corp pdf (1)

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

FRED M. HARDEN, J.D. HIGHSMITH, and JOHN C. HART, in their own behalf and in that all other stockholders of the Balatoc Mining Company, etc., plaintiffs-appellants, vs. BENGUET CONSOLIDATED MINING COMPANY, BALATOC MINING COMPANY, H. E. RENZ, JOHN W. JAUSSERMANN, and A. W. BEAM, defendants-appellees.

Gibbs and McDonough and Roman Ozaeta for appellants. DeWitt, Perkins and Brady for appellees. Ross, Lawrence and Selph for appellee Balatoc Mining Company.

STREET, J.:

This action was originally instituted in the Court of First Instance of the City of Manila by F. M. Harden, acting in his own behalf and that of all other stockholders of the Balatoc Mining Co. who might join in the action and contribute to the expense of the suit. With the plaintiff Harden two others, J. D. Highsmith and John C. Hart, subsequently associated themselves. The defendants are the Benguet Consolidated Mining Co., the Balatoc Mining Co., H. E. Renz, John W. Haussermann, and A. W. Beam. The principal purpose of the original action was to annul a certificate covering 600,000 shares of the stock of the Balatoc Mining Co., which have been issued to the Benguet Consolidated Mining Co., and to secure to the Balatoc Mining Co., the restoration of a large sum of money alleged to have been unlawfully collected by the Benguet Consolidated Mining Co., with legal interest, after deduction therefrom of the amount expended by the latter company under a contract between the two companies, bearing date of March 9, 1927. The complaint was afterwards amended so as to include a prayer for the annulment of this contract. Shortly prior to the institution of this lawsuit, the Benguet Consolidated Mining Co., transferred to H. E. Renz, as trustee, the certificate for 600,000 shares of the Balatoc Mining Co. which constitute the principal subject matter of the action. This was done apparently to facilitate the splitting up to the shares in the course of the sale or distribution. To prevent this the plaintiffs, upon filing their original complaint, procured a preliminary injunction restraining the defendants, their agents and servants, from selling, assigning or transferring the 600,000 shares of the Balatoc Mining Co., or any part thereof, and from removing said shares from the Philippine Islands. This explains the connection of Renz with the case. The other individual defendants are made merely as officials of the Benguet Consolidated Mining Co. Upon hearing the cause the trial court dismissed the complaint and dissolved the preliminary injunction, with costs against the plaintiffs. From this judgment the plaintiffs appealed.

The facts which have given rise this lawsuit are simple, as the financial interests involve are immense. Briefly told these facts are as follows: The Benguet Consolidated Mining

Co. was organized in June, 1903, as a sociedad anonima in conformity with the provisions of Spanish law; while the Balatoc Mining Co. was organized in December 1925, as a corporation, in conformity with the provisions of the Corporation Law (Act No. 1459). Both entities were organized for the purpose of engaging in the mining of gold in the Philippine Islands, and their respective properties are located only a few miles apart in the subprovince of Benguet. The capital stock of the Balatoc Mining Co. consists of one million shares of the par value of one peso (P1) each.

When the Balatoc Mining Co. was first organized the properties acquired by it were largely undeveloped; and the original stockholders were unable to supply the means needed for profitable operation. For this reason, the board of directors of the corporation ordered a suspension of all work, effective July 31, 1926. In November of the same year a general meeting of the company's stockholders appointed a committee for the purpose of interesting outside capital in the mine. Under the authority of this resolution the committee approached A. W. Beam, then president and general manager of the Benguet Company, to secure the capital necessary to the development of the Balatoc property. As a result of the negotiations thus begun, a contract, formally authorized by the management of both companies, was executed on March 9, 1927, the principal features of which were that the Benguet Company was to proceed with the development and construct a milling plant for the Balatoc mine, of a capacity of 100 tons of ore per day, and with an extraction of at least 85 per cent of the gold content. The Benguet Company also agreed to erect an appropriate power plant, with the aerial tramlines and such other surface buildings as might be needed to operate the mine. In return for this it was agreed that the Benguet Company should receive from the treasurer of the Balatoc Company shares of a par value of P600,000, in payment for the first P600,000 be thus advanced to it by the Benguet Company.

The performance of this contract was speedily begun, and by May 31, 1929, the Benguet Company had spent upon the development the sum of P1,417,952.15. In compensation for this work a certificate for six hundred thousand shares of the stock of the Balatoc Company has been delivered to the Benguet Company, and the excess value of the work in the amount of P817,952.15 has been returned to the Benguet Company in cash. Meanwhile dividends of the Balatoc Company have been enriching its stockholders, and at the time of the filing of the complaint the value of its shares had increased in the market from a nominal valuation to more than eleven pesos per share. While the Benguet Company was pouring its million and a half into the Balatoc property, the arrangements made between the two companies appear to have been viewed by the plaintiff Harden with complacency, he being the owner of many thousands of the shares of the Balatoc Company. But as soon as the success of the development had become apparent, he began this litigation in which he has been joined by two others of the eighty shareholders of the Balatoc Company.

Briefly, the legal point upon which the action is planted is that it is unlawful for the Benguet Company to hold any interest in a mining corporation and that the contract by

which the interest here in question was acquired must be annulled, with the consequent obliteration of the certificate issued to the Benguet Company and the corresponding enrichment of the shareholders of the Balatoc Company.

