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July 8, 2015

G.R. No. 198436

PIONEER INSURANCE SURETY CORPORATION, Petitioner,


vs.
MORNING STAR TRAVEL & TOURS, INC., ESTELITA CO WONG, BENNY H.
WONG, ARSENIO CHUA, SONNY CHUA, AND WONG YAN TAK, Respondents.

DECISION

LEONEN, J.:

As a general rule, a corporation has a separate and distinct personality from those who
represent it.1 Its officers are solidarily liable only when exceptional circumstances exist,
such as cases enumerated in Section 31 of the Corporation Code.2The liability of the
officers must be proven by evidence sufficient to overcome the burden of proof borne by
the plaintiff.

This case originated from a Complaint3 for Collection of Sum of Money and Damages
filed by Pioneer Insurance & Surety Corporation (Pioneer) against Morning Star Travel
& Tours, Inc. (Morning Star) for the amounts Pioneer paid the International Air Transport
Association under its credit insurance policy. The amounts of P100,479,171.59 and
US$457,834.14 represent Morning Star’s overdue remittances to the International Air
Transport Association.4

Pioneer filed this Petition for Review5 assailing the Court of Appeals’ February 28, 2011
Decision6 "only insofar as it absolved the individual respondents of their joint and
solidary liability to petitioner[,]"7 and August 31, 2011 Resolution8 denying
reconsideration.

Morning Star is a travel and tours agency with Benny Wong, Estelita Wong, Arsenio
Chua, Sonny Chua, and Wong Yan Tak as shareholders and members of the board of
directors.9

International Air Transport Association is a Canadian corporation licensed to do


business in the Philippines "to promote safe, regular and economical air transport for all
people, among others."10

International Air Transport Association appointed Morning Star as an accredited travel


agent.11 Morning Star "avail[ed] of the privilege of getting on credit . . . air transport
tickets from various airline companies [to be sold] to passengers at prices fixed by the
airline companies[.]"12

Morning Star and International Air Transport Association entered a Passenger Sales
Agency Agreement such that Morning Star must report all air transport ticket sales to
International Air Transport Association and account all payments received through the
centralized system called Billing and Settlement Plan.13 Morning Star only holds in trust
all monies collected as these belong to the airline companies. 14

International Air Transport Association obtained a Credit Insurance Policy from Pioneer
to assure itself of payments by accredited travel agents for ticket sales and monies due
to the airline companies under the Billing and Settlement Plan. 15 The policy was for the
period from November 1, 2001 to December 31, 2002, renewed for the period from
January 1, 2003 to December 31, 2003.16

The policy was made known to the accredited travel agents. Morning Star, through its
President, Benny Wong, was among those that declared itself liable to indemnify
Pioneer for any and all claims under the policy. He executed a registration form under
the Credit Insurance Program for BSP-Philippines Agents.17

Morning Star had an accrued billing of P49,051,641.80 and US$325,865.35 for the
period from December 16, 2002 to December 31, 2002. It failed to remit these amounts
through the Billing and Settlement Plan, prompting the International Air Transport
Association to send a letter dated January 17, 2003 advising on the overdue
remittance.18

International Air Transport Association again declared Morning Star in default by a letter
dated January 20, 2003 for its overdue account covering the period from January 1,
2003 to January 20, 2003.19

Pursuant to the credit insurance policies, International Air Transport Association


demanded from Pioneer the sums of P109,728,051.00 and US$457,834.14
representing Morning Star’s overdue account as of April 30, 2003. Pioneer investigated,
ascertained, and validated the claims, then paid International Air Transport Association
the amounts of P100,479,171.59 and US$457,834.14.20

Consequently, Pioneer demanded these amounts from Morning Star through a letter
dated September 23, 2003.21International Air Transport Association executed in
Pioneer’s favor a Release of Claim and Subrogation Receipt on December 23, 2003. 22

On November 10, 2005, Pioneer filed a Complaint for Collection of Sum of Money and
Damages against Morning Star and its shareholders and directors.23

Morning Star, Benny Wong, and Estelita Wong were served with summons and a copy
of the Complaint on November 22, 2005, while Arsenio Chua, Sonny Chua, and Wong
Yan Tak were unserved.24

The trial court granted Pioneer’s Motion to Declare Respondents in Default for failure to
file an Answer within the period.25 Pioneer presented its evidence ex-parte.26
Meanwhile, Pioneer filed an Ex-Parte Motion for Issuance of Alias Summons since
Morning Star was previously served through substituted service. The trial court granted
the Motion, and alias summons was served on February 5, 2007. Upon motion, Morning
Star was declared in default for failure to file an Answer within the period. 27

On June 28, 2007, Morning Star filed a Motion for Leave of Court to File Attached
Answer explaining that it only received a copy of the Complaint on February 5,
2007.28 Its counsel also alleged that he was retained only on June 22, 2007. 29 The trial
court denied the Motion on July 23, 2007, and also denied reconsideration.30

The Regional Trial Court in its Decision31 dated November 9, 2007 ruled in favor of
Pioneer and ordered respondents to jointly and severally pay Pioneer:

WHEREFORE PREMISES CONSIDERED, judgment is hereby rendered in favor of the


plaintiff as against the defendants ordering the latter to jointly and severally pay the
following amount:

1. One Hundred Million Four Hundred Seventy Nine Thousand One Hundred
Seventy One Pesos and Fifty Nine (Php100,479,171.59) and Four Hundred Fifty
Seven Thousand Eight Hundred Thirty Four Dollars and 14/100
(US$457,834.14), with interest at 12% per annum from September 23, 2003 until
the sum is fully paid;

2. Php100,000.00 as attorney’s fees;

3. Php100,000.00 as exemplary damages;

4. Php200,000.00 as litigation expenses[;]

5. costs of suit.

SO ORDERED.32

The Court of Appeals, in its Decision dated February 28, 2011, affirmed the trial court
with modification in that only Morning Star was liable to pay petitioner:

WHEREFORE, premises considered, the instant Appeal is DENIED. Accordingly, the


assailed 9 November 2007 Decision of the Regional Trial Court of Makati City, Branch
143 in Civil Case No. 05-993 is AFFIRMED with MODIFICATION. Insofar as the trial
court ordered Defendants-Appellants Estelita Co Wong, Benny H. Wong, Arsenio Chua,
Sonny Chua and Wong Yan Tak to jointly and severally pay the amounts awarded to
Plaintiff-Appellee, the same is deleted. Only Morning Star is held personally liable for
the payment thereof. Further, exemplary damages and attorney’s fees are likewise
deleted for lack of basis.

SO ORDERED.33
The Court of Appeals denied Pioneer’s Motion for Partial Reconsideration. 34 Thus,
Pioneer filed this Petition.

Pioneer submits that its Petition falls under the exceptions to the general rule that
petitions for review may raise only questions of law.35 Pioneer raises conflicting findings
and conclusions by the lower courts regarding solidary liability, and misapprehension of
facts by the Court of Appeals.36

Pioneer argues that "the individual respondents were, at the very least, grossly
negligent in running the affairs of respondent Morning Star by knowingly allowing it to
amass huge debts to [International Air Transport Association] despite its financial
distress, thus, giving sufficient ground for the court to pierce the corporate veil and hold
said individual respondents personally liable."37 It cites Section 31 of the Corporation
Code on the liability of directors "guilty of gross negligence or bad faith in directing the
affairs of the corporation[.]"38

Pioneer also cites jurisprudence39 on the requisites for the doctrine of piercing the
corporate veil to apply.40 It submits that all requisites are present, thus, the individual
respondents should be held solidarily liable with Morning Star.41 It cites at length the
testimony of its witness Atty. Vincenzo Nonato M. Taggueg (Atty. Taggueg)42 that based
on Morning Star’s General Information Sheet and financial statements, Morning Star
"has been accumulating losses as early as 1998 continuing to 1999 and 2000 resulting
to a deficit of Php26,168,1768.00 [sic] as of December 31, 2000[.]" 43

Pioneer contends that the abnormally large indebtedness to International Air Transport
Association was incurred in fraud and bad faith, with Morning Star having no intention to
pay its debt.44 It cites Oria v. McMicking45 on the badges of fraud.46 Pioneer then
enumerates "the unmistakable badges of fraud and deceit committed by individual
respondents"47 such as the fact that Morning Star had no assets,48 but the two
corporations also "controlled and managed by the individual respondents were doing
relatively well [at] the time . . . Morning Star was incurring huge losses[.]"49 Moreover, a
new travel agency called Morning Star Tour Planners, Inc. now operates at the Morning
Star’s former principal place of business in Pedro Gil, Manila, with the children of
individual respondents as its stockholders, directors, and officers.50

Respondents counter with the general rule clothing corporations with personality
separate and distinct from their officers and stockholders.51 They submit that "[m]ere
sweeping allegations that officers acted in bad faith because it incurred obligations it
cannot pay will not hold any water."52 Respondents argue that Pioneer failed to prove
bad faith, relying only on Atty. Taggueg’s testimony, but "Mr. Taggueg admitted that his
knowledge about the defendant Morning Star was merely based on his assumptions
and his examination of the [Securities and Exchange Commission] documents."53

The issues for resolution are:


First, whether this case involves an exception to the general rule that petitions for
review are limited to questions of law; and

Second, whether the doctrine of piercing the corporate veil applies to hold the individual
respondents solidarily liable with respondent Morning Star Travel and Tours, Inc. to pay
the award in favor of petitioner Pioneer Insurance & Surety Corporation.

Only questions of law may be raised in a petition for review.54 Factual findings of the
Court of Appeals are generally "final and conclusive, and cannot be reviewed on appeal
by [this court], provided they are borne out by the record or based on substantial
evidence."55

Issues such as whether the separate and distinct personality of a corporation was used
for fraudulent ends, or whether the evidence warrants a piercing of the corporate veil,
involve questions of fact.56

Jurisprudence established exceptions from the general rule against a factual review by
this court. These exceptions include cases when the judgment appears to be based on
a "patent misappreciation of facts."57

Petitioner invokes this exception in alleging that "the conflicting findings and conclusions
between the Court of Appeals and the trial court insofar as the solidary liability of
respondents to pay petitioner and the misapprehensions of facts by the Court of
Appeals constrains petitioner to raise both questions of fact and law in the Petition." 58

In ruling against the solidary liability of the individual respondents with respondent
Morning Star, the Court of Appeals discussed that "the trial court merely stated in the
dispositive portion thereof that Defendants- Appellants are ordered to pay Plaintiff-
Appellee jointly and severally the judgment award without discussing in the body of the
decision the reason for such conclusion."59

The Court of Appeals then enumerated the exceptional circumstances warranting


solidary liabilities by corporate agents based on jurisprudence, and found none to be
present in this case.60

We affirm the Court of Appeals.

II

The law vests corporations with a separate and distinct personality from those that
represent these corporations.61

The corporate legal structure draws its "economic superiority"62 from key features such
as a separate corporate personality. Unlike other business associations such as
partnerships, the corporate framework encourages investment by allowing even small
capital contributors to be part of a big business endeavor made possible by the
aggregation of their capital funds.63 The consequent limited liability feature, since
corporate assets will answer for corporate debts, also proves attractive for investors.
However, this legal structure should not be abused.

A separate corporate personality shields corporate officers acting in good faith and
within their scope of authority from personal liability except for situations enumerated by
law and jurisprudence,64 thus:

Personal liability of a corporate director, trustee or officer along (although not


necessarily) with the corporation may so validly attach, as a rule, only when —

‘1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith
or gross negligence in directing its affairs, or (c) for conflict of interest, resulting in
damages to the corporation, its stockholders or other persons;

‘2. He consents to the issuance of watered stocks or who, having knowledge


thereof, does not forthwith file with the corporate secretary his written objection
thereto;

‘3. He agrees to hold himself personally and solidarily liable with the corporation;
or

‘4. He is made, by a specific provision of law, to personally answer for his


corporate action.’65

The first exception comes from Section 31 of the Corporation Code:

SECTION 31. Liability of Directors, Trustees or Officers. —

Directors or trustees who wilfully and knowingly vote for or assent to patently unlawful
acts of the corporation or who are guilty of gross negligence or bad faith in
directing the affairs of the corporation or acquire any personal or pecuniary interest
in conflict with their duty as such directors or trustees shall be liable jointly and
severally for all damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons. (Emphasis supplied)

Petitioner imputes gross negligence and bad faith on the part of the individual
respondents for incurring the huge indebtedness to International Air Transport
Association.66

Bad faith "imports a dishonest purpose or some moral obliquity and conscious doing of
a wrong, not simply bad judgment or negligence."67 "[I]t means breach of a known duty
through some motive or interest or ill will; it partakes of the nature of fraud."68
The trial court gave weight to its finding that respondent Morning Star still availed itself
of loans and/or obligations with International Air Transport Association despite its
financial standing of operating at a loss:

Based on the plaintiff’s examination of the financial statements submitted by the


defendant Morning Star with the Securities and Exchange Commission (SEC) for the
years 2000 and 2001 with comparative figures for the years ending 1998, 1999 and
2000, herein defendant corporation has been accumulating losses as early as 1998
continuing to 1999 and 2000 resulting to a deficit of Php26, 168,176.80 as of December
31, 2000. It was also shown that for the prior years of 1998 and 1999, defendant
Morning Star incurred a deficit of Php3,910,763.00 as of December 31, 1998 and
Php2,841,626.00 as of December 31, 1999 and in the Balance Sheet, it indicated
therein the defendants’ total assets of Php150,579,421.00 while the total liabilities
amounted to Php160,222,966.00, thereby making the defendant Morning Star
insolvent. Despite the fact that defendant Morning Star was already incurring
losses as early as 1998 up to the year 2000, the latter still contractedloans and/or
obligations with IATA sometime in 2002 and which indebtedness ballooned to the
huge amount of Php109,728,051.00 and US$496,403.21 as of April 30, 2003, which
obviously it could not pay considering its financial standing.

Further investigation by the plaintiff shows that it could not find any assets or properties
in the name of defendant Morning Star because even the land and the building where it
held office was registered in the name of "Morning Star Management Ventures
Corporation", as evidenced by the certified true copies of the transfer certificates of title
(TCT) nos. 192243 and 192244 in the name of Morning Star Management Ventures
Corporation and unlike the defendant Morning Star, which has practically the same
officers and members of the Board, has only an asset of Php125,392,960.00 and
liabilities of Php4,306,702[.]00 and an income deficit of Php26,922,598.00 as of
December 31, 2001. Similarly, the Pic [‘]N Pac Mart, Inc., which has the same set of
officers, said corporation has shown a total assets of Php5,423,201.30 and
liabilities/stockholders equity of Php5,423,201.30 but with a retained earnings of
Php194,412[.]74 as of December 31, 1999. Plaintiff contends that in such a case,
defendant Morning Star has used the separate and distinct corporate personality
accorded to it under the Corporation Code to commit said fraudulent transaction
of incurring corporate debts and allow the herein individual defendants to escape
personal liability and placing the assets beyond the reach of the
creditors.69(Emphasis supplied, citations omitted)

On the other hand, the Court of Appeals ruled that the general rule on separate
corporate personality and against personal liability by corporate officers applies since
petitioner failed to prove bad faith amounting to fraud by the corporate officers:

The mere fact that Morning Star has been incurring huge losses and that it has no
assets at the time it contracted large financial obligations to IATA, cannot be considered
that its officers, Defendants-Appellants Estelita Co Wong, Benny H. Wong, Arsenio
Chua, Sonny Chua and Wong Yan Tak, acted in bad faith or such circumstance would
amount to fraud, warranting personal and solidary liability of its corporate officers. The
same is also true with the fact that Morning Star Management Ventures Corporation and
Pic ‘N Pac Mart, Inc., corporations having the same set of officers as Morning Star,
were doing relatively well during the time that the former incurred huge losses. Thus,
only Morning Star should be held personally liable to Plaintiff- Appellee, and not its
corporate officers.70

Piercing the corporate veil in order to hold corporate officers personally liable for the
corporation’s debts requires that "the bad faith or wrongdoing of the director must be
established clearly and convincingly [as] [b]ad faith is never presumed."71

III

Oria v. McMicking72 enumerates several badges of fraud. Petitioner argues the


existence of the fourth to sixth badges:73

1. The fact that the consideration of the conveyance is fictitious or is inadequate.

2. A transfer made by a debtor after suit has been begun and while it is pending
against him.

3. A sale upon credit by an insolvent debtor.

4. Evidence of large indebtedness or complete insolvency.

5. The transfer of all or nearly all of his property by a debtor, especially


when he is insolvent or greatly embarrassed financially.

