G.R. No. L-23145 November 29, 1968

TESTATE ESTATE OF IDONAH SLADE PERKINS, deceased. RENATO D. TAYAG, ancillary administrator-appellee, vs. BENGUET CONSOLIDATED, INC., oppositor-appellant.

Cirilo F. Asperillo, Jr., for ancillary administrator-appellee. Ross, Salcedo, Del Rosario, Bito and Misa for oppositor-appellant.

FERNANDO, J.:

Confronted by an obstinate and adamant refusal of the domiciliary administrator, the County Trust Company of New York, United States of America, of the estate of the deceased Idonah Slade Perkins, who died in New York City on March 27, 1960, to surrender to the ancillary administrator in the Philippines the stock certificates owned by her in a Philippine corporation, Benguet Consolidated, Inc., to satisfy the legitimate claims of local creditors, the lower court, then presided by the Honorable Arsenio Santos, now retired, issued on May 18, 1964, an order of this tenor: "After considering the motion of the ancillary administrator, dated February 11, 1964, as well as the opposition filed by the Benguet Consolidated, Inc., the Court hereby (1) considers as lost for all purposes in connection with the administration and liquidation of the Philippine estate of Idonah Slade Perkins the stock certificates covering the 33,002 shares of stock standing in her name in the books of the Benguet Consolidated, Inc., (2) orders said certificates cancelled, and (3) directs said corporation to issue new certificates in lieu thereof, the same to be delivered by said corporation to either the incumbent ancillary administrator or to the Probate Division of this Court."1

From such an order, an appeal was taken to this Court not by the domiciliary administrator, the County Trust Company of New York, but by the Philippine corporation, the Benguet Consolidated, Inc. The appeal cannot possibly prosper. The challenged order represents a response and expresses a policy, to paraphrase Frankfurter, arising out of a specific problem, addressed to the attainment of specific ends by the use of specific remedies, with full and ample support from legal doctrines of weight and significance.

The facts will explain why. As set forth in the brief of appellant Benguet Consolidated, Inc., Idonah Slade Perkins, who died on March 27, 1960 in New York City, left among others, two stock certificates covering 33,002 shares of appellant, the certificates being in the possession of the County Trust Company of New York, which as noted, is the domiciliary administrator of the estate of the deceased.2 Then came this portion of the

appellant's brief: "On August 12, 1960, Prospero Sanidad instituted ancillary administration proceedings in the Court of First Instance of Manila; Lazaro A. Marquez was appointed ancillary administrator, and on January 22, 1963, he was substituted by the appellee Renato D. Tayag. A dispute arose between the domiciary administrator in New York and the ancillary administrator in the Philippines as to which of them was entitled to the possession of the stock certificates in question. On January 27, 1964, the Court of First Instance of Manila ordered the domiciliary administrator, County Trust Company, to "produce and deposit" them with the ancillary administrator or with the Clerk of Court. The domiciliary administrator did not comply with the order, and on February 11, 1964, the ancillary administrator petitioned the court to "issue an order declaring the certificate or certificates of stocks covering the 33,002 shares issued in the name of Idonah Slade Perkins by Benguet Consolidated, Inc., be declared [or] considered as lost."3

It is to be noted further that appellant Benguet Consolidated, Inc. admits that "it is immaterial" as far as it is concerned as to "who is entitled to the possession of the stock certificates in question; appellant opposed the petition of the ancillary administrator because the said stock certificates are in existence, they are today in the possession of the domiciliary administrator, the County Trust Company, in New York, U.S.A...."4

It is its view, therefore, that under the circumstances, the stock certificates cannot be declared or considered as lost. Moreover, it would allege that there was a failure to observe certain requirements of its by-laws before new stock certificates could be issued. Hence, its appeal.

As was made clear at the outset of this opinion, the appeal lacks merit. The challenged order constitutes an emphatic affirmation of judicial authority sought to be emasculated by the wilful conduct of the domiciliary administrator in refusing to accord obedience to a court decree. How, then, can this order be stigmatized as illegal?

As is true of many problems confronting the judiciary, such a response was called for by the realities of the situation. What cannot be ignored is that conduct bordering on wilful defiance, if it had not actually reached it, cannot without undue loss of judicial prestige, be condoned or tolerated. For the law is not so lacking in flexibility and resourcefulness as to preclude such a solution, the more so as deeper reflection would make clear its being buttressed by indisputable principles and supported by the strongest policy considerations.

It can truly be said then that the result arrived at upheld and vindicated the honor of the judiciary no less than that of the country. Through this challenged order, there is thus dispelled the atmosphere of contingent frustration brought about by the persistence of

the domiciliary administrator to hold on to the stock certificates after it had, as admitted, voluntarily submitted itself to the jurisdiction of the lower court by entering its appearance through counsel on June 27, 1963, and filing a petition for relief from a previous order of March 15, 1963.

Thus did the lower court, in the order now on appeal, impart vitality and effectiveness to what was decreed. For without it, what it had been decided would be set at naught and nullified. Unless such a blatant disregard by the domiciliary administrator, with residence abroad, of what was previously ordained by a court order could be thus remedied, it would have entailed, insofar as this matter was concerned, not a partial but a well-nigh complete paralysis of judicial authority.

