:

WHEREFORE, premises considered, and invoking the Commissioner's authority and

jurisdiction under Section 3 of the Revised Securities Act, in conjunction with Section 3,

6(j) and 6(m) of Presidential Decree No. 902-A, the decision of the Board of Governors

of the Philippine Stock Exchange denying the listing of shares of Puerto Azul Land, Inc.,

is hereby set aside, and the PSE is hereby ordered to immediately cause the listing of the

PALI shares in the Exchange, without prejudice to its authority to require PALI to

disclose such other material information it deems necessary for the protection of the

investigating public.

This Order shall take effect immediately.

SO ORDERED.

PSE filed a motion for reconsideration of the said order on April 29, 1996, which was, however denied by

the Commission in its May 9, 1996 Order which states:

WHEREFORE, premises considered, the Commission finds no compelling reason to

reconsider its order dated April 24, 1996, and in the light of recent developments on the

adverse claim against the PALI properties, PSE should require PALI to submit full

disclosure of material facts and information to protect the investing public. In this regard,

PALI is hereby ordered to amend its registration statements filed with the Commission to

incorporate the full disclosure of these material facts and information.

Dissatisfied with this ruling, the PSE filed with the Court of Appeals on May 17, 1996 a Petition for

Review (with Application for Writ of Preliminary Injunction and Temporary Restraining Order), assailing

the above mentioned orders of the SEC, submitting the following as errors of the SEC:

I. SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE OF

DISCRETION IN ISSUING THE ASSAILED ORDERS WITHOUT

POWER, JURISDICTION, OR AUTHORITY; SEC HAS NO POWER

TO ORDER THE LISTING AND SALE OF SHARES OF PALI

WHOSE ASSETS ARE SEQUESTERED AND TO REVIEW AND

SUBSTITUTE DECISIONS OF PSE ON LISTING APPLICATIONS;

II. SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE OF

DISCRETION IN FINDING THAT PSE ACTED IN AN ARBITRARY

AND ABUSIVE MANNER IN DISAPPROVING PALI'S LISTING

APPLICATION;

III. THE ASSAILED ORDERS OF SEC ARE ILLEGAL AND VOID

FOR ALLOWING FURTHER DISPOSITION OF PROPERTIES IN

CUSTODIA LEGIS AND WHICH FORM PART OF

NAVAL/MILITARY RESERVATION; AND

IV. THE FULL DISCLOSURE OF THE SEC WAS NOT PROPERLY

PROMULGATED AND ITS IMPLEMENTATION AND

APPLICATION IN THIS CASE VIOLATES THE DUE PROCESS

CLAUSE OF THE CONSTITUTION.

On June 4, 1996, PALI filed its Comment to the Petition for Review and subsequently, a Comment and

Motion to Dismiss. On June 10, 1996, PSE fled its Reply to Comment and Opposition to Motion to

Dismiss.

On June 27, 1996, the Court of Appeals promulgated its Resolution dismissing the PSE's Petition for

Review. Hence, this Petition by the PSE.

The appellate court had ruled that the SEC had both jurisdiction and authority to look into the decision of

the petitioner PSE, pursuant to Section 3 3 of the Revised Securities Act in relation to Section 6(j) and

6(m) 4 of P.D. No. 902-A, and Section 38(b)

5 of the Revised Securities Act, and for the purpose of

ensuring fair administration of the exchange. Both as a corporation and as a stock exchange, the petitioner

is subject to public respondent's jurisdiction, regulation and control. Accepting the argument that the

public respondent has the authority merely to supervise or regulate, would amount to serious

consequences, considering that the petitioner is a stock exchange whose business is impressed with public

interest. Abuse is not remote if the public respondent is left without any system of control. If the

securities act vested the public respondent with jurisdiction and control over all corporations; the power to

authorize the establishment of stock exchanges; the right to supervise and regulate the same; and the

power to alter and supplement rules of the exchange in the listing or delisting of securities, then the law

certainly granted to the public respondent the plenary authority over the petitioner; and the power of

review necessarily comes within its authority.

All in all, the court held that PALI complied with all the requirements for public listing, affirming the

SEC's ruling to the effect that:

. . . the Philippine Stock Exchange has acted in an arbitrary and abusive manner in

disapproving the application of PALI for listing of its shares in the face of the following

considerations:

1. PALI has clearly and admittedly complied with the Listing Rules and full disclosure

requirements of the Exchange;

2. In applying its clear and reasonable standards on the suitability for listing of shares,

PSE has failed to justify why it acted differently on the application of PALI, as compared

to the IPOs of other companies similarly situated that were allowed listing in the

Exchange;

3. It appears that the claims and issues on the title to PALI's properties were even less

serious than the claims against the assets of the other companies in that, the assertions of

the Marcoses that they are owners of the disputed properties were not substantiated

enough to overcome the strength of a title to properties issued under the Torrens System

as evidence of ownership thereof;

4. No action has been filed in any court of competent jurisdiction seeking to nullify

PALI's ownership over the disputed properties, neither has the government instituted

recovery proceedings against these properties. Yet the import of PSE's decision in

denying PALI's application is that it would be PALI, not the Marcoses, that must go to

court to prove the legality of its ownership on these properties before its shares can be

listed.

In addition, the argument that the PALI properties belong to the Military/Naval Reservation does not

inspire belief. The point is, the PALI properties are now titled. A property losses its public character the

moment it is covered by a title. As a matter of fact, the titles have long been settled by a final judgment;

and the final decree having been registered, they can no longer be re-opened considering that the one year

period has already passed. Lastly, the determination of what standard to apply in allowing PALI's

application for listing, whether the discretion method or the system of public disclosure adhered to by the

SEC, should be addressed to the Securities Commission, it being the government agency that exercises

both supervisory and regulatory authority over all corporations.

