corporation

SICI vs Cuenca (G.R. No. 173297 March 6, 2013)

Stronghold Insurance Company Inc. vs Cuenca
G.R. No. 173297 March 6, 2013

Facts: On January 19, 1998, Marañon filed a complaint in the RTC against the Cuencas for the collection of a sum of money and damages. His complaint, docketed as Civil Case No. 98-023, included an application for the issuance of a writ of preliminary attachment. On January 26, 1998, the RTC granted the application for the issuance of the writ of preliminary attachment conditioned upon the posting of a bond of P1,000,000.00 executed in favor of the Cuencas. Less than a month later, Marañon amended the complaint to implead Tayactac as a defendant. On February 11, 1998, Marañon posted SICI Bond No. 68427 JCL (4) No. 02370 in the amount of P1,000,000.00 issued by Stronghold Insurance. Two days later, the RTC issued the writ of preliminary attachment. The sheriff served the writ, the summons and a copy of the complaint on the Cuencas on the same day. The service of the writ, summons and copy of the complaint were made on Tayactac on February 16, 1998.

Issue: Whether or not the respondents have the legal standing to sue petitioner for the recovery of the attached properties and damages.

Held: No. To ensure the observance of the mandate of the Constitution, Section 2, Rule 3 of the Rules of Court requires that unless otherwise authorized by law or the Rules of Court every action must be prosecuted or defended in the name of the real party in interest. Under the same rule, a real party in interest is one who stands to be benefited or injured by the judgment in the suit, or one who is entitled to the avails of the suit. Accordingly, a person , to be a real party in interest in whose name an action must be prosecuted, should appear to be the present real owner of the right sought to be enforced, that is, his interest must be a present substantial interest, not a mere expectancy, or a future, contingent, subordinate, or consequential interest.

Where the plaintiff is not the real party in interest, the ground for the motion to dismiss is lack of cause of action. The reason for this is that the courts ought not to pass upon questions not derived from any actual controversy. Truly, a person having no material interest to protect cannot invoke the jurisdiction of the court as the plaintiff in an action. Nor does a court acquire jurisdiction over a case where the real party in interest is not present or impleaded.

The purposes of the requirement for the real party in interest prosecuting or defending an action at law are: (a) to prevent the prosecution of actions by persons without any right, title or interest in the case; (b) to require that the actual party entitled to legal relief be the one to prosecute the action; (c) to avoid a multiplicity of suits; and (d) to discourage litigation and keep it within certain bounds, pursuant to sound public policy. Indeed, considering that all civil actions must be based on a cause of action, defined as the act or omission by which a party violates the right of another, the former as the defendant must be allowed to insist upon being opposed by the real party in interest so that he is protected from further suits regarding the same claim. Under this rationale, the requirement benefits the defendant because “the defendant can insist upon a plaintiff who will afford him a setup providing good res judicata protection if the struggle is carried through on the merits to the end.”

The rule on real party in interest ensures, therefore, that the party with the legal right to sue brings the action, and this interest ends when a judgment involving the nominal plaintiff will protect the defendant from a subsequent identical action. Such a rule is intended to bring before the court the party rightfully interested in the litigation so that only real controversies will be presented and the judgment, when entered, will be binding and conclusive and the defendant will be saved from further harassment and vexation at the hands of other claimants to the same demand.

But the real party in interest need not be the person who ultimately will benefit from the successful prosecution of the action. Hence, to aid itself in the proper identification of the real party in interest, the court should first ascertain the nature of the substantive right being asserted, and then must determine whether the party asserting that right is recognized as the real party in interest under the rules of procedure. Truly, that a party stands to gain from the litigation is not necessarily controlling.

Given the separate and distinct legal personality of Arc Cuisine, Inc., the Cuenca’s and Tayactac lacked the legal personality to claim the damages sustained from the levy of the former’s properties. According to Asset Privatization Trust v. Court of Appeals,  even when the foreclosure on the assets of the corporation was wrongful and done in bad faith the stockholders had no standing to recover for themselves moral damages; otherwise, they would be appropriating and distributing part of the corporation’s assets prior to the dissolution of the corporation and the liquidation of its debts and liabilities. Moreover, in Evangelista v. Santos, the Court, resolving whether or not the minority stockholders had the right to bring an action for damages against the principal officers of the corporation for their own benefit.