6. The fact that the transfer is made between father and son, when there are
present other of the above circumstances.

7. The failure of the vendee to take exclusive possession of all the


property.74 (Emphasis supplied)

Petitioner listed the following circumstances as constituting badges of fraud by the


individual respondents:

Attention is drawn to the following badges of fraud by individual respondents to use the
corporate fiction of respondent Morning Star as a veil or cloak to insulate themselves
from any liability to pay its indebtedness to [sic], to wit:

a. As members of the Board of Directors and at the same time, officers of


respondent Morning Star, individual respondents Estelita Co Wong (President
and Member of the Board), Benny H. Wong (Chairman of the Board), Arsenio
Chua (Member of the Board), Sonny Chua (Secretary and Member of the Board)
and Wong Yan Tak (Treasurer and Member of the Board) undoubtedly exercised
complete control and direction of the financial management and business
operations of respondent Morning Star;

b. Similarly, the individual respondents are likewise in direct control of the


management of two other corporations, Morning Star Management Ventures
Corp. and Pic ‘N Pac Mart[,] Inc., being the shareholders, members of the Board
and officers of the said corporations, as evidenced by the General Information
Sheets (GIS) of the said corporations filed with the Securities and Exchange
Commission (Exhibits "O" to "O-4" and "P" to "P-3" of petitioner’s Formal Offer of
Evidence dated August 15, 2007);

c. Respondent Morning Star has no assets or property in its name that may be
levied upon for attachment and execution to secure and to satisfy any judgment
debt, as in fact the land and building where its offices can be found and situated
at J. Bocobo Street cor. Pedro Gil Street, Ermita Manila is not even registered in
its name but in the name of another corporation "Morning Star Management
Ventures Corporation" which is similarly owned and controlled by the individual
respondents (Exhibits "S" to "S-2" and "T" to "T-2" of petitioner’s Formal Offer of
Evidence dated August 15, 2007);

d. As early as 1998, respondent Morning Star had already been incurring huge
losses which clearly show the inability to pay its obligations to IATA but the
individual respondents contracted its huge financial obligations from IATA
knowing fully well that respondent Morning Star will be unable to pay such
obligations;

e. Strangely, on the other hand, Pic ‘N Pac Mart, Inc. and Morning Star
Management Ventures Corp., the other two (2) corporations similarly controlled
and managed by the individual respondents, were doing relatively well during the
time that respondent Morning Star was incurring huge losses (Exhibits "U" to "U-
7" and "V" to "V-9" of petitioner’s Formal Offer of Evidence dated August 15,
2007);

f. Individual respondents allowed the indebtedness of respondent Morning Star to


balloon to a staggering amount of Php100,479,171.59 and
US$457,834.14[.]75 (Citations omitted)

This court finds that petitioner was not able to clearly and convincingly establish bad
faith by the individual respondents, nor substantiate the alleged badges of
fraud.1avvphi1

IV

First, petitioner failed to substantiate the fourth badge of fraud on "[e]vidence of large
indebtedness or complete insolvency."76
In 1993, International Air Transport Association appointed respondent Morning Star as
an accredited travel agent with the privilege of getting air tickets on credit, and they
entered a Passenger Sales Agency Agreement.77 None of the parties made allegations
on the financial status or business standing of respondent Morning Star during the first
five years from its accreditation in 1993.

Petitioner relies on Atty. Taggueg’s testimony regarding respondent Morning Star’s


financial statements with the Securities and Exchange Commission.

Atty. Taggueg testified on the comparative figures for the years ended 1998, 1999, and
2000 and how the company was "accumulating losses as early as 1998 continuing to
1999 and 2000 resulting to a deficit of Php26,168,1768.00 [sic] as of December 31,
2000 . . . deficit of Php3,910,763.00 as of December 31, 1998 and another deficit of
Php2,841,626.00 as of December 31, 1999[.]"78 He testified that as of December 31,
2000, respondent Morning Star had total assets of Php150,579,421.00 and total
liabilities of Php160,222,966.00.79

Atty. Taggueg then testified that despite this insolvency, "Morning Star Travel still
contracted loans and/or obligations from the IATA sometime in December 2002 which
indebtedness with IATA ballooned to the huge amount of Php109,728,051.00 and
US$496,403.21 as of April 30, 2003[.]"80

Petitioner did not present Securities and Exchange Commission documents on


respondent Morning Star’s total assets as of December 2002.1a\^/phi1 It did not present
respondent Morning Star’s financial statements for December 2002, the year it incurred
obligations from International Air Transport Association.81

The financial statements for years 1998 to 1999 and 1999 to 2000 testified on by Atty.
Taggueg are not representative of the financial status of respondent Morning Star’s
business. Year 2000 reflected total assets of P150,579,421.00 and total liabilities of
P160,222,966.00.82 On the other hand, year 1999 showed total assets of
P134,361,353.00 and total liabilities of P120,678,345.00.83 Businesses may earn profits
in some years and operate at a loss in others as a result of changing economic
conditions. These two financial statements do not show that respondent Morning Star
was operating at a loss in 2002. Deficits in the years 1998 to 2000 do not necessarily
mean deficits in 2002. It is unclear if these figures included previous obligations to
International Air Transport Association, or whether some or all of such obligations were
paid in subsequent years as an indication of respondent Morning Star’s credit history.

In any event, it is in the nature of businesses to take risks when making business
judgments, and this includes taking loans and incurring liabilities.

Atty. Taggueg’s association with respondent Morning Star, or this case, is also unclear.
Respondents submit in their memorandum that "[i]n his testimony[,] Mr. Taggueg
admitted that his knowledge about . . . Morning Star was merely based on his
assumptions and his examination of the [Securities and Exchange Commission]
documents."84

Petitioner’s reliance on Atty. Taggueg’s testimony on respondentMorning Star’s financial


statements for previous years fails to clearly and convincingly establish bad faith by the
individual respondents.

Second, petitioner failed to substantiate the fifth badge of fraud on the "transfer of all or
nearly all of his property by a debtor, especially when he is insolvent or greatly
embarrassed financially."85

Mere allegations that Morning Star Management Ventures Corporation and Pic ‘N Pac
Mart, Inc. "were doing relatively well during the time that respondent Morning Star was
incurring huge losses"86 do not establish bad faith or fraud by the individual
respondents. Such allegations alone do not prove that the individual respondents were
transferring respondent Morning Star’s properties in fraud of its creditors.

Neither does the allegation that Morning Star Management Ventures Corporation has
title over the land and building where the offices can be found establish bad faith or
fraud. Petitioner did not show that this title was originally in respondent Morning Star’s
name and was later transferred to respondent Morning Star.

This court has held that the "existence of interlocking directors, corporate officers and
shareholders is not enough justification to pierce the veil of corporate fiction in the
absence of fraud or other public policy considerations." 87

VI

Third, petitioner also failed to substantiate the sixth badge of fraud that "the transfer is
made between father and son, when there are present other of the above
circumstances."88

Petitioner submits that:

It would be the height of injustice to allow individual respondents to get away with their
gross negligence to the prejudice of petitioner, especially since there is now another
travel agency in the name of Morning Star Tour Planners, Inc. operating at the
respondent Morning Star’s former principal place of business at 1600 J. Bocobo St.
corner Pedro Gil Malate, Manila. . . .

....

Curiously, among the stockholders, directors and officers of Morning Star Tour
Planners, Inc., are the following: Belinda Wong, Billy Wong, Barbara C. Wong and
Benny C. Wong, Jr., who all have the same address as individual respondents Estelita
Co Wong and Benny H. Wong.

Given, these vital pieces of information, it is at once indubitable that respondents have
established another travel agency in the name of their children in order to escape their
solidary liability to petitioner!89 (Citation omitted)

This court has held that "compliance with the recognized modes of acquisition of
jurisdiction cannot be dispensed with even in piercing the veil of corporate
fiction[.]"90 Morning Star Tour Planners, Inc. is not a party in this case. It would offend
due process rights if what petitioner ultimately seeks in its allegation is to hold Morning
Star Tour Planners, Inc. responsible for respondent Morning Star’s liability.

In any event, petitioner failed to plead and prove the circumstances that would pass the
following control test for the operation of the alter ego doctrine:

(1) Control, not mere majority or complete stock control, but complete
domination, not only of finances but of policy and business practice in respect to
the transaction attacked so that the corporate entity as to this transaction had at
the time no separate mind, will or existence of its own;

(2) Such control must have been used by the defendant to commit fraud or
wrong, to perpetuate the violation of a statutory or other positive legal duty, or
dishonest and unjust act in contravention of plaintiff’s legal right; and

(3) The aforesaid control and breach of duty must [have] proximately caused the
injury or unjust loss complained of.91

The records do not show that the individual respondents controlled Morning Star Tour
Planners, Inc. and that such control was used to commit fraud against petitioner.
Neither does this suspicion support petitioner’s position that the individual respondents
were in bad faith or gross negligence in directing the affairs of respondent Morning Star.

Finally, pursuant to this court's pronouncement in Nacar v. Gallery Frames,92 the


interest rate should be 6% per annum on the amount owing to petitioner representing
respondent Morning Star's unpaid air transport tickets availed on credit.

WHEREFORE, the Petition is DENIED. The Court of Appeals Decision is AFFIRMED


with MODIFICATION in that legal interest is 6% per annum from September 23, 2003
until fully paid.

SO ORDERED
160 Phil. 624

MAKASIAR, J.:
A petition for certiorari to set aside the order of respondent Court of Industrial Relations
dated May 30, 1969 directing petitioners to pay back wages and bonuses to private
respondents as well as its resolution of July 5, 1969 denying the motion for
reconsideration of said order in Case No. 32-ULP-Iloilo entitled ''Allied Workers'
Association, et. at. versus Eduardo Claparols, et. at. al. "

It appears that on August 6, 1957. a complaint for unfair labor practice was filed by
herein private respondent Allied Workers' Association, respondent Demetrio Garlitos
and ten (10) respondent workers against herein petitioners on account of the dismissal
of respondent workers from petitioner Claparols Steel and Nail Plant.

On September 16,1963, respondent Court rendered its decision finding "Mr. Claparols
guilty of union busting and" of having "dismissed said complainants because of their
union activities," and ordering respondents "(1) To cease and desist from committing
unfair labor practices against their employees and laborers; (2) To reinstate said
complainants to their former or equivalent jobs, as soon as possible, with back wages
from the date of their dismissal up to their actual reinstatement" (p. 12, Decision; p. 27,
rec).

A motion to reconsider the above decision was filed by herein petitioners, which
respondent Court, sitting en banc, denied in a resolution dated January 27, 1964.

On March 30, 1964, counsel for herein respondent workers (complainants in the ULP
case) filed a motion for execution of respondent Court's September 16, 1963 decision.

On May 14, 1964, respondent Court, in its order of September 16, 1963, granted
execution and directed herein petitioners.

"to reinstate the above complainants to their former or equivalent jobs within five (5)
days after receipt of a copy of this order. In order to implement the award of back
wages, the Chief of the Examining Division or any of his assistants is hereby directed to
proceed to the office of the respondents at Matabang, Talisay, Negros Occidental, and
examine its payrolls and other pertinent records and compute the back wages of the
complainants in accordance with the decision dated September 16, 1963, and. upon
termination, to submit his report as soon as possible for further disposition" (p. 7, Brief
for Respondents, p. 113, rec).

which was reiterated by respondent Court in a subsequent order dated November


10,1964 (pp. 7-8, Brief for Respondents, p. 113, rec).

On December 14, 1964, respondent workers were accompanied by the Chief of Police
of Talisay, Negros Occidental to the compound of herein petitioner company to report
for reinstatement per order of the court. Respondent workers were, however, refused
reinstatement by company accountant Francisco Cusi for he had no order from plant
owner Eduardo Claparols nor from his lawyer Atty. Plaridel Katalbas, to reinstate
respondent workers.

Again, on December 15, 1964, respondent workers were accompanied by a police


officer to the company compound, but then, they were again refused reinstatement by
Cusi on the same ground.

OnJanuary 15, 1965, the CIR Chief Examiner submitted his report containing three
computations, to wit:

"The first computation covers the period February 1, 1957 to October 31,1964. The
second is up to and including December 7, 1962, when the corporation stopped
operations, while the third is only up to June 30, 1957 when the Claparols Steel and Nail
Plant ceased to operate" (Annex B, Petition for Review on Certiorari, p. 14, Brief for
appellees, p. 113,rec).

with the explanation that:

"6. Since the records of the Claparols Steel Corporation show that it was established on
July 1, 1957 succeeding the Claparols Steel and Nail Plant which ceased operations on
June 30, 1957, and that the Claparols Steel Corporation stopped operations on
December 7, 1962, three (3) computations are presented herein for the consideration of
this Honorable Court" (p. 2, Report of Examiner, p. 29, rec.)

On January 23, 1965, petitioners filed an opposition alleging that under the
circumstances presently engulfing the company, petitioner Claparols could not
personally reinstate respondent workers; that assuming the workers are entitled to back
wages, the same should only be limited to three months pursuant to the court ruling in
the case of Sta. Cecilia Sawmills vs. CIR (L-19273-74, February 20, 1964); and that
since Claparols Steel Corporation ceased to operate on December 7, 1962, re-
employment of respondent workers cannot go beyond December 7, 1962.

A reply to petitioner's opposition was filed by respondent workers, alleging among


others, that Claparols Steel and Nail Plant and Claparols Steel and Nail Corporation are
one and the same corporation controlled by petitioner Claparols, with the latter
corporation succeeding the former.

On November 28, 1966, after conducting a series of hearings on the report of the
examiner, respondent Court issued an order, the dispositive portion of which reads:
WHEREFORE, the Report of the Examiner filed on January 15,1965, is hereby
approved subject to the foregoing findings and dispositions. Consequently, the
Corporation Auditing Examiner is directed to recompute the back wages of
complainants Demetrio Garlitos and Alfredo Ongsuco on the basis of F200.00 and
P270.00 a month, respectively; to compute those of complainant Ignacio Quioyo as
aforesaid; to compute the deductible earnings of complainants Ongsuco, Jorge
Semillano and Garlitos, as found in the body of this order; and to compute the bonuses
of each and every complainant, except Honorato Quioyo. Thereafter, as soon as
possible, the Examiner should submit a report in compliance herewith of the Court's
further disposition" (p. 24, Brief for Respondents, p. 113, rec.)

On December 7, 1966, a motion for reconsideration was filed by petitioner, assailing


respondent Court's ruling that (1) the ruling in the case of Sta. Cecilia Sawmills Inc. CIR,
et. al. does not apply in the case at bar; and (2) that bonus should be included in the
recoverable wages.

On December 14, 1966, a counter-opposition was filed by private respondents alleging


that petitioners' motion for reconsideration was pro forma, it not making express
reference to the testimony or documentary evidence or to the provision of law alleged to
be contrary to such findings or conclusions of respondent Court.

On February 8, 1967, respondent Court of Industrial Relations dismissed petitioners'


motion for reconsideration for being pro forma.

Whereupon, petitioners filed a petition for certiorari with this COURT in G.R. No. L-
27272 to set aside the November 28, 1966 order of respondent Court, as well as its
February 8, 1967 resolution. Petitioners assigned therein as errors of law the very same
assignment of errors it raises in the present case, t wit:

"I

"THE RESPONDENT COURT ERRED AND/OR ACTED WITH GRAVE ABUSE OF


DISCRETION, AMOUNTING TO LACK OF JURISDICTION, IN HOLDING IN THE
ORDER UNDER REVIEW THAT BONUSES SHOULD BE PAID TO THE
RESPONDENT WORKERS DESPITE THE FACT THAT THE SAME WAS NOT
ADJUDICATED IN ITS ORIGINAL DECISION.

"II

"THE RESPONDENT COURT ERRED AND/OR ACTED WITH GRAVE ABUSE OF


DISCRETION, AMOUNTING TO LACK OF JURISDICTION, IN NOT APPLYING THE
DOCTRINE LAID DOWN BY THIS HONORABLE TRIBUNAL IN THE CASE OF 'SAT.
CECILIA SAWMILLS, INC. VS. C.I.R., ET. AL.,' G.R. No. L-19273-74, PROMULGATED
ON FEBRUARY 29, 1964" (pp. 10-11, rec.)

On April 27, 1967, the Supreme Court denied petitioner's petition for certiorari (p. 77,
rec. of L-27272), which was reiterated on May 19, 1967 (p. 27, Respondent's Brief, p.
113, rec.; p. 81, rec. of L-27272).

On May 3, 1967, private respondent moved to have the workers' back wages properly
recomputed. A motion to the same end was reiterated by private respondents on June
14, 1967.

On July 13, 1967, respondent Court directed a recomputation of the back wages of
respondent workers in accordance with its order dated November 28, 1966. The said
order in part reads:

"WHEREFORE, the chief Auditing Examiner of the court or any of his assistants, is
hereby directed to recompute the back wages of the workers involved in this case in
accordance with the Order of November 28, 1966, within 20 days from receipt of a copy
of this Order" (p. 28, Brief for Respondents, p. 113, rec.)

Then on March 21, 1968 the Chief Examiner came out with his report, the disputed
portion of which (regarding bonuses) reads:

"xxx xxx xxx

"4. The yearly bonuses of the employees and laborers of respondent corporation are
given on the following basis:

'Basic Additional:

"a. For every dependent 1% of monthly salary

For every dependent in elementary


"b. 2% of monthly salary
grade

c. "For every dependent in high school 3% of monthly salary

"d. For every dependent in college 5% of monthly salary

"xxx xxx xxx


"7. The computed x x x bonuses after deducting the earnings elsewhere of Messrs.
Ongsuco, Garlitos and Semillano, are as follows:

"Name xxx Bonuses xxx


1. Alfredo Ongsuco P1,620.00
2. Demetrio Garlitos 1,200.00
3. Ignacio Quioyo 455.23
4. Aser Abancio 461.00
5. Ludovico Belopenos 752.05
6. Salvador Doroteo 714.70
7. Rosendo Espinosa 1,075.40
8. Gaudencio Quioyo 1,167.92
9. Jorge Semillano 1,212.08
10. Maximo Quioyo 449.41
__________
Total P9,107.79"

(Pp. 30-31, Respondent's Brief, p. 113,rec).