On August 15, 19961 the PSE, after it was granted an extension, filed the instant Petition for Review

on Certiorari, taking exception to the rulings of the SEC and the Court of Appeals. Respondent PALI

filed its Comment to the petition on October 17, 1996. On the same date, the PCGG filed a Motion for

Leave to file a Petition for Intervention. This was followed up by the PCGG's Petition for Intervention on

October 21, 1996. A supplemental Comment was filed by PALI on October 25, 1997. The Office of the

Solicitor General, representing the SEC and the Court of Appeals, likewise filed its Comment on

December 26, 1996. In answer to the PCGG's motion for leave to file petition for intervention, PALI filed

its Comment thereto on January 17, 1997, whereas the PSE filed its own Comment on January 20, 1997.

On February 25, 1996, the PSE filed its Consolidated Reply to the comments of respondent PALI

(October 17, 1996) and the Solicitor General (December 26, 1996). On May 16, 1997, PALI filed its

Rejoinder to the said consolidated reply of PSE.

PSE submits that the Court of Appeals erred in ruling that the SEC had authority to order the PSE to list

the shares of PALI in the stock exchange. Under presidential decree No. 902-A, the powers of the SEC

over stock exchanges are more limited as compared to its authority over ordinary corporations. In

connection with this, the powers of the SEC over stock exchanges under the Revised Securities Act are

specifically enumerated, and these do not include the power to reverse the decisions of the stock

exchange. Authorities are in abundance even in the United States, from which the country's security

policies are patterned, to the effect of giving the Securities Commission less control over stock

exchanges, which in turn are given more lee-way in making the decision whether or not to allow

corporations to offer their stock to the public through the stock exchange. This is in accord with the

"business judgment rule" whereby the SEC and the courts are barred from intruding into business

judgments of corporations, when the same are made in good faith. the said rule precludes the reversal of

the decision of the PSE to deny PALI's listing application, absent a showing of bad faith on the part of the

PSE. Under the listing rules of the PSE, to which PALI had previously agreed to comply, the PSE retains

the discretion to accept or reject applications for listing. Thus, even if an issuer has complied with the

PSE listing rules and requirements, PSE retains the discretion to accept or reject the issuer's listing

application if the PSE determines that the listing shall not serve the interests of the investing public.

Moreover, PSE argues that the SEC has no jurisdiction over sequestered corporations, nor with

corporations whose properties are under sequestration. A reading of Republic of the Philippines

vs. Sadiganbayan, G.R. No. 105205, 240 SCRA 376, would reveal that the properties of PALI, which

were derived from the Ternate Development Corporation (TDC) and the Monte del Sol Development

Corporation (MSDC). are under sequestration by the PCGG, and subject of forfeiture proceedings in the

Sandiganbayan. This ruling of the Court is the "law of the case" between the Republic and TDC and

MSDC. It categorically declares that the assets of these corporations were sequestered by the PCGG on

March 10, 1986 and April 4, 1988.

It is, likewise, intimated that the Court of Appeals' sanction that PALI's ownership over its properties can

no longer be questioned, since certificates of title have been issued to PALI and more than one year has

since lapsed, is erroneous and ignores well settled jurisprudence on land titles. That a certificate of title

issued under the Torrens System is a conclusive evidence of ownership is not an absolute rule and admits

certain exceptions. It is fundamental that forest lands or military reservations are non-alienable. Thus,

when a title covers a forest reserve or a government reservation, such title is void.

PSE, likewise, assails the SEC's and the Court of Appeals reliance on the alleged policy of "full

disclosure" to uphold the listing of PALI's shares with the PSE, in the absence of a clear mandate for the

effectivity of such policy. As it is, the case records reveal the truth that PALI did not comply with the

listing rules and disclosure requirements. In fact, PALI's documents supporting its application contained

misrepresentations and misleading statements, and concealed material information. The matter of

sequestration of PALI's properties and the fact that the same form part of military/naval/forest

reservations were not reflected in PALI's application.

It is undeniable that the petitioner PSE is not an ordinary corporation, in that although it is clothed with

the markings of a corporate entity, it functions as the primary channel through which the vessels of capital

trade ply. The PSE's relevance to the continued operation and filtration of the securities transactions in the

country gives it a distinct color of importance such that government intervention in its affairs becomes

justified, if not necessarily. Indeed, as the only operational stock exchange in the country today, the PSE

enjoys a monopoly of securities transactions, and as such, it yields an immense influence upon the

country's economy.

Due to this special nature of stock exchanges, the country's lawmakers has seen it wise to give special

treatment to the administration and regulation of stock exchanges. 6

These provisions, read together with the general grant of jurisdiction, and right of supervision and control

over all corporations under Sec. 3 of P.D. 902-A, give the SEC the special mandate to be vigilant in the

supervision of the affairs of stock exchanges so that the interests of the investing public may be fully

safeguard.

Section 3 of Presidential Decree 902-A, standing alone, is enough authority to uphold the SEC's

challenged control authority over the petitioner PSE even as it provides that "the Commission shall have

absolute jurisdiction, supervision, and control over all corporations, partnerships or associations, who are

the grantees of primary franchises and/or a license or permit issued by the government to operate in the

Philippines. . ." The SEC's regulatory authority over private corporations encompasses a wide margin of

areas, touching nearly all of a corporation's concerns. This authority springs from the fact that a

corporation owes its existence to the concession of its corporate franchise from the state.

The SEC's power to look into the subject ruling of the PSE, therefore, may be implied from or be

considered as necessary or incidental to the carrying out of the SEC's express power to insure fair dealing

in securities traded upon a stock exchange or to ensure the fair administration of such exchange. 7 It is,

likewise, observed that the principal function of the SEC is the supervision and control over corporations,

partnerships and associations with the end in view that investment in these entities may be encouraged

and protected, and their activities for the promotion of economic development. 8

Thus, it was in the alleged exercise of this authority that the SEC reversed the decision of the PSE to deny

the application for listing in the stock exchange of the private respondent PALI. The SEC's action was

affirmed by the Court of Appeals.

