revised bagtas reviewer (repaired)

7/31/2019 Revised Bagtas Reviewer (Repaired)

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Revised Bagtas Reviewer by Ve and Ocfe 2A

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Atty. CESAR L. VILLANUEVAOUTLINE IN PHILIPPINE CORPORATE LAW

12ND SEMESTER, SY 2004-2005

I. HISTORICAL BACKGROUND

1. Philippine Corporate Law2:Sort of Codification of American Corporate Law

Under American sovereignty, attention was drawn to the fact that there was no entity in Spanish lawexactly corresponding to the notion "corporation" in English and American law; the PhilippineCommission enacted the Corporation Law (Act No. 1459), to introduce the American corporation intothe Philippines as the standard commercial entity and to hasten the day when the sociedad annimaofthe Spanish law would be obsolete. The statute is a sort of codification of American Corporate Law.Harden v. Benguet Consolidated Mining, 58 Phil. 141 (1933).

2. The Corporation Law

The first corporate statute, the Corporation Law, or Act No. 1459, became effective on 1April 1906. It had various piece-meal amendments during its 74-year history. It rapidly became

antiquated and not adapted to the changing times.3. The Corporation Code

The Corporation Code (Batas Pambansa Blg. 68) took effect on 1 May 1980. It adopted variouscorporate doctrines enunciated by the Supreme Court under the old Corporation Law. It clarified theobligations of corporate directors and officers, expressed in statutory language established principles anddoctrines, and provided for a chapter on close corporations.

4. Proper Treatment of Philippine Corporate Law

Philippine Corporate Law comes from the common law system of the United States. Therefore,although we have a Corporation Code that provides for statutory principles, Corporate Law isessentially, and continues to be, the product of commercial developments. Much of this developmentcan be expected to happen in the world of commerce, and some expressed jurisprudential rules thattry to apply and adopt corporate principles into the changing concepts and mechanism of thecommercial world.

A public corporation can only exist when a legislative grant is conferred. A corporation will be formed onlywhen 5 individual persons, as incorporators, agree to form a corporation.

1Unless otherwise indicated, all references to sections pertain to The Corporation Code ofthe Philippines.

2The whole body ofstatutory and jurisprudential rules pertaining to corporations is referred to as "Corporate Law" to

differentiate it from the old statute known as "The Corporation Law," or Act No. 1459.


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II. CONCEPTS

See opening paragraphs ofVILLANUEVA, Corporate Contract Law, 38 ATENEO L.J. 1 (No. 2, June1994)

1. Definition (Section 2; Articles 44(3), 45, 46, and 1775, Civil Code)

Sec. 2 Corporation defined A corporation is an artificial being created by operation of law, havingthe rights of succession and the powers attributes and properties, expressly authorized by lawor incident to its existence.

Art. 44(3) The following are juridical persons Corporations, partnerships and associations forprivate interest or purpose to which the law grants a juridical personality, separate and distinct fromthat of each shareholder, partner or member.

Art. 45 Juridical persons mentioned in Nos.1 and 2 of the preceding article are governed by laws creatingor recognizing them.

Private corporations are regulated by laws of general application on the subject.Partnerships and associations for private interest or purpose are governed by the provisions of this Codeconcerning partnerships.

Art. 46 Juridical persons may acquire and possess property of all kinds, as well as incurobligations and bring civil or criminal actions, in conformity with the laws and regulations of theirorganization.

Art. 1775 Association and societies, whose articles are kept secret among the members, and whereinany pone of the members may contract in his own name with third persons, shall have no juridicalpersonality, and shall be governed by the provisions relating to co-ownership

A corporation is an artificial being created by operation of law. It has a personality separate anddistinct from the persons composing it, as well as from any other legal entity to which it may be related.PNB v. Andrada Electric & Engring Co., 381 SCRA 244 (2002).

- an artificial being - a person created by law or by state; legal fiction

- created by law its existence is dependent upon the onset or grant of the stateEXCEPT corporation by estoppel and de facto corporation

- the definition of a corporation is merely a guide and does not really provide for the basis of acorporation

A corporation upon coming to existence, is invested by law with a personality separate and distinct fromthose persons comprising it as well as from any other legal entity to which it may be related. (Construction

Dev. Corp of the Phils v. Cuenca 466 SCRA 714, 2005)

Corporation is a creature of Limited Powers- Except for those powers which are expressly conferredon it by the Corporation Code and those that are implied by or are incidental to its existence, acorporation has no powers. It exercises its powers through its board of directors and/or its duly authorizedofficers and agents. (Pascual and Santos v. The Members of the Tramo Wakas NeighborhoodAssociation, INC., 442 SCRA 438, 2004)


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Q. Why is it important to know that the corporation is a juridical person?A. To be able to know that the corporation is able to contract with others.

Q. Why does the definition of a corporation involve a statement creature of the law? A. To reiterate the fact that the corporations can only do acts given to it by the law. It is of limitedexistence. Outside its powers, it does not exist.

2. Four Corporate Attributes Based on Section 2

(a) A corporation is an artificial being (Ability to contract and Transact)- a person created by law or by state; a legal fiction.

(b) Created by operation of law (Creature of the Law) - its existence is dependent upon the consent or grant of the state except corporation by estoppeland de facto corporation.

(c) With the right of succession (strong juridical personality)- the corporation exists despite the death of a member as a corporation has a personalityseparate and distinct from that of its individual Stockholders. The separate juridical personalityremains even if there has been a change in the members and stockholders of the corporation.

(d) Has the powers, attributes and properties expressly authorized by law or incident to itsexistence (Creature of Limited Powers)

3. Tri-Level Existence of the Corporation

(a) AGGREGATION OF ASSETS AND RESOURCES physical assets of the corporation; thetangibles (Ex. in a grocery, the goods being sold)

(b) BUSINESS ENTERPRISE OR ECONOMIC UNIT the commercial venture; this includes not onlythe tangible assets but also the intangibles like goodwill created by the business

(C) JURIDICAL ENTITY juridical existence as a person; the primary franchise granted by the state

Q. Why is the distinction between the three levels important?A. Each is important in its own way as there are consequences for each. The distinctions becomeimportant and come into play when it comes to dealing with corporation law. What are you selling orbuying (and their worth) will depend upon the particular level you choose.

EXAMPLE: If you merely want to purchase the assets and not the business, a simple deed of sale wouldsuffice and you will not be liable for contingent liabilities. It will be different if you buy the business as aneconomic concept. SEC Regulations or Bulk sales Law may be applied.

CLV: We should note that there must be an underlying contract between and among the people forming the

corporation for it is upon such contract that the state grant is offered. A corporation will be formed only when

5 individual persons, as incorporators agree to form a corporation and the state gives its consent. Being only a

creature of law, it only has powers, attributes and properties which the law wishes to grant.