On April 16, 1968. petitioners filed their opposition to the report of the Examiner dated
March 21,1968 on grounds already rejected by respondent Court in its order dated
November 28, 1966, and by the Supreme Court also in its ruling in G.R. No. L-27272.

On May 4, 1968, a rejoinder to petitioners' opposition was filed by private respondents,


alleging among others "that the grounds of petitioners' opposition were the same
grounds raised by them before and passed upon by respondent Court and this
Honorable Tribunal; that this order of November 28,1966 which passed upon these
issues became final and executory on June 3,1967 from the Honorable Supreme Court.
(Order of respondent Court dated July 13, 1967)." [P. 32, Brief for Respondents, p. 113,
rec.].

On July 26, 1968, private respondents filed their motion for approval of the Report of the
Examiner submitted on March 21, 1968, alleging, among others, that petitioners, in their
opposition, did not actually dispute the data elicited by the Chief Examiner but rather
harped on grounds which, as already stated, had already been turned down by the
Supreme Court.

On October 19, 1968, herein private respondents filed their "Constancia", submitting the
case for resolution of respondent Court of Industrial Relations.

On May 30,1969, respondent Court issued an order, subject of the present appeal, the
dispositive portion of which reads:
"WHEREFORE, there being no proof offered to substantiate respondent Eduardo
Claparols' opposition, the Examiner's Report should be, and it is hereby, APPROVED.
Consequently, pursuant to the decision dated September 16, 1963, respondent x x x
(petitioners herein) are hereby directed to pay the respective back wages and bonuses
of the complainants (respondents herein) x x x" (p 35, Brief for Respondents; p. 113,
rec; italics supplied).

On June 7, 1969, petitioners filed a motion for reconsideration on practically the same
grounds previously raised by them.

On June 30,1969, respondents filed an opposition to petitioners' motion for


reconsideration, with the following allegations:

"1. The issues raised, namely, whether bonuses should be included in the award for
back wages had already been resolved by respondent court in its orders dated
November 28, 1966, and December 7, 1966, and in the Resolution of the Honorable
Supreme Court in G.R. No. L- 27272 dated April 26, 1967 and May 19, 1967, and the
same is already a settled and final issue.

"2. Petitioners' motion for reconsideration is merely a rehash of previous arguments,


effete and unrejuvenated, pro forma, and intended merely to delay the proceedings.

As correctly contended by private respondents, the present petition is barred by Our


resolutions of April 26, 1967 and May 19, 1967 in G. R. No. L-27272 (Eduardo
Claparols, et al. vs. CIR, et al.) [pp. 77-83, rec. of L-27272] dismissing said case,
wherein said petitioners invoked the applicability of the doctrine in Sta. Cecilia Sawmills,
Inc. vs. CIR, et al. (L-19273-74, Feb. 29, 1964, 10 SCRA 433) and impugned the
illegality of the order of respondent Court dated November 28, 1966 directing the
computation and payment of the bonuses were not included in the decision of
September 16, 1963, which had long become final.

The aforesaid resolution in G.R. No. L-27272 constitute the law of the instant case,
wherein herein petitioners raised again practically the same issues invoked in the above
mentioned case. The denial of the petition in G.R. No. L-27272, suffices to warrant the
denial of the present petition; and We need not go any further.

However, without lending a sympathetic ear to the obvious desire of herein petitioners
of this Court to re-examine which would be an exercise in futility the final ruling in G.R.
No. L-27272, which as above-stated is the law of the instant case, but solely to remind
herein petitioners, We reiterate the governing principles.

WE uniformly held that "a bonus is not demandable and enforceable obligation, except
when it is made part of the wage or salary compensation" (Philippine Education Co. vs.
CIR and the Union of Philippine Co. Employees [NLU], 92, Phil. 381; Ansay, et. al. vs.
National Development Co., et. al., 107 Phil. 998, 999; Italics supplied).
In Atok Big Wedge Mining Co. vs. Atok Big Wedge Mutual Benefit Association (92 Phil.
754), this Court, thru Justice Labrador, held:

"Whether or not bonus forms part of wages depends upon the condition or circumstance
for its payment. If it is an additional compensation WHICH THE EMPLOYER
PROMISED AND A GREED to give without any condition imposed for its payment x x x
then it is part of the wage." (Italics supplied).

In Altomonte vs. Philippine American Drug Co. (106 Phil. 137), the Supreme Court held
that an employee is not entitled to bonus where there is no showing that it had been
granted by the employer to its employees periodically or regularly as to become part of
their wages or salaries. The clear implication is that bonus is recoverable as part of the
wage or salary where the employer regularly or periodically gives it to employees.

American jurisprudence equally regards bonuses as part of compensation or


recoverable wages.

Thus, it was held that "x x x it follows that in determining the regular rate of pay, a bonus
which in fact constitutes PART OF AN EMPLOYEE'S compensation, rather than a true
gift or gratuity, has to be taken into consideration." (48 Am. Jur. 2d, Labor and Labor
Relations, No. 1555, citing the cases of Triple "AAA " Co. vs. Wirtz and Haber vs.
Americana Corporation; Italics supplied). It was further held that "x x x the regular rate
includes incentive bonuses paid to the employees in addition to the guaranteed base
rates regardless of any contract provision to the contrary and even though such
bonuses could not be determined or paid until such time after the payday" (48 Am. Jur.
2d, Labor and Labor Relations, No. 1555, citing the case of Walling vs. Harnischfeger
Corp., 325 US 427, 89 L Ed 1711, 65 S Ct. 1246; Italics supplied).

Petitioners in the present case do not dispute that as a matter of tradition, the company
has been doling out bonuses to employees. In fact, the company balance sheets for the
years 1956 to 1962 contained bonus and pension computations which were never
repudiated or questioned by petitioners. As such, bonus for a given year earmarked as
a matter of tradition for distribution to employees has formed part of their recoverable
wages from the company. Moreover, with greater reason, should recovery of bonuses
as part of back wages be observed in the present case since the company, in the light
of the very admission of company accountant Francisco Cusi, distributes bonuses to its
employees even if the company has suffered losses. Specifically, petitioner company
has done this in 1962 (t.s.n., p. 149, Sept. 20, 1965).

Since bonuses are part of back wages of private respondents, the order of May 30,
1969, directing the payment of their bonuses, did not amend the decision of September
16, 1963 of respondent Court directing payment of their wages, which has long become
final and executory, in the same way that the previous order of May 14,1964 granting
execution of said decision of September 16, 1963 also directed the computation of the
wages to be paid to private respondents as decreed by the decision of September 16,
1963. All the orders of May 30s 1969, November 28, 1966 and May 14, 1964 merely
implement the already final and executory decision of September 16, 1963.

Petitioners insist that We adopt the ruling in the Sta. Cecilia Sawmills case wherein the
recoverable back wages were limited to only three (3) months: because as in the Sta.
Cecilia Sawmills case, the Claparols Steel and Nail Plant ceased operations due to
enormous business reverses.

Respondent Court's findings that indeed the Claparols Steel and Nail Plant, which
ceased operation of June 30, 1957, v. as SUCCEEDED by the Claparols Steel
Corporation effective the next day, July 1, 1957 up to December 7, 1962, when the
latter finally ceased to operate, were not disputed by petitioners. It is very clear that the
latter corporation was a continuation and successor of the first entity, and its emergence
was skillfully timed to avoid the financial liability that already attached to its predecessor,
the Claparols Steel and Nail Plant. Both predecessors and successor were owned and
controlled by petitioner Eduardo Claparols and there was no break in the succession
and continuity of the same business. This "avoiding-the-liability" scheme is very patent,
considering that 90% of the subscribed shares of stocks of the Claparols Steel
Corporation (the second corporation) was owned by respondent (herein petitioner)
Claparols himself, and all the assets of the dissolved Claparols Steel and Nail Plant
were turned over to the emerging Claparols Steel Corporation.

It is very obvious that the second corporation seeks the protective shield of a corporate
fiction whose veil in the present case could, and should, be pierced as it was
deliberately and maliciously designed to evade its financial obligation to its employees.

It is well remembering that in Yutivo & Sons Hardware Company vs. Court of Tax
Appeals (L-13203, Jan. 28, 1961, 1 SCRA 160), We held that when the notion of legal
entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime,
the law will regard the corporation as an association or persons, or, in the case of two
corporations, will merge them into one.

In Liddel & Company, Inc. vs. Collector of Internal Revenue (L-9687, June 30, 1961, 2
SCRA 632), this Court likewise held that where a corporation is a dummy and serves no
business purpose and is intended only as a blind, the corporate fiction may be ignored.

In Commissioner of Internal Revenue vs. Norton and Harrison Company (L-17618, Aug.
31, 1964, 11 SCRA 714), We ruled that where a corporation is merely an adjunct,
business conduit or alter ego of another corporation, the fiction of separate and distinct
corporate entities should be disregarded.

To the same uniform effect are the decisions in the cases of Republic vs. Razon (L-
17462, May 29, 1967, 20 SCRA 234) and A.D. Santos, Inc. vs. Vasquez (L-23586,
March 20, 1968,22 SCRA 1156).
WE agree with respondent Court of Industrial Relations, therefore, that the amount of
back wages recoverable by respondent workers from petitioners should be the amount
accruing up to December 7, 1962 when the Claparols Steel Corporation ceased
operations.

WHEREFORE, PETITION IS HEREBY DENIED WITH TREBLE COSTS AGAINST


PETITIONERS TO BE PAID BY THEIR COUNSEL.

[G.R. No. 108734. May 29, 1996]

CONCEPT BUILDERS, INC., petitioner, vs. THE NATIONAL LABOR RELATIONS


COMMISSION, (First Division); and Norberto Marabe, Rodolfo Raquel,
Cristobal Riego, Manuel Gillego, Palcronio Giducos, Pedro Aboigar,
Norberto Comendador, Rogello Salut, Emilio Garcia, Jr., Mariano Rio,
Paulina Basea, Aifredo Albera, Paquito Salut, Domingo Guarino, Romeo
Galve, Dominador Sabina, Felipe Radiana, Gavino Sualibio, Moreno
Escares, Ferdinand Torres, Felipe Basilan, and Ruben
Robalos, respondents.

DECISION
HERMOSISIMA, JR., J.:

The corporate mask may be lifted and the corporate veil may be pierced when a
corporation is just but the alter ego of a person or of another corporation. Where badges
of fraud exist; where public convenience is defeated; where a wrong is sought to be
justified thereby, the corporate fiction or the notion of legal entity should come to
naught. The law in these instances will regard the corporation as a mere association of
persons and, in case of two corporations, merge them into one.
Thus, where a sister corporation is used as a shield to evade a corporations
subsidiary liability for damages, the corporation may not be heard to say that it has a
personality separate and distinct from the other corporation. The piercing of the
corporate veil comes into play.
This special civil action ostensibly raises the question of whether the National Labor
Relations Commission committed grave abuse of discretion when it issued a break-
open order to the sheriff to be enforced against personal property found in the premises
of petitioners sister company.
Petitioner Concept Builders, Inc., a domestic corporation, with principal office
at 355 Maysan Road, Valenzuela, Metro Manila, is engaged in the construction
business. Private respondents were employed by said company as laborers, carpenters
and riggers.
On November, 1981, private respondents were served individual written notices of
termination of employment by petitioner, effective on November 30, 1981. It was stated
in the individual notices that their contracts of employment had expired and the project
in which they were hired had been completed.
Public respondent found it to be, the fact, however, that at the time of the
termination of private respondents employment, the project in which they were hired
had not yet been finished and completed. Petitioner had to engage the services of sub-
contractors whose workers performed the functions of private respondents.
Aggrieved, private respondents filed a complaint for illegal dismissal, unfair labor
practice and non-payment of their legal holiday pay, overtime pay and thirteenth-month
pay against petitioner.
On December 19, 1984, the Labor Arbiter rendered judgment 1 ordering petitioner to
reinstate private respondents and to pay them back wages equivalent to one year or
three hundred working days.
On November 27, 1985, the National Labor Relations Commission (NLRC)
dismissed the motion for reconsideration filed by petitioner on the ground that the said
decision had already become final and executory.2
On October 16, 1986, the NLRC Research and Information Department made the
finding that private respondents backwages amounted to P199,800.00. 3
On October 29, 1986, the Labor Arbiter issued a writ of execution directing the
sheriff to execute the Decision, dated December 19, 1984. The writ was partially
satisfied through garnishment of sums from petitioners debtor, the Metropolitan
Waterworks and Sewerage Authority, in the amount of P81,385.34. Said amount was
turned over to the cashier of the NLRC.
On February 1, 1989, an Alias Writ of Execution was issued by the Labor Arbiter
directing the sheriff to collect from herein petitioner the sum of P117,414.76,
representing the balance of the judgment award, and to reinstate private respondents to
their former positions.
On July 13, 1989, the sheriff issued a report stating that he tried to serve the alias
writ of execution on petitioner through the security guard on duty but the service was
refused on the ground that petitioner no longer occupied the premises.
On September 26, 1986, upon motion of private respondents, the Labor Arbiter
issued a second alias writ of execution.
The said writ had not been enforced by the special sheriff because, as stated in his
progress report, dated November 2, 1989:

1. All the employees inside petitioners premises at 355 Maysan Road, Valenzuela,
Metro Manila, claimed that they were employees of Hydro Pipes Philippines, Inc. (HPPI)
and not by respondent;

2. Levy was made upon personal properties he found in the premises;

3. Security guards with high-powered guns prevented him from removing the properties
he had levied upon.4

The said special sheriff recommended that a break-open order be issued to enable
him to enter petitioners premises so that he could proceed with the public auction sale
of the aforesaid personal properties on November 7, 1989.
On November 6, 1989, a certain Dennis Cuyegkeng filed a third-party claim with the
Labor Arbiter alleging that the properties sought to be levied upon by the sheriff were
owned by Hydro (Phils.), Inc. (HPPI) of which he is the Vice-President.
On November 23, 1989, private respondents filed a Motion for Issuance of a Break-
Open Order, alleging that HPPI and petitioner corporation were owned by the same
incorporator! stockholders. They also alleged that petitioner temporarily suspended its
business operations in order to evade its legal obligations to them and that private
respondents were willing to post an indemnity bond to answer for any damages which
petitioner and HPPI may suffer because of the issuance of the break-open order.
In support of their claim against HPPI, private respondents presented duly certified
copies of the General Informations Sheet, dated May 15, 1987, submitted by petitioner
to the Securities and Exchange Commission (SEC) and the General Information Sheet,
dated May 15, 1987, submitted by HPPI to the Securities and Exchange Commission.
The General Information Sheet submitted by the petitioner1 revealed the following:

1. Breakdown of Subscribed Capital

Name of Stockholder Amount Subscribed

HPPI P6,999,500.00

Antonio W. Lim 2,900,000.00

Dennis S. Cuyegkeng 300.00

Elisa C. Lim 100,000.00

Teodulo R. Dino 100.00


Virgilio O. Casino 100.00

2. Board of Directors

Antonio W. Lim Chairman

Dennis S. Cuyegkeng Member

Elisa C. Lim Member

Teodulo R. Dino Member

Virgilio O. Casino Member

3. Corporate Officers

Antonio W. Lim President

Dennis S. Cuyegkeng Assistant to the President

Elisa 0. Lim Treasurer

Virgilio O. Casino Corporate Secretary

4. Principal Office

355 Maysan Road

Valenzuela, Metro Manila.5

On the other hand, the General Information Sheet of HPPI revealed the following:

1. Breakdown of Subscribed Capital

Name of Stockholder Amount Subscribed

Antonio W. Lim P400,000.00

Elisa C. Lim 57,700.00

AWL Trading 455,000.00

Dennis S. Cuyegkeng 40,100.00

Teodulo R. Dino 100.00


Virgilio O. Casino 100.00

2. Board of Directors

Antonio W. Lim Chairman

Elisa C. Lim Member

Dennis S. Cuyegkeng Member

Virgilio O. Casino Member

Teodulo R. Dino Member

3. Corporate Officers

Antonio W. Lim President

Dennis S. Cuyegkeng Assistant to the President

Elisa O. Lim Treasurer

Virgilio O. Casino Corporate Secretary

4. Principal Office

355 Maysan Road, Valenzuela, Metro Manila.6

On February 1, 1990, HPPI filed an Opposition to private respondents motion for


issuance of a break-open order, contending that HPPI is a corporation which is separate
and distinct from petitioner. HPPI also alleged that the two corporations are engaged in
two different kinds of businesses, i.e., HPPI is a manufacturing firm while petitioner was
then engaged in construction.
On March 2, 1990, the Labor Arbiter issued an Order which denied private
respondents motion for break-open order.
Private respondents then appealed to the NLRC. On April 23, 1992, the NLRC set
aside the order of the Labor Arbiter, issued a break-open order and directed private
respondents to file a bond. Thereafter, it directed the sheriff to proceed with the auction
sale of the properties already levied upon. It dismissed the third-party claim for lack of
merit.
Petitioner moved for reconsideration but the motion was denied by the NLRC in a
Resolution, dated December 3, 1992.
Hence, the resort to the present petition.
Petitioner alleges that the NLRC committed grave abuse of discretion when it
ordered the execution of its decision despite a third-party claim on the levied
property. Petitioner further contends, that the doctrine of piercing the corporate veil
should not have been applied, in this case, in the absence of any showing that it created
HPPI in order to evade its liability to private respondents. It also contends that HPPI is
engaged in the manufacture and sale of steel, concrete and iron pipes, a business
which is distinct and separate from petitioners construction business. Hence, it is of no
consequence that petitioner and HPPI shared the same premises, the same President
and the same set of officers and subscribers.7
We find petitioners contention to be unmeritorious.
It is a fundamental principle of corporation law that a corporation is an entity
separate and distinct from its stockholders and from other corporations to which it may
be connected.8 But, this separate and distinct personality of a corporation is merely a
fiction created by law for convenience and to promote justice. 9 So, when the notion of
separate juridical personality is used to defeat public convenience, justify wrong, protect
fraud or defend crime, or is used as a device to defeat the labor laws, 10 this separate
personality of the corporation may be disregarded or the veil of corporate fiction
pierced.11 This is true likewise when the corporation is merely an adjunct, a business
conduit or an alter ego of another corporation.12
The conditions under which the juridical entity may be disregarded vary according to
the peculiar facts and circumstances of each case. No hard and fast rule can be
accurately laid down, but certainly, there are some probative factors of identity that will
justify the application of the doctrine of piercing the corporate veil, to wit:

1. Stock ownership by one or common ownership of both corporations.

2. Identity of directors and officers.

3. The manner of keeping corporate books and records.

4. Methods of conducting the business.13

The SEC en banc explained the instrumentality rule which the courts have applied
in disregarding the separate juridical personality of corporations as follows:

Where one corporation is so organized and controlled and its affairs are conducted so
that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the
corporate entity of the instrumentality may be disregarded. The control necessary to
invoke the rule is not majority or even complete stock control but such domination of
finances, policies and practices that the controlled corporation has, so to speak, no
separate mind, will or existence of its own, and is but a conduit for its principal. It must
be kept in mind that the control must be shown to have been exercised at the time the
acts complained of took place. Moreover, the control and breach of duty must
proximately cause the injury or unjust loss for which the complaint is made.
The test in determining the applicability of the doctrine of piercing the veil of
corporate fiction is as follows:

1. Control, not mere majority or complete stock control, but complete domination, not
only of finances but of policy and business practice in respect to the transaction
attacked so that the corporate entity as to this transaction had at the time no separate
mind, will or existence of its own;

2. Such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest and
unjust act in contravention of plaintiffs legal rights; and

3. The aforesaid control and breach of duty must proximately cause the injury or unjust
loss complained of.

The absence of any one of these elements prevents piercing the corporate veil. in
applying the instrumentality or alter ego doctrine, the courts are concerned with reality
and not form, with how the corporation operated and the individual defendants
relationship to that operation. 14

Thus, the question of whether a corporation is a mere alter ego, a mere sheet or
paper corporation, a sham or a subterfuge is purely one of fact.15
In this case, the NLRC noted that, while petitioner claimed that it ceased its
business operations on April 29, 1986, it filed an Information Sheet with the Securities
and Exchange Commission on May 15, 1987, stating that its office address is
at 355 Maysan Road, Valenzuela, Metro Manila. On the other hand, HPPI, the third-
party claimant, submitted on the same day, a similar information sheet stating that its
office address is at 355 Maysan Road, Valenzuela, Metro Manila.
Furthermore, the NLRC stated that:

Both information sheets were filed by the same Virgilio O. Casino as the corporate
secretary of both corporations. It would also not be amiss to note that both corporations
had the same president, the same board of directors, the same corporate officers, and
substantially the same subscribers.

From the foregoing, it appears that, among other things, the respondent (herein
petitioner) and the third-party claimant shared the same address and/or premises.
Under this circumstances, (sic) it cannot be said that the property levied upon by the
sheriff were not of respondents.16

Clearly, petitioner ceased its business operations in order to evade the payment to
private respondents of backwages and to bar their reinstatement to their former
positions. HPPI is obviously a business conduit of petitioner corporation and its
emergence was skillfully orchestrated to avoid the financial liability that already attached
to petitioner corporation.
The facts in this case are analogous to Claparols v. Court of Industrial
Relations17 where we had the occasion to rule:

Respondent courts findings that indeed the Claparols Steel and Nail Plant, which
ceased operation of June 30, 1957, was SUCCEEDED by the Claparols Steel
Corporation effective the next day, July 1, 1957, up to December 7, 1962, when the
latter finally ceased to operate, were not disputed by petitioner. it is very clear that the
latter corporation was a continuation and successor of the first entity x x x. Both
predecessors and successor were owned and controlled by petitioner Eduardo
Claparols and there was no break in the succession and continuity of the same
business. This avoiding-the-liability scheme is very patent, considering that 90% of the
subscribed shares of stock of the Claparols Steel Corporation (the second corporation)
was owned by respondent x x x Claparols himself, and all the assets of the dissolved
Claparols Steel and Nail Plant were turned over to the emerging Claparols Steel
Corporation.

It is very obvious that the second corporation seeks the protective shield of a
corporate fiction whose veil in the present case could, and should, be pierced as it was
deliberately and maliciously designed to evade its financial obligation to its employees.
In view of the failure of the sheriff, in the case at bar, to effect a levy upon the
property subject of the execution, private respondents had no other recourse but to
apply for a break-open order after the third-party claim of HPPI was dismissed for lack
of merit by the NLRC. This is in consonance with Section 3, Rule VII of the NLRC
Manual of Execution of Judgment which provides that:

Should the losing party, his agent or representative, refuse or prohibit the Sheriff or his
representative entry to the place where the property subject of execution is located or
kept, the judgment creditor may apply to the Commission or Labor Arbiter concerned for
a break-open order.

Furthermore, our perusal of the records shows that the twin requirements of due
notice and hearing were complied with. Petitioner and the third-party claimant were
given the opportunity to submit evidence in support of their claim.
Hence, the NLRC did not commit any grave abuse of discretion when it affirmed the
break-open order issued by the Labor Arbiter.
Finally, we do not find any reason to disturb the rule that factual findings of quasi-
judicial agencies supported by substantial evidence are binding on this Court and are
entitled to great respect, in the absence of showing of grave abuse of a discretion. 18
WHEREFORE, the petition is DISMISSED and the assailed resolutions of the
NLRC, dated April 23, 1992 and December 3, 1992, are AFFIRMED.
SO ORDERED.
DONNINA C. HALLEY, G.R. No. 157549
Petitioner,
Present:

CARPIO MORALES, Chairperson,


BRION,
-versus- BERSAMIN,
VILLARAMA, JR., and
SERENO, JJ.

Promulgated:
PRINTWELL, INC.,
Respondent. May 30, 2011
x-----------------------------------------------------------------------------------------x

DECISION

BERSAMIN, J:

Stockholders of a corporation are liable for the debts of the corporation up to the extent
of their unpaid subscriptions. They cannot invoke the veil of corporate identity as a
shield from liability, because the veil may be lifted to avoid defrauding corporate
creditors.

Weaffirm with modification the decisionpromulgated on August 14,


2002,[1]whereby the Court of Appeals(CA) upheld thedecision of the Regional Trial
Court, Branch 71, in Pasig City (RTC),[2]ordering the defendants (including the
petitioner)to pay to Printwell, Inc. (Printwell) the principal sum of P291,342.76 plus
interest.

Antecedents

The petitioner wasan incorporator and original director of Business Media


Philippines, Inc. (BMPI), which, at its incorporation on November 12, 1987, [3]had an
authorized capital stock of P3,000,000.00 divided into 300,000 shares each with a par
value of P10.00,of which 75,000 were initially subscribed, to wit:

Subscriber No. of Total Amount paid


shares subscription
Donnina C. Halley 35,000 P 350,000.00 P87,500.00
Roberto V. Cabrera, 18,000 P 180,000.00 P45,000.00
Jr.
Albert T. Yu 18,000 P 180,000.00 P45,000.00
Zenaida V. Yu 2,000 P 20,000.00 P5,000.00
Rizalino C. Vineza 2,000 P 20,000.00 P5,000.00
TOTAL 75,000 P750,000.00 P187,500.00

Printwellengaged in commercial and industrial printing.BMPI commissioned


Printwell for the printing of the magazine Philippines, Inc. (together with wrappers and
subscription cards) that BMPI published and sold. For that purpose, Printwell extended
30-day credit accommodations to BMPI.

In the period from October 11, 1988 until July 12, 1989, BMPI placedwith
Printwell several orders on credit, evidenced byinvoices and delivery receipts
totalingP316,342.76.Considering that BMPI paidonlyP25,000.00,Printwell suedBMPIon
January 26, 1990 for the collection of the unpaid balance of P291,342.76 in the RTC.[4]

On February 8, 1990,Printwell amended thecomplaint in order to implead as


defendants all the original stockholders and incorporators to recover on theirunpaid
subscriptions, as follows:[5]

Name Unpaid Shares


Donnina C. Halley P 262,500.00
Roberto V. Cabrera, Jr. P135,000.00
Albert T. Yu P135,000.00
Zenaida V. Yu P15,000.00
Rizalino C. Vieza P15,000.00
TOTAL P 562,500.00

The defendants filed a consolidated answer,[6]averring that they all had paid their
subscriptions in full; that BMPI had a separate personality from those of its
stockholders; thatRizalino C. Vieza had assigned his fully-paid up sharesto a certain
Gerardo R. Jacinto in 1989; andthat the directors and stockholders of BMPI had
resolved to dissolve BMPI during the annual meetingheld on February 5, 1990.

To prove payment of their subscriptions, the defendantstockholderssubmitted in


evidenceBMPI official receipt (OR) no. 217, OR no. 218, OR no. 220,OR no. 221, OR
no. 222, OR no. 223, andOR no. 227,to wit:

Receipt Date Name Amount


No.
217 November 5, Albert T. Yu P 45,000.00
1987
218 May 13, 1988 Albert T. Yu P 135,000.00
220 May 13, 1988 Roberto V. Cabrera, P 135,000.00
Jr.
221 November 5, Roberto V. Cabrera, P 45,000.00
1987 Jr.
222 November 5, Zenaida V. Yu P 5,000.00
1987
223 May 13, 1988 Zenaida V. Yu P 15,000.00
227 May 13, 1988 Donnina C. Halley P 262,500.00

In addition, the stockholderssubmitted other documentsin evidence, namely:(a) an audit


report dated March 30, 1989 prepared by Ilagan, Cepillo & Associates (submitted to the
SEC and the BIR);[7](b) BMPIbalance sheet[8] and income statement[9]as of December
31, 1988; (c) BMPI income tax return for the year 1988 (stamped received by the
BIR);[10](d) journal vouchers;[11](e) cash deposit slips;[12] and(f)Bank of the Philippine
Islands (BPI) savings account passbookin the name of BMPI.[13]

Ruling of the RTC

On November 3, 1993, the RTC rendereda decision in favor of Printwell, rejecting the
allegation of payment in full of the subscriptions in view of an irregularity in the issuance
of the ORs and observingthat the defendants had used BMPIs corporate personality to
evade payment and create injustice, viz:
The claim of individual defendants that they have fully paid their
subscriptions to defend[a]nt corporation, is not worthy of consideration,
because:

a) in the case of defendants-spouses Albert and Zenaida Yu, it will


be noted that the alleged payment made on May 13,
1988 amounting to P135,000.00, is covered by Official Receipt No.
218 (Exh. 2), whereas the alleged payment made earlier
on November 5, 1987, amounting to P5,000.00, is covered by
Official Receipt No. 222 (Exh. 3). This is cogent proof that said
receipts were belatedly issued just to suit their theory since in the
ordinary course of business, a receipt issued earlier must have
serial numbers lower than those issued on a later date. But in the
case at bar, the receipt issued on November 5, 1987 has serial
numbers (222) higher than those issued on a later date (May 13,
1988).

b) The claim that since there was no call by the Board of Directors
of defendant corporation for the payment of unpaid subscriptions
will not be a valid excuse to free individual defendants from liability.
Since the individual defendants are members of the Board of
Directors of defendantcorporation, it was within their exclusive
power to prevent the fulfillment of the condition, by simply not
making a call for the payment of the unpaid subscriptions. Their
inaction should not work to their benefit and unjust enrichment at
the expense of plaintiff.
Assuming arguendo that the individual defendants have paid their
unpaid subscriptions, still, it is very apparent that individual defendants
merely used the corporate fiction as a cloak or cover to create an injustice;
hence, the alleged separate personality of defendant corporation should
be disregarded (Tan Boon Bee & Co., Inc. vs. Judge Jarencio, G.R. No.
41337, 30 June 1988).[14]
Applying the trust fund doctrine, the RTC declared the defendant stockholders liable to
Printwell pro rata, thusly:

Defendant Business Media, Inc. is a registered corporation (Exhibits


A, A-1 to A-9), and, as appearing from the Articles of Incorporation,
individual defendants have the following unpaid subscriptions:
Names Unpaid Subscription
Donnina C. Halley P262,500.00
Roberto V. Cabrera, Jr. 135.000.00
Albert T. Yu 135,000.00
Zenaida V. Yu 15,000.00
Rizalino V. Vineza 15,000.00
--------------------
Total P562,500.00
and it is an established doctrine that subscriptions to the capital stock of a
corporation constitute a fund to which creditors have a right to look for
satisfaction of their claims (Philippine National Bank vs. Bitulok Sawmill,
Inc., 23 SCRA 1366) and, in fact, a corporation has no legal capacity to
release a subscriber to its capital stock from the obligation to pay for his
shares, and any agreement to this effect is invalid (Velasco vs. Poizat, 37
Phil. 802).

The liability of the individual stockholders in the instant case shall be


pro-rated as follows:

Names Amount
Donnina C. Halley P149,955.65
Roberto V. Cabrera, Jr. 77,144.55
Albert T. Yu 77,144.55
Zenaida V. Yu 8,579.00
Rizalino V. Vineza 8,579.00
------------------
Total P321,342.75[15]

The RTC disposed as follows:


WHEREFORE, judgment is hereby rendered in favor of plaintiff and
against defendants, ordering defendants to pay to plaintiff the amount
of P291,342.76, as principal, with interest thereon at 20% per annum, from
date of default, until fully paid, plus P30,000.00 as attorneys fees, plus
costs of suit.

Defendants counterclaims are ordered dismissed for lack of merit.

SO ORDERED.[16]

Ruling of the CA

All the defendants, except BMPI, appealed.

Spouses Donnina and Simon Halley, andRizalinoVieza defined the following


errors committed by the RTC, as follows:

I.
THE TRIAL COURT ERRED IN HOLDING APPELLANTS-
STOCKHOLDERS LIABLE FOR THE LIABILITIES OF THE DEFENDANT
CORPORATION.
II.
ASSUMING ARGUENDO THAT APPELLANTS MAY BE LIABLE TO THE
EXTENT OF THEIR UNPAID SUBSCRIPTION OF SHARES OF STOCK,
IF ANY, THE TRIAL COURT NONETHELESS ERRED IN NOT FINDING
THAT APPELLANTS-STOCKHOLDERS HAVE, AT THE TIME THE SUIT
WAS FILED, NO SUCH UNPAID SUBSCRIPTIONS.

On their part, Spouses Albert and Zenaida Yu averred:

I.
THE RTC ERRED IN REFUSING TO GIVE CREDENCE AND WEIGHT
TO DEFENDANTS-APPELLANTS SPOUSES ALBERT AND ZENAIDA
YUS EXHIBITS 2 AND 3 DESPITE THE UNREBUTTED TESTIMONY
THEREON BY APPELLANT ALBERT YU AND THE ABSENCE OF
PROOF CONTROVERTING THEM.

II.
THE RTC ERRED IN HOLDING DEFENDANTS-APPELLANTS
SPOUSES ALBERT AND ZENAIDA YU PERSONALLY LIABLE FOR THE
CONTRACTUAL OBLIGATION OF BUSINESS MEDIA PHILS., INC.
DESPITE FULL PAYMENT BY SAID DEFENDANTS-APPELLANTS OF
THEIR RESPECTIVE SUBSCRIPTIONS TO THE CAPITAL STOCK OF
BUSINESS MEDIA PHILS., INC.

Roberto V. Cabrera, Jr. argued:

I.
IT IS GRAVE ERROR ON THE PART OF THE COURT A QUO TO
APPLY THE DOCTRINE OF PIERCING THE VEIL OF CORPORATE
PERSONALITY IN ABSENCE OF ANY SHOWING OF EXTRA-
ORDINARY CIRCUMSTANCES THAT WOULD JUSTIFY RESORT
THERETO.