We affirm that the SEC is the entity with the primary say as to whether or not securities, including shares

of stock of a corporation, may be traded or not in the stock exchange. This is in line with the SEC's

mission to ensure proper compliance with the laws, such as the Revised Securities Act and to regulate the

sale and disposition of securities in the country. 9 As the appellate court explains:

Paramount policy also supports the authority of the public respondent to review

petitioner's denial of the listing. Being a stock exchange, the petitioner performs a

function that is vital to the national economy, as the business is affected with public

interest. As a matter of fact, it has often been said that the economy moves on the basis of

the rise and fall of stocks being traded. By its economic power, the petitioner certainly

can dictate which and how many users are allowed to sell securities thru the facilities of a

stock exchange, if allowed to interpret its own rules liberally as it may please. Petitioner

can either allow or deny the entry to the market of securities. To repeat, the monopoly,

unless accompanied by control, becomes subject to abuse; hence, considering public

interest, then it should be subject to government regulation.

The role of the SEC in our national economy cannot be minimized. The legislature, through the Revised

Securities Act, Presidential Decree No. 902-A, and other pertinent laws, has entrusted to it the serious

responsibility of enforcing all laws affecting corporations and other forms of associations not otherwise

vested in some other government office. 10

This is not to say, however, that the PSE's management prerogatives are under the absolute control of the

SEC. The PSE is, alter all, a corporation authorized by its corporate franchise to engage in its proposed

and duly approved business. One of the PSE's main concerns, as such, is still the generation of profit for

its stockholders. Moreover, the PSE has all the rights pertaining to corporations, including the right to sue

and be sued, to hold property in its own name, to enter (or not to enter) into contracts with third persons,

and to perform all other legal acts within its allocated express or implied powers.

A corporation is but an association of individuals, allowed to transact under an assumed corporate name,

and with a distinct legal personality. In organizing itself as a collective body, it waives no constitutional

immunities and perquisites appropriate to such a body. 11

As to its corporate and management decisions,

therefore, the state will generally not interfere with the same. Questions of policy and of management are

left to the honest decision of the officers and directors of a corporation, and the courts are without

authority to substitute their judgment for the judgment of the board of directors. The board is the business

manager of the corporation, and so long as it acts in good faith, its orders are not reviewable by the

courts. 12

Thus, notwithstanding the regulatory power of the SEC over the PSE, and the resultant authority to

reverse the PSE's decision in matters of application for listing in the market, the SEC may exercise such

power only if the PSE's judgment is attended by bad faith. In Board of Liquidators vs. Kalaw, 13

it was

held that bad faith does not simply connote bad judgment or negligence. It imports a dishonest purpose or

some moral obliquity and conscious doing of wrong. It means a breach of a known duty through some

motive or interest of ill will, partaking of the nature of fraud.

In reaching its decision to deny the application for listing of PALI, the PSE considered important facts,

which, in the general scheme, brings to serious question the qualification of PALI to sell its shares to the

public through the stock exchange. During the time for receiving objections to the application, the PSE

heard from the representative of the late President Ferdinand E. Marcos and his family who claim the

properties of the private respondent to be part of the Marcos estate. In time, the PCGG confirmed this

claim. In fact, an order of sequestration has been issued covering the properties of PALI, and suit for

reconveyance to the state has been filed in the Sandiganbayan Court. How the properties were effectively

transferred, despite the sequestration order, from the TDC and MSDC to Rebecco Panlilio, and to the

private respondent PALI, in only a short span of time, are not yet explained to the Court, but it is clear

that such circumstances give rise to serious doubt as to the integrity of PALI as a stock issuer. The

petitioner was in the right when it refused application of PALI, for a contrary ruling was not to the best

interest of the general public. The purpose of the Revised Securities Act, after all, is to give adequate and

effective protection to the investing public against fraudulent representations, or false promises, and the

imposition of worthless ventures. 14

It is to be observed that the U.S. Securities Act emphasized its avowed protection to acts detrimental to

legitimate business, thus:

The Securities Act, often referred to as the "truth in securities" Act, was designed not

only to provide investors with adequate information upon which to base their decisions to

buy and sell securities, but also to protect legitimate business seeking to obtain capital

through honest presentation against competition from crooked promoters and to prevent

fraud in the sale of securities. (Tenth Annual Report, U.S. Securities & Exchange

Commission, p. 14).

As has been pointed out, the effects of such an act are chiefly (1) prevention of excesses

and fraudulent transactions, merely by requirement of that their details be revealed; (2)

placing the market during the early stages of the offering of a security a body of

information, which operating indirectly through investment services and expert investors,

will tend to produce a more accurate appraisal of a security, . . . Thus, the Commission

may refuse to permit a registration statement to become effective if it appears on its face

to be incomplete or inaccurate in any material respect, and empower the Commission to

issue a stop order suspending the effectiveness of any registration statement which is

found to include any untrue statement of a material fact or to omit to state any material

fact required to be stated therein or necessary to make the statements therein not

misleading. (Idem).

Also, as the primary market for securities, the PSE has established its name and goodwill, and it has the

right to protect such goodwill by maintaining a reasonable standard of propriety in the entities who

choose to transact through its facilities. It was reasonable for the PSE, therefore, to exercise its judgment

in the manner it deems appropriate for its business identity, as long as no rights are trampled upon, and

public welfare is safeguarded.

In this connection, it is proper to observe that the concept of government absolutism is a thing of the past,

and should remain so.

The observation that the title of PALI over its properties is absolute and can no longer be assailed is of no

moment. At this juncture, there is the claim that the properties were owned by TDC and MSDC and were

transferred in violation of sequestration orders, to Rebecco Panlilio and later on to PALI, besides the

claim of the Marcoses that such properties belong to the Marcos estate, and were held only in trust by

Rebecco Panlilio. It is also alleged by the petitioner that these properties belong to naval and forest

reserves, and therefore beyond private dominion. If any of these claims is established to be true, the

certificates of title over the subject properties now held by PALI map be disregarded, as it is an

established rule that a registration of a certificate of title does not confer ownership over the properties

described therein to the person named as owner. The inscription in the registry, to be effective, must be

made in good faith. The defense of indefeasibility of a Torrens Title does not extend to a transferee who

takes the certificate of title with notice of a flaw.