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4. Relationships Involved in a Corporate Setting

A) JURIDICAL ENTITY LEVEL, which views the State-corporation relationship

- The state cannot destroy a corporation without observing due process of law.

B) INTRA-CORPORATE LEVEL, which considers that the corporate setting is at once a contractualrelationship on four (4) levels:

1. Between the corporation and its agents or representatives to act in the real world, such as itsdirectors and its officers, which is governed also by the Law on Agency

2. Between the corporation and its shareholders or members

3. Between and among the shareholders in a common venture

C) EXTRA-CORPORATE LEVEL, which views the relationship between the corporation and third-parties or outsiders, essentially governed by Contract Law and Labor Law.

- Most important level, highest form of law in this level is contract law.4. Theories on the Formation of Corporation:

Theory of Corporate Enterprise or Economic unit - the SC has looked upon the corporation not merelyas an artificial being but more as an AGGRUPATION OF PERSONS DOING BUSINESS or ANUNDERLYING ECONOMIC UNIT.

- The corporation is emerging as an enterprise bounded by economics rather than an artificialpersonality bounded by forms of words in a charter, minute books & books of accounts.

- The proposition that a corporation has existence separate and distinct from its membership hasits limitations. (Separate existence is for a particular purpose.) There can be no corporateexistence w/o persons to compose it & there can be no association w/o associates.

(a) Theory of Concession (Tayag v. Benguet Consolidated, 26 SCRA 242 [1968]).

- corporation creature of the state

- limited no other privilege may be exercised beyond grant

To organize a corporation that could claim a juridical personality of its own and transactbusiness as such, is not a matter of absolute right but a privilege which may be enjoyed only undersuch terms as the State may deem necessary to impose. cf. Ang Pue& Co. v. Sec. of Commerce and Industry, 5 SCRA 645 (1962)

It is a basic postulate that before a corporation may acquire juridical personality, the State must

give its consent either in the form of a special law or a general enabling act, and the procedureand conditions provided under the law for the acquisition of such juridical personality must becomplied with. Although the statutory grant to an association of the powers to purchase, sell, lease andencumber property can only be construed the grant of a juridical personality to such an association . .. nevertheless, the failure to comply with the statutory procedure and conditions does not warrant afinding that such association acquired a separate juridical personality, even when it adopts setsof constitution and by-laws. International Express Travel & Tour Services, Inc. v. Court of Appeals, 343SCRA 674 (2000).


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Since all corporations, big or small, must abide by the provisions of the Corporation Code, then evena simple family corporation cannot claim an exemption nor can it have rules and practices other thanthose established by law. Torres v. Court of Appeals, 278 SCRA 793 (1997).

TAYAG V. BENGUET CONSOLIDATED, 26 SCRA 242 (1968)

FACTS:

Idonah Slade Perkins died in 1960 with County Trust & Co. of New York as her domiciliaryadministrator. She left, among others, 2 stock certificates covering 33, 002 shares of stock of appellantBenguet Consolidated, Inc.

Renato Tayag, as ancilliary administrator in the Philippines, requested County Trust to surrender toancilliary administrator the stock certificates to satisfy the legitimate claims of local creditors. However,County Trust refused.

The lower court then presided by Judge Santos ruled that :

1. Stock certificates are considered lost for all purposes of admin. & liquidation of the Philippine estateof Perkins

2. Said certificates are cancelled

3. Directs said corporation to issue new certificates in lieu thereof, the same to be delivered by aidcorp. to either Tayag or the Probate division of this court.

An appeal was taken not by County Trust, as domiciliary admin., but by Benguet on the ground that thecertificates of stock are existing and in possession of County Trust. They also assert that there was afailure to observe certain requirements of its by-laws before new stock certificates could be issued.

ISSUE: Whether or not Benguet properly pursued the appeal?

HELD: The Court held that the appeal cannot prosper. Judgment affirmed. Benguet bound by order.

The challenged order represents a response & expresses a policy arising out of a specific problem,addressed to the attainent of specific ends by the use of specific remedies, w/ full & ample support fromlegal doctrines of weight and significance.

A disagreement ensued between the ancillary and the domicillary administrator as to who was entitled tothe certificate of stocks

- The CFI ordered County Trust to produce and deposit the stocks with the court which was notcomplied with. Thus the order of the CFI.

- Benguet did not dispute Tayags authority to gain control and possession of all the assets of the

dependent within the Philippines. The corporation, like every Juan and Maria given life by God acts on it

- Corporation is an artificial being created by operation of law. It owes it life to the state its birthbeing purely dependent on its will.

- Flether: A corp. is not in fact and in reality a person, but the law treats it as though it were aperson by process of fiction, or by regarding it as an artificial person distinct and separate from itsindividual stockholders.


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- There is thus a rejection of Gierkes genossenchaft theory. A corporation, as known to Phil.Jurisprudence is a creature w/o any existence until it has received the imprimatur of the state actingaccording to law. It is logically inconceivable therefore that it will have rights and privileges of a higherpriority than that of its creator. More than that it cannot legitimately refuse to yield obedience to actsof its state organs, certainly not excluding the judiciary, whenever called upon to do so.

- Corporate by-laws must yield to judicial order

- As a matter of fact, a corp. once it comes into being comes more often w/n the ken of the judiciarythan the other two coordinate branches. It institutes the appropriate court action to enforce its right.Correlatively, it is not immune from judicial control in those instances, where a duty under the law asascertained in an appropriate legal proceeding is cast upon it.

c) Theory of Enterprise Entity (BERLE, Theory of Enterprise Entity, 47 COL. L. REV. 343 [1947])

- juridical personality

- contractual relation between 5 or more individuals

- recognize existence of an aggregation of individuals (enterprise entity)

A corporation is but an association of individuals, allowed to transact under an assumedcorporate name, and with a distinct legal personality. In organizing itself as a collective body, it waives noconstitutional immunities and perquisites appropriate to such a body. PSE v. Court of Appeals, 281 SCRA232 (1997).

Corporations are composed of natural persons and the legal fiction of a separate corporatepersonality is not a shield for the commission of injustice and inequity, such as to avoid the executionof the property of a sister company. Tan Boon Bee & Co., Inc. v. Jarencio, 163 SCRA 205 (1988).

TAYAG DOCTRINES: Formally adopts the concession theory; corp. w/o imprimatur outside the state grant:

1. Even if it has its own set of by laws etc., the corp would still have to obey the order of the state.2. Repudiated the application of EET- corp as reality of the group as a social and legal entity independent of st

recognition.