II.
IT IS GRAVE ERROR ON THE PART OF THE COURT A QUO TO RULE
THAT INDIVIDUAL DEFENDANTS ARE LIABLE TO PAY THE
PLAINTIFF-APPELLEES CLAIM BASED ON THEIR RESPECTIVE
SUBSCRIPTION. NOTWITHSTANDING OVERWHELMING EVIDENCE
SHOWING FULL SETTLEMENT OF SUBSCRIBED CAPITAL BY THE
INDIVIDUAL DEFENDANTS.
On August 14, 2002, the CA affirmed the RTC, holding that the defendants resort to the
corporate personality would createan injustice becausePrintwell would thereby be at a
loss against whom it would assert the right to collect, viz:

Settled is the rule that when the veil of corporate fiction is used as a
means of perpetrating fraud or an illegal act or as a vehicle for the evasion
of an existing obligation, the circumvention of statutes, the achievements
or perfection of 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 (First Philippine
International Bank vs. Court of Appeals, 252 SCRA 259). Moreover, under
this doctrine, the corporate existence may be disregarded where the entity
is formed or used for non-legitimate purposes, such as to evade a just and
due obligations or to justify wrong (Claparols vs. CIR, 65 SCRA 613).

In the case at bench, it is undisputed that BMPI made several orders on


credit from appellee PRINTWELL involving the printing of business
magazines, wrappers and subscription cards, in the total amount of
P291,342.76 (Record pp. 3-5, Annex A) which facts were never denied by
appellants stockholders that they owe appellee the amount of
P291,342.76. The said goods were delivered to and received by BMPI but
it failed to pay its overdue account to appellee as well as the interest
thereon, at the rate of 20% per annum until fully paid. It was also during
this time that appellants stockholders were in charge of the operation of
BMPI despite the fact that they were not able to pay their unpaid
subscriptions to BMPI yet greatly benefited from said transactions. In view
of the unpaid subscriptions, BMPI failed to pay appellee of its liability,
hence appellee in order to protect its right can collect from the appellants
stockholders regarding their unpaid subscriptions. To deny appellee from
recovering from appellants would place appellee in a limbo on where to
assert their right to collect from BMPI since the stockholders who are
appellants herein are availing the defense of corporate fiction to evade
payment of its obligations.[17]

Further, the CA concurred with the RTC on theapplicability of thetrust fund doctrine,
under which corporate debtors might look to the unpaid subscriptions for the satisfaction
of unpaid corporate debts, stating thus:

It is an established doctrine that subscription to the capital stock of a


corporation constitute a fund to which creditors have a right to look up to
for satisfaction of their claims, and that the assignee in insolvency can
maintain an action upon any unpaid stock subscription in order to realize
assets for the payment of its debts (PNB vs. Bitulok Sawmill, 23 SCRA
1366).

Premised on the above-doctrine, an inference could be made that the


funds, which consists of the payment of subscriptions of the stockholders,
is where the creditors can claim monetary considerations for the
satisfaction of their claims. If these funds which ought to be fully
subscribed by the stockholders were not paid or remain an unpaid
subscription of the corporation then the creditors have no other recourse
to collect from the corporation of its liability. Such occurrence was evident
in the case at bar wherein the appellants as stockholders failed to fully pay
their unpaid subscriptions, which left the creditors helpless in collecting
their claim due to insufficiency of funds of the corporation. Likewise, the
claim of appellants that they already paid the unpaid subscriptions could
not be given weight because said payment did not reflect in the Articles of
Incorporations of BMPI that the unpaid subscriptions were fully paid by the
appellants stockholders. For it is a rule that a stockholder may be sued
directly by creditors to the extent of their unpaid subscriptions to the
corporation (Keller vs. COB Marketing, 141 SCRA 86).

Moreover, a corporation has no power to release a subscription or its


capital stock, without valuable consideration for such releases, and as
against creditors, a reduction of the capital stock can take place only in the
manner and under the conditions prescribed by the statute or the charter
or the Articles of Incorporation. (PNB vs. Bitulok Sawmill, 23 SCRA
1366).[18]

The CAdeclared thatthe inconsistency in the issuance of the ORs rendered the claim of
full payment of the subscriptions to the capital stock unworthy of consideration; andheld
that the veil of corporate fiction could be pierced when it was used as a shield to
perpetrate a fraud or to confuse legitimate issues, to wit:

Finally, appellants SPS YU, argued that the fact of full payment for
the unpaid subscriptions was incontrovertibly established by competent
testimonial and documentary evidence, namely Exhibits 1, 2, 3 & 4, which
were never disputed by appellee, clearly shows that they should not be
held liable for payment of the said unpaid subscriptions of BMPI.

The reliance is misplaced.

We are hereby reproducing the contents of the above-mentioned


exhibits, to wit:
Exh: 1 YU Official Receipt No. 217 dated November 5,
1987 amounting to P45,000.00 allegedly representing the initial
payment of subscriptions of stockholder Albert Yu.
Exh: 2 YU Official Receipt No. 218 dated May 13, 1988
amounting to P135,000.00 allegedly representing full payment of
balance of subscriptions of stockholder Albert Yu. (Record p. 352).
Exh: 3 YU Official Receipt No. 222 dated November 5,
1987 amounting to P5,000.00 allegedly representing the initial
payment of subscriptions of stockholder Zenaida Yu.
Exh: 4 YU Official Receipt No. 223 dated May 13,
1988 amounting to P15,000.00 allegedly representing the full
payment of balance of subscriptions of stockholder Zenaida Yu.
(Record p. 353).

Based on the above exhibits, we are in accord with the lower courts
findings that the claim of the individual appellants that they fully paid their
subscription to the defendant BMPI is not worthy of consideration,
because, in the case of appellants SPS. YU, there is an inconsistency
regarding the issuance of the official receipt since the alleged payment
made on May 13, 1988 amounting to P135,000.00 was covered by Official
Receipt No. 218 (Record, p. 352), whereas the alleged payment made
earlier on November 5, 1987 amounting to P5,000.00 is covered by
Official Receipt No. 222 (Record, p. 353). Such issuance is a clear
indication that said receipts were belatedly issued just to suit their claim
that they have fully paid the unpaid subscriptions since in the ordinary
course of business, a receipt is issued earlier must have serial numbers
lower than those issued on a later date. But in the case at bar, the receipt
issued on November 5, 1987 had a serial number (222) higher than those
issued on May 13, 1988 (218). And even assuming arguendo that the
individual appellants have paid their unpaid subscriptions, still, it is very
apparent that the veil of corporate fiction may be pierced when made as a
shield to perpetuate fraud and/or confuse legitimate issues. (Jacinto vs.
Court of Appeals, 198 SCRA 211).[19]

Spouses Halley and Vieza moved for a reconsideration, but the CA denied their motion
for reconsideration.

Issues
Only Donnina Halley has come to the Court to seek a further review, positing the
following for our consideration and resolution, to wit:

I.
THE COURT OF APPEALS ERRED IN AFFIRMING IN TOTO THE
DECISION THAT DID NOTSTATE THE FACTS AND THE LAW UPON
WHICH THE JUDGMENT WAS BASED BUT MERELY COPIED THE
CONTENTS OF RESPONDENTS MEMORANDUM ADOPTING THE
SAME AS THE REASON FOR THE DECISION

II.
THE COURT OF APPEALS ERRED IN AFFIRMING THE DECISION OF
THE REGIONAL TRIAL COURT WHICH ESSENTIALLY ALLOWED THE
PIERCING OF THE VEIL OF CORPORATE FICTION

III.
THE HONORABLE COURT OF APPEALS ERRED IN APPLYING THE
TRUST FUND DOCTRINE WHEN THE GROUNDS THEREFOR HAVE
NOT BEEN SATISFIED.

On the first error, the petitioner contends that the RTC lifted verbatim from the
memorandum of Printwell; and submits that the RTCthereby violatedthe requirement
imposed in Section 14, Article VIII of the Constitution [20] as well as in Section 1,Rule 36
of the Rules of Court,[21]to the effect that a judgment or final order of a court should state
clearly and distinctly the facts and the law on which it is based. The petitioner claims
that the RTCs violation indicated that the RTC did not analyze the case before
rendering its decision, thus denying her the opportunity to analyze the decision; andthat
a suspicion of partiality arose from the fact that the RTC decision was but a replica of
Printwells memorandum.She cites Francisco v. Permskul,[22] in which the Court has
stated that the reason underlying the constitutional requirement, that every decision
should clearly and distinctly state the facts and the law on which it is based, is to inform
the reader of how the court has reached its decision and thereby give the losing party
an opportunity to study and analyze the decision and enable such party to appropriately
assign the errors committed therein on appeal.

On the second and third errors, the petitioner maintains that the CA and the RTC
erroneously pierced the veil of corporate fiction despite the absence of cogent proof
showing that she, as stockholder of BMPI, had any hand in transacting with Printwell;
thatthe CA and the RTC failed to appreciate the evidence that she had fully paid her
subscriptions; and the CA and the RTCwrongly relied on the articles of incorporation in
determining the current list of unpaid subscriptions despite the articles of
incorporationbeing at best reflectiveonly of the pre-incorporation status of BMPI.

As her submissions indicate, the petitioner assails the decisions of the CA on: (a) the
propriety of disregarding the separate personalities of BMPI and its stockholdersby
piercing the thin veil that separated them; and (b) the application of the trust fund
doctrine.

Ruling

The petition for review fails.

I
The RTC did not violate
the Constitution and the Rules of Court

The contention of the petitioner, that the RTC merely copied the memorandum of
Printwell in writing its decision, and did not analyze the records on its own, thereby
manifesting a bias in favor of Printwell, is unfounded.

It is noted that the petition for review merely generally alleges that starting from
its page 5, the decision of the RTC copied verbatim the allegations of herein
Respondents in its Memorandum before the said court, as if the Memorandum was the
draft of the Decision of the Regional Trial Court of Pasig, [23]but fails to specify either the
portions allegedly lifted verbatim from the memorandum, or why she regards the
decision as copied. The omission renders thepetition for review insufficient to support
her contention, considering that the mere similarityin language or thought between
Printwells memorandum and the trial courts decisiondid not necessarily justify the
conclusion that the RTC simply lifted verbatim or copied from thememorandum.

It is to be observed in this connection that a trial or appellate judge may


occasionally viewa partys memorandum or brief as worthy of due consideration either
entirely or partly. When he does so, the judgemay adopt and incorporatein his
adjudicationthe memorandum or the parts of it he deems suitable,and yet not be guilty
of the accusation of lifting or copying from the memorandum. [24] This isbecause ofthe
avowed objective of the memorandum to contribute in the proper illumination and
correct determination of the controversy.Nor is there anything untoward in the
congruence of ideas and views about the legal issues between himself and the party
drafting the memorandum.The frequency of similarities in argumentation, phraseology,
expression, and citation of authorities between the decisions of the courts and the
memoranda of the parties, which may be great or small, can be fairly attributable tothe
adherence by our courts of law and the legal profession to widely knownor universally
accepted precedents set in earlier judicial actions with identical factual milieus or posing
related judicial dilemmas.

We also do not agree with the petitioner that the RTCs manner of writing the
decisiondeprivedher ofthe opportunity to analyze its decisionas to be able to assign
errors on appeal. The contrary appears, considering that she was able to impute and
assignerrors to the RTCthat she extensively discussed in her appeal in the CA,
indicating her thorough analysis ofthe decision of the RTC.

Our own readingof the trial courts decision persuasively shows that the RTC did
comply with the requirements regarding the content and the manner of writing a
decision prescribed in the Constitution and the Rules of Court. The decision of the RTC
contained clear and distinct findings of facts, and stated the applicablelaw and
jurisprudence, fully explaining why the defendants were being held liable to the
plaintiff. In short, the reader was at once informed of the factual and legal reasons for
the ultimate result.

II
Corporate personality not to be used to foster injustice

Printwell impleaded the petitioner and the other stockholders of BMPI for two
reasons, namely: (a) to reach the unpaid subscriptions because it appeared that such
subscriptions were the remaining visible assets of BMPI; and (b) to avoid multiplicity of
suits.[25]
The petitionersubmits that she had no participation in the transaction between
BMPI and Printwell;that BMPI acted on its own; and that shehad no hand in persuading
BMPI to renege on its obligation to pay. Hence, she should not be personally liable.

We rule against the petitioners submission.

Although a corporation has a personality separate and distinct from those of its
stockholders, directors, or officers,[26]such separate and distinct personality is merely a
fiction created by law for the sake of convenience and to promote the ends of
justice.[27]The corporate personality may be disregarded, and the individuals composing
the corporation will be treated as individuals, if the corporate entity is being used as a
cloak or cover for fraud or illegality;as a justification for a wrong; as an alter ego, an
adjunct, or a business conduit for the sole benefit of the stockholders. [28] As a general
rule, a corporation is looked upon as a legal entity, unless and until sufficient reason to
the contrary appears. Thus,the courts always presume good faith, andfor that reason
accord prime importance to the separate personality of the corporation, disregarding the
corporate personality only after the wrongdoing is first clearly and convincingly
established.[29]It thus behooves the courts to be careful in assessing the milieu where
the piercing of the corporate veil shall be done.[30]

Although nowhere in Printwells amended complaint or in the testimonies Printwell


offered can it be read or inferred from that the petitioner was instrumental in persuading
BMPI to renege onits obligation to pay; or that sheinduced Printwell to extend the credit
accommodation by misrepresenting the solvency of BMPI toPrintwell, her personal
liability, together with that of her co-defendants, remainedbecause the CA found her and
the other defendant stockholders to be in charge of the operations of BMPI at the time
the unpaid obligation was transacted and incurred, to wit:
In the case at bench, it is undisputed that BMPI made several orders
on credit from appellee PRINTWELL involving the printing of business
magazines, wrappers and subscription cards, in the total amount
of P291,342.76 (Record pp. 3-5, Annex A) which facts were never denied
by appellants stockholders that they owe(d) appellee the amount
of P291,342.76. The said goods were delivered to and received by BMPI
but it failed to pay its overdue account to appellee as well as the interest
thereon, at the rate of 20% per annum until fully paid. It was also during
this time that appellants stockholders were in charge of the operation of
BMPI despite the fact that they were not able to pay their unpaid
subscriptions to BMPI yet greatly benefited from said transactions. In view
of the unpaid subscriptions, BMPI failed to pay appellee of its liability,
hence appellee in order to protect its right can collect from the appellants
stockholders regarding their unpaid subscriptions. To deny appellee from
recovering from appellants would place appellee in a limbo on where to
assert their right to collect from BMPI since the stockholders who are
appellants herein are availing the defense of corporate fiction to evade
payment of its obligations.[31]

It follows, therefore, that whether or not the petitioner persuaded BMPI to renege
on its obligations to pay, and whether or not she induced Printwell to transact with BMPI
were not gooddefensesin the suit.

III
Unpaid creditor may satisfy its claim from
unpaid subscriptions;stockholders must
prove full payment oftheir subscriptions

Both the RTC and the CA applied the trust fund doctrineagainst the defendant
stockholders, including the petitioner.

The petitionerargues, however,that the trust fund doctrinewas


inapplicablebecause she had already fully paid her subscriptions to the capital stock of
BMPI. She thus insiststhat both lower courts erred in disregarding the evidence on the
complete payment of the subscription, like receipts, income tax returns, and relevant
financial statements.

The petitioners argumentis devoid of substance.

The trust fund doctrineenunciates a

xxx rule that the property of a corporation is a trust fund for the
payment of creditors, but such property can be called a trust fund only by
way of analogy or metaphor. As between the corporation itself and its
creditors it is a simple debtor, and as between its creditors and
stockholders its assets are in equity a fund for the payment of its debts. [32]
The trust fund doctrine, first enunciated in the American case of Wood v.
Dummer,[33]was adopted in our jurisdiction in Philippine Trust Co. v. Rivera,[34]where
thisCourt declared that:

It is established doctrine that subscriptions to the capital of a


corporation constitute a fund to which creditors have a right to look for
satisfaction of their claims and that the assignee in insolvency can
maintain an action upon any unpaid stock subscription in order to realize
assets for the payment of its debts. (Velasco vs. Poizat, 37 Phil., 802)
xxx[35]

We clarify that the trust fund doctrineis not limited to reaching the stockholders
unpaid subscriptions. The scope of the doctrine when the corporation is insolvent
encompasses not only the capital stock, but also other property and assets generally
regarded in equity as a trust fund for the payment of corporate debts. [36]All assets and
property belonging to the corporation held in trust for the benefit of creditors thatwere
distributed or in the possession of the stockholders, regardless of full paymentof their
subscriptions, may be reached by the creditor in satisfaction of its claim.