When the Philippine Islands passed to the sovereignty of the United States, in the attention of the Philippine Commission was early drawn to the fact that there is no entity in Spanish law exactly corresponding to the notion of the corporation in English and American law; and in the Philippine Bill, approved July 1, 1902, the Congress of the United States inserted certain provisions, under the head of Franchises, which were intended to control the lawmaking power in the Philippine Islands in the matter of granting of franchises, privileges and concessions. These provisions are found in section 74 and 75 of the Act. The provisions of section 74 have been superseded by section 28 of the Act of Congress of August 29, 1916, but in section 75 there is a provision referring to mining corporations, which still remains the law, as amended. This provisions, in its original form, reads as follows: "... it shall be unlawful for any member of a corporation engaged in agriculture or mining and for any corporation organized for any purpose except irrigation to be in any wise interested in any other corporation engaged in agriculture or in mining."

Under the guidance of this and certain other provisions thus enacted by Congress, the Philippine Commission entered upon the enactment of a general law authorizing the creation of corporations in the Philippine Islands. This rather elaborate piece of legislation is embodied in what is called our Corporation Law (Act No. 1459 of the Philippine Commission). The evident purpose of the commission was to introduce the American corporation into the Philippine Islands as the standard commercial entity and to hasten the day when the sociedad anonima of the Spanish law would be obsolete. That statute is a sort of codification of American corporate law.

For the purposes general description only, it may be stated that the sociedad anonima is something very much like the English joint stock company, with features resembling those of both the partnership is shown in the fact that sociedad, the generic component of its name in Spanish, is the same word that is used in that language to designate other forms of partnership, and in its organization it is constructed along the same general lines as the ordinary partnership. It is therefore not surprising that for purposes of loose translation the expression sociedad anonima has not infrequently the other hand, the affinity of this entity to the American corporation has not escaped notice, and the expression sociedad anonima is now generally translated by the word corporation. But when the word corporation is used in the sense of sociedad anonima and close discrimination is necessary, it should be associated with the Spanish expression sociedad anonima either in a parenthesis or connected by the word "or". This latter device was adopted in sections 75 and 191 of the Corporation Law.

In drafting the Corporation Law the Philippine Commission inserted bodily, in subsection (5) of section 13 of that Act (No. 1459) the words which we have already quoted from

section 75 of the Act of Congress of July 1, 1902 (Philippine Bill); and it is of course obvious that whatever meaning originally attached to this provision in the Act of Congress, the same significance should be attached to it in section 13 of our Corporation Law.

As it was the intention of our lawmakers to stimulate the introduction of the American Corporation into Philippine law in the place of the sociedad anonima, it was necessary to make certain adjustments resulting from the continued co-existence, for a time, of the two forms of commercial entities. Accordingly, in section 75 of the Corporation Law, a provision is found making the sociedad anonima subject to the provisions of the Corporation Law "so far as such provisions may be applicable", and giving to the sociedades anonimas previously created in the Islands the option to continue business as such or to reform and organize under the provisions of the Corporation Law. Again, in section 191 of the Corporation Law, the Code of Commerce is repealed in so far as it relates to sociedades anonimas. The purpose of the commission in repealing this part of the Code of Commerce was to compel commercial entities thereafter organized to incorporate under the Corporation Law, unless they should prefer to adopt some form or other of the partnership. To this provision was added another to the effect that existing sociedades anonimas, which elected to continue their business as such, instead of reforming and reorganizing under the Corporation Law, should continue to be governed by the laws that were in force prior to the passage of this Act "in relation to their organization and method of transacting business and to the rights of members thereof as between themselves, but their relations to the public and public officials shall be governed by the provisions of this Act."

As already observed, the provision above quoted from section 75 of the Act Congress of July 1, 1902 (Philippine Bill), generally prohibiting corporations engaged in mining and members of such from being interested in any other corporation engaged in mining, was amended by section 7 of Act No. 3518 of the Philippine Legislature, approved by Congress March 1, 1929. The change in the law effected by this amendment was in the direction of liberalization. Thus, the inhibition contained in the original provision against members of a corporation engaged in agriculture or mining from being interested in other corporations engaged in agriculture or in mining was so modified as merely to prohibit any such member from holding more than fifteen per centum of the outstanding capital stock of another such corporation. Moreover, the explicit prohibition against the holding by any corporation (except for irrigation) of an interest in any other corporation engaged in agriculture or in mining was so modified as to limit the restriction to corporations organized for the purpose of engaging in agriculture or in mining.

As originally drawn, our Corporation Law (Act No. 1459) did not contain any appropriate clause directly penalizing the act of a corporation, a member of a corporation , in acquiring an interest contrary to paragraph (5) of section 13 of the Act. The Philippine Legislature undertook to remedy this situation in section 3 of Act No. 2792 of the

Philippine Legislature, approved on February 18, 1919, but this provision was declared invalid by this court inGovernment of the Philippine Islands vs. El Hogar Filipino (50 Phil., 399), for lack of an adequate title to the Act. Subsequently the Legislature reenacted substantially the same penal provision in section 21 of Act No. 3518, under a title sufficiently broad to comprehend the subject matter. This part of Act No. 3518 became effective upon approval by the Governor-General, on December 3, 1928, and it was therefore in full force when the contract now in question was made.

This provision was inserted as a new section in the Corporation Law, forming section 1990 (A) of said Act as it now stands. Omitting the proviso, which seems not to be pertinent to the present controversy, said provision reads as follows:

SEC. 190 (A). Penalties. — The violation of any of the provisions of this Act and its amendments not otherwise penalized therein, shall be punished by a fine of not more than five thousand pesos and by imprisonment for not more than five years, in the discretion of the court. If the violation is committed by a corporation, the same shall, upon such violation being proved, be dissolved by quo warranto proceedings instituted by the Attorney-General or by any provincial fiscal by order of said Attorney-General: . . . .