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5. Four Corporate Attributes Based on Section 2:

A) A CORPORATION IS AN ARTIFICIAL BEING (Ability to Contract and Transact)

- a person created by law or by state; a legal fiction

B) CREATED BY OPERATION OF LAW (Creature of the Law)

- its existence is dependent upon the consent or grant of the state EXCEPT corporation byestoppel and de facto corporation

C) WITH RIGHT OF SUCCESSION (Strong Juridical Personality)

- the corporation exist despite the death of its members as a corporation has a personalityseparate and distinct from that of its individual stockholders. The separate personality remains even ifthere has been a change in the members and stockholders of the corporation.

D) HAS THE POWERS, ATTRIBUTES AND PROPERTIES EXPRESSLY AUTHORIZED BYLAW OR INCIDENT TO ITS EXISTENCE (Creature of Limited Powers)

6. Advantages and Disadvantages of Corporate Form:

(a) Four Basic Advantageous Characteristics of Corporate Organization:

(i) STRONG LEGAL PERSONALITYA corporation is an entity separate and distinct from its stockholders. While not in fact and in

reality a person, the law treats the corporation as though it were a person by process of fiction or byregarding it as an artificial person distinct and separate from its individual stockholders. Remo, Jr. v.IAC, 172 SCRA 405 (1989).

The transfer of the corporate assets to the stockholder is not in the nature of a partition but is aconveyance from one party to another. a Stockholders of F. Guanzon and Sons, Inc. v. Register ofDeeds of Manila, 6 SCRA 373 (1962).

Execution pending appeal was allowed in Borja v. Court of Appeals, 196 SCRA 847 (1991) onlybecause the prevailing party is already of advanced age and in danger of extinction but not in this casebecause the winning party is a corporation. A juridical entitys existence cannot be likened to a naturalperson- its precarious financial condition is not by itself a compelling circumstance warranting immediateexecution and does not outweigh the long standing general policy of enforcing only final and executorjudgment (Manacop v. Equitable PCI Bank, 468 SCRA 256, 2005).

CLV: Fiction cannot be created unless there is an enterprise or group of persons upon whom it would be conferred.

But in spite of the underlying contract among the persons wanting to form a corp., the grant is only by virtue of a

primary franchise given by the state. And it is within the power of the state to grant it or not. But once granted

corporate life of its own tells it to go and multiply profitably. Once juridical personality is acquired, however, thisdoesnt mean that the group becomes a creature of the state, but actually becomes a creature of its own volition

and remains as a distinct personality.


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STOCKHOLDERS OF F. GUANZON & SONS Inc. v REGISTER OF DEEDS

Facts: In 1960, five stockholders of F. Guanzon & Sons, Inc. executed a certificate of liquidation ofthe assets of the corporation which provided that due to the resolution of the stockholders dissolving thecorporation, they have distributed among themselves in proportion to their shareholdings, asliquidating dividends, the assets of said corporation including real properties located in Manila. The

certificate of liquidation was denied registration by the Register of Deeds and one of the grounds isthat the judgment of the corporation in approving dissolution and directing opposition of assets of thecorporation need to be presented aside from the following: (1) the number of parcels which were notcertified in the acknowledgement (2) P430.50 registration fees have to be paid (3) P90.45documentary stamps need to be attached. Stockholders contend that it was not conveyance but a meredistribution of corporate assets after the corporation ceased to exist upon dissolution.

Issue: WON the certificate merely involves a distribution of the corporate assets or should beconsidered a transfer or conveyance.

Held: The Supreme Court agrees with the Register of Deeds and the Land Registration Commission.A corporation is a juridical person distinct from the members composing it. Properties registered in thename of the corporation are owned by it as an entity separate and distinct from its members. While

shares of stock constitute personal property, they do not represent property of the corporation. Thecorporation has property of its own which consist mainly of real estates. A share of stock only typifies analiquot part of the corporations property or the right to share in the proceeds to that extent whendistributed according to law and equity. But its holder is not the owner of any part of the capital nor is heentitled to the possession of any definite portion of its property or assets. The stockholder is not a co-owner or tenant in common of the corporate property. Thus, the act of liquidation made by thestockholders of the corporations assets cannot be considered as a partition of the communityproperty but rather a transference or conveyance of the title of its assets to the individualstockholders in proportion to their stockholdings. Therefore, said transfer cannot be effected without thecorresponding deed of conveyance from the corporation to the stockholders.

(ii) CENTRALIZED MANAGEMENT

As can be gleaned from Sec. 23 of Corporation Code It is the board of directors or trustees

which exercises almost all the corporate powers in a corporation. Firme v. Bukal Enterprises and Dev.Corp., 414 SCRA 190 (2003).

The exercise of the corporate powers of the corporation rest in the Board of Directors save inthose instances where the Corporation Code requires stockholders approval for certain specific acts.Great Asian Sales Center Corp. v. Court of Appeals, 381 SCRA 557 (2002).

(iii) LIMITED LIABILITY TO INVESTORS AND OFFICERS

One of the advantages of the corporation is the limitation of an investors liability to the amount ofinvestment, which flows from the legal theory that a corporate entity is separate and distinct from itsstockholders. San Juan Structural and Steel Fabricators, Inc. v. Court of Appeals, 296 SCRA 631(1998).

It is hornbook law that corporate personality is a shield against personal liability of its officersacorporate officer and his spouse cannot be made personally liable under a trust receipt where heentered into and signed the contract clearly in his official capacity. Consolidated Bank and Trust Corp.v. Court of Appeals, 356 SCRA 671 (2001).

Obligations incurred by the corporation acting through its directors, officers and employees, are its soleliabilities. Malayang Samahan ng mga Manggagawa sa M. Greenfield v. Ramos, 357 SCRA 77 (2001).


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(iv) FREE TRANSFERABILITY OF UNITS OF OWNERSHIP FOR INVESTORS

Authority granted to corporations to regulate the transfer of its stock does not empower thecorporation to restrict the right of a stockholder to transfer his shares, but merely authorizes theadoption of regulations as to the formalities and procedure to be followed in effecting transfer.Thomson v. Court of Appeals, 298 SCRA 280 (1998)

(b) Disadvantages:

(i) Abuse of corporate management

(ii) Abuse of limited liability feature

(iii) High cost of maintenance

(iv) Double taxation

Dividends received by individuals from domestic corporations are subject to final 10% tax for income

earned on or after 1 January 1998 (Sec. 24(b)(2), 1997 NIRC)

Inter-corporate dividends between domestic corporations, however, are not subject to any income tax(Sec. 27(d)(4), 1997 NIRC)

There is re-imposition of the 10% improperly accumulated earnings tax for holding companies (Sec.29, 1997 NIRC)

7. COMPARED WITH OTHER BUSINESS MEDIA

Distribution of Risk, Profit and Control

a) Sole Proprietorships

Sole Proprietorship Corporation

Free from many requirements andregulations in its operation

Heavily regulated; a lot of requirementsimposed for registration and incorporation

Owner has full control of his business Control of business is done by the BOD

Owner stands to lose more than what he putinto the venture

Investors have limited liability

(b) Partnerships and Other Associations (Arts. 1768 and 1775, Civil Code)

Art. 1768 The partnership has a juridical capacity separate and distinct from that of each of thepartners, even in case of failure to comply with requirements of Art. 1772 first paragraph.