In any case, for the purpose of determining whether PSE acted correctly in refusing the application of

PALI, the true ownership of the properties of PALI need not be determined as an absolute fact. What is

material is that the uncertainty of the properties' ownership and alienability exists, and this puts to

question the qualification of PALI's public offering. In sum, the Court finds that the SEC had acted

arbitrarily in arrogating unto itself the discretion of approving the application for listing in the PSE of the

private respondent PALI, since this is a matter addressed to the sound discretion of the PSE, a corporation

entity, whose business judgments are respected in the absence of bad faith.

The question as to what policy is, or should be relied upon in approving the registration and sale of

securities in the SEC is not for the Court to determine, but is left to the sound discretion of the Securities

and Exchange Commission. In mandating the SEC to administer the Revised Securities Act, and in

performing its other functions under pertinent laws, the Revised Securities Act, under Section 3 thereof,

gives the SEC the power to promulgate such rules and regulations as it may consider appropriate in the

public interest for the enforcement of the said laws. The second paragraph of Section 4 of the said law, on

the other hand, provides that no security, unless exempt by law, shall be issued, endorsed, sold,

transferred or in any other manner conveyed to the public, unless registered in accordance with the rules

and regulations that shall be promulgated in the public interest and for the protection of investors by the

Commission. Presidential Decree No. 902-A, on the other hand, provides that the SEC, as regulatory

agency, has supervision and control over all corporations and over the securities market as a whole, and

as such, is given ample authority in determining appropriate policies. Pursuant to this regulatory

authority, the SEC has manifested that it has adopted the policy of "full material disclosure" where all

companies, listed or applying for listing, are required to divulge truthfully and accurately, all material

information about themselves and the securities they sell, for the protection of the investing public, and

under pain of administrative, criminal and civil sanctions. In connection with this, a fact is deemed

material if it tends to induce or otherwise effect the sale or purchase of its securities. 15

While the

employment of this policy is recognized and sanctioned by the laws, nonetheless, the Revised Securities

Act sets substantial and procedural standards which a proposed issuer of securities must

satisfy.16

Pertinently, Section 9 of the Revised Securities Act sets forth the possible Grounds for the

Rejection of the registration of a security:

The Commission may reject a registration statement and refuse to issue a permit to sell the securities included in such registration statement if it finds that

(1) The registration statement is on its face incomplete or inaccurate in any material

respect or includes any untrue statement of a material fact or omits to state a material

fact required to be stated therein or necessary to make the statements therein not

misleading; or

(2) The issuer or registrant

(i) is not solvent or not in sound financial condition;

(ii) has violated or has not complied with the provisions of this Act, or

the rules promulgated pursuant thereto, or any order of the Commission;

(iii) has failed to comply with any of the applicable requirements and

conditions that the Commission may, in the public interest and for the

protection of investors, impose before the security can be registered;

(iv) has been engaged or is engaged or is about to engage in fraudulent

transaction;

(v) is in any way dishonest or is not of good repute; or

(vi) does not conduct its business in accordance with law or is engaged in

a business that is illegal or contrary to government rules and regulations.

(3) The enterprise or the business of the issuer is not shown to be sound or to be based on

sound business principles;

(4) An officer, member of the board of directors, or principal stockholder of the issuer is

disqualified to be such officer, director or principal stockholder; or

(5) The issuer or registrant has not shown to the satisfaction of the Commission that the

sale of its security would not work to the prejudice of the public interest or as a fraud

upon the purchasers or investors. (Emphasis Ours)

A reading of the foregoing grounds reveals the intention of the lawmakers to make the registration and

issuance of securities dependent, to a certain extent, on the merits of the securities themselves, and of the

issuer, to be determined by the Securities and Exchange Commission. This measure was meant to protect

the interests of the investing public against fraudulent and worthless securities, and the SEC is mandated

by law to safeguard these interests, following the policies and rules therefore provided. The absolute

reliance on the full disclosure method in the registration of securities is, therefore, untenable. As it is, the

Court finds that the private respondent PALI, on at least two points (nos. 1 and 5) has failed to support the

propriety of the issue of its shares with unfailing clarity, thereby lending support to the conclusion that the

PSE acted correctly in refusing the listing of PALI in its stock exchange. This does not discount the

effectivity of whatever method the SEC, in the exercise of its vested authority, chooses in setting the

standard for public offerings of corporations wishing to do so. However, the SEC must recognize and

implement the mandate of the law, particularly the Revised Securities Act, the provisions of which cannot

be amended or supplanted by mere administrative issuance.

In resume, the Court finds that the PSE has acted with justified circumspection, discounting, therefore,

any imputation of arbitrariness and whimsical animation on its part. Its action in refusing to allow the

listing of PALI in the stock exchange is justified by the law and by the circumstances attendant to this

case.

ACCORDINGLY, in view of the foregoing considerations, the Court hereby GRANTS the Petition for

Review on Certiorari. The Decisions of the Court of Appeals and the Securities and Exchange

Commission dated July 27, 1996 and April 24, 1996 respectively, are hereby REVERSED and SET

ASIDE, and a new Judgment is hereby ENTERED, affirming the decision of the Philippine Stock

Exchange to deny the application for listing of the private respondent Puerto Azul Land, Inc.

SO ORDERED.

[G.R. Nos. 116124-25. November 22, 2000]

BIBIANO O. REYNOSO, IV, petitioner, vs. HON. COURT OF APPEALS and GENERAL

CREDIT CORPORATION,respondents.

D E C I S I O N

YNARES-SANTIAGO, J.:

Assailed in this petition for review is the consolidated decision of the Court of Appeals dated July 7,

1994, which reversed the separate decisions of the Regional Trial Court of Pasig City and the Regional

Trial Court of Quezon City in two cases between petitioner Reynoso and respondent General Credit

Corporation (GCC).

Sometime in the early 1960s, the Commercial Credit Corporation (hereinafter, CCC), a financing and investment firm, decided to organize franchise companies in different parts of the country, wherein it

shall hold thirty percent (30%) equity. Employees of the CCC were designated as resident managers of

the franchise companies. Petitioner Bibiano O. Reynoso, IV was designated as the resident manager of

the franchise company in Quezon City, known as the Commercial Credit Corporation of Quezon City

(hereinafter, CCC-QC).