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Tan vs Sycip (G.R. No. 153468 August 17, 2006)

Tan vs Sycip
G.R. No. 153468 August 17, 2006

Facts: Petitioner Grace Christian High School (GCHS) is a non-stock, non-profit educational corporation with fifteen (15) regular members, who also constitute the board of trustees.During the annual members meeting held on April 6, 1998, there were only eleven (11) living member-trustees, as four (4) had already died. Out of the eleven, seven (7) attended the meeting through their respective proxies. The meeting was convened and chaired by Atty. Sabino Padilla Jr. over the objection of Atty. Antonio C. Pacis, who argued that there was no quorum. In the meeting, Petitioners Ernesto Tanchi, Edwin Ngo, Virginia Khoo, and Judith Tan were voted to replace the four deceased member-trustees. When the controversy reached the Securities and Exchange Commission (SEC), petitioners maintained that the deceased member-trustees should not be counted in the computation of the quorum because, upon their death, members automatically lost all their rights (including the right to vote) and interests in the corporation. SEC Hearing Officer Malthie G. Militar declared the April 6, 1998 meeting null and void for lack of quorum. She held that the basis for determining the quorum in a meeting of members should be their number as specified in the articles of incorporation, not simply the number of living members. She explained that the qualifying phrase entitled to vote in Section 24 of the Corporation Code, which provided the basis for determining a quorum for the election of directors or trustees, should be read together with Section 89. The hearing officer also opined that Article III (2) of the By-Laws of GCHS, insofar as it prescribed the mode of filling vacancies in the board of trustees, must be interpreted in conjunction with Section 29 of the Corporation Code. The SEC en banc denied the appeal of petitioners and affirmed the Decision of the hearing officer in toto. It found to be untenable their contention that the word members, as used in Section 52 of the Corporation Code, referred only to the living members of a non-stock corporation.

Issue: Whether or not the only the living members for non-stock corporations should be considered in determining the quorum.

Held: Yes. Section 52 of the corporation code provides for Quorum in Meetings, unless otherwise provided for in this Code or in the by-laws, a quorum shall consist of the stockholders representing a majority of the outstanding capital stock or a majority of the members in the case of non-stock corporations.

In stock corporations, the presence of a quorum is ascertained and counted on the basis of the outstanding capital stock, as defined by the Code.

In non-stock corporations, the voting rights attach to membership. Members vote as persons, in accordance with the law and the bylaws of the corporation. Each member shall be entitled to one vote unless so limited, broadened, or denied in the articles of incorporation or bylaws. We hold that when the principle for determining the quorum for stock corporations is applied by analogy to nonstock corporations, only those who are actual members with voting rights should be counted

Section 25 of the Code specifically provides that a majority of the directors or trustees, as fixed in the articles of incorporation, shall constitute a quorum for the transaction of corporate business (unless the articles of incorporation or the bylaws provide for a greater majority). If the intention of the lawmakers was to base the quorum in the meetings of stockholders or members on their absolute number as fixed in the articles of incorporation, it would have expressly specified so. Otherwise, the only logical conclusion is that the legislature did not have that intention.

Under the By-Laws of GCHS, membership in the corporation shall, among others, be terminated by the death of the member. Section 91 of the Corporation Code further provides that termination extinguishes all the rights of a member of the corporation, unless otherwise provided in the articles of incorporation or the bylaws.

Applying Section 91 to the present case, we hold that dead members who are dropped from the membership roster in the manner and for the cause provided for in the By-Laws of GCHS are not to be counted in determining the requisite vote in corporate matters or the requisite quorum for the annual members meeting. With 11 remaining members, the quorum in the present case should be 6. Therefore, there being a quorum, the annual members meeting, conducted with six members present, was valid.

The By-Laws of GCHS prescribed the specific mode of filling up existing vacancies in its board of directors; that is, by a majority vote of the remaining members of the board.

While a majority of the remaining corporate members were present, however, the election of the four trustees cannot be legally upheld for the obvious reason that it was held in an annual meeting of the members, not of the board of trustees. We are not unmindful of the fact that the members of GCHS themselves also constitute the trustees, but we cannot ignore the GCHS bylaw provision, which specifically prescribes that vacancies in the board must be filled up by the remaining trustees. In other words, these remaining member-trustees must sit as a board in order to validly elect the new ones.