Art. 1775 Association and societies, whose articles are kept secret among the members, and wherein anypone of the members may contract in his own name with third persons, shall have no juridicalpersonality, and shall be governed by the provisions relating to co- ownership.


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Corporation Partnership

Separate legal personality Separate legal personality

Investors limited liability Contractual limited liability ( when a limitedpartnership is created)

Free transfer of shares Transfer with consent of partner

Centralized management Every partner is agent

Q. How does the contractual management of a corporation compare with the management ofa partnership?

A. Every partner, in the absence of a stipulation in the articles of partnership, binds the partnershipas every partner is an agent of the others (delectus personarum). In a corporation, only the BoDand not the stockholders can bind the corporation.


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Four Basic Advantageous Characteristics of CorporateOrganization

Disadvantages

(i) Strong Legal Personality

- entity attributable powers;

- continuity of existence;

- having the right of succession, the death of an individualstockholder does not affect corporate existence

- not a natural occurrence, exists mainly because the law providesfor it. This is what distinguishes the separate juridical personality of acorporation from a partnership. The legal personality of acorporation is strong because the law provides for the right ofsuccession, surviving even w/o those who incorporated it, while in apartnership the separate juridical personality is extinguished uponthe death of a partner

- no delectus personarum

(ii) Limited Liability of Investors (provided for byjurisprudence only)

The liability of an investor is limited; their investments and investorscannot be held accountable for more than what they invested.

CLV: However there are a lot of ways to circumvent the lawand make the shareholders liable for more than his actualinvestment (ex. A creditor requiring the chairman or president of thecompany as a joint debtor of the loan)

A trade-off to the abdication made by the investor of his right to

manage the property he had invested in the company. Underproperty law, a person exercises full ownership over his property butwhen he invests it in a corporation, the owner abdicates the six jusof ownership.

(i) Abuse of corporatemanagement

-There is severance of control andownership. Control will be vested

with the BOD, thus investors haveno say over the use of theirinvestment and have little voice inthe conduct of the business

(ii) Abuse of limited liabilityfeature

- This feature has often beenabused and may hurt innocentcreditors.

(iii) Cost of maintenance

-The formation and incorporation ofa corp. entails a lot of difficulties andcosts, particularly the requirementsmade by the law so as to qualifyfor incorporation.

(iv) Double taxation

Dividends received by individualsfrom domestic corporations aresubject to final 10% tax for incomeearned on or after 1 January

1998 (Sec. 24(B) (2), 1997 NIRC)Inter-corporate dividends betweendomestic corporations, however, arenot subject to any income tax(Sec. 27(D)(4), 1997 NIRC)

In addition, there is the re-imposition of the 10% improperlyaccumulated earnings tax forholding companies (Sec. 29, 1997NIRC)

(iii) Free Transferability of shares

A legal relationship is created which is more stable for there are lawswhich govern, and the corporation and the stockholders arebound by the law.

(iv) Centralized ManagementOne of the advantages of a corp. is the limitation of an investorsliability, this flows from the legal theory that a corp. entity isseparate and distinct from its stockholders


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Q. Is a corp. in our jurisdiction given the feature of limited liability?A. No. The feature of limited liability is given to the stockholder and not to the corporation.

Q. Is limited liability a normal run of things?A. No. It is only there because in this case, it comes with the separate juridical personality.

Q. If limited liability as shown in a corporation setting good for the investors, does it mean thatdelectus personarum is a bad thing?A. No. It is good in one way, since persons are bound by the contracts they enter into.

Q. What are the 2 types of partnerships?A. Regular (General and Limited) and Joint venture

Q. Can a corporation be a partner in a regular partnership?A. No. Because a partner must be a natural person. It is against public policy for corporation to be apartner in a regular partnership.

Q. If limited liability is something that can be contracted in a partnership, why did the legislatureput such limited liability as an attribute of a corporation? If the feature of limited liabilitycosts money then why not take it out? Why not leave it up to the investors who can decide ifthey want limited liability or not?A. Even though limited liability will cost a lot of money, borrowing makes a lot more sense. If I haveP100M, it would be foolish to put all my eggs in one basket (if the basket falls, all eggs break). So, I

merely put P10M in one corporation and then borrow the P90M while the rest of my money I putsomewhere else. If the corporation fails, I do not lose all my P100M, I lose only my P10M. But if thecorp. succeeds and I get to pay my creditor, I retain the P10M plus the profits acquired from theP90M paid up loan. This is the concept of LEVERAGING, using other peoples money to make a profitfor yourself. This is why borrowing is an integral part of corporate life and it is up to the creditors to makea diligent appraisal of the credit standing of the corp.

Q. What is the main distinction between a corporation and a partnership?A. A corporation is the intermingling of corporation law and contract law. On the other hand, apartnership is purely a contractual relationship and so every time a partner dies, the contract isactually extinguished.

Q. What is Corporation Law all about?

A. It is all about jurisprudence actually built around the 4 attributes of a corporation

Q. Can a defective attempt to form a corporation result at least in a partnership?A. Pioneer Insurance v. Court of Appeals, 175 SCRA 668 (1989); Lim Tong Lim v. Philippine FishingGear Industries, Inc., 317 SCRA 728 (1999).

CLV: The principle in constitutional law that delegated power cannot be further delegated has no application in a

corporate setting because a corp. is not a product of political context- it is a product of business. A corporate

setting is best described as hierarchical and flat. Just because the BoD are to be elected by the stockholders does

not mean that the former derives its power from the latter. The powers of the BoD is original, said powers are

not delegated by the stockholder. The powers are vested by law (and by the AoI). The BoD sit on the board not as

representatives of the stockholders but because they are directors.


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Pioneer insurance & Surety corp. vs. CA ( 175 SCRA 668)

Facts:- In 1965, Jacob S. Lim was engaged in the airline business as owner of SouthernAirlines, a single proprietorship.

- On May 17, 1965, he bought from Japan Domestic Airlines for the sale of 2 aircrafts and one set fnecessary spare parts for the total price of $109,00. Both arrived in Manila

- On May, 22 1965, Pioneer Insurance Corp, as surety executed and issued its surety bond in behalfof Lim, principal, for the balance price for the aircrafts and spare parts.