CCC-QC entered into an exclusive management contract with CCC whereby the latter was granted the

management and full control of the business activities of the former. Under the contract, CCC-QC shall

sell, discount and/or assign its receivables to CCC. Subsequently, however, this discounting arrangement

was discontinued pursuant to the so-called DOSRI Rule, prohibiting the lending of funds by corporations to its directors, officers, stockholders and other persons with related interests therein.

On account of the new restrictions imposed by the Central Bank policy by virtue of the DOSRI Rule,

CCC decided to form CCC Equity Corporation, (hereinafter, CCC-Equity), a wholly-owned subsidiary,

to which CCC transferred its thirty (30%) percent equity in CCC-QC, together with two seats in the

latters Board of Directors.

Under the new set-up, several officials of Commercial Credit Corporation, including petitioner Reynoso,

became employees of CCC-Equity. While petitioner continued to be the Resident Manager of CCC-QC,

he drew his salaries and allowances from CCC-Equity. Furthermore, although an employee of CCC-

Equity, petitioner, as well as all employees of CCC-QC, became qualified members of the Commercial

Credit Corporation Employees Pension Plan.

As Resident Manager of CCC-QC, petitioner oversaw the operations of CCC-QC and supervised its

employees. The business activities of CCC-QC pertain to the acceptance of funds from depositors who

are issued interest-bearing promissory notes. The amounts deposited are then loaned out to various

borrowers. Petitioner, in order to boost the business activities of CCC-QC, deposited his personal funds

in the company. In return, CCC-QC issued to him its interest-bearing promissory notes.

On August 15, 1980, a complaint for sum of money with preliminary attachment,[1]

docketed as Civil

Case No. Q-30583, was instituted in the then Court of First Instance of Rizal by CCC-QC against

petitioner, who had in the meantime been dismissed from his employment by CCC-Equity. The

complaint was subsequently amended in order to include Hidelita Nuval, petitioners wife, as a party defendant.

[2] The complaint alleged that petitioner embezzled the funds of CCC-QC amounting to

P1,300,593.11. Out of this amount, at least P630,000.00 was used for the purchase of a house and lot

located at No. 12 Macopa Street, Valle Verde I, Pasig City. The property was mortgaged to CCC, and

was later foreclosed.

In his amended Answer, petitioner denied having unlawfully used funds of CCC-QC and asserted that the

sum of P1,300,593.11 represented his money placements in CCC-QC, as shown by twenty-three (23)

checks which he issued to the said company.[3]

The case was subsequently transferred to the Regional Trial Court of Quezon City, Branch 86, pursuant to

the Judiciary Reorganization Act of 1980.

On January 14, 1985, the trial court rendered its decision, the decretal portion of which states:

Premises considered, the Court finds the complaint without merit. Accordingly, said complaint is hereby

DISMISSED.

By reason of said complaint, defendant Bibiano Reynoso IV suffered degradation, humiliation and mental

anguish.

On the counterclaim, which the Court finds to be meritorious, plaintiff corporation is hereby ordered:

a) to pay defendant the sum of P185,000.00 plus 14% interest per annum from October 2, 1980 until

fully paid;

b) to pay defendant P3,639,470.82 plus interest thereon at the rate of 14% per annum from June 24,

1981, the date of filing of Amended Answer, until fully paid; from this amount may be deducted the

remaining obligation of defendant under the promissory note of October 24, 1977, in the sum

of P9,738.00 plus penalty at the rate of 1% per month from December 24, 1977 until fully paid;

c) to pay defendants P200,000.00 as moral damages;

d) to pay defendants P100,000.00 as exemplary damages;

e) to pay defendants P25,000.00 as and for attorney's fees; plus costs of the suit.

SO ORDERED.

Both parties appealed to the then Intermediate Appellate Court. The appeal of Commercial Credit

Corporation of Quezon City was dismissed for failure to pay docket fees. Petitioner, on the other hand,

withdrew his appeal.

Hence, the decision became final and, accordingly, a Writ of Execution was issued on July 24,

1989.[4]

However, the judgment remained unsatisfied,[5]

prompting petitioner to file a Motion for Alias

Writ of Execution, Examination of Judgment Debtor, and to Bring Financial Records for Examination to

Court. CCC-QC filed an Opposition to petitioners motion,[6] alleging that the possession of its premises and records had been taken over by CCC.

Meanwhile, in 1983, CCC became known as the General Credit Corporation.

On November 22, 1991, the Regional Trial Court of Quezon City issued an Order directing General

Credit Corporation to file its comment on petitioners motion for alias writ of execution.[7] General Credit Corporation filed a Special Appearance and Opposition on December 2, 1991,

[8]alleging that it was not a

party to the case, and therefore petitioner should direct his claim against CCC-QC and not General Credit

Corporation. Petitioner filed his reply,[9]

stating that the CCC-QC is an adjunct instrumentality, conduit

and agency of CCC. Furthermore, petitioner invoked the decision of the Securities and Exchange

Commission in SEC Case No. 2581, entitled, Avelina G. Ramoso, et al., Petitioner versus General Credit Corp., et al., Respondents, where it was declared that General Credit Corporation, CCC-Equity and other franchised companies including CCC-QC were declared as one corporation.

On December 9, 1991, the Regional Trial Court of Quezon City ordered the issuance of an alias writ of

execution.[10]

On December 20, 1991, General Credit Corporation filed an Omnibus Motion,[11]

alleging

that SEC Case No. 2581 was still pending appeal, and maintaining that the levy on properties of the

General Credit Corporation by the deputy sheriff of the court was erroneous.

In his Opposition to the Omnibus Motion, petitioner insisted that General Credit Corporation is just the

new name of Commercial Credit Corporation; hence, General Credit Corporation and Commercial Credit

Corporation should be treated as one and the same entity.