Also, under the trust fund doctrine,a corporation has no legal capacity to release
an original subscriber to its capital stock from the obligation of paying for his shares, in
whole or in part,[37] without a valuable consideration,[38] or fraudulently, to the prejudice
of creditors.[39]The creditor is allowed to maintain an action upon any unpaid
subscriptions and thereby steps into the shoes of the corporation for the satisfaction of
its debt.[40]To make out a prima facie case in a suit against stockholders of an insolvent
corporation to compel them to contribute to the payment of its debts by making good
unpaid balances upon their subscriptions, it is only necessary to establish that
thestockholders have not in good faith paid the par value of the stocks of the
corporation.[41]

The petitionerposits that the finding of irregularity attending the issuance of the
receipts (ORs) issued to the other stockholders/subscribers should not affect her
becauseher receipt did not suffer similar irregularity.

Notwithstanding that the RTC and the CA did not find any irregularity in the OR
issued in her favor,we still cannot sustain the petitioners defense of full payment of her
subscription.
In civil cases, theparty who pleads payment has the burden of proving it, that
even where the plaintiff must allege nonpayment, the general rule is that the burden
rests on the defendant to prove payment, rather than on the plaintiff to prove
nonpayment. In other words, the debtor bears the burden of showing with legal
certainty that the obligation has been discharged by payment. [42]

Apparently, the petitioner failed to discharge her burden.

A receipt is the written acknowledgment of the fact of payment in money or other


settlement between the seller and the buyer of goods, thedebtor or thecreditor, or
theperson rendering services, and theclient or thecustomer.[43]Althougha receipt is the
best evidence of the fact of payment, it isnot conclusive, but merely presumptive;nor is it
exclusive evidence,considering thatparole evidence may also establishthe fact of
payment.[44]

The petitioners ORNo. 227,presentedto prove the payment of the balance of her
subscription, indicated that her supposed payment had beenmade by means of a check.
Thus, to discharge theburden to prove payment of her subscription, she had to adduce
evidence satisfactorily proving that her payment by check wasregardedas payment
under the law.

Paymentis defined as the delivery of money.[45]Yet, because a check is not


money and only substitutes for money, the delivery of a check does not operate as
payment and does not discharge the obligation under a judgment.[46] The delivery of a
bill of exchange only produces the fact of payment when the bill has been
encashed.[47]The following passage fromBank of Philippine Islands v. Royeca[48]is
enlightening:

Settled is the rule that payment must be made in legal tender. A


check is not legal tender and, therefore, cannot constitute a valid
tender of payment. Since a negotiable instrument is only a substitute
for money and not money, the delivery of such an instrument does
not, by itself, operate as payment. Mere delivery of checks does not
discharge the obligation under a judgment. The obligation is not
extinguished and remains suspended until the payment by
commercial document is actually realized.
To establish their defense, the respondents therefore had to
present proof, not only that they delivered the checks to the
petitioner, but also that the checks were encashed. The respondents
failed to do so. Had the checks been actually encashed, the
respondents could have easily produced the cancelled checks as
evidence to prove the same. Instead, they merely averred that they
believed in good faith that the checks were encashed because they
were not notified of the dishonor of the checks and three years had
already lapsed since they issued the checks.

Because of this failure of the respondents to present sufficient proof


of payment, it was no longer necessary for the petitioner to prove non-
payment, particularly proof that the checks were dishonored. The burden
of evidence is shifted only if the party upon whom it is lodged was able to
adduce preponderant evidence to prove its claim.

Ostensibly, therefore, the petitioners mere submission of the receipt issued in


exchange of the check did not satisfactorily establish her allegation of full payment of
her subscription. Indeed, she could not even inform the trial court about the identity of
her drawee bank,[49]and about whether the check was cleared and its amount paid to
BMPI.[50]In fact, she did not present the check itself.

Theincome tax return (ITR) and statement of assets and liabilities of BMPI, albeit
presented, had no bearing on the issue of payment of the subscription because they did
not by themselves prove payment. ITRsestablish ataxpayers liability for taxes or a
taxpayers claim for refund. In the same manner, the deposit slips and entries in the
passbook issued in the name of BMPI were hardly relevant due to their not reflecting
the alleged payments.

It is notable, too, that the petitioner and her co-stockholders did not support their
allegation of complete payment of their respective subscriptions with the stock and
transfer book of BMPI. Indeed, books and records of a corporation (including the stock
and transfer book) are admissible in evidence in favor of or against the corporation and
its members to prove the corporate acts, its financial status and other matters (like the
status of the stockholders), and are ordinarily the best evidence of corporate acts and
proceedings.[51]Specifically, a stock and transfer book is necessary as a measure of
precaution, expediency, and convenience because it provides the only certain and
accurate method of establishing the various corporate acts and transactions and of
showing the ownership of stock and like matters.[52]That she tendered no explanation
why the stock and transfer book was not presented warrants the inference that the book
did not reflect the actual payment of her subscription.

Nor did the petitioner present any certificate of stock issued by BMPI to her. Such
a certificate covering her subscription might have been a reliable evidence of full
payment of the subscriptions, considering that under Section 65 of the Corporation
Code a certificate of stock issues only to a subscriber who has fully paid his
subscription. The lack of any explanation for the absence of a stock certificate in her
favor likewise warrants an unfavorable inference on the issue of payment.

Lastly, the petitioner maintains that both lower courts erred in relying on
the articles of incorporationas proof of the liabilities of the stockholders subscribing to
BMPIs stocks, averring that the articles of incorporationdid not reflect the latest
subscription status of BMPI.

Although the articles of incorporation may possibly reflect only the pre-
incorporation status of a corporation, the lower courts reliance on that document to
determine whether the original subscribersalready fully paid their subscriptions or not
was neither unwarranted nor erroneous. As earlier explained, the burden of establishing
the fact of full payment belonged not to Printwell even if it was the plaintiff, but to the
stockholders like the petitioner who, as the defendants, averredfull payment of their
subscriptions as a defense. Their failure to substantiate their averment of full payment,
as well as their failure to counter the reliance on the recitals found in the articles of
incorporation simply meant their failure or inability to satisfactorily prove their defense of
full payment of the subscriptions.

To reiterate, the petitionerwas liablepursuant to the trust fund doctrine for the
corporate obligation of BMPI by virtue of her subscription being still unpaid. Printwell, as
BMPIs creditor,had a right to reachher unpaid subscription in satisfaction of its claim.

IV
Liability of stockholders for corporate debts isup
to the extentof their unpaid subscription
The RTC declared the stockholders pro rata liable for the debt(based on the
proportion to their shares in the capital stock of BMPI); and held the petitionerpersonally
liable onlyin the amount of P149,955.65.

We do not agree. The RTC lacked the legal and factual support for its prorating
the liability. Hence, we need to modify the extent of the petitioners personal liability to
Printwell. The prevailing rule is that a stockholder is personally liable for the financial
obligations of the corporation to the extent of his unpaid subscription.[53]In view ofthe
petitioners unpaid subscription being worth P262,500.00, shewas liable up to that
amount.

Interest is also imposable on the unpaid obligation. Absent any stipulation,


interest is fixed at 12% per annum from the date the amended complaint was filed on
February 8, 1990 until the obligation (i.e., to the extent of the petitioners personal
liability of P262,500.00) is fully paid.[54]

Lastly, we find no basis togrant attorneys fees, the award for which must be
supported by findings of fact and of law as provided under Article 2208 of the Civil
Code[55]incorporated in the body of decision of the trial court. The absence of the
requisite findings from the RTC decision warrants the deletion of the attorneys fees.

ACCORDINGLY, we deny the petition for review on certiorari;and affirm with


modification the decision promulgated on August 14, 2002by ordering the petitionerto
pay to Printwell, Inc. the sum of P262,500.00, plus interest of 12% per annum to be
computed from February 8, 1990 until full payment.

The petitioner shall paycost of suit in this appeal.

SO ORDERED.

G.R. No. 96161 February 21, 1992


PHILIPS EXPORT B.V., PHILIPS ELECTRICAL LAMPS, INC. and PHILIPS
INDUSTRIAL DEVELOPMENT, INC., petitioners,
vs.
COURT OF APPEALS, SECURITIES & EXCHANGE COMMISSION and STANDARD
PHILIPS CORPORATION, respondents.

Emeterio V. Soliven & Associates for petitioners.

Narciso A. Manantan for private respondent.

MELENCIO-HERRERA, J.:

Petitioners challenge the Decision of the Court of Appeals, dated 31 July 1990, in CA-
GR Sp. No. 20067, upholding the Order of the Securities and Exchange Commission,
dated 2 January 1990, in SEC-AC No. 202, dismissing petitioners' prayer for the
cancellation or removal of the word "PHILIPS" from private respondent's corporate
name.

Petitioner Philips Export B.V. (PEBV), a foreign corporation organized under the laws of
the Netherlands, although not engaged in business here, is the registered owner of the
trademarks PHILIPS and PHILIPS SHIELD EMBLEM under Certificates of Registration
Nos. R-1641 and R-1674, respectively issued by the Philippine Patents Office (presently
known as the Bureau of Patents, Trademarks and Technology Transfer). Petitioners
Philips Electrical Lamps, Inc. (Philips Electrical, for brevity) and Philips Industrial
Developments, Inc. (Philips Industrial, for short), authorized users of the trademarks
PHILIPS and PHILIPS SHIELD EMBLEM, were incorporated on 29 August 1956 and 25
May 1956, respectively. All petitioner corporations belong to the PHILIPS Group of
Companies.

Respondent Standard Philips Corporation (Standard Philips), on the other hand, was
issued a Certificate of Registration by respondent Commission on 19 May 1982.

On 24 September 1984, Petitioners filed a letter complaint with the Securities &
Exchange Commission (SEC) asking for the cancellation of the word "PHILIPS" from
Private Respondent's corporate name in view of the prior registration with the Bureau of
Patents of the trademark "PHILIPS" and the logo "PHILIPS SHIELD EMBLEM" in the
name of Petitioner, PEBV, and the previous registration of Petitioners Philips Electrical
and Philips Industrial with the SEC.

As a result of Private Respondent's refusal to amend its Articles of Incorporation,


Petitioners filed with the SEC, on 6 February 1985, a Petition (SEC Case No. 2743)
praying for the issuance of a Writ of Preliminary Injunction, alleging, among others, that
Private Respondent's use of the word PHILIPS amounts to an infringement and clear
violation of Petitioners' exclusive right to use the same considering that both parties
engage in the same business.

In its Answer, dated 7 March 1985, Private Respondent countered that Petitioner PEBV
has no legal capacity to sue; that its use of its corporate name is not at all similar to
Petitioners' trademark PHILIPS when considered in its entirety; and that its products
consisting of chain rollers, belts, bearings and cutting saw are grossly different from
Petitioners' electrical products.

After conducting hearings with respect to the prayer for Injunction; the SEC Hearing
Officer, on 27 September 1985, ruled against the issuance of such Writ.

On 30 January 1987, the same Hearing Officer dismissed the Petition for lack of merit.
In so ruling, the latter declared that inasmuch as the SEC found no sufficient ground for
the granting of injunctive relief on the basis of the testimonial and documentary
evidence presented, it cannot order the removal or cancellation of the word "PHILIPS"
from Private Respondent's corporate name on the basis of the same evidence
adopted in toto during trial on the merits. Besides, Section 18 of the Corporation Code
(infra) is applicable only when the corporate names in question are identical. Here, there
is no confusing similarity between Petitioners' and Private Respondent's corporate
names as those of the Petitioners contain at least two words different from that of the
Respondent. Petitioners' Motion for Reconsideration was likewise denied on 17 June
1987.

On appeal, the SEC en banc affirmed the dismissal declaring that the corporate names
of Petitioners and Private Respondent hardly breed confusion inasmuch as each
contains at least two different words and, therefore, rules out any possibility of confusing
one for the other.

On 30 January 1990, Petitioners sought an extension of time to file a Petition for Review
on Certiorari before this Court, which Petition was later referred to the Court of Appeals
in a Resolution dated 12 February 1990.

In deciding to dismiss the petition on 31 July 1990, the Court of


Appeals1 swept aside Petitioners' claim that following the ruling in Converse Rubber
Corporation v. Universal Converse Rubber Products, Inc., et al, (G. R. No. L-27906,
January 8, 1987, 147 SCRA 154), the word PHILIPS cannot be used as part of Private
Respondent's corporate name as the same constitutes a dominant part of Petitioners'
corporate names. In so holding, the Appellate Court observed that the Converse case is
not four-square with the present case inasmuch as the contending parties
in Converse are engaged in a similar business, that is, the manufacture of rubber
shoes. Upholding the SEC, the Appellate Court concluded that "private respondents'
products consisting of chain rollers, belts, bearings and cutting saw are unrelated and
non-competing with petitioners' products i.e. electrical lamps such that consumers
would not in any probability mistake one as the source or origin of the product of the
other."
The Appellate Court denied Petitioners' Motion for Reconsideration on 20 November
1990, hence, this Petition which was given due course on 22 April 1991, after which the
parties were required to submit their memoranda, the latest of which was received on 2
July 1991. In December 1991, the SEC was also required to elevate its records for the
perusal of this Court, the same not having been apparently before respondent Court of
Appeals.

We find basis for petitioners' plea.

As early as Western Equipment and Supply Co. v. Reyes, 51 Phil. 115 (1927), the Court
declared that a corporation's right to use its corporate and trade name is a property
right, a right in rem, which it may assert and protect against the world in the same
manner as it may protect its tangible property, real or personal, against trespass or
conversion. It is regarded, to a certain extent, as a property right and one which cannot
be impaired or defeated by subsequent appropriation by another corporation in the
same field (Red Line Transportation Co. vs. Rural Transit Co., September 8, 1934, 20
Phil 549).

A name is peculiarly important as necessary to the very existence of a corporation


(American Steel Foundries vs. Robertson, 269 US 372, 70 L ed 317, 46 S Ct 160;
Lauman vs. Lebanon Valley R. Co., 30 Pa 42; First National Bank vs. Huntington
Distilling Co. 40 W Va 530, 23 SE 792). Its name is one of its attributes, an element of
its existence, and essential to its identity (6 Fletcher [Perm Ed], pp. 3-4). The general
rule as to corporations is that each corporation must have a name by which it is to sue
and be sued and do all legal acts. The name of a corporation in this respect designates
the corporation in the same manner as the name of an individual designates the person
(Cincinnati Cooperage Co. vs. Bate. 96 Ky 356, 26 SW 538; Newport Mechanics Mfg.
Co. vs. Starbird. 10 NH 123); and the right to use its corporate name is as much a part
of the corporate franchise as any other privilege granted (Federal Secur. Co. vs.
Federal Secur. Corp., 129 Or 375, 276 P 1100, 66 ALR 934; Paulino vs. Portuguese
Beneficial Association, 18 RI 165, 26 A 36).

A corporation acquires its name by choice and need not select a name identical with or
similar to one already appropriated by a senior corporation while an individual's name is
thrust upon him (See Standard Oil Co. of New Mexico, Inc. v. Standard Oil Co. of
California, 56 F 2d 973, 977). A corporation can no more use a corporate name in
violation of the rights of others than an individual can use his name legally acquired so
as to mislead the public and injure another (Armington vs. Palmer, 21 RI 109. 42 A
308).

Our own Corporation Code, in its Section 18, expressly provides that:

No corporate name may be allowed by the Securities and Exchange


Commission if the proposed name is identical or deceptively or
confusingly similar to that of any existing corporation or to any other name
already protected by law or is patently deceptive, confusing or contrary to
existing law. Where a change in a corporate name is approved, the
commission shall issue an amended certificate of incorporation under the
amended name. (Emphasis supplied)

The statutory prohibition cannot be any clearer. To come within its scope, two requisites
must be proven, namely:

(1) that the complainant corporation acquired a prior right over the use of such
corporate name; and

(2) the proposed name is either:

(a) identical; or

(b) deceptively or confusingly similar

to that of any existing corporation or to any other name already protected by law;
or

(c) patently deceptive, confusing or contrary to existing law.

The right to the exclusive use of a corporate name with freedom from infringement by
similarity is determined by priority of adoption (1 Thompson, p. 80 citing Munn v.
Americana Co., 82 N. Eq. 63, 88 Atl. 30; San Francisco Oyster House v. Mihich, 75
Wash. 274, 134 Pac. 921). In this regard, there is no doubt with respect to Petitioners'
prior adoption of' the name ''PHILIPS" as part of its corporate name. Petitioners Philips
Electrical and Philips Industrial were incorporated on 29 August 1956 and 25 May 1956,
respectively, while Respondent Standard Philips was issued a Certificate of Registration
on 12 April 1982, twenty-six (26) years later (Rollo, p. 16). Petitioner PEBV has also
used the trademark "PHILIPS" on electrical lamps of all types and their accessories
since 30 September 1922, as evidenced by Certificate of Registration No. 1651.

The second requisite no less exists in this case. In determining the existence of
confusing similarity in corporate names, the test is whether the similarity is such as to
mislead a person, using ordinary care and discrimination. In so doing, the Court must
look to the record as well as the names themselves (Ohio Nat. Life Ins. Co. v. Ohio Life
Ins. Co., 210 NE 2d 298). While the corporate names of Petitioners and Private
Respondent are not identical, a reading of Petitioner's corporate names, to wit: PHILIPS
EXPORT B.V., PHILIPS ELECTRICAL LAMPS, INC. and PHILIPS INDUSTRIAL
DEVELOPMENT, INC., inevitably leads one to conclude that "PHILIPS" is, indeed, the
dominant word in that all the companies affiliated or associated with the principal
corporation, PEBV, are known in the Philippines and abroad as the PHILIPS Group of
Companies.