- Border Machinery and Heavy Equipment (BORMAHECO), the Cervanteses and ConstanciaMaglana contributed some funds in the purchase of the above aircrafts and spare parts. The fundswere supposed to be their contributions to anew corporation proposed by Lim to expand hisairline business.They executed indemnity agreements in favor of Pioneer, one signed by Maglanaand the other jointly signed SAL, BORMAHECO and Cervantes: where they principally agree andbind themselves jointly and severally to indemnify pioneer.

- On June 10, 1965 Lim for SAL executed in favor of Pioneer a deed of chattel mortgageas security for the suretyship in favor of Pioneer. The deed was duly registered with the Manila RoDand with the Civil Aeronautics Administration.

- Lim defaulted on his subsequent installments prompting JDA to request payment from thesurety. Pioneer paid about P298,000

- Pioneer filed for an extra-judicial foreclosure of the mortgage but the Cervanteses and Maglanafiled a third party complaint claiming that they are co-owners of the aircraft. Pioneer later filed apetition for judicial foreclosure and an application for a writ of preliminary attachment against Lim,the Cervanteses, BORMAHECO and Maglana.

- In their answer, the Cervanteses, BORMAHECO and Maglana alleged they were not privy to thecontracts signed by Lim.

- The RTC ruled in favor of Pioneer, holding Lim liable but dismissing the case as to the otherdefendants. On appeal, the CA affirmed.

ISSUE: whether or not the Cervanteses, BORMAHECO and Maglana are entitled to reimbursement ofamounts given by Lim?

HELD: Lims assertions: For failure of respondents to incorporate, a de facto partnership amongthem was created, and that as a consequence of such relationship all must share in the losses and/orgains of the venture in proportion to their contribution.PRINCIPLES: Persons who attempt, but fail, to form a corporation and who carry on business underthe corporate name occupy the position of PARTNERS INTER SE. Thus, where persons associate

themselves together under articles to purchase property to carry on a business, and theirorganization is so defective as to come short of creating a corp. w/n the statute, they become in legaleffect partners inter se, and their rights as members of the company to the property acquired by thecompany will be recognized.

However, such a relationship does not exist, for ordinary persons cannot be made to assume therelation of partners, as between themselves, when their purpose is that no partnership shall exist andshould be implied only when necessary to do justice between the parties: thus, one who takes nopart except to subscribe for stock in a proposed corporation which is never legally formed does not


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become a partner with other subscribers who engage in business under the name of thepretended corp., so as to be liable as such in an action for settlement of the alleged partnership andcontribution.

- the records show that Lim received the amount of P151,000 representing the participationof BORMAHECO and Maglana

- it was clear that Lim never intended to form a corp with them but they were duped into giving theirmoney

- no de facto corp. was created

Q. In cases where there is a defective attempt to form a corp. which is the prevailing rule, apartnership inter se is created or a corporation by estoppel?A. It depends wholly on the extent of the participation of the party on who a claim is being mind. In thecase at bar, there was no intent on the other parties to enter into a partnership but a corporation. As tothe Cervanteses & BORMAHECO, they cannot be considered to have entered even into a partnershipinter se, since there was no intention to do so and to be held liable as such.

But if it were the Cervanteses or BORMAHECO, who entered into the contracts using the corporatename and actively participated in the activities of the corporation, then they are to be held liable aspartners.

Q. Why are we taking up Pioneer? Why were they not liable?A. Because Pioneer shows us that for a person to be liable as a partner, he should have activelyparticipated in the conduct of the business, the SC held in this case that to be able to be held liable theperson should possess powers of management.

Q. What is the difference between Pioneer and Lim Tong Lim?A. In the case of Pioneer, the SC stopped when it declared that to be liable, you have to possesspowers of management. In Lim tong Lim, it continues its pronouncement, by saying that if you havebeneficial ownership over the business, then you are also liable as a partner.

LIM TONG LIM v. PHILIPPINE FISHING GEAR INDUSTRIES

Facts: Antonio Chua and Peter Yao on behalf of Ocean Quest Fishing Co. entered into a contract withPhil. Fishing Gear Industries Inc. for the purchase of fishing nets and floats. They claimed that theywere a fishing venture with Lim Tong Lim who was however not a signatory to the contract. They failedto pay and so PFGI filed a collection case with a prayed for a writ of preliminary attachment. The casewas filed against Chua, Yao and Lim because it was found that Ocean Quest was a non- existentcorporation as shown by the certification from SEC. Chua admitted liability and Yao waived his right tocross-examine and present evidence because he failed to appear while Lim filed a counterclaimand a cross-claim. Court granted the writ of attachment and ordered the Auction Sale of the F/BLourdes which was previously attached. Trial court ruled that PFGI was entitled to the Writ and Chua,Yao and Lim were jointly liable as general partners.


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Held:1.) Lim was contesting that the CA ruled that there was a partnership in the CompromiseAgreement and alleges that he had no direct participation in the negotiations and was merely leasing F/B

formed by the three of them. They initially purchased two boats through a loan from Lims brother andas security, was placed in the name of Lim Tong Lim. The repairs and supplies were shouldered by Chua

and Yao. A civil case was filed by Chua and Yao against Lim for nullity of commercial documents,reformation of contracts and declaration of ownership of fishing boatswhich was settled amicably. Inthe Compromise Agreement, it was revealed that they intended to pay the loan from Jesus Lim byselling the boats and to divide among them the excess or loss. Therefore it was clear that a partnershipexisted which was not solely based on the agreement. It was merely an embodiment of the relationshipamong parties.

2.) Lim alleges that he was merely a LESSOR by showing the Contract of Lease and registration

courts, the boats were registered to Lim only as security for the loan that was granted to thepartnership by the brother of Lim, which was not an uncommon practice. Aside from the fact that it wasabsurd for Lim to sell the boats to pay the debt he did not incur, if needed he was merely leasing theboats to Chua and Yao.

3.) Lim contests his liability by saying that only those who dealt in the name of the ostensiblecorporation should be held liable. His name was not in any of the contracts and never dealt with PFGI:Sec. 21 All persons who assume to act as a corporation knowing it to be without authority to do so shallbe liable as general partners for all debts, liabilities and damages incurred or arising as a resultthereof; Provided however that when any such ostensible corporation is sued, on any transactionentered by it as a corporation or ant tort committed by it as such, it shall not be allowed to use as adefense its lack of corporate personality. Even if the ostensible corporate entity is proven to be non-existent, a party may be estopped from denying its corporate existence because an unincorporatedassociation has no personality and would be incompetent to act and appropriate for itself the powerand attributes of a corporation as provided by law. It cannot create agents or confer authority onanother to act on its behalf. Thus, those who act or purport to act as its representatives do so withoutauthority and at their own risk. Clearly, Lim benefited from the use of the nets found inside F/BLourdes which was proved to be an asset of the partnership. He in fact questioned the attachmentbecause it has effectively interfered with the use of the vessel. Though technically, he did notdirectly act on behalf of the corporation, however, by reaping the benefits of the contract entered intoby persons he previously had an existing relationship with, he is deemed part of said association andis covered by the doctrine of corporation by estoppel.