Lanuza Jr. vs BF Corporation (G.R. No. 174938 October 1, 2014)

Lanuza Jr. vs BF Corporation
G.R. No. 174938 October 1, 2014

Facts: In 1993, BF Corporation filed a collection complaint with the Regional Trial Court against Shangri-La and the members of its board of directors: Alfredo C. Ramos, Rufo B.Colayco, Antonio O. Olbes, Gerardo Lanuza, Jr., Maximo G. Licauco III, and Benjamin C. Ramos. BF Corporation alleged in its complaint that on December 11, 1989 and May 30, 1991, it entered into agreements with Shangri-La wherein it undertook to construct for Shangri-La a mall and a multilevel parking structure along EDSA.Shangri-La had been consistent in paying BF Corporation in accordance with its progress billing statements. However, by October 1991, Shangri-La started defaulting in payment. BF Corporation alleged that Shangri-La induced BF Corporation to continue with the construction of the buildings using its own funds and credit despite Shangri-La’s default. According to BF Corporation, Shangri-La misrepresented that it had funds to pay for its obligations with BF Corporation, and the delay in payment was simply a matter of delayed processing of BF Corporation’s progress billing statements. BF Corporation eventually completed the construction of the buildings. Shangri-La allegedly took possession of the buildings while still owing BF Corporation an outstanding balance. BF Corporation alleged that despite repeated demands, Shangri-La refused to pay the balance owed to it.It also alleged that the Shangri-La’s directors were in bad faith in directing Shangri-La’s affairs. Therefore, they should be held jointly and severally liable with Shangri-La for its obligations as well as for the damages that BF Corporation incurred as a result of Shangri-La’s default. On August 3, 1993, Shangri-La, Alfredo C. Ramos, Rufo B. Colayco, Maximo G. Licauco III, and Benjamin C. Ramos filed a motion to suspend the proceedings in view of BF Corporation’s failure to submit its dispute to arbitration, in accordance with the arbitration clause provided in its contract. Petitioners filed their comment on Shangri-La’s and BF Corporation’s motions, praying that they be excluded from the arbitration proceedings for being non-parties to Shangri-La’s and BF Corporation’s agreement.

Issue: Whether or not petitioners as directors of Shangri-La is personally liable for the contractual obligations entered into by the corporation.

Held: No. Because a corporation’s existence is only by fiction of law, it can only exercise its rights and powers through its directors, officers, or agents, who are all natural persons. A corporation cannot sue or enter into contracts without them.

A consequence of a corporation’s separate personality is that consent by a corporation through its representatives is not consent of the representative, personally. Its obligations, incurred through official acts of its representatives, are its own. A stockholder, director, or representative does not become a party to a contract just because a corporation executed a contract through that stockholder, director or representative.

Hence, a corporation’s representatives are generally not bound by the terms of the contract executed by the corporation. They are not personally liable for obligations and liabilities incurred on or in behalf of the corporation.

A submission to arbitration is a contract. As such, the Agreement, containing the stipulation on arbitration, binds the parties thereto, as well as their assigns and heirs.

When there are allegations of bad faith or malice against corporate directors or representatives, it becomes the duty of courts or tribunals to determine if these persons and the corporation should be treated as one. Without a trial, courts and tribunals have no basis for determining whether the veil of corporate fiction should be pierced. Courts or tribunals do not have such prior knowledge. Thus, the courts or tribunals must first determine whether circumstances exist towarrant the courts or tribunals to disregard the distinction between the corporation and the persons representing it. The determination of these circumstances must be made by one tribunal or court in a proceeding participated in by all parties involved, including current representatives of the corporation, and those persons whose personalities are impliedly the sameas the corporation. This is because when the court or tribunal finds that circumstances exist warranting the piercing of the corporate veil, the corporate representatives are treated as the corporation itself and should be held liable for corporate acts. The corporation’s distinct personality is disregarded, and the corporation is seen as a mere aggregation of persons undertaking a business under the collective name of the corporation.

A corporation is an artificial entity created by fiction of law. This means that while it is not a person, naturally, the law gives it a distinct personality and treats it as such. A corporation, in the legal sense, is an individual with a personality that is distinct and separate from other persons including its stockholders, officers, directors, representatives, and other juridical entities. The law vests in corporations rights,powers, and attributes as if they were natural persons with physical existence and capabilities to act on their own. For instance, they have the power to sue and enter into transactions or contracts. Section 36 of the Corporation Code enumerates some of a corporation’s powers, thus:

Section 36. Corporate powers and capacity.– Every corporation incorporated under this Code has the power and capacity: 1. To sue and be sued in its corporate name; 2. Of succession by its corporate name for the period of time stated in the articles of incorporation and the certificate ofincorporation; 3. To adopt and use a corporate seal; 4. To amend its articles of incorporation in accordance with the provisions of this Code; 5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with this Code; 6. In case of stock corporations, to issue or sell stocks to subscribers and to sell treasury stocks in accordance with the provisions of this Code; and to admit members to the corporation if it be a non-stock corporation; 7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property, including securities and bonds of other corporations, as the transaction of the lawful business of the corporation may reasonably and necessarily require, subject to the limitations prescribed by law and the Constitution; 8. To enter into merger or consolidation with other corporations as provided in this Code; 9. To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural, scientific, civic, or similar purposes: Provided, That no corporation, domestic or foreign, shall give donations in aid of any political party or candidate or for purposes of partisan political activity; 10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees; and 11. To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in its articles of incorporation.