Upon a survey of the facts sketched above it is obvious that there are two fundamental questions involved in this controversy. The first is whether the plaintiffs can maintain an action based upon the violation of law supposedly committed by the Benguet Company in this case. The second is whether, assuming the first question to be answered in the affirmative, the Benguet Company, which was organized as a sociedad anonima, is a corporation within the meaning of the language used by the Congress of the United States, and later by the Philippine Legislature, prohibiting a mining corporation from becoming interested in another mining corporation. It is obvious that, if the first question be answered in the negative, it will be unnecessary to consider the second question in this lawsuit.

Upon the first point it is at once obvious that the provision referred to was adopted by the lawmakers with a sole view to the public policy that should control in the granting of mining rights. Furthermore, the penalties imposed in what is now section 190 (A) of the Corporation Law for the violation of the prohibition in question are of such nature that they can be enforced only by a criminal prosecution or by an action of quo warranto. But these proceedings can be maintained only by the Attorney-General in representation of the Government.

What room then is left for the private action which the plaintiffs seek to assert in this case? The defendant Benguet Company has committed no civil wrong against the plaintiffs, and if a public wrong has been committed, the directors of the Balatoc Company, and the plaintiff Harden himself, were the active inducers of the commission of that wrong. The contract, supposing it to have been unlawful in fact, has been

performed on both sides, by the building of the Balatoc plant by the Benguet Company and the delivery to the latter of the certificate of 600,000 shares of the Balatoc Company. There is no possibility of really undoing what has been done. Nobody would suggest the demolition of the mill. The Balatoc Company is secure in the possession of that improvement, and talk about putting the parties in status quo ante by restoring the consideration with interest, while the Balatoc Company remains in possession of what it obtained by the use of that money, does not quite meet the case. Also, to mulct the Benguet Company in many millions of dollars in favor of individuals who have not the slightest equitable right to that money in a proposition to which no court can give a ready assent.

The most plausible presentation of the case of the plaintiffs proceeds on the assumption that only one of the contracting parties has been guilty of a misdemeanor, namely, the Benguet Company, and that the other party, the Balatoc Company, is wholly innocent to participation in that wrong. The plaintiffs would then have us apply the second paragraph of article 1305 of the Civil Code which declares that an innocent party to an illegal contract may recover anything he may have given, while he is not bound to fulfill any promise he may have made. But, supposing that the first hurdle can be safely vaulted, the general remedy supplied in article 1305 of the Civil Code cannot be invoked where an adequate special remedy is supplied in a special law. It has been so held by this court in Go Chioco vs. Martinez (45 Phil., 256, 280), where we refused to apply that article to a case of nullity arising upon a usurious loan. The reason given for the decision on this point was that the Usury Act, as amended, contains all the provisions necessary for the effectuation of its purposes, with the result that the remedy given in article 1305 of the Civil Code is unnecessary. Much more is that idea applicable to the situation now before us, where the special provisions give ample remedies for the enforcement of the law by action in the name of the Government, and where no civil wrong has been done to the party here seeking redress.

The view of the case presented above rest upon considerations arising upon our own statutes; and it would seem to be unnecessary to ransack the American decisions for analogies pertinent to the case. We may observe, however, that the situation involved is not unlike that which has frequently arisen in the United States under provisions of the National Bank Act prohibiting banks organized under that law from holding real property. It has been uniformly held that a trust deed or mortgaged conveying property of this kind to a bank, by way of security, is valid until the transaction is assailed in a direct proceeding instituted by the Government against the bank, and the illegality of such tenure supplies no basis for an action by the former private owner, or his creditor, to annul the conveyance. (National Bank vs. Matthews, 98 U. S., 621; Kerfoot vs. Farmers & M. Bank, 218 U. S., 281.) Other analogies point in the same direction. (South & Ala. R. Ginniss vs. B. & M. Consol. etc. Mining Co., 29 Mont., 428; Holmes & Griggs Mfg. Co. vs. Holmes & Wessell Metal Co., 127 N. Y., 252; Oelbermann vs. N. Y. & N. R. Co., 77 Hun., 332.)

Most suggestive perhaps of all the cases in Compañia Azucarera de Carolina vs. Registrar (19 Porto Rico, 143), for the reason that this case arose under a provision of the Foraker Act, a law analogous to our Philippine Bill. It appears that the registrar had refused to register two deeds in favor of the Compañia Azucarera on the ground that the land thereby conveyed was in excess of the area permitted by law to the company. The Porto Rican court reversed the ruling of the registrar and ordered the registration of the deeds, saying:

Thus it may be seen that a corporation limited by the law or by its charter has until the State acts every power and capacity that any other individual capable of acquiring lands, possesses. The corporation may exercise every act of ownership over such lands; it may sue in ejectment or unlawful detainer and it may demand specific performance. It has an absolute title against all the world except the State after a proper proceeding is begun in a court of law. ... The Attorney General is the exclusive officer in whom is confided the right to initiate proceedings for escheat or attack the right of a corporation to hold land.

Having shown that the plaintiffs in this case have no right of action against the Benguet Company for the infraction of law supposed to have been committed, we forego cny discussion of the further question whether a sociedad anonima created under Spanish law, such as the Benguet Company, is a corporation within the meaning of the prohibitory provision already so many times mentioned. That important question should, in our opinion, be left until it is raised in an action brought by the Government.

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

Avanceña, C.J., Villamor, Ostrand, Villa-Real, Abad Santos, Hull, Vickers, Imperial and Butte, JJ., concur.

2. EXCELLENT QUALITY APPAREL, G.R. No. 175048 INC., Petitioner, Present: QUISUMBING, J., Chairperson, - versus - CARPIO MORALES TINGA, VELASCO, JR., and WIN MULTI RICH BUILDERS, INC., BRION, JJ. represented by its President, WILSON G. CHUA, Promulgated: Respondent. February 10, 2009 x ---------------------------------------------------------------------------------x D E C I S I O N TINGA, J.:

Before us is a Rule 45 petition[1] seeking the reversal of the Decision[2] and

Resolution[3] of the Court of Appeals in CA-G.R. SP No. 84640. The Court of Appeals

had annulled two orders[4] of the Regional Trial Court (RTC), Branch 32, of Manila in

Civil Case No. 04-108940. This case involves a claim for a sum of money which arose

from a construction dispute.