Respondents maintain, however, that Petitioners did not present an iota of proof of
actual confusion or deception of the public much less a single purchaser of their product
who has been deceived or confused or showed any likelihood of confusion. It is settled,
however, that proof of actual confusion need not be shown. It suffices that confusion is
probably or likely to occur (6 Fletcher [Perm Ed], pp. 107-108, enumerating a long line
of cases).

It may be that Private Respondent's products also consist of chain rollers, belts, bearing
and the like, while petitioners deal principally with electrical products. It is significant to
note, however, that even the Director of Patents had denied Private Respondent's
application for registration of the trademarks "Standard Philips & Device" for chain,
rollers, belts, bearings and cutting saw. That office held that PEBV, "had shipped to its
subsidiaries in the Philippines equipment, machines and their parts which fall under
international class where "chains, rollers, belts, bearings and cutting saw," the goods in
connection with which Respondent is seeking to register 'STANDARD PHILIPS' . . . also
belong" ( Inter Partes Case No. 2010, June 17, 1988, SEC Rollo).

Furthermore, the records show that among Private Respondent's primary purposes in
its Articles of Incorporation (Annex D, Petition p. 37, Rollo) are the following:

To buy, sell, barter, trade, manufacture, import, export, or otherwise


acquire, dispose of, and deal in and deal with any kind of goods, wares,
and merchandise such as but not limited to plastics, carbon products,
office stationery and supplies, hardware parts, electrical wiring devices,
electrical component parts, and/or complement of industrial, agricultural or
commercial machineries, constructive supplies, electrical supplies and
other merchandise which are or may become articles of commerce except
food, drugs and cosmetics and to carry on such business as
manufacturer, distributor, dealer, indentor, factor, manufacturer's
representative capacity for domestic or foreign companies. (emphasis
ours)

For its part, Philips Electrical also includes, among its primary purposes, the following:

To develop manufacture and deal in electrical products, including


electronic, mechanical and other similar products . . . (p. 30, Record of
SEC Case No. 2743)

Given Private Respondent's aforesaid underlined primary purpose, nothing could


prevent it from dealing in the same line of business of electrical devices, products or
supplies which fall under its primary purposes. Besides, there is showing that Private
Respondent not only manufactured and sold ballasts for fluorescent lamps with their
corporate name printed thereon but also advertised the same as, among others,
Standard Philips (TSN, before the SEC, pp. 14, 17, 25, 26, 37-42, June 14, 1985; pp.
16-19, July 25, 1985). As aptly pointed out by Petitioners, [p]rivate respondent's choice
of "PHILIPS" as part of its corporate name [STANDARD PHILIPS CORPORATION] . . .
tends to show said respondent's intention to ride on the popularity and established
goodwill of said petitioner's business throughout the world" (Rollo, p. 137). The
subsequent appropriator of the name or one confusingly similar thereto usually seeks
an unfair advantage, a free ride of another's goodwill (American Gold Star Mothers, Inc.
v. National Gold Star Mothers, Inc., et al, 89 App DC 269, 191 F 2d 488).

In allowing Private Respondent the continued use of its corporate name, the SEC
maintains that the corporate names of Petitioners PHILIPS ELECTRICAL LAMPS. INC.
and PHILIPS INDUSTRIAL DEVELOPMENT, INC. contain at least two words different
from that of the corporate name of respondent STANDARD PHILIPS CORPORATION,
which words will readily identify Private Respondent from Petitioners and vice-versa.

True, under the Guidelines in the Approval of Corporate and Partnership Names
formulated by the SEC, the proposed name "should not be similar to one already used
by another corporation or partnership. If the proposed name contains a word already
used as part of the firm name or style of a registered company; the proposed name
must contain two other words different from the company already registered" (Emphasis
ours). It is then pointed out that Petitioners Philips Electrical and Philips Industrial have
two words different from that of Private Respondent's name.

What is lost sight of, however, is that PHILIPS is a trademark or trade name which was
registered as far back as 1922. Petitioners, therefore, have the exclusive right to its use
which must be free from any infringement by similarity. A corporation has an exclusive
right to the use of its name, which may be protected by injunction upon a principle
similar to that upon which persons are protected in the use of trademarks and
tradenames (18 C.J.S. 574). Such principle proceeds upon the theory that it is a fraud
on the corporation which has acquired a right to that name and perhaps carried on its
business thereunder, that another should attempt to use the same name, or the same
name with a slight variation in such a way as to induce persons to deal with it in the
belief that they are dealing with the corporation which has given a reputation to the
name (6 Fletcher [Perm Ed], pp. 39-40, citing Borden Ice Cream Co. v. Borden's
Condensed Milk Co., 210 F 510). Notably, too, Private Respondent's name actually
contains only a single word, that is, "STANDARD", different from that of Petitioners
inasmuch as the inclusion of the term "Corporation" or "Corp." merely serves the
Purpose of distinguishing the corporation from partnerships and other business
organizations.

The fact that there are other companies engaged in other lines of business using the
word "PHILIPS" as part of their corporate names is no defense and does not warrant
the use by Private Respondent of such word which constitutes an essential feature of
Petitioners' corporate name previously adopted and registered and-having acquired the
status of a well-known mark in the Philippines and internationally as well (Bureau of
Patents Decision No. 88-35 [TM], June 17, 1988, SEC Records).

In support of its application for the registration of its Articles of Incorporation with the
SEC, Private Respondent had submitted an undertaking "manifesting its willingness to
change its corporate name in the event another person, firm or entity has acquired a
prior right to the use of the said firm name or one deceptively or confusingly similar to
it." Private respondent must now be held to its undertaking.

As a general rule, parties organizing a corporation must choose a name at


their peril; and the use of a name similar to one adopted by another
corporation, whether a business or a nonbusiness or non-profit
organization if misleading and likely to injure it in the exercise in its
corporate functions, regardless of intent, may be prevented by the
corporation having the prior right, by a suit for injunction against the new
corporation to prevent the use of the name (American Gold Star Mothers,
Inc. v. National Gold Star Mothers, Inc., 89 App DC 269, 191 F 2d 488, 27
ALR 2d 948).

WHEREFORE, the Decision of the Court of Appeals dated 31 July 1990, and its
Resolution dated 20 November 1990, are SET ASIDE and a new one entered
ENJOINING private respondent from using "PHILIPS" as a feature of its corporate
name, and ORDERING the Securities and Exchange Commission to amend private
respondent's Articles of Incorporation by deleting the word PHILIPS from the corporate
name of private respondent.

No costs.

SO ORDERED.

[G.R. No. 137592. December 12, 2001]

ANG MGA KAANIB SA IGLESIA NG DIOS KAY KRISTO HESUS, H.S.K. SA


BANSANG PILIPINAS, INC. petitioner, vs. IGLESIA NG DIOS KAY CRISTO
JESUS, HALIGI AT SUHAY NG KATOTOHANAN, respondent.

DECISION
YNARES-SANTIAGO, J.:

This is a petition for review assailing the Decision dated October 7, 1997 [1] and the
Resolution dated February 16, 1999[2] of the Court of Appeals in CA-G.R. SP No.
40933, which affirmed the Decision of the Securities and Exchange and Commission
(SEC) in SEC-AC No. 539.[3]
Respondent Iglesia ng Dios Kay Cristo Jesus, Haligi at Suhay ng
Katotohanan (Church of God in Christ Jesus, the Pillar and Ground of Truth),[4] is a non-
stock religious society or corporation registered in 1936.Sometime in 1976, one Eliseo
Soriano and several other members of respondent corporation disassociated
themselves from the latter and succeeded in registering on March 30, 1977 a new non-
stock religious society or corporation, named Iglesia ng Dios Kay Kristo Hesus, Haligi at
Saligan ng Katotohanan.
On July 16, 1979, respondent corporation filed with the SEC a petition to compel
the Iglesia ng Dios Kay Kristo Hesus, Haligi at Saligan ng Katotohanan to change its
corporate name, which petition was docketed as SEC Case No. 1774. On May 4, 1988,
the SEC rendered judgment in favor of respondent, ordering the Iglesia ng Dios Kay
Kristo Hesus, Haligi at Saligan ng Katotohanan to change its corporate name to another
name that is not similar or identical to any name already used by a corporation,
partnership or association registered with the Commission.[5] No appeal was taken from
said decision.
It appears that during the pendency of SEC Case No. 1774, Soriano, et al., caused
the registration on April 25, 1980 of petitioner corporation, Ang Mga Kaanib sa Iglesia
ng Dios Kay Kristo Hesus, H.S.K., sa Bansang Pilipinas. The acronym H.S.K. stands
for Haligi at Saligan ng Katotohanan.[6]
On March 2, 1994, respondent corporation filed before the SEC a petition, docketed
as SEC Case No. 03-94-4704, praying that petitioner be compelled to change its
corporate name and be barred from using the same or similar name on the ground that
the same causes confusion among their members as well as the public.
Petitioner filed a motion to dismiss on the ground of lack of cause of action. The
motion to dismiss was denied. Thereafter, for failure to file an answer, petitioner was
declared in default and respondent was allowed to present its evidence ex parte.
On November 20, 1995, the SEC rendered a decision ordering petitioner to change
its corporate name. The dispositive portion thereof reads:

PREMISES CONSIDERED, judgment is hereby rendered in favor of the petitioner


(respondent herein).

Respondent Mga Kaanib sa Iglesia ng Dios Kay Kristo Jesus (sic), H.S.K. sa Bansang
Pilipinas (petitioner herein) is hereby MANDATED to change its corporate name to
another not deceptively similar or identical to the same already used by the
Petitioner, any corporation, association, and/or partnership presently registered with
the Commission.

Let a copy of this Decision be furnished the Records Division and the Corporate and
Legal Department [CLD] of this Commission for their records, reference and/or for
whatever requisite action, if any, to be undertaken at their end.

SO ORDERED.[7]
Petitioner appealed to the SEC En Banc, where its appeal was docketed as SEC-
AC No. 539. In a decision dated March 4, 1996, the SEC En Banc affirmed the above
decision, upon a finding that petitioner's corporate name was identical or confusingly or
deceptively similar to that of respondents corporate name.[8]
Petitioner filed a petition for review with the Court of Appeals. On October 7, 1997,
the Court of Appeals rendered the assailed decision affirming the decision of the
SEC En Banc. Petitioners motion for reconsideration was denied by the Court of
Appeals on February 16, 1992.
Hence, the instant petition for review, raising the following assignment of errors:
I

THE HONORABLE COURT OF APPEALS ERRED IN CONCLUDING THAT


PETITIONER HAS NOT BEEN DEPRIVED OF ITS RIGHT TO PROCEDURAL
DUE PROCESS, THE HONORABLE COURT OF APPEALS DISREGARDED THE
JURISPRUDENCE APPLICABLE TO THE CASE AT BAR AND INSTEAD RELIED
ON TOTALLY INAPPLICABLE JURISPRUDENCE.

II

THE HONORABLE COURT OF APPEALS ERRED IN ITS INTEPRETATION OF


THE CIVIL CODE PROVISIONS ON EXTINCTIVE PRESCRIPTION, THEREBY
RESULTING IN ITS FAILURE TO FIND THAT THE RESPONDENT'S RIGHT OF
ACTION TO INSTITUTE THE SEC CASE HAS SINCE PRESCRIBED PRIOR TO
ITS INSTITUTION.

III

THE HONORABLE COURT OF APPEALS FAILED TO CONSIDER AND


PROPERLY APPLY THE EXCEPTIONS ESTABLISHED BY JURISPRUDENCE IN
THE APPLICATION OF SECTION 18 OF THE CORPORATION CODE TO THE
INSTANT CASE.

IV

THE HONORABLE COURT OF APPEALS FAILED TO PROPERLY APPRECIATE


THE SCOPE OF THE CONSTITUTIONAL GUARANTEE ON RELIGIOUS
FREEDOM, THEREBY FAILING TO APPLY THE SAME TO PROTECT
PETITIONERS RIGHTS.[9]

Invoking the case of Legarda v. Court of Appeals,[10] petitioner insists that the
decision of the Court of Appeals and the SEC should be set aside because the
negligence of its former counsel of record, Atty. Joaquin Garaygay, in failing to file an
answer after its motion to dismiss was denied by the SEC, deprived them of their day in
court.
The contention is without merit. As a general rule, the negligence of counsel binds
the client. This is based on the rule that any act performed by a lawyer within the scope
of his general or implied authority is regarded as an act of his client. [11] An exception to
the foregoing is where the reckless or gross negligence of the counsel deprives the
client of due process of law.[12] Said exception, however, does not obtain in the present
case.
In Legarda v. Court of Appeals, the effort of the counsel in defending his clients
cause consisted in filing a motion for extension of time to file answer before the trial
court. When his client was declared in default, the counsel did nothing and allowed the
judgment by default to become final and executory. Upon the insistence of his client, the
counsel filed a petition to annul the judgment with the Court of Appeals, which denied
the petition, and again the counsel allowed the denial to become final and
executory. This Court found the counsel grossly negligent and consequently declared
as null and void the decision adverse to his client.
The factual antecedents of the case at bar are different. Atty. Garaygay filed before
the SEC a motion to dismiss on the ground of lack of cause of action. When his client
was declared in default for failure to file an answer, Atty. Garaygay moved for
reconsideration and lifting of the order of default.[13] After judgment by default was
rendered against petitioner corporation, Atty. Garaygay filed a motion for extension of
time to appeal/motion for reconsideration, and thereafter a motion to set aside the
decision.[14]
Evidently, Atty. Garaygay was only guilty of simple negligence. Although he failed to
file an answer that led to the rendition of a judgment by default against petitioner, his
efforts were palpably real, albeit bereft of zeal.[15]
Likewise, the issue of prescription, which petitioner raised for the first time on
appeal to the Court of Appeals, is untenable. Its failure to raise prescription before the
SEC can only be construed as a waiver of that defense. [16] At any rate, the SEC has the
authority to de-register at all times and under all circumstances corporate names which
in its estimation are likely to spawn confusion. It is the duty of the SEC to prevent
confusion in the use of corporate names not only for the protection of the corporations
involved but more so for the protection of the public.[17]
Section 18 of the Corporation Code provides:

Corporate Name. --- No corporate name may be allowed by the Securities and
Exchange Commission if the proposed name is identical or deceptively or confusingly
similar to that of any existing corporation or to any other name already protected by law
or is patently deceptive, confusing or is contrary to existing laws. When a change in the
corporate name is approved, the Commission shall issue an amended certificate of
incorporation under the amended name.

Corollary thereto, the pertinent portion of the SEC Guidelines on Corporate Names
states:
(d) If the proposed name contains a word similar to a word already used as part of the
firm name or style of a registered company, the proposed name must contain two other
words different from the name of the company already registered;

Parties organizing a corporation must choose a name at their peril; and the use of a
name similar to one adopted by another corporation, whether a business or a nonprofit
organization, if misleading or likely to injure in the exercise of its corporate functions,
regardless of intent, may be prevented by the corporation having a prior right, by a suit
for injunction against the new corporation to prevent the use of the name.[18]
Petitioner claims that it complied with the aforecited SEC guideline by adding not
only two but eight words to their registered name, to wit: Ang Mga Kaanib" and "Sa
Bansang Pilipinas, Inc., which, petitioner argues, effectively distinguished it from
respondent corporation.
The additional words Ang Mga Kaanib and Sa Bansang Pilipinas, Inc. in petitioners
name are, as correctly observed by the SEC, merely descriptive of and also referring to
the members, or kaanib, of respondent who are likewise residing in the
Philippines. These words can hardly serve as an effective differentiating medium
necessary to avoid confusion or difficulty in distinguishing petitioner from
respondent. This is especially so, since both petitioner and respondent corporations are
using the same acronym --- H.S.K.;[19] not to mention the fact that both are espousing
religious beliefs and operating in the same place. Parenthetically, it is well to mention
that the acronym H.S.K. used by petitioner stands for Haligi at Saligan ng
Katotohanan.[20]
Then, too, the records reveal that in holding out their corporate name to the public,
petitioner highlights the dominant words IGLESIA NG DIOS KAY KRISTO HESUS,
HALIGI AT SALIGAN NG KATOTOHANAN, which is strikingly similar to respondent's
corporate name, thus making it even more evident that the additional words Ang Mga
Kaanib and Sa Bansang Pilipinas, Inc., are merely descriptive of and pertaining to the
members of respondent corporation.[21]
Significantly, the only difference between the corporate names of petitioner and
respondent are the words SALIGAN and SUHAY. These words are synonymous ---
both mean ground, foundation or support. Hence, this case is on all fours with Universal
Mills Corporation v. Universal Textile Mills, Inc.,[22] where the Court ruled that the
corporate names Universal Mills Corporation and Universal Textile Mills, Inc., are
undisputably so similar that even under the test of reasonable care and observation
confusion may arise.
Furthermore, the wholesale appropriation by petitioner of respondent's corporate
name cannot find justification under the generic word rule. We agree with the Court of
Appeals conclusion that a contrary ruling would encourage other corporations to adopt
verbatim and register an existing and protected corporate name, to the detriment of the
public.
The fact that there are other non-stock religious societies or corporations using the
names Church of the Living God, Inc., Church of God Jesus Christ the Son of God the
Head, Church of God in Christ & By the Holy Spirit, and other similar names, is of no
consequence. It does not authorize the use by petitioner of the essential and
distinguishing feature of respondent's registered and protected corporate name.[23]
We need not belabor the fourth issue raised by petitioner. Certainly, ordering
petitioner to change its corporate name is not a violation of its constitutionally
guaranteed right to religious freedom. In so doing, the SEC merely compelled petitioner
to abide by one of the SEC guidelines in the approval of partnership and corporate
names, namely its undertaking to manifest its willingness to change its corporate name
in the event another person, firm, or entity has acquired a prior right to the use of the
said firm name or one deceptively or confusingly similar to it.
WHEREFORE, in view of all the foregoing, the instant petition for review is
DENIED. The appealed decision of the Court of Appeals is AFFIRMED in toto.
SO ORDERED.