Alhambra Cigar vs SEC (G.R. No. L-23606 July 29, 1968)

Alhambra Cigar & Cigarette Manufacturing Company Inc. vs Securities and Exchange Commission
G.R. No. L-23606 July 29, 1968

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. 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.”

Issue: Whether or not the corporate life of a corporation be extended during the period of winding up or after it’s charter has already expired.

Held: No. 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”. 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”. There is nothing left but to conduct, as it were, the settlement of the estate of a deceased juridical person.

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.

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.

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.

The pari materia rule of statutory construction, in fact, commands that statutes must be harmonized with each other. 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.

PNB vs CFI Pasig (G.R. No. 63201 May 27, 1992)

Philippine National Bank vs Court of First Instance of Pasig, Rizal Branch XXI
G.R. No. 63201 May 27, 1992

Facts: Private respondents are the registered owners of three parcels of land in Pasig, Metro Manila covered by OCT No. 853, TCT Nos. 32843 and 32897 of the Registry of Deeds of Rizal. On March 1, 1954, private respondents entered into a contract of lease with Philippine Blooming Mills, Co., Inc., (PBM) whereby the latter shall lease the aforementioned parcels of land as factory site. PBM was duly organized and incorporated on January 19, 1952 with a corporate term of twenty-five (25) years. This leasehold right of PBM covering the parcels of land was duly annotated at the back of the above stated certificates of title as Entry No. 9367/T-No. 32843. The contract of lease provides that the term of the lease is for twenty years beginning from the date of the contract and “is extendable for another term of twenty years at the option of the LESSEE should its term of existence be extended in accordance with law.”. The contract also states that the lessee agrees to “use the property as factory site and for that purpose to construct whatever buildings or improvements may be necessary or convenient and/or . . . for any purpose it may deem fit; and before the termination of the lease to remove all such buildings and improvements. In accordance with the contract, PBM introduced on the land, buildings, machineries and other useful improvements. These constructions and improvements were registered with the Registry of Deeds of Rizal and annotated at the back of the respondents’ certificates of title as Entry No. 85213/T-No. 43338. On October 11, 1963, PBM executed in favor of Philippine National Bank (PNB), petitioner herein, a deed of assignment, conveying and transferring all its rights and interests under the contract of lease which it executed with private respondents. The assignment was for and in consideration of the loans granted by PNB to PBM. The deed of assignment was registered and annotated at the back of the private respondents’ certificates of title as Entry No. 85215/TNo. 32843. On November 6, 1963 and December 23, 1963 respectively, PBM executed in favor of PNB a real estate mortgage for a loan of P100,000.00 and an addendum to real estate mortgage for another loan of P1,590,000.00, covering all the improvements constructed by PBM on the leased premises. These mortgages were registered and annotated at the back of respondents’ certificates as Entry No. 85214/T-No. 43338 and Entry No. 870971/T-No. 32843, respectively. On October 7, 1981, private respondents filed a motion in the same proceedings which was given a different case number to wit, LRC Case No.  R-2744, because of the payment of filing fees for the motion. The motion sought to cancel the annotations on respondents’ certificates of title pertaining to the assignment by PBM to PNB of the former’s leasehold rights, inclusion of improvements and the real estate mortgages made by PBM in favor of PNB, on the ground that the contract of lease entered into between PBM and respondents-movants had already expired by the failure of PBM and/or its assignee to exercise the option to renew the second 20-year lease commencing on March 1, 1974 and also by the failure of PBM to extend its corporate existence in accordance with law. The motion also states that since PBM failed to remove its improvements on the leased premises before the expiration of the contract of lease, such improvements shall accrue to respondents as owners of the land.

Issue: Whether or not the corporate life of PBM was extended by the continuance of the lease and subsequent registration of the title to the improvements under its name.