On 26 March 1996, petitioner Excellent Quality Apparel, Inc. (petitioner) then

represented by Max L.F. Ying, Vice-President for Productions, and Alfiero R. Orden,

Treasurer, entered into a contract[5] with Multi-Rich Builders (Multi-Rich) represented by

Wilson G. Chua (Chua), its President and General Manager, for the construction of a

garment factory within the Cavite Philippine Economic Zone Authority (CPEZ).[6] The

duration of the project was for a maximum period of five (5) months or 150 consecutive

calendar days. Included in the contract is an arbitration clause which is as follows:

http://sc.judiciary.gov.ph/jurisprudence/2009/feb2009/175048.htm#_ftn1






Article XIX : ARBITRATION CLAUSE

Should there be any dispute, controversy or difference between the parties arising out of this Contract that may not be resolved by them to their mutual satisfaction, the matter shall be submitted to an Arbitration Committee of three (3) members; one (1) chosen by the OWNER; one (1) chosen by the CONTRACTOR; and the Chairman thereof to be chosen by two (2) members. The decision of the Arbitration Committee shall be final and binding on both the parties hereto. The Arbitration shall be governed by the Arbitration Law (R.A. [No.] 876). The cost of arbitration shall be borned [sic] jointly by both CONTRACTOR and OWNER on 50-50 basis.[7]

The construction of the factory building was completed on 27 November 1996.

Respondent Win Multi-Rich Builders, Inc. (Win) was incorporated with the

Securities and Exchange Commission (SEC) on 20 February 1997[8] with Chua as its

President and General Manager. On 26 January 2004, Win filed a complaint for a sum of

money[9] against petitioner and Mr. Ying amounting to P8,634,448.20. It also prayed for

the issuance of a writ of attachment claiming that Mr. Ying was about to abscond and

that petitioner was about to close. Win obtained a surety bond[10] issued by Visayan

Surety & Insurance Corporation. On 10 February 2004, the RTC issued the Writ of

Attachment[11] against the properties of petitioner.

On 16 February 2004, Sheriff Salvador D. Dacumos of the RTC of Manila, Branch

32, went to the office of petitioner in CPEZ to serve the Writ of Attachment,

Summons[12] and the Complaint. Petitioner issued Equitable PCIBank (PEZA Branch)

Check No. 160149, dated 16 February 2004, in the amount of P8,634,448.20, to

prevent the Sheriff from taking possession of its properties.[13] The check was made

payable to the Office of the Clerk of Court of the RTC of Manila as a guarantee for

whatever liability there may be against petitioner.








Petitioner filed an Omnibus Motion[14] claiming that it was neither about to close.

It also denied owing anything to Win, as it had already paid all its obligations to it.

Lastly, it questioned the jurisdiction of the trial court from taking cognizance of the

case. Petitioner pointed to the presence of the Arbitration Clause and it asserted that

the case should be referred to the Construction Industry Arbitration Commission (CIAC)

pursuant to Executive Order (E.O.) No. 1008.

In the hearing held on 10 February 2004, the counsel of Win moved that its

name in the case be changed from “Win Multi-Rich Builders, Inc.” to “Multi-Rich

Builders, Inc.” It was only then that petitioner apparently became aware of the variance

in the name of the plaintiff. In the Reply[15] filed by petitioner, it moved to dismiss the

case since Win was not the contractor and neither a party to the contract, thus it

cannot institute the case. Petitioner obtained a Certificate of Non-Registration of

Corporation/Partnership[16] from the SEC which certified that the latter did not have any

records of a “Multi-Rich Builders, Inc.” Moreover, Win in its Rejoinder[17] did not

oppose the allegations in the Reply. Win admitted that it was only incorporated on 20

February 1997 while the construction contract was executed on 26 March 1996.

Likewise, it admitted that at the time of execution of the contract, Multi-Rich was a

registered sole proprietorship and was issued a business permit[18] by the Office of the

Mayor of Manila.

In an Order[19] dated 12 April 2004, the RTC denied the motion and stated that

the issues can be answered in a full-blown trial. Upon its denial, petitioner filed its

Answer and prayed for the dismissal of the case.[20] Win filed a Motion[21] to deposit the

garnished amount to the court to protect its legal rights. In a

Manifestation,[22] petitioner vehemently opposed the deposit of the garnished amount.

The RTC issued an Order[23] dated 20 April 2004, which granted the motion to deposit

the garnished amount. On the same date, Win filed a motion[24] to release the

garnished amount to it. Petitioner filed its opposition[25] to the motion claiming that the

release of the money does not have legal and factual basis.













On 18 June 2004, petitioner filed a petition for review on certiorari[26] under Rule

65 before the Court of Appeals, which questioned the jurisdiction of the RTC and

challenged the orders issued by the lower court with a prayer for the issuance of a

temporary retraining order and a writ of preliminary injunction.

Subsequently, petitioner filed a Supplemental Manifestation and Motion[27] and alleged

that the money deposited with the RTC was turned over to Win. Win admitted that the

garnished amount had already been released to it. On 14 March 2006, the Court of

Appeals rendered its Decision[28] annulling the 12 April and 20 April 2004 orders of the

RTC. It also ruled that the RTC had jurisdiction over the case since it is a suit for

collection of sum of money. Petitioner filed a Motion for Reconsideration[29] which was

subsequently denied in a resolution.[30]

Hence this petition.