1. Appellant Benguet Consolidated, Inc. did not dispute the power of the appellee ancillary administrator to gain control and possession of all assets of the decedent within the jurisdiction of the Philippines. Nor could it. Such a power is inherent in his duty to settle her estate and satisfy the claims of local creditors.5 As Justice Tuason speaking for this Court made clear, it is a "general rule universally recognized" that administration, whether principal or ancillary, certainly "extends to the assets of a decedent found within the state or country where it was granted," the corollary being "that an administrator appointed in one state or country has no power over property in another state or country."6

It is to be noted that the scope of the power of the ancillary administrator was, in an earlier case, set forth by Justice Malcolm. Thus: "It is often necessary to have more than one administration of an estate. When a person dies intestate owning property in the country of his domicile as well as in a foreign country, administration is had in both countries. That which is granted in the jurisdiction of decedent's last domicile is termed the principal administration, while any other administration is termed the ancillary administration. The reason for the latter is because a grant of administration does not ex proprio vigore have any effect beyond the limits of the country in which it is granted. Hence, an administrator appointed in a foreign state has no authority in the [Philippines]. The ancillary administration is proper, whenever a person dies, leaving in a country other than that of his last domicile, property to be administered in the nature of assets of the deceased liable for his individual debts or to be distributed among his heirs."7

It would follow then that the authority of the probate court to require that ancillary administrator's right to "the stock certificates covering the 33,002 shares ... standing in her name in the books of [appellant] Benguet Consolidated, Inc...." be respected is equally beyond question. For appellant is a Philippine corporation owing full allegiance

and subject to the unrestricted jurisdiction of local courts. Its shares of stock cannot therefore be considered in any wise as immune from lawful court orders.

Our holding in Wells Fargo Bank and Union v. Collector of Internal Revenue8 finds application. "In the instant case, the actual situs of the shares of stock is in the Philippines, the corporation being domiciled [here]." To the force of the above undeniable proposition, not even appellant is insensible. It does not dispute it. Nor could it successfully do so even if it were so minded.

2. In the face of such incontrovertible doctrines that argue in a rather conclusive fashion for the legality of the challenged order, how does appellant, Benguet Consolidated, Inc. propose to carry the extremely heavy burden of persuasion of precisely demonstrating the contrary? It would assign as the basic error allegedly committed by the lower court its "considering as lost the stock certificates covering 33,002 shares of Benguet belonging to the deceased Idonah Slade Perkins, ..."9 More specifically, appellant would stress that the "lower court could not "consider as lost" the stock certificates in question when, as a matter of fact, his Honor the trial Judge knew, and does know, and it is admitted by the appellee, that the said stock certificates are in existence and are today in the possession of the domiciliary administrator in New York."10

There may be an element of fiction in the above view of the lower court. That certainly does not suffice to call for the reversal of the appealed order. Since there is a refusal, persistently adhered to by the domiciliary administrator in New York, to deliver the shares of stocks of appellant corporation owned by the decedent to the ancillary administrator in the Philippines, there was nothing unreasonable or arbitrary in considering them as lost and requiring the appellant to issue new certificates in lieu thereof. Thereby, the task incumbent under the law on the ancillary administrator could be discharged and his responsibility fulfilled.

Any other view would result in the compliance to a valid judicial order being made to depend on the uncontrolled discretion of the party or entity, in this case domiciled abroad, which thus far has shown the utmost persistence in refusing to yield obedience. Certainly, appellant would not be heard to contend in all seriousness that a judicial decree could be treated as a mere scrap of paper, the court issuing it being powerless to remedy its flagrant disregard.

It may be admitted of course that such alleged loss as found by the lower court did not correspond exactly with the facts. To be more blunt, the quality of truth may be lacking in such a conclusion arrived at. It is to be remembered however, again to borrow from Frankfurter, "that fictions which the law may rely upon in the pursuit of legitimate ends have played an important part in its development."11

Speaking of the common law in its earlier period, Cardozo could state fictions "were devices to advance the ends of justice, [even if] clumsy and at times offensive."12 Some of them have persisted even to the present, that eminent jurist, noting "the quasi contract, the adopted child, the constructive trust, all of flourishing vitality, to attest the empire of "as if" today."13 He likewise noted "a class of fictions of another order, the fiction which is a working tool of thought, but which at times hides itself from view till reflection and analysis have brought it to the light."14

What cannot be disputed, therefore, is the at times indispensable role that fictions as such played in the law. There should be then on the part of the appellant a further refinement in the catholicity of its condemnation of such judicial technique. If ever an occasion did call for the employment of a legal fiction to put an end to the anomalous situation of a valid judicial order being disregarded with apparent impunity, this is it. What is thus most obvious is that this particular alleged error does not carry persuasion.

3. Appellant Benguet Consolidated, Inc. would seek to bolster the above contention by its invoking one of the provisions of its by-laws which would set forth the procedure to be followed in case of a lost, stolen or destroyed stock certificate; it would stress that in the event of a contest or the pendency of an action regarding ownership of such certificate or certificates of stock allegedly lost, stolen or destroyed, the issuance of a new certificate or certificates would await the "final decision by [a] court regarding the ownership [thereof]."15

Such reliance is misplaced. In the first place, there is no such occasion to apply such by-law. It is admitted that the foreign domiciliary administrator did not appeal from the order now in question. Moreover, there is likewise the express admission of appellant that as far as it is concerned, "it is immaterial ... who is entitled to the possession of the stock certificates ..." Even if such were not the case, it would be a legal absurdity to impart to such a provision conclusiveness and finality. Assuming that a contrariety exists between the above by-law and the command of a court decree, the latter is to be followed.

It is understandable, as Cardozo pointed out, that the Constitution overrides a statute, to which, however, the judiciary must yield deference, when appropriately invoked and deemed applicable. It would be most highly unorthodox, however, if a corporate by-law would be accorded such a high estate in the jural order that a court must not only take note of it but yield to its alleged controlling force.

The fear of appellant of a contingent liability with which it could be saddled unless the appealed order be set aside for its inconsistency with one of its by-laws does not impress us. Its obedience to a lawful court order certainly constitutes a valid defense,

assuming that such apprehension of a possible court action against it could possibly materialize. Thus far, nothing in the circumstances as they have developed gives substance to such a fear. Gossamer possibilities of a future prejudice to appellant do not suffice to nullify the lawful exercise of judicial authority.