Held: No. The contract of lease expressly provides that the term of the lease shall be twenty years from the execution of the contract but can be extended for another period of twenty years at the option of the lessee should the corporate term be extended in accordance with law. Clearly, the option of the lessee to extend the lease for another period of twenty years can be exercised only if the lessee as corporation renews or extends its corporate term of existence in accordance with the Corporation Code which is the applicable law. Contracts are to be interpreted according to their literal meaning and should not be interpreted beyond their obvious intendment. Thus, in the instant case, the initial term of the contract of lease which commenced on March 1, 1954 ended on March 1, 1974. PBM as lessee continued to occupy the leased premises beyond that date with the acquiescence and consent of the respondents as lessor. Records show however, that PBM as a corporation had a corporate life of only twenty-five (25) years which ended an January 19, 1977. It should be noted however that PBM allowed its corporate term to expire without complying with the requirements provided by law for the extension of its corporate term of existence.

Section 11 of Corporation Code provides that a corporation shall exist for a period not exceeding fifty (50) years from the date of incorporation unless sooner dissolved or unless said period is extended. Upon the expiration of the period fixed in the articles of incorporation in the absence of compliance with the legal requisites for the extension of the period, the corporation ceases to exist and is dissolved ipso facto. When the period of corporate life expires, the corporation ceases to be a body corporate for the purpose of continuing the business for which it was organized. But it 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 enabling it gradually to settle and close its affairs, to dispose of and convey its property and to divide its assets. There is no need for the institution of a proceeding for quo warranto to determine the time or date of the dissolution of a corporation because the period of corporate existence is provided in the articles of incorporation. When such period expires and without any extension having been made pursuant to law, the corporation is dissolved automatically insofar as the continuation of its business is concerned. The quo warranto proceeding under Rule 66 of the Rules of Court, as amended, may be instituted by the Solicitor General only for the involuntary dissolution of a corporation on the following grounds: a) when the corporation has offended against a provision of an Act for its creation or renewal; b) when it has forfeited its privileges and franchises by non-user; c) when it has committed or omitted an act which amounts to a surrender of its corporate rights, privileges or franchises; d) when it has mis-used a right, privilege or franchise conferred upon it by law, or when it has exercised a right, privilege or franchise in contravention of law. Hence, there is no need for the SEC to make an involuntary dissolution of a corporation whose corporate term had ended because its articles of incorporation had in effect expired by its own limitation.

Considering the foregoing in relation to the contract of lease between the parties herein, when PBM’s corporate life ended on January 19, 1977 and its 3-year period for winding up and liquidation expired on January 19, 1980, the option of extending the lease was likewise terminated on January 19, 1977 because PBM failed to renew or extend its corporate life in accordance with law. From then on, the respondents can exercise their right to terminate the lease pursuant to the stipulations in the contract.

Cease vs CA (G.R. No. L-33172 October 18, 1979)

Cease vs Court of Appeals
G.R. No. L-33172 October 18, 1979

Facts: sometime in June 1908, one Forrest L. Cease common predecessor in interest of the parties together with five (5) other American citizens organized the Tiaong Milling and Plantation Company and in the course of its corporate existence the company acquired various properties but at the same time all the other original incorporators were bought out by Forrest L. Cease together with his children namely Ernest, Cecilia, Teresita, Benjamin, Florence and one Bonifacia Tirante also considered a member of the family; the charter of the company lapsed in June 1958; but whether there were steps to liquidate it, the record is silent; on 13 August 1959, Forrest L. Cease died and by extrajudicial partition of his shares, among the children, this was disposed of on 19 October 1959; it was here where the trouble among them came to arise because it would appear that Benjamin and Florence wanted an actual division while the other children wanted reincorporation; and proceeding on that, these other children Ernesto, Teresita and Cecilia and aforementioned other stockholder Bonifacia Tirante proceeded to incorporate themselves into the F.L. Cease Plantation Company and registered it with the Securities and Exchange Commission on 9 December, 1959; apparently in view of that, Benjamin and Florence for their part initiated a Special Proceeding No. 3893 of the Court of First Instance of Tayabas for the settlement of the estate of Forest L. Cease on 21 April, 1960 and one month afterwards on 19 May 1960 they filed Civil Case No. 6326 against Ernesto, Teresita and Cecilia Cease together with Bonifacia Tirante asking that the Tiaong Milling and Plantation Corporation be declared Identical to F.L. Cease and that its properties be divided among his children as his intestate heirs; this Civil Case was resisted by aforestated defendants and notwithstanding efforts of the plaintiffs to have the properties placed under receivership, they were not able to succeed because defendants filed a bond to remain as they have remained in possession; after that and already, during the pendency of Civil Case No. 6326 specifically on 21 May, 1961 apparently on the eve of the expiry of the three (3) year period provided by the law for the liquidation of corporations, the board of liquidators of Tiaong Milling executed an assignment and conveyance of properties and trust agreement in favor of F.L. Cease Plantation Co. Inc. as trustee of the Tiaong Milling and Plantation Co. so that upon motion of the plaintiffs trial Judge ordered that this alleged trustee be also included as party defendant; now this being the situation, it will be remembered that there were thus two (2) proceedings pending in the Court of First Instance of Quezon namely Civil Case No. 6326 and Special Proceeding No. 3893 but both of these were assigned to the Honorable Respondent Judge Manolo L. Maddela p. 43 and the case was finally heard and submitted upon stipulation of facts pp, 34-110, rollo; and trial Judge by decision dated 27 December 1969 held for the plaintiffs Benjamin and Florence.
 