Petitioner raised the following issues to wit: (1) does Win have a legal personality

to institute the present case; (2) does the RTC have jurisdiction over the case

notwithstanding the presence of the arbitration clause; and (3) was the issuance of the

writ of attachment and the subsequent garnishment proper.

A suit may only be instituted by the real party in interest. Section 2, Rule 3 of the

Rules of Court defines “parties in interest” in this manner:

A real party in interest is the party who stands to be benefited or injured by the judgment in the suit, or the party entitled to the avails of the suit. Unless otherwise authorized by law or these Rules, every action must be prosecuted or defended in the name of the real party in interest.

Is Win a real party in interest? We answer in the negative.






Win admitted that the contract was executed between Multi-Rich and petitioner.

It further admitted that Multi-Rich was a sole proprietorship with a business permit

issued by the Office of the Mayor of Manila. A sole proprietorship is the oldest, simplest,

and most prevalent form of business enterprise.[31] It is an unorganized business owned

by one person. The sole proprietor is personally liable for all the debts and obligations

of the business.[32] In the case of Mangila v. Court of Appeals,[33] we held that:




x x x In fact, there is no law authorizing sole proprietorships to file

a suit in court.

A sole proprietorship does not possess a juridical personality separate and distinct from the personality of the owner of the enterprise. The law merely recognizes the existence of a soleproprietorship as a form of business organization conducted for profit by a single individual and requires its proprietor or owner to secure licenses and permits, register its business name, and pay taxes to the national government. The law does not vest a separate legal personality on the sole proprietorship or empower it to file or defend an action in court.

The original petition was instituted by Win, which is a SEC-registered

corporation. It filed a collection of sum of money suit which involved a construction

contract entered into by petitioner and Multi-Rich, a sole proprietorship. The counsel of

Win wanted to change the name of the plaintiff in the suit to Multi-Rich. The change

cannot be countenanced. The plaintiff in the collection suit is a corporation. The name

cannot be changed to that of a sole proprietorship. Again, a sole proprietorship is not

vested with juridical personality to file or defend an action.[34]

Petitioner had continuously contested the legal personality of Win to institute the

case. Win was given ample opportunity to adduce evidence to show that it had legal

personality. It failed to do so. Corpus Juris Secundum, notes:

x x x where an individual or sole trader organizes a corporation to take over his business and all his assets, and it becomes in effect merely an alter ego of the incorporator, the corporation, either on the grounds of implied assumption of the debts or on the grounds that the business is the same and is merely being conducted under a new guise, is liable for the incorporator's preexisting debts and liabilities. Clearly, where the corporation assumes or accepts the debt of its predecessor in business it is liable and if the transfer of assets is in fraud of creditors it will be liable to the extent of the assets transferred. The corporation is not liable on an implied assumption of debts from the receipt of assets where the incorporator retains sufficient assets to pay the indebtedness, or where none of his assets are transferred to the corporation, or


where, although all the assets of the incorporator have been transferred, there is a change in the persons carrying on the business and the corporation is not merely an alter ego of the person to whose business it succeeded.[35]

In order for a corporation to be able to file suit and claim the receivables of its

predecessor in business, in this case a sole proprietorship, it must show proof that the

corporation had acquired the assets and liabilities of the sole proprietorship. Win could

have easily presented or attached any document e.g., deed of assignment which will

show whether the assets, liabilities and receivables of Multi-Rich were acquired by Win.

Having been given the opportunity to rebut the allegations made by petitioner, Win

failed to use that opportunity. Thus, we cannot presume that Multi-Rich is the

predecessor-in-business of Win and hold that the latter has standing to institute the

collection suit.

Assuming arguendo that Win has legal personality, the petition will still be

granted.

Section 4 of E.O. No. 1008[36] provides for the jurisdiction of the Construction

Industry Arbitration Commission, to wit:

Section 4. Jurisdiction.—The CIAC shall have original and exclusive jurisdiction over disputes arising from, or connected with, contracts entered into by parties involved in construction in the Philippines, whether the disputes arises before or after the completion of the contract, or after the abandonment or breach thereof. These disputes may involve government or private contracts. For the Board to acquire jurisdiction, the parties to a dispute must agree to submit the same to voluntary arbitration. The jurisdiction of the CIAC may include but is not limited to violation of specifications for materials and workmanship; violation of the terms of agreement; interpretation and/or application of contractual time and delays; amount of damages and penalties; commencement time and



delays; maintenance and defects; payment, default of employer or contractor and changes in contract cost. Excluded from the coverage of this law are disputes from employer-employee relationships which shall continue to be covered by the Labor Code of the Philippines.

There is nothing in the law which limits the exercise of jurisdiction to complex or

difficult cases. E.O. No. 1008 does not distinguish between claims involving payment of

money or not.[37] The CIAC acquires jurisdiction over a construction contract by the

mere fact that the parties agreed to submit to voluntary arbitration.[38] The law does

not preclude parties from stipulating a preferred forum or arbitral body but they may

not divest the CIAC of jurisdiction as provided by law.[39] Arbitration is an alternative

method of dispute resolution which is highly encouraged.[40] The arbitration clause is a

commitment on the part of the parties to submit to arbitration the disputes covered

since that clause is binding, and they are expected to

abide by it in good faith.[41] Clearly, the RTC should not have taken cognizance of the

collection suit. The presence of the arbitration clause vested jurisdiction to the CIAC

over all construction disputes between Petitioner and Multi-Rich. The RTC does not

have jurisdiction.[42]

Based on the foregoing, there is no need to discuss the propriety of the issuance

of the writ of attachment. However, we cannot allow Win to retain the garnished

amount which was turned over by the RTC. The RTC did not have jurisdiction to issue

the questioned writ of attachment and to order the release of the garnished funds.

WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals

is hereby MODIFIED. Civil Case No. 04-108940 is DISMISSED. Win Multi-Rich

Builders, Inc. is ORDERED to return the garnished

amount of EIGHT MILLION SIX HUNDRED THIRTY-FOUR THOUSAND FOUR

HUNDRED FORTY-EIGHT PESOS AND FORTY CENTAVOS (P8,634,448.40),







which was turned over by the Regional Trial Court, to petitioner with legal interest of 12

percent (12%) per annum upon finality of this Decision until payment.

SO ORDERED.

3. BIENVENIDO EJERCITO and G.R. No. 172595 JOSE MARTINEZ, Petitioners, Present: QUISUMBING, J.* Chairperson, - versus - CARPIO MORALES,

Acting Chairperson, TINGA,

VELASCO, JR., and M.R. VARGAS CONSTRUCTION, BRION, JJ. MARCIAL R. VARGAS, Sole Owner, RENATO AGARAO,* Project Foreman, Promulgated: Respondents. April 10, 2008 x---------------------------------------------------------------------------x D E C I S I O N TINGA, J.:

This is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil

Procedure, assailing the Court of Appeals’ Decision[1] and Resolution[2] in CA-G.R. SP

No. 89001. The appellate court’s decision dismissed the petition for certiorari, which

sought to set aside the Order[3] dated 08 November 2004 issued by Hon. Marie

Christine Jacob, Presiding Judge of the Regional Trial Court (RTC) of Quezon City,

Branch 100. The appellate court’s resolution denied petitioners’ motion for

reconsideration of the decision.

As culled from the records, the following factual antecedents appear:

On 5 March 2004, the City Government of Quezon City, represented by Mayor

Feliciano Belmonte, Jr., entered into a construction contract[4] with M.R. Vargas

Construction, represented by Marcial Vargas in his capacity as general manager of the

said business enterprise, for the improvement and concreting

of Panay Avenue.[5] Pursuant to the contract, the business enterprise commenced its

http://sc.judiciary.gov.ph/jurisprudence/2008/april2008/172595.htm#_ftn1







clearing operations by removing the structures and uprooting the trees along the

thoroughfare. Its foreman, Renato Agarao, supervised the clearing operations.[6]

Claiming that the clearing operations lacked the necessary permit and prior

consultation, petitioners Bienvenido Ejercito and Jose Martinez, as well as a certain

OscarBaria, brought the matter to the attention of the barangay authorities,

Mayor Belmonte, Senator Ma. Ana Consuelo A.S. Madrigal, the Department of

Environment and Natural Resources and the Philippine Coconut Authority.[7]

The efforts of petitioners proved unsuccessful. Hence, on 10 September 2004,

they filed a petition for injunction before the Quezon City RTC. The petition named

“M.R. Vargas Construction Co., represented by herein Marcial R. Vargas

and Renato Agarao,” as respondent.[8]

The Petition,[9] docketed as Civil Case No. Q-04-53687, indicated that

“Respondent M.R. Vargas Construction, is an entity, with office address at the 4th Floor,

President Tower, Timog Avenue corner Scout Ybardaloza [sic] St., Quezon City,

represented herein by its President Marcial Vargas and its construction

foreman Renato Agarao, where they may be served with summons and other court

processes.”[10]

The petition was accompanied with an application for a temporary restraining

order (TRO) and a writ of preliminary injunction.[11] Thus, the Office of the Clerk of

Court forthwith issued summons and notice of raffle on 10 September 2004.[12] Upon

service of the processes on the aforementioned address, they were

returned unserved on the ground that respondent enterprise was unknown thereat.[13]

The petition was subsequently raffled to the sala of Judge Jacob, before which

petitioners’ application for a temporary restraining order was heard on 15 September

2004.[14] On the same day, when Agarao was also present in court, Judge Jacob issued










a TRO directing respondent enterprise to desist from cutting, damaging or transferring

the trees found along Panay Avenue.[15]

On 23 September 2004, the Mangoba Tan Agus Law Offices filed a special

appearance on behalf of respondent enterprise and moved for the dismissal of the

petition as well as the quashal of the temporary restraining order on the ground of lack

of jurisdiction over respondent enterprise. The motion also assailed the raffle of the

case for having been conducted in violation of Section 4, Rule 58 of the Rules of Court;

the issuance of the TRO without requiring the posting of a bond; the failure

to implead the Government of Quezon City despite its being the real party-in-interest;

and petitioners’ application for the injunctive writ which was allegedly grossly defective

in form and substance.[16]

The motion to dismiss the petition and to quash the TRO was heard on 24

September 2004.[17] Before the hearing, a court interpreter showed to respondent

enterprise’s counsel a copy of the summons and of the notice of raffle in which appear

a signature at the bottom of each copy, apparently indicating the receipt of the

summons.[18] On the mistaken belief that the summons was received by respondent

enterprise, at the hearing of the motion, its counsel withdrew two of the grounds stated

in the motion, to wit, lack of jurisdiction and irregularity in the raffle of the

case.[19]

At the hearing of petitioners’ application for a writ of preliminary injunction on 1

October 2004, the counsel for respondent enterprise manifested that he was adopting

the arguments in the motion to quash the TRO.[20] On 6 October 2004, the RTC issued

an Order granting petitioners’ application for a writ of preliminary injunction.[21]

On 7 October 2004, counsel for respondent enterprise filed a manifestation with

urgent omnibus motion to nullify the proceedings and to cite petitioners and the

process server in contempt of court.[22] He argued that respondent enterprise failed to









receive the summons, alleging that it was herein petitioner Jose Martinez who signed as

recipient thereof as well as of the notice of raffle that was served on 10 September