CLV: Pioneer case - actors who knew of corporations non-existence are liable as general partnerswhile actors who did not know are liable as limited partners, passive investors are not liable; Limteaches us that even passive investors should be held liable provided they benefited from suchtransactions.

(c) Joint Ventures

Joint venture is an association of persons or companies jointly undertaking some commercial

enterprise; generally all contribute assets and share risks. It requires a community of interest inthe performance of the subject matter, a right to direct and govern the policy in connection therewith,and duty, which may be altered by agreement to share both in profit and losses. Kilosbayan, Inc. v.Guingona, Jr., 232 SCRA 110 (1994).

Q. What is the difference between a joint venture and a partnership?A. A joint venture is by law a partnership because it follows the same definition as having two or morepersons binding themselves together under a common fund with the intention of dividing the profits


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between themselves. Therefore, every joint venture is a partnership. The distinction between the twois that a joint venture is for a limited purpose only while a partnership involves an arrangementor an on-going concern.

Q. Is it possible for a joint venture not to be a partnership?

A. Yes. When the joint venture forms a corporation, it then becomes a joint venture corporation.

Q. Does the requirement of registration needed in a partnership also required in a joint venture?A. No. Only in a partnership is registration required (Art. 1772, Civil Code)

(d) Cooperatives (Art. 3, R.A. No. 6938)

A cooperative is a duly registered association of persons, with a common bond of interest, who havevoluntarily joined together to achieve a lawful common social or economic end, making equitablecontributions to the capital required and accepting a fair share of the risks and benefits of theundertaking in accordance with universally accepted cooperative principles.

Cooperatives are established to provide a strong social and economic organization to ensure that thetenant-farmers will enjoy on a lasting basis the benefits of agrarian reforms. Corpuz v. Grospe,333 SCRA 425 (2000).

Cooperative Corporation

Separate Juridical Personality

Governed by principles ofdemocratic control where themembers have equal voting rights on aone-member-one vote principle

SH vote their percentage share ofthe stocks subscribed by them

BoD manage the affairs of the coop. But itis the GA of full membership thatexercises all the rights and performs allof the obligations of the coop.

BoD is the repository of all powers EXCEPTfor acts where the Corp. Code requiresconcurrence or ratification by the SH.

Under the supervision of the coop.Development Authority

Under the Supervision of the SEC

Organized for the purpose ofproviding goods and services to itsmembers and thus to enable them to attain

increased income and

Stock Corp. for profit; Non-StockCorp eleemosynary (charitable,philantrophic) purpose

e) Business Trusts (Article 1442, Civil Code) Art. 1442

Q. What is the difference between a business trust and a corporation?A. The relationship in a business trust is essentially a trust relationship. The business trust does nothave a personality which is apart from the trustor or the trustee/beneficiary.

The concept of a separate juridical personality is absent from a business trust.


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(f) Sociedades AnnimasA sociedad annima was considered a commercial partnership where upon the execution of

the public instrument in which its articles of agreement appear, and the contribution of funds andpersonal property, becomes a juridical personan artificial being, invisible, intangible, and existingonly in contemplation of lawwith power to hold, buy, and sell property, and to sue and besueda corporationnot a general copartnership nor a limited copartnership . . . The inscribing of its

articles of agreement in the commercial register was not necessary to make it a juridical personacorporation. Such inscription only operated to show that it partook of the formof a commercialcorporation. Mead v. McCullough, 21 Phil. 95 (1911).

The sociedades annimas were introduced in Philippine jurisdiction on 1 December1888 with the extension to Philippine territorial application of Articles 151 to 159 of the Spanish Codeof Commerce. Those articles contained the features of limited liability and centralized managementgranted to a juridical entity. But they were more similar to the English joint stock companies than themodern commercial corporations. Benguet Consolidated Mining Co. v. Pineda, 98 Phil. 711 (1956).

Our Corporation Law recognizes the difference between sociedades annimas and corporationsand will not apply legal provisions pertaining to the latter to the former. Phil. Product Co. v. PrimateriaSociete Anonyme, 15 SCRA 301 (1965).

(g) Cuentas En Participacion

A cuentas en participacionas a sort of an accidental partnership constituted in such a manner that itsexistence was only known to those who had an interest in the same, there being no mutual agreementbetween the partners, and without a corporate name indicating to the public in some way that therewere other people besides the one who ostensibly managed and conducted the business, governedunder Article 239 of the Code of Commerce.

Those who contract with the person under whose name the business of such partnershipof cuentas en participacionis conducted, shall have only a right of action against such person andnot against the other persons interested, and the latter, on the other hand, shall have no right ofaction against third person who contracted with the manager unless such manager formally transfershis rights to them. Bourns v. Carman, 7 Phil 117 (1906).


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a juridical entity, which therefore extends to private corporations within the scope of the guaranty.

Q: Why is the corporation entitled to the protection against unreasonable searches andseizures?A: The corporation being entitled to due process and equal protection is the consequence of the Statesgrant of a primary franchise to a corporation. It emanates from the Theory of Concession, whereby the

government recognizes not only the separate juridical personality of the corporation but also grantsunto it all the rights and protections that a natural individual would possess which includes the right todue process and equal protection.

However, a corporation is also entitled to protection against unreasonable searches and seizures.This right however does not emanate from the grant of the State by way of primary franchise but issourced through the Theory of Enterprise Entity which recognizes that regardless of Section 2 of theCorporation Code, a corporation is still for all intents and purposes an association of individualsunder an assumed name and with a distinct legal personality. In organizing itself as a collective body,it waives no constitutional immunities for such body. (1) Its properties cannot be taken without justcompensation (2) it can only be proceeded against by due process of law (3) it is protected againstunlawful discrimination.

In the same line of reasoning, although a corporation is a legal fiction, a search and seizure involvesphysical intrusion into the premises of the corporation, and therefore also intrudes into the personaland business privacy of the stockholders or members who compose it. It can be seen that the right of theindividual against unreasonable searches and seizures is extended to corporations upon whom they aremembers.

(c) But Not Entitled to Privilege Against Self incrimination

It is elementary that the right against self-incrimination has no application to juridical persons.Bataan Shipyard & Engineering v. PCGG, 150 SCRA 181 (1987).

While an individual may lawfully refuse to answer incriminating questions unless protected by animmunity statute, it does not follow that a corporation, vested with special privileges and franchises,may refuse to show its hand when charged with an abuse of such privilege. Hale v. Henkel, 201U.S. 43 (1906); Wilson v. United States, 221U.S. 361 (1911); United States v. White, 322 U.S. 694 (1944).