4. What is more the view adopted by appellant Benguet Consolidated, Inc. is fraught with implications at war with the basic postulates of corporate theory.

We start with the undeniable premise that, "a corporation is an artificial being created by operation of law...."16 It owes its life to the state, its birth being purely dependent on its will. As Berle so aptly stated: "Classically, a corporation was conceived as an artificial person, owing its existence through creation by a sovereign power."17As a matter of fact, the statutory language employed owes much to Chief Justice Marshall, who in the Dartmouth College decision defined a corporation precisely as "an artificial being, invisible, intangible, and existing only in contemplation of law."18

The well-known authority Fletcher could summarize the matter thus: "A corporation is not in fact and in reality a person, but the law treats it as though it were a person by process of fiction, or by regarding it as an artificial person distinct and separate from its individual stockholders.... It owes its existence to law. It is an artificial person created by law for certain specific purposes, the extent of whose existence, powers and liberties is fixed by its charter."19 Dean Pound's terse summary, a juristic person, resulting from an association of human beings granted legal personality by the state, puts the matter neatly.20

There is thus a rejection of Gierke's genossenchaft theory, the basic theme of which to quote from Friedmann, "is the reality of the group as a social and legal entity, independent of state recognition and concession."21 A corporation as known to Philippine jurisprudence is a creature without any existence until it has received the imprimatur of the state according to law. It is logically inconceivable therefore that it will have rights and privileges of a higher priority than that of its creator. More than that, it cannot legitimately refuse to yield obedience to acts of its state organs, certainly not excluding the judiciary, whenever called upon to do so.

As a matter of fact, a corporation once it comes into being, following American law still of persuasive authority in our jurisdiction, comes more often within the ken of the judiciary than the other two coordinate branches. It institutes the appropriate court action to enforce its right. Correlatively, it is not immune from judicial control in those instances, where a duty under the law as ascertained in an appropriate legal proceeding is cast upon it.

To assert that it can choose which court order to follow and which to disregard is to confer upon it not autonomy which may be conceded but license which cannot be tolerated. It is to argue that it may, when so minded, overrule the state, the source of its very existence; it is to contend that what any of its governmental organs may lawfully require could be ignored at will. So extravagant a claim cannot possibly merit approval.

5. One last point. In Viloria v. Administrator of Veterans Affairs,22 it was shown that in a guardianship proceedings then pending in a lower court, the United States Veterans Administration filed a motion for the refund of a certain sum of money paid to the minor under guardianship, alleging that the lower court had previously granted its petition to consider the deceased father as not entitled to guerilla benefits according to a determination arrived at by its main office in the United States. The motion was denied. In seeking a reconsideration of such order, the Administrator relied on an American federal statute making his decisions "final and conclusive on all questions of law or fact" precluding any other American official to examine the matter anew, "except a judge or judges of the United States court."23 Reconsideration was denied, and the Administrator appealed.

In an opinion by Justice J.B.L. Reyes, we sustained the lower court. Thus: "We are of the opinion that the appeal should be rejected. The provisions of the U.S. Code, invoked by the appellant, make the decisions of the U.S. Veterans' Administrator final and conclusive when made on claims property submitted to him for resolution; but they are not applicable to the present case, where the Administrator is not acting as a judge but as a litigant. There is a great difference between actions against the Administrator (which must be filed strictly in accordance with the conditions that are imposed by the Veterans' Act, including the exclusive review by United States courts), and those actions where the Veterans' Administrator seeks a remedy from our courts and submits to their jurisdiction by filing actions therein. Our attention has not been called to any law or treaty that would make the findings of the Veterans' Administrator, in actions where he is a party, conclusive on our courts. That, in effect, would deprive our tribunals of judicial discretion and render them mere subordinate instrumentalities of the Veterans' Administrator."

It is bad enough as the Viloria decision made patent for our judiciary to accept as final and conclusive, determinations made by foreign governmental agencies. It is infinitely worse if through the absence of any coercive power by our courts over juridical persons within our jurisdiction, the force and effectivity of their orders could be made to depend on the whim or caprice of alien entities. It is difficult to imagine of a situation more offensive to the dignity of the bench or the honor of the country.

Yet that would be the effect, even if unintended, of the proposition to which appellant Benguet Consolidated seems to be firmly committed as shown by its failure to accept the validity of the order complained of; it seeks its reversal. Certainly we must at all pains see to it that it does not succeed. The deplorable consequences attendant on appellant prevailing attest to the necessity of negative response from us. That is what appellant will get.

That is all then that this case presents. It is obvious why the appeal cannot succeed. It is always easy to conjure extreme and even oppressive possibilities. That is not decisive. It does not settle the issue. What carries weight and conviction is the result arrived at, the just solution obtained, grounded in the soundest of legal doctrines and distinguished by its correspondence with what a sense of realism requires. For through the appealed order, the imperative requirement of justice according to law is satisfied and national dignity and honor maintained.

WHEREFORE, the appealed order of the Honorable Arsenio Santos, the Judge of the Court of First Instance, dated May 18, 1964, is affirmed. With costs against oppositor-appelant Benguet Consolidated, Inc.

ANTONIA TORRES, assisted by her husband, ANGELO TORRES; and EMETERIA BARING, petitioners, vs. COURT OF APPEALS and MANUEL TORRES,respondents.

D E C I S I O N

PANGANIBAN, J.:

Courts may not extricate parties from the necessary consequences of their acts. That the terms of a contract turn out to be financially disadvantageous to them will not relieve them of their obligations therein. The lack of an inventory of real property will not ipso facto release the contracting partners from their respective obligations to each other arising from acts executed in accordance with their agreement.