2004.[23]

On 18 October 2004, the writ of preliminary injunction was issued. Subsequently,

petitioners filed a motion for ocular inspection and another motion praying that

respondent enterprise be ordered to

restore the structures damaged by its clearing operations.[24]

On 8 November 2004, the RTC issued the assailed Order,[25] nullifying the

proceedings thus far conducted in the case.[26] Petitioners sought reconsideration, but

the motion was denied in an Order dated 20 December 2004.[27]

Thus, petitioners filed a petition for certiorari before the Court of Appeals

assailing the 8 November 2004 Order issued by Judge Jacob.[28] This time, aside from

Judge Jacob and the enterprise “M.R. Vargas Construction” itself, the petition also

named Marcial R. Vargas and Renato Agarao, the enterprise’s owner and foreman,

respectively, as individual respondents. The separate addresses of said respondents

were also indicated in the initial part of the petition.

It was argued in the petition that Judge Jacob committed grave abuse of

direction in nullifying the proceedings on the ground of lack of jurisdiction in view

of Agarao’spresence at the hearing on petitioners’ application for TRO, in failing to act

on petitioners’ pending motions and in directing instead the issuance of new summons

on respondent enterprise.[29]








On 10 October 2005, the Court of Appeals rendered the assailed Decision

dismissing the petition for certiorari for lack of merit.[30] In its Order dated 28 April

2006, the Court of Appeals denied petitioners’ motion for reconsideration.

Hence, the instant petition attributes the following errors to the Court of

Appeals:

I. THE COURT OF APPEALS ERRED IN RULING THAT THE REGIONAL

TRIAL COURT DID NOT OBTAIN JURISDICTION OVER THE RESPONDENTS, DEPSITE THE RECEIPT OF COURT PROCESSES AND VOLUNTARY APPEARANCE BEFORE THE COURTS.

II. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE

WITHDRAWAL BY PRIVATE RESPONDENTS OF THE GROUND OF ABSENCE OF JURISDICTION OVER ITS PERSON CONSTITUTED A WAIVER OF SUCH OBJECTION[31]

The instant petition which similarly impleads the enterprise, M.R. Vargas

Construction, Marcial R. Vargas and Renato Agarao as respondents raises two issues,

namely: (1) whether the trial court acquired jurisdiction over respondent enterprise and

(2) whether the defense of lack of jurisdiction had been waived.

Jurisdiction over the defendant is acquired either upon a valid service of

summons or the defendant’s voluntary appearance in court. When the defendant does

not voluntarily submit to the court’s jurisdiction or when there is no valid service of

summons, any judgment of the court, which has no jurisdiction over the person of

the defendantis null and void. In an action strictly in personam, personal service on the

defendant is the preferred mode of service, that is, by handing a copy of the summons

to the defendant in person.[32]




Citing the jurisdictional implications of the failure of service of summons, the

Court of Appeals concluded that no grave abuse of discretion was committed by Judge

Jacob in nullifying the proceedings thus far conducted in the case based on the finding

that the summons had not been served on respondent enterprise and that Agarao,

despite being present at the 15 September 2004 hearing, was not authorized to

represent respondent enterprise in said hearing.

Petitioners take exception. They argue that the trial court acquired jurisdiction

over respondent enterprise, an entity without juridical personality, through the

appearance of its foreman, Agarao, at the 15 September 2004 hearing on the TRO

application. Petitioners theorize that the voluntary appearance of Agarao in said hearing

was equivalent to service of summons binding upon respondent enterprise, following by

analogy, Section 8, Rule 14[33] which allows the service of summons on any of the

defendants associated to an entity without juridical personality. Furthermore, they

contend that the receipt by a certain Rona Adol of the court processes was binding

upon respondent enterprise because the latter did not deny the authority of Adol to

receive communications on its behalf.

Petitioners’ argument is untenable.

At the outset, it is worthy to note that both the Court of Appeals and the trial

court found that summons was not served on respondent enterprise. The Officer’s

Return stated essentially that the server failed to serve the summons on respondent

enterprise because it could not be found at the address alleged in the petition. This

factual finding, especially when affirmed by the appellate court, is conclusive upon this

Court and should not be disturbed because this Court is not a trier of facts.

A sole proprietorship does not possess a juridical personality separate and

distinct from the personality of the owner of the enterprise. The law does not vest a

separate legal personality on the sole proprietorship or empower it to file or defend an


action in court.[34] Only natural or juridical persons or entities authorized by law may be

parties to a civil action and every action must be prosecuted and defended in the name

of the real parties-in-interest.[35]

The records show that respondent enterprise, M.R. Vargas Construction Co., is a

sole proprietorship and, therefore, an entity without juridical personality. Clearly, the

real party-in-interest is Marcial R. Vargas who is the owner of the enterprise. Thus, the

petition for injunction should have impleaded him as the party respondent either simply

by mention of his name or by denominating him as doing business under the name and

style of “M.R. Vargas Construction Co.” It was erroneous to refer to him, as the petition

did in both its caption and body, as representing the enterprise. Petitioners apparently

realized this procedural lapse when in the petition for certiorari filed before the Court of

Appeals and in the instant petition, M.R. Vargas Construction, Marcial R. Vargas

and Renato Agaro were separately named as individual respondents.