Q: Why is a corporation entitled to equal protection but not the right against self-incrimination?A: Any individual is entitled to equal protection whether they be juridical or natural. The corporation beingin the same class should be treated equally. However, the right to self-incrimation is not extended tocorporation because:

1. The right is meant to prevent individuals from having to lie under oath in order to protect his interest.It is to protect the individual from having to commit perjury just to keep himself from going to jail.However, if a corporation lies under oath, who would you bring to jail when in fact, a corporation is just alegal fiction.

2. The corporation is subject to the reportorial requirements of the law. The corporation being a merecreature of the State is subject to the whims of its Creator. The corporation powers are limited by law.

CLV: Beats me! Perhaps such right is attributable to the moral dimension of an individual, and since thecorporation is of an amoral personality, such right may not be attributable to it.


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3. Practice of Profession

Corporations cannot engage in the practice of a profession since they lack the moral and technicalcompetence required by the PRC.

A corporation engaged in the selling of eyeglasses and which hires optometrists is not engaged

in the practice of optometry. Samahan ng Optometrists v. Acebedo International Corp., 270 SCRA 298(1997); Alfafara v. Acebedo Optical Company, 381 SCRA 293 (2002).

4. Liability for Torts

A corporation is civilly liable in the same manner as natural persons for torts, because the rulesgoverning the liability of a principal or master for a tort committed by an agent or servant are thesame whether the principal or master be a natural person or a corporation, and whether the servantor agent be a natural or artificial person. That a principal or master is liable for every tort which heexpressly directs or authorizes, is just as true of a corporation as a natural person. a PNB v. Court ofAppeals, 83 SCRA 237 (1978).

Our jurisprudence is wanting as to the definite scope of corporate tort. Essentially, tort consists

in the violation of a right given or the omission of a duty imposed by law; a breach of a legal duty. Thefailure of the corporate employer to comply with the law-imposed duty under the Labor Code to grantseparation pay to employees in case of cessation of operations constitutes tort and its stockholderwho was actively engaged in the management or operation of the business should be held personallyliable. Sergio F. Naguiat v. NLRC, 269 SCRA 564 (1997).

PNB v COURT OF APPEALSFacts:Rita Gueco Tapnio had an export sugar quota of 1,000 piculs for the agricultural year 1956-1957. Since, she did not need it, she agreed to allow Mr. Jacobo Tuazon to use the said quota forconsideration of 2,500. Her sugar cannot be exported without sugar quota allotments. Sometimes,however a planter harvests less sugar than her quota so her excess quota is used by her mother whopays for it. This is her arrangement with Mr. Tuazon. At the time of the agreement, she was indebtedto PNB of San Fernando, Pampanga. Her indebtedness was known as a crop loan and was securedby her sugar crop, and since her quota was mortgaged to PNB, her arrangement with Mr. Tuazon had tobe approved by the bank. Upon presentment of the lease arrangement, the PNB branch manager revisedit by increasing the lease amount to P2.80 per picul for a total of P2,800. Such increase was agreed toby both Rita and Jacobo. However, when it was presented to the Board of Directors for approval, theyfurther increased the amount to P3.00 per picul. Jacobo asked for the reconsideration but he wasdenied the same. The matter stood as it was until Jacobo informed Rita and PNB that he had lost interestin pursuing the deal. In the meantime, the debt of Rita with the PNB matured. Since she had a suretyagreement with the Philippine American General Insurance Co. Inc. (Philamgen), the latter paid heroutstanding debt. Philamgen in turn demanded from Rita the amount which they paid the bank.Instead of paying the bank, Rita claimed that she told Philamgen that she did not consider herselfindebted to the bank since she had an agreement with Jacobo Tuazon. When such was discontinued,she failed to realized the income with which she could have paid her creditors. Philamgen filed acomplaint for the collection of sum of money against Rita. Rita implicated PNB as a third party

defendant claiming that her failure to pay was due to the fault or negligence of PNB.


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Issue: WON PNB is liable for the damage caused to Rita.

Held:There is no question that Ritas failure to utilize her sugar quota was due to the

disapproval of the lease by the Board of Directors of the petitioner, thus PNB should be held liable.

The Board justified the increase to P 3.00 per picul by saying that it was the prevalent rate at thattime. However, there was no proof that any other person was willing to lease the sugar quota allotmentof Rita for a price higher than P2.80 per picul. Just because there are isolated transactions where thelease price was P3.00 per picul does not mean that there are always ready takers.

While PNB had the ultimate authority of approving or disapproving the proposed lease since thequota was mortgaged to the bank, the latter certainly cannot escape its responsibility of observingprecaution and vigilance which the circumstances of the case justly demanded in approving ordisapproving the lease of said sugar quota.

According to Art. 19 of the Civil Code, [e]very person must in the exercise of his rights andthe performance of his duties, act with justice, give everyone his due and observe honesty and good

faith. This the petitioner failed to do. As a consequence, Art. 21 states, [a]ny person who willfully causesloss or injury to another in a manner that is contrary to morals, good customs or public policy shallcompensate the latter for the damage.

On the liability of the corporation, the court ruled that, [a] corporation is civilly liable in the samemanner as natural persons for torts, because generally speaking, the rules governing the liability of aprincipal or master for a tort committed by an agent or servant are the same whether the principal ormaster be a natural person or artificial person. All of the authorities agree that a principal or master isliable for every tort which he expressly directs or authorizes, and this is just as true of a corporation asof a natural person. A corporation, is liable therefore, whenever a tortuous act is committed by anofficer or agent under express direction or authority from the stockholders or members acting as abody, or generally, from the directors as the governing body.

NOTE: CLV tells us that it is clear from the ruling of the Court in this case that not every tortuous actcommitted by an officer can be ascribed to the corporation as its liability, for it is reasonable to presumethat in the granting of authority by the corporation to its agent, such a grant did not include a direction tocommit tortuous acts against third parties. Only when the corporation has expressly directed thecommission of such tortuous act, would the damages resulting therefrom be ascribable to thecorporation. And such a direction by the corporation, is manifested either by its board adopting aresolution to such effect, as in this case, or having taken advantage of such a tortuous act thecorporation, through its board, expressly or impliedly ratifies such an act or is estopped from impugningsuch an act.

Q: When is a corporation liable for tort?A: A corporation is liable for tort when: (a) the act is committed by an officer or agent (2) under express

direction of authority from the stockholders or members acting as a body or through the Board ofDirectors.

Q: How can authority given to the agent of the corporation be determined?A: Either by: (a) such direction by the corporation is manifested, by its board adopting aresolution to such effect (b) by having takien advantage of such a tortious act, the corporation throughits board, has expressly or impliedly ratified such an act or estopped from impugning the same.