On February 13, 1992, the Regional Trial Court of Quezon City denied the Omnibus Motion.[12]

On

March 5, 1992, it issued an Order directing the issuance of an alias writ of execution.[13]

Previously, on February 21, 1992, General Credit Corporation instituted a complaint before the Regional

Trial Court of Pasig against Bibiano Reynoso IV and Edgardo C. Tanangco, in his capacity as Deputy

Sheriff of Quezon City,[14]

docketed as Civil Case No. 61777, praying that the levy on its parcel of land

located in Pasig, Metro Manila and covered by Transfer Certificate of Title No. 29940 be declared null

and void, and that defendant sheriff be enjoined from consolidating ownership over the land and from

further levying on other properties of General Credit Corporation to answer for any liability under the

decision in Civil Case No. Q-30583.

The Regional Trial Court of Pasig, Branch 167, did not issue a temporary restraining order. Thus,

General Credit Corporation instituted two (2) petitions for certiorari with the Court of Appeals, docketed

as CA-G.R. SP No. 27518[15]

and CA-G.R. SP No. 27683. These cases were later consolidated.

On July 7, 1994, the Court of Appeals rendered a decision in the two consolidated cases, the dispositive

portion of which reads:

WHEREFORE, in SP No. 27518 we declare the issue of the respondent court's refusal to issue a

restraining order as having been rendered moot by our Resolution of 7 April 1992 which, by way of

injunctive relief, provided that "the respondents and their representatives are hereby enjoined from

conducting an auction sale (on execution) of petitioner's properties as well as initiating similar acts of

levying (upon) and selling on execution other properties of said petitioner". The injunction thus granted,

as modified by the words in parenthesis, shall remain in force until Civil Case No. 61777 shall have been

finally terminated.

In SP No. 27683, we grant the petition for certiorari and accordingly NULLIFY and SET ASIDE, for

having been issued in excess of jurisdiction, the Order of 13 February 1992 in Civil Case No. Q-30583 as

well as any other order or process through which the petitioner is made liable under the judgment in said

Civil Case No. Q-30583.

No damages and no costs.

SO ORDERED.[16]

Hence, this petition for review anchored on the following arguments:

1. THE HONORABLE COURT OF APPEALS ERRED IN CA-G.R. SP NO. 27683 WHEN IT

NULLIFIED AND SET ASIDE THE 13 FEBRUARY 1992 ORDER AND OTHER ORDERS OR

PROCESS OF BRANCH 86 OF THE REGIONAL TRIAL COURT OF QUEZON CITY THROUGH

WHICH GENERAL CREDIT CORPORATION IS MADE LIABLE UNDER THE JUDGMENT THAT

WAS RENDERED IN CIVIL CASE NO. Q-30583.

2. THE HONORABLE COURT OF APPEALS ERRED IN CA-G.R. SP NO. 27518 WHEN IT

ENJOINED THE AUCTION SALE ON EXECUTION OF THE PROPERTIES OF GENERAL CREDIT

CORPORATION AS WELL AS INITIATING SIMILAR ACTS OF LEVYING UPON AND SELLING

ON EXECUTION OF OTHER PROPERTIES OF GENERAL CREDIT CORPORATION.

3. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT GENERAL CREDIT

CORPORATION IS A STRANGER TO CIVIL CASE NO. Q-30583, INSTEAD OF, DECLARING

THAT COMMERCIAL CREDIT CORPORATION OF QUEZON CITY IS THE ALTER EGO,

INSTRUMENTALITY, CONDUIT OR ADJUNCT OF COMMERCIAL CREDIT CORPORATION

AND ITS SUCCESSOR GENERAL CREDIT CORPORATION.

At the outset, it must be stressed that there is no longer any controversy over petitioners claims against his former employer, CCC-QC, inasmuch as the decision in Civil Case No. Q-30583 of the Regional Trial

Court of Quezon City has long become final and executory. The only issue, therefore, to be resolved in

the instant petition is whether or not the judgment in favor of petitioner may be executed against

respondent General Credit Corporation. The latter contends that it is a corporation separate and distinct

from CCC-QC and, therefore, its properties may not be levied upon to satisfy the monetary judgment in

favor of petitioner. In short, respondent raises corporate fiction as its defense. Hence, we are necessarily

called upon to apply the doctrine of piercing the veil of corporate entity in order to determine if General

Credit Corporation, formerly CCC, may be held liable for the obligations of CCC-QC.

The petition is impressed with merit.

A corporation is an artificial being created by operation of law, having the right of succession and the

powers, attributes, and properties expressly authorized by law or incident to its existence.[17]

It is an

artificial being invested by law with a personality separate and distinct from those of the persons

composing it as well as from that of any other legal entity to which it may be related.[18]

It was evolved to

make possible the aggregation and assembling of huge amounts of capital upon which big business

depends. It also has the advantage of non-dependence on the lives of those who compose it even as it

enjoys certain rights and conducts activities of natural persons.

Precisely because the corporation is such a prevalent and dominating factor in the business life of the

country, the law has to look carefully into the exercise of powers by these artificial persons it has created.

Any piercing of the corporate veil has to be done with caution. However, the Court will not hesitate to

use its supervisory and adjudicative powers where the corporate fiction is used as an unfair device to

achieve an inequitable result, defraud creditors, evade contracts and obligations, or to shield it from the

effects of a court decision. The corporate fiction has to be disregarded when necessary in the interest of

justice.

In First Philippine International Bank v. Court of Appeals, et al.,[19]

we held:

When the fiction is urged as a means of perpetrating a fraud or an illegal act or as a vehicle for the

evasion of an existing obligation, the circumvention of statutes, the achievement or perfection of a

monopoly or generally the perpetration of knavery or crime, the veil with which the law covers and

isolates the corporation from the members or stockholders who compose it will be lifted to allow for its

consideration merely as an aggregation of individuals.

Also in the above-cited case, we stated that this Court has pierced the veil of corporate fiction in

numerous cases where it was used, among others, to avoid a judgment credit;[20]

to avoid inclusion of

corporate assets as part of the estate of a decedent;[21]

to avoid liability arising from debt;[22]

when made

use of as a shield to perpetrate fraud and/or confuse legitimate issues;[23]

or to promote unfair objectives

or otherwise to shield them.[24]

In the appealed judgment, the Court of Appeals sustained respondents arguments of separateness and its character as a different corporation which is a non-party or stranger to this case.