Since respondent enterprise is only a sole proprietorship, an entity without

juridical personality, the suit for injunction may be instituted only against its

owner, MarcialVargas. Accordingly summons should have been served on Vargas

himself, following Rule 14, Sections 6[36] and 7[37] of the Rules of Court on personal

service and substituted service. In the instant case, no service of summons, whether

personal or substituted, was effected on Vargas. It is well-established that summons

upon a respondent or a defendant must be served by handing a copy thereof to him in

person or, if he refuses to receive it, by tendering it to him. Personal service of

summons most effectively ensures that the notice desired under the constitutional

requirement of due process is accomplished. If however efforts to find him personally

would make prompt service impossible, service may be completed by substituted

service, i.e., by leaving copies of the summons at his dwelling house or residence with

some person of suitable age and discretion then residing therein or by leaving the





copies at his office or regular place of business with some competent person in charge

thereof.[38]

The modes of service of summons should be strictly followed in order that the

court may acquire jurisdiction over the respondents, and failure to strictly comply with

the requirements of the rules regarding the order of its publication is a fatal defect in

the service of summons. It cannot be overemphasized that the statutory requirements

on service of summons, whether personally, by substituted service or by publication,

must be followed strictly, faithfully and fully, and any mode of service other than that

prescribed by the statute is considered ineffective.[39]

Agarao was not a party respondent in the injunction case before the trial court.

Certainly, he is not a real party-in-interest against whom the injunction suit may be

brought, absent any showing that he is also an owner or he acts as an agent of

respondent enterprise. Agarao is only a foreman, bereft of any authority to defend the

suit on behalf of respondent enterprise. As earlier mentioned, the suit against an entity

without juridical personality like respondent enterprise may be instituted only by or

against its owner.Impleading Agarao as a party-respondent in the suit for injunction

would have no legal consequence. In any event, the petition for injunction

described Agarao only as a representative of M.R. Vargas Construction Co., which is a

mere inconsequentiality considering that only Vargas, as its sole owner, is authorized by

the Rules of Court to defend the suit on behalf of the enterprise.

Despite Agarao’s not being a party-respondent, petitioners nevertheless confuse

his presence or attendance at the hearing on the application for TRO with the notion of

voluntary appearance, which interpretation has a legal nuance as far as jurisdiction is

concerned. While it is true that an appearance in whatever form, without explicitly

objecting to the jurisdiction of the court over the person, is a submission to the

jurisdiction of the court over the person, the appearance must constitute a positive act



on the part of the litigant manifesting an intention to submit to the court’s

jurisdiction.[40] Thus, in the instances where the Court upheld the jurisdiction of the trial

court over the person of the defendant, the parties showed the intention to participate

or be bound by the proceedings through the filing of a motion, a plea or an answer.[41]

Neither is the service of the notice of hearing on the application for a TRO on a

certain Rona Adol binding on respondent enterprise. The records show that

Rona Adolreceived the notice of hearing on behalf of an entity named JCB. More

importantly, for purposes of acquiring jurisdiction over the person of the defendant, the

Rules require the service of summons and not of any other court processes.

Petitioners also contend that respondent enterprise waived the defense of lack of

jurisdiction when its counsel actively demanded positive action on the omnibus motion.

The argument is implausible.

It should be noted that when the defendant’s appearance is made precisely to

object to the jurisdiction of the court over his person, it cannot be considered as

appearance in court.[42] Such was the purpose of the omnibus motion, as counsel for

respondent enterprise precisely manifested therein that he erroneously believed that

Vargas himself had received the summons when in fact it was petitioner Martinez who

signed as recipient of the summons. Noteworthy is the fact that when the counsel first

appeared in court his appearance was “special” in character and was only for the

purpose of questioning the court’s jurisdiction over Vargas, considering that the latter

never received the summons. However, the counsel was shown a copy of the summons

where a signature appears at the bottom which led him to believe that the summons

was actually received by Vargas when in fact it was petitioner Martinez himself who

affixed his signature as recipient thereof. When the counsel discovered his mistake, he

lost no time pleading that the proceedings be nullified and that petitioners and the

process server be cited for contempt of court. Both the trial and appellate courts




concluded that the improvident withdrawal of the defense of lack of jurisdiction was an

innocuous error, proceeding on the undeniable fact that the summons was not properly

served on Vargas. Thus, the Court of Appeals did not commit a reversible error when it

affirmed the trial court’s nullification of the proceedings for lack of jurisdiction.

WHEREFORE, the instant petition for certiorari is DENIED. The Decision and

Resolution of the Court of Appeals in CA-G.R. SP No. 89001 are AFFIRMED in toto.

Costs against petitioners.

The temporary restraining order issued in this case is DISSOLVED.

SO ORDERED.

4. BIENVENIDO EJERCITO and G.R. No. 172595 JOSE MARTINEZ, Petitioners, Present: QUISUMBING, J.* Chairperson, - versus - CARPIO MORALES,

Acting Chairperson, TINGA,

VELASCO, JR., and M.R. VARGAS CONSTRUCTION, BRION, JJ. MARCIAL R. VARGAS, Sole Owner, RENATO AGARAO,* Project Foreman, Promulgated: Respondents. April 10, 2008 x---------------------------------------------------------------------------x D E C I S I O N TINGA, J.:

This is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil

Procedure, assailing the Court of Appeals’ Decision[1] and Resolution[2] in CA-G.R. SP

No. 89001. The appellate court’s decision dismissed the petition for certiorari, which

sought to set aside the Order[3] dated 08 November 2004 issued by Hon. Marie

Christine Jacob, Presiding Judge of the Regional Trial Court (RTC) of Quezon City,

Branch 100. The appellate court’s resolution denied petitioners’ motion for

reconsideration of the decision.

As culled from the records, the following factual antecedents appear:

On 5 March 2004, the City Government of Quezon City, represented by Mayor

Feliciano Belmonte, Jr., entered into a construction contract[4] with M.R. Vargas

Construction, represented by Marcial Vargas in his capacity as general manager of the

said business enterprise, for the improvement and concreting

of Panay Avenue.[5] Pursuant to the contract, the business enterprise commenced its