The Case

The Petition for Review on Certiorari before us assails the March 5, 1998 Decision[1] Second Division of the Court of Appeals[2] (CA) in CA-GR CV No. 42378 and its June 25, 1998 Resolution denying reconsideration. The assailed Decision affirmed the ruling of the Regional Trial Court (RTC) of Cebu City in Civil Case No. R-21208, which disposed as follows:

WHEREFORE, for all the foregoing considerations, the Court, finding for the defendant and against the plaintiffs, orders the dismissal of the plaintiffs complaint. The counterclaims of the defendant are likewise ordered dismissed. No pronouncement as to costs.[3]

The Facts

Sisters Antonia Torres and Emeteria Baring, herein petitioners, entered into a "joint venture agreement" with Respondent Manuel Torres for the development of a parcel of land into a subdivision. Pursuant to the contract, they executed a Deed of Sale covering the said parcel of land in favor of respondent, who then had it registered in his name. By mortgaging the property, respondent obtained from Equitable Bank a loan ofP40,000 which, under the Joint Venture Agreement, was to be used for the development of the subdivision.[4] All three of them also agreed to share the proceeds from the sale of the subdivided lots.

The project did not push through, and the land was subsequently foreclosed by the bank.

According to petitioners, the project failed because of respondents lack of funds or means and skills. They add that respondent used the loan not for the development of the subdivision, but in furtherance of his own company, Universal Umbrella Company.

On the other hand, respondent alleged that he used the loan to implement the Agreement. With the said amount, he was able to effect the survey and the subdivision of the lots. He secured the Lapu Lapu City Councils approval of the subdivision project which he advertised in a local newspaper. He also caused the construction of roads, curbs and gutters. Likewise, he entered into a contract with an engineering firm for the building of sixty low-cost housing units and actually even set up a model house on one of the subdivision lots. He did all of these for a total expense of P85,000.

Respondent claimed that the subdivision project failed, however, because petitioners and their relatives had separately caused the annotations of adverse claims on the title to the land, which eventually scared away prospective buyers. Despite his

requests, petitioners refused to cause the clearing of the claims, thereby forcing him to give up on the project.[5]

Subsequently, petitioners filed a criminal case for estafa against respondent and his wife, who were however acquitted. Thereafter, they filed the present civil case which, upon respondent's motion, was later dismissed by the trial court in an Order dated September 6, 1982. On appeal, however, the appellate court remanded the case for further proceedings. Thereafter, the RTC issued its assailed Decision, which, as earlier stated, was affirmed by the CA.

Hence, this Petition.[6]

Ruling of the Court of Appeals

In affirming the trial court, the Court of Appeals held that petitioners and respondent had formed a partnership for the development of the subdivision. Thus, they must bear the loss suffered by the partnership in the same proportion as their share in the profits stipulated in the contract. Disagreeing with the trial courts pronouncement that losses as well as profits in a joint venture should be distributed equally,[7] the CA invoked Article 1797 of the Civil Code which provides:

Article 1797 - The losses and profits shall be distributed in conformity with the agreement. If only the share of each partner in the profits has been agreed upon, the share of each in the losses shall be in the same proportion.

The CA elucidated further:

In the absence of stipulation, the share of each partner in the profits and losses shall be in proportion to what he may have contributed, but the industrial partner shall not be liable for the losses. As for the profits, the industrial partner shall receive such share as may be just and equitable under the circumstances. If besides his services he has contributed capital, he shall also receive a share in the profits in proportion to his capital.

The Issue

Petitioners impute to the Court of Appeals the following error:

x x x [The] Court of Appeals erred in concluding that the transaction x x x between the petitioners and respondent was that of a joint venture/partnership, ignoring outright

the provision of Article 1769, and other related provisions of the Civil Code of the Philippines.[8]

The Courts Ruling

The Petition is bereft of merit.

Main Issue: Existence of a Partnership

Petitioners deny having formed a partnership with respondent. They contend that the Joint Venture Agreement and the earlier Deed of Sale, both of which were the bases of the appellate courts finding of a partnership, were void.

In the same breath, however, they assert that under those very same contracts, respondent is liable for his failure to implement the project. Because the agreement entitled them to receive 60 percent of the proceeds from the sale of the subdivision lots, they pray that respondent pay them damages equivalent to 60 percent of the value of the property.[9]

The pertinent portions of the Joint Venture Agreement read as follows:

KNOW ALL MEN BY THESE PRESENTS:

This AGREEMENT, is made and entered into at Cebu City, Philippines, this 5th day of March, 1969, by and between MR. MANUEL R. TORRES, x x x the FIRST PARTY, likewise, MRS. ANTONIA B. TORRES, and MISS EMETERIA BARING, x x x the SECOND PARTY:

W I T N E S S E T H:

That, whereas, the SECOND PARTY, voluntarily offered the FIRST PARTY, this property located at Lapu-Lapu City, Island of Mactan, under Lot No. 1368 covering TCT No. T-0184 with a total area of 17,009 square meters, to be sub-divided by the FIRST PARTY;

Whereas, the FIRST PARTY had given the SECOND PARTY, the sum of: TWENTY THOUSAND (P20,000.00) Pesos, Philippine Currency, upon the execution of this contract for the property entrusted by the SECOND PARTY, for sub-division projects and development purposes;

NOW THEREFORE, for and in consideration of the above covenants and promises herein contained the respective parties hereto do hereby stipulate and agree as follows:

ONE: That the SECOND PARTY signed an absolute Deed of Sale x x x dated March 5, 1969, in the amount of TWENTY FIVE THOUSAND FIVE HUNDRED THIRTEEN & FIFTY CTVS. (P25,513.50) Philippine Currency, for 1,700 square meters at ONE [PESO] & FIFTY CTVS. (P1.50) Philippine Currency, in favor of the FIRST PARTY, but the SECOND PARTY did not actually receive the payment.