Issue: Whether or not the properties of the Tiaong Milling and Plantation Company forms part of the estate of the deceased Forrest L. Cease.
 
Held: Yes. The theory of “merger of Forrest L. Cease and The Tiaong Milling as one personality”, or that “the company is only the business conduit and alter ego of the deceased Forrest L. Cease and the registered properties of Tiaong Milling are actually properties of Forrest L. Cease and should be divided equally, share and share alike among his six children, … “, the trial court did aptly apply the familiar exception to the general rule by disregarding the legal fiction of distinct and separate corporate personality and regarding the corporation and the individual member one and the same.
 
It must be remembered that when Tiaong Milling adduced its defense and raised the issue of ownership, its corporate existence already terminated through the expiration of its charter. It is clear in Section 77 of Act No. 1459 (Corporation Law) that upon the expiration of the charter period, the corporation ceases to exist and is dissolved ipso facto except for purposes connected with the winding up and liquidation. The provision allows a three year, period from expiration of the charter within which the entity gradually settles and closes its affairs, disposes and convey its property and to divide its capital stock, but not for the purpose of continuing the business for which it was established. At this terminal stage of its existence, Tiaong Milling may no longer persist to maintain adverse title and ownership of the corporate assets as against the prospective distributees when at this time it merely holds the property in trust, its assertion of ownership is not only a legal contradiction, but more so, to allow it to maintain adverse interest would certainly thwart the very purpose of liquidation and the final distribute loll of the assets to the proper, parties.  
 
While the records showed that originally its incorporators were aliens, friends or third-parties in relation of one to another, in the course of its existence, it developed into a close family corporation. The Board of Directors and stockholders belong to one family the head of which Forrest L. Cease always retained the majority stocks and hence the control and management of its affairs. In fact, during the reconstruction of its records in 1947 before the Security and Exchange Commission only 9 nominal shares out of 300 appears in the name of his 3 eldest children then and another person close to them. It is likewise noteworthy to observe that as his children increase or perhaps become of age, he continued distributing his shares among them adding Florence, Teresa and Marion until at the time of his death only 190 were left to his name. Definitely, only the members of his family benefited from the Corporation.
 
The accounts of the corporation and therefore its operation, as well as that of the family appears to be indistinguishable and apparently joined together. As admitted by the defendants corporation ‘never’ had any account with any banking institution or if any account was carried in a bank on its behalf, it was in the name of Mr. Forrest L. Cease. In brief, the operation of the Corporation is merged with those of the majority stockholders, the latter using the former as his instrumentality and for the exclusive benefits of all his family. From the foregoing indication, therefore, there is truth in plaintiff’s allegation that the corporation is only a business conduit of his father and an extension of his personality, they are one and the same thing. Thus, the assets of the corporation are also the estate of Forrest L. Cease, the father of the parties herein who are all legitimate children of full blood.  
 
A rich store of jurisprudence has established the rule known as the doctrine of disregarding or piercing the veil of corporate fiction. Generally, a corporation is invested by law with a personality separate and distinct from that of the persons composing it as well as from that of any other legal entity to which it may be related. By virtue of this attribute, a corporation may not, generally, be made to answer for acts or liabilities of its stockholders or those of the legal entities to which it may be connected, and vice versa. This separate and distinct personality is, however, merely a fiction created by law for convenience and to promote the ends of justice. For this reason, it may not be used or invoked for ends subversive of the policy and purpose behind its creation. This is particularly true where the fiction is used to defeat public convenience, justify wrong, protect fraud, defend crime, confuse legitimate legal or judicial issues , perpetrate deception or otherwise circumvent the law. This is likewise true where the corporate entity is being used as an alter ego, adjunct, or business conduit for the sole benefit of the stockholders or of another corporate entity.