The defense of separateness will be disregarded where the business affairs of a subsidiary corporation are

so controlled by the mother corporation to the extent that it becomes an instrument or agent of its

parent. But even when there is dominance over the affairs of the subsidiary, the doctrine of piercing the

veil of corporate fiction applies only when such fiction is used to defeat public convenience, justify

wrong, protect fraud or defend crime.[25]

We stated in Tomas Lao Construction v. National Labor Relations Commission,[26]

that the legal fiction of

a corporation being a judicial entity with a distinct and separate personality was envisaged for

convenience and to serve justice. Therefore, it should not be used as a subterfuge to commit injustice and

circumvent the law.

Precisely for the above reasons, we grant the instant petition.

It is obvious that the use by CCC-QC of the same name of Commercial Credit Corporation was intended

to publicly identify it as a component of the CCC group of companies engaged in one and the same

business, i.e., investment and financing. Aside from CCC-Quezon City, other franchise companies were

organized such as CCC-North Manila and CCC-Cagayan Valley. The organization of subsidiary

corporations as what was done here is usually resorted to for the aggrupation of capital, the ability to

cover more territory and population, the decentralization of activities best decentralized, and the securing

of other legitimate advantages. But when the mother corporation and its subsidiary cease to act in good

faith and honest business judgment, when the corporate device is used by the parent to avoid its liability

for legitimate obligations of the subsidiary, and when the corporate fiction is used to perpetrate fraud or

promote injustice, the law steps in to remedy the problem. When that happens, the corporate character is

not necessarily abrogated. It continues for legitimate objectives. However, it is pierced in order to

remedy injustice, such as that inflicted in this case.

Factually and legally, the CCC had dominant control of the business operations of CCC-QC. The

exclusive management contract insured that CCC-QC would be managed and controlled by CCC and

would not deviate from the commands of the mother corporation. In addition to the exclusive

management contract, CCC appointed its own employee, petitioner, as the resident manager of CCC-QC.

Petitioners designation as resident manager implies that he was placed in CCC-QC by a superior authority. In fact, even after his assignment to the subsidiary corporation, petitioner continued to receive

his salaries, allowances, and benefits from CCC, which later became respondent General Credit

Corporation. Not only that. Petitioner and the other permanent employees of CCC-QC were qualified

members and participants of the Employees Pension Plan of CCC.

There are other indications in the record which attest to the applicability of the identity rule in this case,

namely: the unity of interests, management, and control; the transfer of funds to suit their individual

corporate conveniences; and the dominance of policy and practice by the mother corporation insure that

CCC-QC was an instrumentality or agency of CCC.

As petitioner stresses, both CCC and CCC-QC were engaged in the same principal line of business

involving a single transaction process. Under their discounting arrangements, CCC financed the

operations of CCC-QC. The subsidiary sold, discounted, or assigned its accounts receivables to CCC.

The testimony of Joselito D. Liwanag, accountant and auditor of CCC since 1971, shows the pervasive

and intensive auditing function of CCC over CCC-QC.[27]

The two corporations also shared the same

office space. CCC-QC had no office of its own.

The complaint in Civil Case No. Q-30583, instituted by CCC-QC, was even verified by the director-

representative of CCC. The lawyers who filed the complaint and amended complaint were all in-house

lawyers of CCC.

The challenged decision of the Court of Appeals states that CCC, now General Credit Corporation, is not

a formal party in the case. The reason for this is that the complaint was filed by CCC-QC against

petitioner. The choice of parties was with CCC-QC. The judgment award in this case arose from the

counterclaim which petitioner set up against CCC-QC.

The circumstances which led to the filing of the aforesaid complaint are quite revealing. As narrated

above, the discounting agreements through which CCC controlled the finances of its subordinates became

unlawful when Central Bank adopted the DOSRI prohibitions. Under this rule the directors, officers, and

stockholders are prohibited from borrowing from their company. Instead of adhering to the letter and

spirit of the regulations by avoiding DOSRI loans altogether, CCC used the corporate device to continue

the prohibited practice. CCC organized still another corporation, the CCC-Equity Corporation. However,

as a wholly owned subsidiary, CCC-Equity was in fact only another name for CCC. Key officials of

CCC, including the resident managers of subsidiary corporations, were appointed to positions in CCC-

Equity.

In order to circumvent the Central Banks disapproval of CCC-QCs mode of reducing its DOSRI lender accounts and its directive to follow Central Bank requirements, resident managers, including petitioner,

were told to observe a pseudo-compliance with the phasing out orders. For his unwillingness to

satisfactorily conform to these directives and his reluctance to resort to illegal practices, petitioner earned

the ire of his employers. Eventually, his services were terminated, and criminal and civil cases were filed

against him.

Petitioner issued twenty-three checks as money placements with CCC-QC because of difficulties faced by

the firm in implementing the required phase-out program. Funds from his current account in the Far East

Bank and Trust Company were transferred to CCC-QC. These monies were alleged in the criminal

complaints against him as having been stolen. Complaints for qualified theft and estafa were brought by

CCC-QC against petitioner. These criminal cases were later dismissed. Similarly, the civil complaint

which was filed with the Court of First Instance of Pasig and later transferred to the Regional Trial Court

of Quezon City was dismissed, but his counterclaims were granted.

Faced with the financial obligations which CCC-QC had to satisfy, the mother firm closed CCC-QC, in

obvious fraud of its creditors. CCC-QC, instead of opposing its closure, cooperated in its own

demise. Conveniently, CCC-QC stated in its opposition to the motion for alias writ of execution that all

its properties and assets had been transferred and taken over by CCC.

Under the foregoing circumstances, the contention of respondent General Credit Corporation, the new

name of CCC, that the corporate fiction should be appreciated in its favor is without merit.

Paraphrasing the ruling in Claparols v. Court of Industrial Relations,[28]

reiterated in Concept Builders

Inc. v. National Labor Relations,[29]

it is very obvious that respondent seeks the protective shield of a corporate fiction whose veil the present case could, and should, be pierced as it was deliberately and

maliciously designed to evade its financial obligation of its employees.