SECOND: That the SECOND PARTY, had received from the FIRST PARTY, the necessary amount of TWENTY THOUSAND (P20,000.00) pesos, Philippine currency, for their personal obligations and this particular amount will serve as an advance payment from the FIRST PARTY for the property mentioned to be sub-divided and to be deducted from the sales.

THIRD: That the FIRST PARTY, will not collect from the SECOND PARTY, the interest and the principal amount involving the amount of TWENTY THOUSAND (P20,000.00) Pesos, Philippine Currency, until the sub-division project is terminated and ready for sale to any interested parties, and the amount of TWENTY THOUSAND (P20,000.00) pesos, Philippine currency, will be deducted accordingly.

FOURTH: That all general expense[s] and all cost[s] involved in the sub-division project should be paid by the FIRST PARTY, exclusively and all the expenses will not be deducted from the sales after the development of the sub-division project.

FIFTH: That the sales of the sub-divided lots will be divided into SIXTY PERCENTUM 60% for the SECOND PARTY and FORTY PERCENTUM 40% for the FIRST PARTY, and additional profits or whatever income deriving from the sales will be divided equally according to the x x x percentage [agreed upon] by both parties.

SIXTH: That the intended sub-division project of the property involved will start the work and all improvements upon the adjacent lots will be negotiated in both parties['] favor and all sales shall [be] decided by both parties.

SEVENTH: That the SECOND PARTIES, should be given an option to get back the property mentioned provided the amount of TWENTY THOUSAND (P20,000.00) Pesos, Philippine Currency, borrowed by the SECOND PARTY, will be paid in full to the FIRST PARTY, including all necessary improvements spent by the FIRST PARTY, and the FIRST PARTY will be given a grace period to turnover the property mentioned above.

That this AGREEMENT shall be binding and obligatory to the parties who executed same freely and voluntarily for the uses and purposes therein stated.[10]

A reading of the terms embodied in the Agreement indubitably shows the existence of a partnership pursuant to Article 1767 of the Civil Code, which provides:

ART. 1767. By the contract of partnership two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves.

Under the above-quoted Agreement, petitioners would contribute property to the partnership in the form of land which was to be developed into a subdivision; while respondent would give, in addition to his industry, the amount needed for general expenses and other costs. Furthermore, the income from the said project would be divided according to the stipulated percentage. Clearly, the contract manifested the intention of the parties to form a partnership.[11]

It should be stressed that the parties implemented the contract. Thus, petitioners transferred the title to the land to facilitate its use in the name of the respondent. On the other hand, respondent caused the subject land to be mortgaged, the proceeds of which were used for the survey and the subdivision of the land. As noted earlier, he developed the roads, the curbs and the gutters of the subdivision and entered into a contract to construct low-cost housing units on the property.

Respondents actions clearly belie petitioners contention that he made no contribution to the partnership. Under Article 1767 of the Civil Code, a partner may contribute not only money or property, but also industry.

Petitioners Bound by Terms of Contract

Under Article 1315 of the Civil Code, contracts bind the parties not only to what has been expressly stipulated, but also to all necessary consequences thereof, as follows:

ART. 1315. Contracts are perfected by mere consent, and from that moment the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all the consequences which, according to their nature, may be in keeping with good faith, usage and law.

It is undisputed that petitioners are educated and are thus presumed to have understood the terms of the contract they voluntarily signed. If it was not in consonance with their expectations, they should have objected to it and insisted on the provisions they wanted.

Courts are not authorized to extricate parties from the necessary consequences of their acts, and the fact that the contractual stipulations may turn out to be financially disadvantageous will not relieve parties thereto of their obligations. They cannot now disavow the relationship formed from such agreement due to their supposed misunderstanding of its terms.

Alleged Nullity of the Partnership Agreement

Petitioners argue that the Joint Venture Agreement is void under Article 1773 of the Civil Code, which provides:

ART. 1773. A contract of partnership is void, whenever immovable property is contributed thereto, if an inventory of said property is not made, signed by the parties, and attached to the public instrument.

They contend that since the parties did not make, sign or attach to the public instrument an inventory of the real property contributed, the partnership is void.

We clarify. First, Article 1773 was intended primarily to protect third persons. Thus, the eminent Arturo M. Tolentino states that under the aforecited provision which is a complement of Article 1771,[12] the execution of a public instrument would be useless if there is no inventory of the property contributed, because without its designation and description, they cannot be subject to inscription in the Registry of Property, and their contribution cannot prejudice third persons. This will result in fraud to those who contract with the partnership in the belief [in] the efficacy of the guaranty in which the immovables may consist. Thus, the contract is declared void by the law when no such inventory is made. The case at bar does not involve third parties who may be prejudiced.

Second, petitioners themselves invoke the allegedly void contract as basis for their claim that respondent should pay them 60 percent of the value of the property.[13] They cannot in one breath deny the contract and in another recognize it, depending on what momentarily suits their purpose. Parties cannot adopt inconsistent positions in regard to a contract and courts will not tolerate, much less approve, such practice.

In short, the alleged nullity of the partnership will not prevent courts from considering the Joint Venture Agreement an ordinary contract from which the parties rights and obligations to each other may be inferred and enforced.

Partnership Agreement Not the Result of an Earlier Illegal Contract

Petitioners also contend that the Joint Venture Agreement is void under Article 1422[14] of the Civil Code, because it is the direct result of an earlier illegal contract, which was for the sale of the land without valid consideration.

This argument is puerile. The Joint Venture Agreement clearly states that the consideration for the sale was the expectation of profits from the subdivision project. Its first stipulation states that petitioners did not actually receive payment for the parcel of land sold to respondent. Consideration, more properly denominated as cause, can take different forms, such as the prestation or promise of a thing or service by another.[15]

In this case, the cause of the contract of sale consisted not in the stated peso value of the land, but in the expectation of profits from the subdivision project, for which the land was intended to be used. As explained by the trial court, the land was in effect given to the partnership as [petitioners] participation therein. x x x There was therefore a consideration for the sale, the [petitioners] acting in the expectation that, should the venture come into fruition, they [would] get sixty percent of the net profits.