McLeod vs NLRC (G.R. No. 146667 January 23, 2007)

McLeod vs National Labor Relations Commission
G.R. No. 146667 January 23, 2007

Facts: On February 2, 1995, John F. McLeod filed a complaint for retirement benefits, vacation and sick leave benefits, nonpayment of unused airline tickets, holiday pay, underpayment of salary and 13th month pay, moral and exemplary damages, attorney’s fees plus interest against Filipinas Synthetic Corporation (Filsyn), Far Eastern Textile Mills, Inc., Sta. Rosa Textiles, Inc., Patricio Lim and Eric Hu. In his Position Paper, complainant alleged that he is an expert in textile manufacturing process; that as early as 1956 he was hired as the Assistant Spinning Manager of Universal Textiles, Inc. (UTEX); that he was promoted to Senior Manager and worked for UTEX till 1980 under its President, respondent Patricio Lim; that in 1978 Patricio Lim formed Peggy Mills, Inc. with respondent Filsyn having controlling interest; that complainant was absorbed by Peggy Mills as its Vice President and Plant Manager of the plant at Sta. Rosa, Laguna; that at the time of his retirement complainant was receiving P 60,000.00 monthly with vacation and sick leave benefits; 13th month pay, holiday pay and two round trip business class tickets on a Manila-London-Manila itinerary every three years which is convertible to cas[h] if unused; that in January 1986, respondents failed to pay vacation and leave credits and requested complainant to wait as it was short of funds but the same remain unpaid at present; that complainant is entitled to such benefit as per CBA provision (Annex “A”); that respondents likewise failed to pay complainant’s holiday pay up to the present; that complainant is entitled to such benefits as per CBA provision (Annex “B”); that in 1989 the plant union staged a strike and in 1993 was found guilty of staging an illegal strike; that from 1989 to 1992 complainant was entitled to 4 round trip business class plane tickets on a Manila-London-Manila itinerary but this benefit not (sic) its monetary equivalent was not given; that on August 1990 the respondents reduced complainant’s monthly salary of P 60,000.00 by P9,900.00 till November 1993 or a period of 39 months; that in 1991 Filsyn sold Peggy Mills, Inc. to Far Eastern Textile Mills, Inc. as per agreement (Annex “D”) and this was renamed as Sta. Rosa Textile with Patricio Lim as Chairman and President; that complainant worked for Sta. Rosa until November 30 that from time to time the owners of Far Eastern consulted with complainant on technical aspects of reoperation of the plant as per correspondence (Annexes “D-1” and “D-2”); that when complainant reached and applied retirement age at the end of 1993, he was only given a reduced 13th month pay of P 44,183.63, leaving a balance of P 15,816.87; that thereafter the owners of Far Eastern Textiles decided for cessation of operations of Sta. Rosa Textiles; that on two occasions, complainant wrote letters (Annexes “E-1” to “E-2”) to Patricio Lim requesting for his retirement and other benefits; that in the last quarter of 1994 respondents offered complainant compromise settlement of only P 300,000.00 which complainant rejected; that again complainant wrote a letter (Annex “F”) reiterating his demand for full payment of all benefits and to no avail, hence this complaint; and that he is entitled to all his money claims pursuant to law. On the other hand, respondents in their Position Paper alleged that complainant was the former Vice-President and Plant Manager of Peggy Mills, Inc.; that he was hired in June 1980 and Peggy Mills closed operations due to irreversible losses at the end of July 1992 but the corporation still exists at present; that its assets were acquired by Sta. Rosa Textile Corporation which was established in April 1992 but still remains non-operational at present; that complainant was hired as consultant by Sta. Rosa Textile in November 1992 but he resigned on November 30, 1993; that Filsyn and Far Eastern Textiles are separate legal entities and have no employer relationship with complainant; that respondent Patricio Lim is the President and Board Chairman of Sta. Rosa Textile Corporation; that respondent Eric Hu is a Taiwanese and is Director of Sta. Rosa Textiles, Inc.; that complainant has no cause of action against Filsyn, Far Eastern Textile Ltd., Sta. Rosa Textile Corporation and Eric Hu; that Sta. Rosa only acquired the assets and not the liabilities of Peggy Mills, Inc.; that Patricio Lim was only impleaded as Board Chairman of Sta. Rosa Textile and not as private individual; that while complainant was Vice President and Plant Manager of Peggy Mills, the union staged a strike up to July 1992 resulting in closure of operations due to irreversible losses as per Notice (Annex “1”); that complainant was relied upon to settle the labor problem but due to his lack of attention and absence the strike continued resulting in closure of the company; and losses to Sta. Rosa which acquired its assets as per their financial statements (Annexes “2” and “3”); that the attendance records of complainant from April 1992 to November 1993 (Annexes “4” and “5”) show that he was either absent or worked at most two hours a day; that Sta. Rosa and Peggy Mills are interposing counterclaims for damages in the total amount of P 36,757.00 against complainant; that complainant’s monthly salary at Peggy Mills was P P 50,495.00 and not 60,000.00; that Peggy Mills, does not have a retirement program; that whatever amount complainant is entitled should be offset with the counterclaims; that complainant worked only for 12 years from 1980 to 1992; that complainant was only hired as a consultant and not an employee by Sta. Rosa Textile; that complainant’s attendance record of absence and two hours daily work during the period of the strike wipes out any vacation/sick leave he may have accumulated; that there is no basis for complainant’s claim of two (2) business class airline tickets; that complainant’s pay already included the holiday pay; that he is entitled to holiday pay as consultant by Sta. Rosa; that he has waived this benefit in his 12 years of work with Peggy Mills; that he is not entitled to 13th month pay as consultant; and that he is not entitled to moral and exemplary damages and attorney’s fees.
 