If the corporate fiction is sustained, it becomes a handy deception to avoid a judgment debt and work an

injustice. The decision raised to us for review is an invitation to multiplicity of litigation. As we stated

in Islamic Directorate vs. Court of Appeals,[30]

the ends of justice are not served if further litigation is

encouraged when the issue is determinable based on the records.

A court judgment becomes useless and ineffective if the employer, in this case CCC as a mother

corporation, is placed beyond the legal reach of the judgment creditor who, after protracted litigation, has

been found entitled to positive relief. Courts have been organized to put an end to controversy. This

purpose should not be negated by an inapplicable and wrong use of the fiction of the corporate veil.

WHEREFORE, the decision of the Court of Appeals is hereby REVERSED and ASIDE. The injunction

against the holding of an auction sale for the execution of the decision in Civil Case No. Q-30583 of

properties of General Credit Corporation, and the levying upon and selling on execution of other

properties of General Credit Corporation, is LIFTED.

SO ORDERED.

[G.R. No. 129459. September 29, 1998]

SAN JUAN STRUCTURAL AND STEEL FABRICATORS, INC., petitioner, vs. COURT OF

APPEALS, MOTORICH SALES CORPORATION, NENITA LEE GRUENBERG, ACL

DEVELOPMENT CORP. and JNM REALTY AND DEVELOPMENT CORP., respondents.

D E C I S I O N

PANGANIBAN, J.

May a corporate treasurer, by herself and without any authorization from the board of directors, validly

sell a parcel of land owned by the corporation? May the veil of corporate fiction be pierced on the mere

ground that almost all of the shares of stock of the corporation are owned by said treasurer and her

husband?

The Case

These questions are answered in the negative by this Court in resolving the Petition for Review on

Certiorari before us, assailing the March 18, 1997 Decision[1]

of the Court of Appeals[2]

in CA GR CV No.

46801 which, in turn, modified the July 18, 1994 Decision of the Regional Trial Court of Makati, Metro

Manila, Branch 63[3]

in Civil Case No. 89-3511. The RTC dismissed both the Complaint and the

Counterclaim filed by the parties. On the other hand, the Court of Appeals ruled:

WHEREFORE, premises considered, the appealed decision is AFFIRMED WITH MODIFICATION ordering defendant-appellee Nenita Lee Gruenberg to REFUND or return to plaintiff-appellant the

downpayment of P100,000.00 which she received from plaintiff-appellant. There is no pronouncement as

to costs.[4]

The petition also challenges the June 10, 1997 CA Resolution denying reconsideration.[5]

The Facts

The facts as found by the Court of Appeals are as follows:

Plaintiff-appellant San Juan Structural and Steel Fabricators, Inc.s amended complaint alleged that on 14 February 1989, plaintiff-appellant entered into an agreement with defendant-appellee Motorich Sales

Corporation for the transfer to it of a parcel of land identified as Lot 30, Block 1 of the Acropolis Greens

Subdivision located in the District of Murphy, Quezon City, Metro Manila, containing an area of Four

Hundred Fourteen (414) square meters, covered by TCT No. (362909) 2876; that as stipulated in the

Agreement of 14 February 1989, plaintiff-appellant paid the down payment in the sum of One Hundred

Thousand (P100,000.00) Pesos, the balance to be paid on or before March 2, 1989; that on March 1,

1989, Mr. Andres T. Co, president of plaintiff-appellant corporation, wrote a letter to defendant-appellee

Motorich Sales Corporation requesting for a computation of the balance to be paid; that said letter was

coursed through defendant-appellees broker, Linda Aduca, who wrote the computation of the balance; that on March 2, 1989, plaintiff-appellant was ready with the amount corresponding to the balance,

covered by Metrobank Cashiers Check No. 004223, payable to defendant-appellee Motorich Sales Corporation; that plaintiff-appellant and defendant-appellee Motorich Sales Corporation were supposed to

meet in the office of plaintiff-appellant but defendant-appellees treasurer, Nenita Lee Gruenberg, did not appear; that defendant-appellee Motorich Sales Corporation despite repeated demands and in utter

disregard of its commitments had refused to execute the Transfer of Rights/Deed of Assignment which is

necessary to transfer the certificate of title; that defendant ACL Development Corp. is impleaded as a

necessary party since Transfer Certificate of Title No. (362909) 2876 is still in the name of said

defendant; while defendant JNM Realty & Development Corp. is likewise impleaded as a necessary party

in view of the fact that it is the transferor of right in favor of defendant-appellee Motorich Sales

Corporation; that on April 6, 1989, defendant ACL Development Corporation and Motorich Sales

Corporation entered into a Deed of Absolute Sale whereby the former transferred to the latter the subject

property; that by reason of said transfer, the Registry of Deeds of Quezon City issued a new title in the

name of Motorich Sales Corporation, represented by defendant-appellee Nenita Lee Gruenberg and

Reynaldo L. Gruenberg, under Transfer Certificate of Title No. 3571; that as a result of defendants-

appellees Nenita Lee Gruenberg and Motorich Sales Corporations bad faith in refusing to execute a formal Transfer of Rights/Deed of Assignment, plaintiff-appellant suffered moral and nominal damages

which may be assessed against defendants-appellees in the sum of Five Hundred Thousand (500,000.00)

Pesos; that as a result of defendants-appellees Nenita Lee Gruenberg and Motorich Sales Corporations unjustified and unwarranted failure to execute the required Transfer of Rights/Deed of Assignment or

formal deed of sale in favor of plaintiff-appellant, defendants-appellees should be assessed exemplary

damages in the sum of One Hundred Thousand (P100,000.00) Pesos; that by reason of defendants-

appellees bad faith in refusing to execute a Transfer of Rights/Deed of Assignment in favor of plaintiff-appellant, the latter lost the opportunity to construct a residential building in the sum of One Hundred

Thousand (P100,000.00) Pesos; and that as a consequence of defendants-appellees Nenita Lee Gruenberg

and Motorich Sales Corporations bad faith in refusing to execute a deed of sale in favor of plaintiff-

appellant, it has been constrained to obtain the services of counsel at an agreed fee of One Hundred

Thousand (P100,000.00) Pesos plus appearance f