Liability of the Parties

Claiming that respondent was solely responsible for the failure of the subdivision project, petitioners maintain that he should be made to pay damages equivalent to 60 percent of the value of the property, which was their share in the profits under the Joint Venture Agreement.

We are not persuaded. True, the Court of Appeals held that petitioners acts were not the cause of the failure of the project.[16] But it also ruled that neither was respondent responsible therefor.[17] In imputing the blame solely to him, petitioners failed to give any reason why we should disregard the factual findings of the appellate court relieving him of fault. Verily, factual issues cannot be resolved in a petition for review under Rule 45, as in this case. Petitioners have not alleged, not to say shown, that their Petition constitutes one of the exceptions to this doctrine.[18] Accordingly, we find no reversible error in the CA's ruling that petitioners are not entitled to damages.

WHEREFORE, the Petition is hereby DENIED and the challenged Decision AFFIRMED. Costs against petitioners.

SO ORDERED.

PHILIPPINE STOCK EXCHANGE, INC., petitioner, vs. THE HONORABLE COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION and PUERTO AZUL LAND, INC., respondents.

D E C I S I O N

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 or 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 of 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 PALIs 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 PALIs application, recommended to the PSEs Board of Governors the approval of PALIs listing application.

On February 14, 1996, before it could act upon PALIs application, the Board of Governors of 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 PALIs application to be deferred. PALI was requested to comment upon the said letter.

PALIs answer stated that the properties forming part of 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 letter 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 PALIs application, citing the existence of serious claims, issues and circumstances surrounding PALIs ownership over its assets that adversely affect the suitability of listing PALIs 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 SECs 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 PSEs action on PALIs listing application and institute such measures as are just and proper and 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 PSEs decision. The dispositive portion of the said order reads:

WHEREFORE, premises considered, and invoking the Commissioners authority and jurisdiction under Section 3 of the Revised Securities Act, in conjunction with Section 3, 6(j) and 6(m) of the 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 investing 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 consider 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 PALIS 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 filed its Reply to Comment and Opposition to Motion to Dismiss.

On June 27, 1996, the Court of Appeals promulgated its Resolution dismissing the PSEs 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 respondents 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 SECs ruling to the effect that:

x x x 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 that were allowed listing in the Exchange;

3. It appears that the claims and issues on the title to PALIs 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 PALIs ownership over the disputed properties, neither has the government instituted recovery proceedings against these properties. Yet the import of PSEs decision in denying PALIs 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 PALIs 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, 1996, the PSE, after it was granted an extension, filed an 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 PCGGs 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 PCGGs 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 countrys 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 PALIs listing application, absent a showing a bad faith on the part of the PSE. Under the listing rule 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 issuers 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. Sandiganbayan, 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 the subject of forfeiture proceedings in the Sandiganbayan. This ruling of the Court is the law of the case between the Republic and the 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, intimidated that the Court of Appeals sanction that PALIs 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 SECs and the Court of Appeals reliance on the alleged policy of full disclosure to uphold the listing of the PALIs 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, PALIs documents supporting its application contained misrepresentations and misleading statements, and concealed material information. The matter of sequestration of PALIs properties and the fact that the same form part of military/naval/forest reservations were not reflected in PALIs application.

It is undeniable that the petitioner PSE is not an ordinary corporation, in that although it is clothed with the marking of a corporate entity, its functions as the primary channel through which the vessels of capital trade ply. The PSEs 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 necessary. 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 countrys economy.

Due to this special nature of stock exchanges, the countrys 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 safeguarded.

Section 3 of Presidential Decree 902-A, standing alone, is enough authority to uphold the SECs 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 SECs regulatory authority over private corporations encompasses a wide margin of areas, touching nearly all of a corporations concerns. This authority springs from the fact that a corporation owes its existence to the concession of its corporate franchise from the state.

The SECs 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 SECs 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 pursued 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 SECs 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 SECs 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 petitioners 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 PSEs management prerogatives are under the absolute control of the SEC. The PSE is, after all, a corporation authorized by its corporate franchise to engage in its proposed and duly approved business. One of the PSEs 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 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 PSEs decision in matters of application for listing in the market, the SEC may exercise such power only if the PSEs 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 form crooked promoters and to prevent fraud in the sale of securities. (Tenth Annual Report, U.S. Securities and 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 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. x x x. 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 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 in 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 the 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 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 may 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 PALIs 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 corporate 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 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 facts 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 is 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) had been engaged or is engaged or is about to engaged in fraudulent transactions;

(v) is in any was dishonest of 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 or 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 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 to the public interest or as a fraud upon the purchaser 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 interest 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. At 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 my mere administrative issuance.

In resum, 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 Exchage 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.

ENGR. RANULFO C. FELICIANO, in his capacity as General Manager of the Leyte Metropolitan Water District (LMWD), Tacloban City, petitioner, vs. COMMISSION ON AUDIT, Chairman CELSO D. GANGAN, Commissioners RAUL C. FLORES and EMMANUEL M. DALMAN, and Regional Director of COA Region VIII, respondents.

D E C I S I O N

CARPIO, J.:

The Case

This is a petition for certiorari[1] to annul the Commission on Audits (COA) Resolution dated 3 January 2000 and the Decision dated 30 January 2001 denying the Motion for Reconsideration. The COA denied petitioner Ranulfo C. Felicianos request for COA to cease all audit services, and to stop charging auditing fees, to Leyte Metropolitan Water District (LMWD). The COA also denied petitioners request for COA to refund all auditing fees previously paid by LMWD.