Issues: Whether or not the doctrine of piercing the corporate veil should be applied to further entitle petitioner for the claim sought in all the corporations allegedly his employer.

Whether or not the corporate directors can be held liable personally with petitioner.

Whether or not there is merger between PMI and SRTI.

Held: No. A corporation is an artificial being invested by law with a personality separate and distinct from that of its stockholders and from that of other corporations to which it may be connected.
 
While a corporation may exist for any lawful purpose, the law will regard it as an association of persons or, in case of two corporations, merge them into one, when its corporate legal entity is used as a cloak for fraud or illegality. This is the doctrine of piercing the veil of corporate fiction. The doctrine applies only when such corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or defend crime, or when it is made as a shield to confuse the legitimate issues, or where a corporation is the mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.
 
To disregard the separate juridical personality of a corporation, the wrongdoing must be established clearly and convincingly. It cannot be presumed.
 
Here, we do not find any of the evils sought to be prevented by the doctrine of piercing the corporate veil.  Respondent corporations may be engaged in the same business as that of PMI, but this fact alone is not enough reason to pierce the veil of corporate fiction.
 
At any rate, the existence of interlocking incorporators, directors, and officers is not enough justification to pierce the veil of corporate fiction, in the absence of fraud or other public policy considerations.
 
No. Personal liability of corporate directors, trustees or officers attaches only when (1) they assent to a patently unlawful act of the corporation, or when they are guilty of bad faith or gross negligence in directing its affairs, or when there is a conflict of interest resulting in damages to the corporation, its stockholders or other persons; (2) they consent to the issuance of watered down stocks or when, having knowledge of such issuance, do not forthwith file with the corporate secretary their written objection; (3) they agree to hold themselves personally and solidarily liable with the corporation; or (4) they are made by specific provision of law personally answerable for their corporate action.
 
No. As a rule, a corporation that purchases the assets of another will not be liable for the debts of the selling corporation, provided the former acted in good faith and paid adequate consideration for such assets, except when any of the following circumstances is present: (1) where the purchaser expressly or impliedly agrees to assume the debts, (2) where the transaction amounts to a consolidation or merger of the corporations, (3) where the purchasing corporation is merely a continuation of the selling corporation, and (4) where the selling corporation fraudulently enters into the transaction to escape liability for those debts.26 None of the foregoing exceptions is present in this case.
 
Here, PMI transferred its assets to SRTI to settle its obligation to SRTI in the sum of P 210,000,000. We are not convinced that PMI fraudulently transferred these assets to escape its liability for any of its debts. PMI had already paid its employees, except McLeod, their money claims. There was also no merger or consolidation of PMI and SRTI.
 
Consolidation is the union of two or more existing corporations to form a new corporation called the consolidated corporation. It is a combination by agreement between two or more corporations by which their rights, franchises, and property are united and become those of a single, new corporation, composed generally, although not necessarily, of the stockholders of the original corporations. Merger, on the other hand, is a union whereby one corporation absorbs one or more existing corporations, and the absorbing corporation survives and continues the combined business. The parties to a merger or consolidation are called constituent corporations. In consolidation, all the constituents are dissolved and absorbed by the new consolidated enterprise. In merger, all constituents, except the surviving corporation, are dissolved. In both cases, however, there is no liquidation of the assets of the dissolved corporations, and the surviving or consolidated corporation acquires all their properties, rights and franchises and their stockholders usually become its stockholders.

Oil and Natural Gas vs CA (293 SCRA 96)

Oil and Natural Gas vs CA
293 SCRA 96 [GR No. 114323 July 23, 1998]