G.R. No. L-23606 July 29, 1968

ALHAMBRA CIGAR & CIGARETTE MANUFACTURING COMPANY, INC., petitioner,


vs.
SECURITIES & EXCHANGE COMMISSION, respondent.

Gamboa and Gamboa for petitioner.


Office of the Solicitor General for respondent.

SANCHEZ, J.:

To the question — May a corporation extend its life by amendment of its articles of
incorporation effected during the three-year statutory period for liquidation when its
original term of existence had already expired? — the answer of the Securities and
Exchange Commissioner was in the negative. Offshoot is this appeal.

That problem emerged out of the following controlling facts:

Petitioner Alhambra Cigar and Cigarette Manufacturing Company, Inc. (hereinafter


referred to simply as Alhambra) was duly incorporated under Philippine laws on January
15, 1912. By its corporate articles it was to exist for fifty (50) years from incorporation.
Its term of existence expired on January 15, 1962. On that date, it ceased transacting
business, entered into a state of liquidation.

Thereafter, a new corporation. — Alhambra Industries, Inc. — was formed to carry on


the business of Alhambra.
On May 1, 1962, Alhambra's stockholders, by resolution named Angel S. Gamboa
trustee to take charge of its liquidation.

On June 20, 1963 — within Alhambra's three-year statutory period for liquidation -
Republic Act 3531 was enacted into law. It amended Section 18 of the Corporation Law;
it empowered domestic private corporations to extend their corporate life beyond the
period fixed by the articles of incorporation for a term not to exceed fifty years in any
one instance. Previous to Republic Act 3531, the maximum non-extendible term of such
corporations was fifty years.

On July 15, 1963, at a special meeting, Alhambra's board of directors resolved to


amend paragraph "Fourth" of its articles of incorporation to extend its corporate life for
an additional fifty years, or a total of 100 years from its incorporation.

On August 26, 1963, Alhambra's stockholders, representing more than two-thirds of its
subscribed capital stock, voted to approve the foregoing resolution. The "Fourth"
paragraph of Alhambra's articles of incorporation was thus altered to read:

FOURTH. That the term for which said corporation is to exist is fifty (50) years
from and after the date of incorporation, and for an additional period of fifty (50)
years thereafter.

On October 28, 1963, Alhambra's articles of incorporation as so amended certified


correct by its president and secretary and a majority of its board of directors, were filed
with respondent Securities and Exchange Commission (SEC).

On November 18, 1963, SEC, however, returned said amended articles of incorporation
to Alhambra's counsel with the ruling that Republic Act 3531 "which took effect only on
June 20, 1963, cannot be availed of by the said corporation, for the reason that its term
of existence had already expired when the said law took effect in short, said law has no
retroactive effect."

On December 3, 1963, Alhambra's counsel sought reconsideration of SEC's ruling


aforesaid, refiled the amended articles of incorporation.

On September 8, 1964, SEC, after a conference hearing, issued an order denying the
reconsideration sought.

Alhambra now invokes the jurisdiction of this Court to overturn the conclusion below. 1

1. Alhambra relies on Republic Act 3531, which amended Section 18 of the Corporation
Law. Well it is to take note of the old and the new statutes as they are framed. Section
18, prior to and after its modification by Republic Act 3531, covers the subject of
amendment of the articles of incorporation of private corporations. A provision thereof
which remains unaltered is that a corporation may amend its articles of incorporation "by
a majority vote of its board of directors or trustees and ... by the vote or written assent of
the stockholders representing at least two-thirds of the subscribed capital stock ... "

But prior to amendment by Republic Act 3531, an explicit prohibition existed in Section
18, thus:

... Provided, however, That the life of said corporation shall not be extended by
said amendment beyond the time fixed in the original articles: ...

This was displaced by Republic Act 3531 which enfranchises all private corporations to
extend their corporate existence. Thus incorporated into the structure of Section 18 are
the following:

... Provided, however, That should the amendment consist in extending the
corporate life, the extension shall not exceed fifty years in any one instance:
Provided, further, That the original articles, and amended articles together shall
contain all provisions required by law to be set out in the articles of incorporation:
...

As we look in retrospect at the facts, we find these: From July 15 to October 28, 1963,
when Alhambra made its attempt to extend its corporate existence, its original term of
fifty years had already expired (January 15, 1962); it was in the midst of the three-year
grace period statutorily fixed in Section 77 of the Corporation Law, thus: .

SEC. 77. Every corporation whose charter expires by its own limitation or is
annulled by forfeiture or otherwise, or whose corporate existence for other
purposes is terminated in any other manner, shall nevertheless be continued as
a body corporate for three years after the time when it would have been so
dissolved, for the purpose of prosecuting and defending suits by or against it and
of enabling it gradually to settle and close its affairs, to dispose of and convey its
property and to divide its capital stock, but not for the purpose of continuing the
business for which it was established.2

Plain from the language of the provision is its meaning: continuance of a "dissolved"
corporation as a body corporate for three years has for its purpose the final closure of
its affairs, and no other; the corporation is specifically enjoined from "continuing the
business for which it was established". The liquidation of the corporation's affairs set
forth in Section 77 became necessary precisely because its life had ended. For this
reason alone, the corporate existence and juridical personality of that corporation to do
business may no longer be extended.

Worth bearing in mind, at this juncture, is the basic development of corporation law.

The common law rule, at the beginning, was rigid and inflexible in that upon its
dissolution, a corporation became legally dead for all purposes. Statutory authorizations
had to be provided for its continuance after dissolution "for limited and specified
purposes incident to complete liquidation of its affairs".3 Thus, the moment a
corporation's right to exist as an "artificial person" ceases, its corporate powers are
terminated "just as the powers of a natural person to take part in mundane affairs cease
to exist upon his death".4 There is nothing left but to conduct, as it were, the settlement
of the estate of a deceased juridical person.

2. Republic Act 3531, amending Section 18 of the Corporation Law, is silent, it is true,
as to when such act of extension may be made. But even with a superficial knowledge
of corporate principles, it does not take much effort to reach a correct conclusion. For,
implicit in Section 77 heretofore quoted is that the privilege given to prolongcorporate
life under the amendment must be exercised before the expiry of the term fixed in the
articles of incorporation.

Silence of the law on the matter is not hard to understand. Specificity is not really
necessary. The authority to prolong corporate life was inserted by Republic Act 3531
into a section of the law that deals with the power of a corporation to amend its articles
of incorporation. (For, the manner of prolongation is through an amendment of the
articles.) And it should be clearly evident that under Section 77 no corporation in a state
of liquidation can act in any way, much less amend its articles, "for the purpose of
continuing the business for which it was established".

All these dilute Alhambra's position that it could revivify its corporate life simply because
when it attempted to do so, Alhambra was still in the process of liquidation. It is surely
impermissible for us to stretch the law — that merely empowers a corporation to act in
liquidation — to inject therein the power to extend its corporate existence.

3. Not that we are alone in this view. Fletcher has written: "Since the privilege of
extension is purely statutory, all of the statutory conditions precedent must be complied
with in order that the extension may be effectuated. And, generally these conditions
must be complied with, and the steps necessary to effect the extension must be
taken, during the life of the corporation, and before the expiration of the term of
existence as original fixed by its charter or the general law, since, as a rule, the
corporation is ipso facto dissolved as soon as that time expires. So where the extension
is by amendment of the articles of incorporation, the amendment must be adopted
before that time. And, similarly, the filing and recording of a certificate of extension after
that time cannot relate back to the date of the passage of a resolution by the
stockholders in favor of the extension so as to save the life of the corporation. The
contrary is true, however, and the doctrine of relation will apply, where the delay is due
to the neglect of the officer with whom the certificate is required to be filed, or to a
wrongful refusal on his part to receive it. And statutes in some states specifically provide
that a renewal may be had within a specified time before or after the time fixed for the
termination of the corporate existence".5

The logic of this position is well expressed in a foursquare case decided by the Court of
Appeals of Kentucky.6There, pronouncement was made as follows:
... But section 561 (section 2147) provides that, when any corporation expires by
the terms of its articles of incorporation, it may be thereafter continued to act for
the purpose of closing up its business, but for no other purpose. The corporate
life of the Home Building Association expired on May 3, 1905. After that date, by
the mandate of the statute, it could continue to act for the purpose of closing up
its business, but for no other purpose. The proposed amendment was not made
until January 16, 1908, or nearly three years after the corporation expired by the
terms of the articles of incorporation. When the corporate life of the corporation
was ended, there was nothing to extend. Here it was proposed nearly three years
after the corporate life of the association had expired to revivify the dead body,
and to make that relate back some two years and eight months. In other words,
the association for two years and eight months had only existed for the purpose
of winding up its business, and, after this length of time, it was proposed to
revivify it and make it a live corporation for the two years and eight months daring
which it had not been such.

The law gives a certain length of time for the filing of records in this court, and
provides that the time may be extended by the court, but under this provision it
has uniformly been held that when the time was expired, there is nothing to
extend, and that the appeal must be dismissed... So, when the articles of a
corporation have expired, it is too late to adopt an amendment extending the life
of a corporation; for, the corporation having expired, this is in effect to create a
new corporation ..."7

True it is, that the Alabama Supreme Court has stated in one case.8 that a corporation
empowered by statute to renew its corporate existence may do so even after the
expiration of its corporate life, provided renewal is taken advantage of within the
extended statutory period for purposes of liquidation. That ruling, however, is inherently
weak as persuasive authority for the situation at bar for at least two reasons: First. That
case was a suit for mandamus to compel a former corporate officer to turn over books
and records that came into his possession and control by virtue of his office. It was
there held that such officer was obliged to surrender his books and records even if the
corporation had already expired. The holding on the continued existence of the
corporation was a mere dictum. Second. Alabama's law is different. Corporations in that
state were authorized not only to extend but also to renew their corporate
existence.That very case defined the word "renew" as follows; "To make new again; to
restore to freshness; to make new spiritually; to regenerate; to begin again; to
recommence; to resume; to restore to existence, to revive; to re-establish; to recreate;
to replace; to grant or obtain an extension of Webster's New International Dict.; 34 Cyc.
1330; Carter v. Brooklyn Life Ins. Co., 110 N.Y. 15, 21, 22, 17 N.E. 396; 54 C.J. 379.
Sec".9

On this point, we again draw from Fletcher: "There is a broad distinction between the
extension of a charter and the grant of a new one. To renew a charter is to revive a
charter which has expired, or, in other words, "to give a new existence to one which has
been forfeited, or which has lost its vitality by lapse of time". To "extend" a charter is "to
increase the time for the existence of one which would otherwise reach its limit at an
earlier period".10 Nowhere in our statute — Section 18, Corporation Law, as amended
by Republic Act 3531 — do we find the word "renew" in reference to the authority given
to corporations to protract their lives. Our law limits itself to extension of corporate
existence. And, as so understood, extension may be made only before the term
provided in the corporate charter expires.

Alhambra draws attention to another case11 which declares that until the end of the
extended period for liquidation, a dissolved corporation "does not become an
extinguished entity". But this statement was obviously lifted out of context. That case
dissected the question whether or not suits can be commenced by or against a
corporation within its liquidation period. Which was answered in the affirmative. For, the
corporation still exists for the settlement of its affairs.

People, ex rel. vs. Green,12 also invoked by Alhambra, is as unavailing. There, although
the corporation amended its articles to extend its existence at a time when it had no
legal authority yet, it adopted the amended articles later on when it had the power to
extend its life and during its original term when it could amend its articles.

The foregoing notwithstanding, Alhambra falls back on the contention that its case is
arguably within the purview of the law. It says that before cessation of its corporate life,
it could not have extended the same, for the simple reason that Republic Act 3531 had
not then become law. It must be remembered that Republic Act 3531 took effect on
June 20, 1963, while the original term of Alhambra's existence expired before that date
— on January 15, 1962. The mischief that flows from this theory is at once apparent. It
would certainly open the gates for all defunct corporations — whose charters have
expired even long before Republic Act 3531 came into being — to resuscitate their
corporate existence.

4. Alhambra brings into argument Republic Act 1932, which amends Section 196 of the
Insurance Act, now reading as follows: 1äwphï1.ñët

SEC. 196. Any provision of law to the contrary notwithstanding, every domestic
life insurance corporation, formed for a limited period under the provisions of its
articles of incorporation, may extend its corporate existence for a period not
exceeding fifty years in any one instance by amendment to its articles of
incorporation on or before the expiration of the term so fixed in said articles ...

To be observed is that the foregoing statute — unlike Republic Act 3531 — expressly
authorizes domestic insurance corporations to extend their corporate existence "on or
before the expiration of the term" fixed in their articles of incorporation. Republic Act
1932 was approved on June 22, 1957, long before the passage of Republic Act 3531 in
1963. Congress, Alhambra points out, must have been aware of Republic Act 1932
when it passed Republic Act 3531. Since the phrase "on or before", etc., was omitted in
Republic Act 3531, which contains no similar limitation, it follows, according to
Alhambra, that it is not necessary to extend corporate existence on or before the
expiration of its original term.

That Republic Act 3531 stands mute as to when extention of corporate existence may
be made, assumes no relevance. We have already said, in the face of a familiar
precept, that a defunct corporation is bereft of any legal faculty not otherwise expressly
sanctioned by law.

Illuminating here is the explanatory note of H.B. 1774, later Republic Act 3531 — now in
dispute. Its first paragraph states that "Republic Act No. 1932 allows the automatic
extension of the corporate existence of domestic life insurance corporations upon
amendment of their articles of incorporation on or before the expiration of the terms
fixed by said articles". The succeeding lines are decisive: "This is a good law, a sane
and sound one. There appears to be no valid reason why it should not be made to apply
to other private corporations.13

The situation here presented is not one where the law under consideration is
ambiguous, where courts have to put in harness extrinsic aids such as a look at another
statute to disentangle doubts. It is an elementary rule in legal hermeneutics that where
the terms of the law are clear, no statutory construction may be permitted. Upon the
basic conceptual scheme under which corporations operate, and with Section 77 of the
Corporation Law particularly in mind, we find no vagueness in Section 18, as amended
by Republic Act 3531. As we view it, by directing attention to Republic Act 1932,
Alhambra would seek to create obscurity in the law; and, with that, ask of us a ruling
that such obscurity be explained. This, we dare say, cannot be done.

The pari materia rule of statutory construction, in fact, commands that statutes must be
harmonized with each other.14 So harmonizing, the conclusion is clear that Section 18 of
the Corporation Law, as amended by Republic Act 3531 in reference to extensions of
corporate existence, is to be read in the same light as Republic Act 1932. Which means
that domestic corporations in general, as with domestic insurance companies, can
extend corporate existence only on or before the expiration of the term fixed in their
charters.

5. Alhambra pleads for munificence in interpretation, one which brushes technicalities


aside. Bases for this posture are that Republic Act 3531 is a remedial statute, and that
extension of corporate life is beneficial to the economy.

Alhambra's stance does not induce assent. Expansive construction is possible only
when there is something to expand. At the time of the passage of Republic Act 3531,
Alhambra's corporate life had already expired. It had overstepped the limits of its limited
existence. No life there is to prolong.

Besides, a new corporation — Alhambra Industries, Inc., with but slight change in
stockholdings15 — has already been established. Its purpose is to carry on, and it
actually does carry on,16 the business of the dissolved entity. The beneficial-effects
argument is off the mark.

The way the whole case shapes up then, the only possible drawbacks of Alhambra
might be that, instead of the new corporation (Alhambra Industries, Inc.) being written
off, the old one (Alhambra Cigar & Cigarette Manufacturing Company, Inc.) has to be
wound up; and that the old corporate name cannot be retained fully in its exact
form.17What is important though is that the word Alhambra, the name that counts [it has
goodwill], remains.

FOR THE REASONS GIVEN, the ruling of the Securities and Exchange Commission of
November 18, 1963, and its order of September 8, 1964, both here under review, are
hereby affirmed.

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