Antecedent Facts

A Special Audit Team from COA Regional Office No. VIII audited the accounts of LMWD. Subsequently, LMWD received a letter from COA dated 19 July 1999 requesting payment of auditing fees. As General Manager of LMWD, petitioner sent a reply dated 12 October 1999 informing COAs Regional Director that the water district could not pay the auditing fees. Petitioner cited as basis for his action Sections 6 and 20 of Presidential Decree 198 (PD 198)[2], as well as Section 18 of Republic Act No. 6758 (RA 6758). The Regional Director referred petitioners reply to the COA Chairman on 18 October 1999.

On 19 October 1999, petitioner wrote COA through the Regional Director asking for refund of all auditing fees LMWD previously paid to COA.

On 16 March 2000, petitioner received COA Chairman Celso D. Gangans Resolution dated 3 January 2000 denying his requests. Petitioner filed a motion for reconsideration on 31 March 2000, which COA denied on 30 January 2001.

On 13 March 2001, petitioner filed this instant petition. Attached to the petition were resolutions of the Visayas Association of Water Districts (VAWD) and the Philippine Association of Water Districts (PAWD) supporting the petition.

The Ruling of the Commission on Audit

The COA ruled that this Court has already settled COAs audit jurisdiction over local water districts in Davao City Water District v. Civil Service Commission and Commission on Audit,[3] as follows:

The above-quoted provision [referring to Section 3(b) PD 198] definitely sets to naught petitioners contention that they are private corporations. It is clear therefrom that the power to appoint the members who will comprise the members of the Board of Directors belong to the local executives of the local subdivision unit where such districts are located. In contrast, the members of the Board of Directors or the trustees of a private corporation are elected from among members or stockholders thereof. It would not be amiss at this point to emphasize that a private corporation is created for the private purpose, benefit, aim and end of its members or stockholders. Necessarily, said members or stockholders should be given a free hand to choose who will compose the governing body of their corporation. But this is not the case here and this clearly indicates that petitioners are not private corporations.

The COA also denied petitioners request for COA to stop charging auditing fees as well as petitioners request for COA to refund all auditing fees already paid.

The Issues

Petitioner contends that COA committed grave abuse of discretion amounting to lack or excess of jurisdiction by auditing LMWD and requiring it to pay auditing fees. Petitioner raises the following issues for resolution:

1. Whether a Local Water District (LWD) created under PD 198, as amended, is a government-owned or controlled corporation subject to the audit jurisdiction of COA;

2. Whether Section 20 of PD 198, as amended, prohibits COAs certified public accountants from auditing local water districts; and

3. Whether Section 18 of RA 6758 prohibits the COA from charging government-owned and controlled corporations auditing fees.

The Ruling of the Court

The petition lacks merit.

The Constitution and existing laws[4] mandate COA to audit all government agencies, including government-owned and controlled corporations (GOCCs) with original charters. An LWD is a GOCC with an original charter. Section 2(1), Article IX-D of the Constitution provides for COAs audit jurisdiction, as follows:

SECTION 2. (1) The Commission on Audit shall have the power, authority and duty to examine, audit, and settle all accounts pertaining to the revenue and receipts of, and expenditures or uses of funds and property, owned or held in trust by, or pertaining to, the Government, or any of its subdivisions, agencies, or instrumentalities, including government-owned and controlled corporations with original charters, and on a post-audit basis: (a) constitutional bodies, commissions and offices that have been granted fiscal autonomy under this Constitution; (b) autonomous state colleges and universities; (c) other government-owned or controlled corporations and their subsidiaries; and (d) such non-governmental entities receiving subsidy or equity, directly or indirectly, from or through the government, which are required by law or the granting institution to submit to such audit as a condition of subsidy or equity. However, where the internal control system of the audited agencies is inadequate, the Commission may adopt such measures, including temporary or special pre-audit, as are necessary and appropriate to correct the deficiencies. It shall keep the general accounts of the Government and, for

such period as may be provided by law, preserve the vouchers and other supporting papers pertaining thereto. (Emphasis supplied)

The COAs audit jurisdiction extends not only to government agencies or instrumentalities, but also to government-owned and controlled corporations with original charters as well as other government-owned or controlled corporations without original charters.

Whether LWDs are Private or Government-Owned and Controlled Corporations with Original Charters

Petitioner seeks to revive a well-settled issue. Petitioner asks for a re-examination of a doctrine backed by a long line of cases culminating in Davao City Water District v. Civil Service Commission[5] and just recently reiterated in De Jesus v. Commission on Audit.[6] Petitioner maintains that LWDs are not government-owned and controlled corporations with original charters. Petitioner even argues that LWDs are private corporations. Petitioner asks the Court to consider certain interpretations of the applicable laws, which would give a new perspective to the issue of the true character of water districts.[7]

Petitioner theorizes that what PD 198 created was the Local Waters Utilities Administration (LWUA) and not the LWDs. Petitioner claims that LWDs are created pursuant to and not created directly by PD 198. Thus, petitioner concludes that PD 198 is not an original charter that would place LWDs within the audit jurisdiction of COA as defined in Section 2(1), Article IX-D of the Constitution. Petitioner elaborates that PD 198 does not create LWDs since it does not expressly direct the creation of such entities, but only provides for their formation on an optional or voluntary basis.[8] Petitioner adds that the operative act that creates an LWD is the approval of the Sanggunian Resolution as specified in PD 198.

Petitioners contention deserves scant consideration.

We begin by explaining the general framework under the fundamental law. The Constitution recognizes two classes of corporations. The first refers to private corporations created under a general law. The second refers to government-owned or controlled corporations created by special charters. Section 16, Article XII of the Constitution provides:

Sec. 16. The Congress shall not, except by general law, provide for the formation, organization, or regulation of private corporations. Government-owned or controlled

corporations may be created or established by special charters in the interest of the common good and subject to the test of economic viability.

The Constitution emphatically prohibits the creation of private corporations except by a general law applicable to all citizens.[9] The purpose of this constitutional provision is to ban private corporations created by special charters, which historically gave certain individuals, families or groups special privileges denied to other citizens.[10]

In short, Congress cannot enact a law creating a private corporation with a special charter. Such legislation would be unconstitutional. Private corporations may exist only under a general law. If the corporation is private, it must necessarily exist under a general law. Stated differently, only corporations created under a general law can qualify as private corporations. Under existing laws, that general law is the Corporation Code,[11] except that the Cooperative Code governs the incorporation of cooperatives.[12]

The Constitution authorizes Congress to create government-owned or controlled corporations through special charters. Since private corporations cannot have special charters, it follows that Congress can create corporations with special charters only if such corporations are government-owned or controlled.

Obviously, LWDs are not private corporations because they are not created under the Corporation Code. LWDs are not registered with the Securities and Exchange Commission. Section 14 of the Corporation Code states that [A]ll corporations organized under this code shall file with the Securities and Exchange Commission articles of incorporation x x x. LWDs have no articles of incorporation, no incorporators and no stockholders or members. There are no stockholders or members to elect the board directors of LWDs as in the case of all corporations registered with the Securities and Exchange Commission. The local mayor or the provincial governor appoints the directors of LWDs for a fixed term of office. This Court has ruled that LWDs are not created under the Corporation Code, thus:

From the foregoing pronouncement, it is clear that what has been excluded from the coverage of the CSC are those corporations created pursuant to the Corporation Code. Significantly, petitioners are not created under the said code, but on the contrary, they were created pursuant to a special law and are governed primarily by its provision.[13] (Emphasis supplied)

LWDs exist by virtue of PD 198, which constitutes their special charter. Since under the Constitution only government-owned or controlled corporations may have special charters, LWDs can validly exist only if they are government-owned or controlled. To claim that LWDs are private corporations with a special charter is to admit that their existence is constitutionally infirm.

Unlike private corporations, which derive their legal existence and power from the Corporation Code, LWDs derive their legal existence and power from PD 198. Sections 6 and 25 of PD 198[14] provide:

Section 6. Formation of District. This Act is the source of authorization and power to form and maintain a district. For purposes of this Act, a district shall be considered as a quasi-public corporation performing public service and supplying public wants. As such, a district shall exercise the powers, rights and privileges given to private corporations under existing laws, in addition to the powers granted in, and subject to such restrictions imposed, under this Act.

(a) The name of the local water district, which shall include the name of the city, municipality, or province, or region thereof, served by said system, followed by the words Water District.

(b) A description of the boundary of the district. In the case of a city or municipality, such boundary may include all lands within the city or municipality. A district may include one or more municipalities, cities or provinces, or portions thereof.

(c) A statement completely transferring any and all waterworks and/or sewerage facilities managed, operated by or under the control of such city, municipality or province to such district upon the filing of resolution forming the district.

(d) A statement identifying the purpose for which the district is formed, which shall include those purposes outlined in Section 5 above.

(e) The names of the initial directors of the district with the date of expiration of term of office for each.

(f) A statement that the district may only be dissolved on the grounds and under the conditions set forth in Section 44 of this Title.

(g) A statement acknowledging the powers, rights and obligations as set forth in Section 36 of this Title.

Nothing in the resolution of formation shall state or infer that the local legislative body has the power to dissolve, alter or affect the district beyond that specifically provided for in this Act.

If two or more cities, municipalities or provinces, or any combination thereof, desire to form a single district, a similar resolution shall be adopted in each city, municipality and province.

x x x

Sec. 25. Authorization. The district may exercise all the powers which are expressly granted by this Title or which are necessarily implied from or incidental to the powers and purposes herein stated. For the purpose of carrying out the objectives of this Act, a district is hereby granted the power of eminent domain, the exercise thereof shall, however, be subject to review by the Administration. (Emphasis supplied)

Clearly, LWDs exist as corporations only by virtue of PD 198, which expressly confers on LWDs corporate powers. Section 6 of PD 198 provides that LWDs shall exercise the powers, rights and privileges given to private corporations under existing laws. Without PD 198, LWDs would have no corporate powers. Thus, PD 198 constitutes the special enabling charter of LWDs. The ineluctable conclusion is that LWDs are government-owned and controlled corporations with a special charter.

The phrase government-owned and controlled corporations with original charters means GOCCs created under special laws and not under the general incorporation law. There is no difference between the term original charters and special charters. The Court clarified this in National Service Corporation v. NLRC[15] by citing the deliberations in the Constitutional Commission, as follows:

THE PRESIDING OFFICER (Mr. Trenas). The session is resumed.

Commissioner Romulo is recognized.

MR. ROMULO. Mr. Presiding Officer, I am amending my original proposed amendment to now read as follows: including government-owned or controlled corporations WITH ORIGINAL CHARTERS. The purpose of this amendment is to indicate that government corporations such as the GSIS and SSS, which have original charters, fall within the ambit of the civil service. However, corporations which are subsidiaries of these chartered agencies such as the Philippine Airlines, Manila Hotel and Hyatt are excluded from the coverage of the civil service.

THE PRESIDING OFFICER (Mr. Trenas). What does the Committee say?

MR. FOZ. Just one question, Mr. Presiding Officer. By the term original charters, what exactly do we mean?

MR. ROMULO. We mean that they were created by law, by an act of Congress, or by special law.

MR. FOZ. And not under the general corporation law.

MR. ROMULO. That is correct. Mr. Presiding Officer.

MR. FOZ. With that understanding and clarification, the Committee accepts the amendment.

MR. NATIVIDAD. Mr. Presiding Officer, so those created by the general corporation law are out.

MR. ROMULO. That is correct. (Emphasis supplied)

Again, in Davao City Water District v. Civil Service Commission,[16] the Court re