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Q: What is a derivative suit?A: Since, the act of the board is essentially that of the corporation and therefore corporate assets cannotescape enforcement of the award of damage to the tort victim. As a remedy, the stockholdersmay institute a derivative suit against the responsible board members and officers for the damagessuffered by the corporation as a result of the tort suit.

5. Corporate Criminal Liability (a West Coast Life Ins. Co. v. Hurd, 27 Phil. 401 (1914); a People v.Tan Boon Kong, 54 Phil. 607 [1930]; a Sia v. Court of Appeals, 121 SCRA 655 [1983]; Articles102 and 103, Revised Penal Code).

WEST COAST LIFE INS. CO. v HURDFacts:The petitioner (West Coast) is a life-insurance corporation, organized under the laws of California, doingbusiness regularly and legally in the Philippines. An information was filed against the plaintiffcorporation as well as John Northcott and Manue Grey charging the said corporation and saidindividuals with the crime of libel. The controversy started when Northcott, as general manager forthe Philippines of said company and John Grey who was an agent and employee of the company,conspired to release certain circulars containing foul statements against Insular Life Company claimingthat the Insular Life was then and there in a dangerous financial condition on the point of going into

insolvency, to the detriment of the policy holders of the said company, and of those with whom saidcompany have and had business transactions. The plaintiffs then filed a motion to quash summons sentby the Judge, on the ground that the court had no jurisdiction over said company, there being noauthority in court for the issuance of the processes. Moreover, plaintiffs alleged that under the laws ofthe Philippines, the court has no power or authority to proceed against a corporation, criminally, tobring it into court for the purpose of making it amenable to criminal laws.

Issue: WON corporations can be held criminally liable.

Held: No. While the courts have inherent powers which usually go with courts of general jurisdiction, itwas held that under circumstances of their creation, they have only such authority in criminalmatters as is expressly conferred upon them by statute or which is necessary to imply from suchauthority in order to carry out fully and adequately the express authority conferred. The SC did not feelthat Courts have authority to created new procedure and new processes of criminal law. Although,there are various penal laws in the Philippines which the corporation may violate, still the SC does notbelieve that the courts are authorized to go to the extent of creating special procedure and processesfor the purpose of carrying out the penal statutes, when the legislative itself has neglected to do so.This is true since the courts are creatures of the statute and have only powers conferred upon them bystatute. Philippines courts have no common law jurisdiction or powers.

PEOPLE v TAN BOON KONGFacts:During 1924, in Iloilo, Tan Boon Kong as manager of the Visayan General Supply Co. engaged in thepurchase and sale of sugar, bayon, copra, and other native products and as such must pay internalrevenue taxes upon is sales. However, he only declared 2.3 million in sales but in actuality thesales amounted to 2.5 million, therefore failing to declare for the purpose of taxation about 200,000, not

having paid the government 2,000 in taxes. Upon filing by the defendant of a demurrer, the lower courtjudge sustained said motion on the ground that the offense charged must be regarded as committedby the corporation and not its officials.

Issue: WON the defendant as manager may be held criminally liable. Held: Ruling reversed. Caseremanded.The court held that the judge erred in sustaining the motion because it is contrary to a great weightof authority. The court pointed out that, a corporation can act only through its officers and agents wherethe business itself involves a violation law, the correct rule is that all who participate in it are


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criminally liable. In the present case, Tan Boon Kong allegedly made a false return for purposes oftaxation of the total amount of sales for year 1924. As such, the filing of false returns constitutes aviolation of law. Him being the author of the illegal act must be held liable.

SIA v PEOPLEFacts:

The facts reveal that in 1963, the accused Jose Sia was the general manager of MetalManufacturing Company of the Philippines engaged in the manufacturing of steel officeequipment. When the company was in need of raw materials to be imported from abroad, Sia appliedfor a letter of credit to import steel sheets from Tokyo, Japan, the application being directed toContinental Bank and was opened in the amount of $18,300. According to the Continental Bank,the delivery of the steel sheets was only permitted upon the execution of the trust receipt. Whileaccording to Sia, the steel sheets were already delivered and were even converted to equipmentbefore the trust receipt was signed by him. However, there is no question that when the bill ofexchange became due, neither the accused nor his company made payments, despite demands of thebank. On appeal, Sia contends that he should not be held liable.

Issue: WON petitioner Sia may be liable for the crime charged, having acted only for and in behalf ofhis company.

Held:

NO. The Court disputed the reliance of the lower court and the CA on the general principle that for acrime committed by a corporation, the responsible officers thereof would personally bear the criminalliability, as enunciated in Tan Boon Kong. The latter provides that: [t]he corporation was directly requiredby law to do an act in a given manner and the same law makes the person who fails to perform the act inthe prescribed manner expressly liable criminally. The performance of an act is an obligation directlyimposed by the law on the corporation. Since it is a responsible officer or officers of the corporationswho actually perform the act for the corporation, they must of necessity be the ones to assume thecriminal liability; otherwise this liability as created by the law would be illusory, and the deterrent effect ofthe law, negated.

The Court concluded that the cited case does not fall squarely with the circumstancessurrounding Sia since the act alleged to be a crime is not in the performance of an act directlyordained by law to be performed by the corporation. The act is imposed by the agreement of the partiesin pursuit of the business. The intention of the parties is therefore a factor determinant of whether a crimeor a civil obligation alone is committed. The absence of a provision of the law even in the RPCmaking Sia criminally liable as the president of his company created a doubt that must be ruled in hisfavor according to the maxim, that all doubts must be resolved in favor of the accused.

CONTRASTING THE THREE CASES

In the case of West, the court in effect enunciated that for a person to proceed criminallyagainst a corporation, it was necessary that express provisions of law be enacted, specifically providingthat a corporation may be proceeded against criminally and brought to court.

But since a corporation is a legal fiction that cannot be handcuffed and brought to court, the caseof Tan Boon Kong provided that since a corporation acts through its officers and agents, any violationof law by any of the actors of the corporation in the conduct of its business involves a violation oflaw, the correct rule is that all who participate in it are liable. In making actors liable, the court here saidattaching criminal liability to the fiction cannot be done since: (1) a corporation is only an artificialperson (2) there is a lack of intent imputable to a being since it lacks its own mind.

To apply the doctrine of separate juridical personality would allow criminals to use thecorporation as a shield or cloak to hide their criminal activities behind such.


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However, the liability of officers were delineated in case of Sia where the court held that theresponsible officer is personally liable is personally liable for crimes committed by the corporationonly in a situation where the corporation was directly required by law to do an act in a given manner, andthe same law makes the person who fails to perform the act in the prescribed manner expressly liablecriminally.

NOTE: While the law only defines individuals as offenders of criminal acts or as criminal actors, thelaw is currently undergoing changes such that juridical persons are also defined as offenders of criminalacts, as with the case of the Anti-Money Laundering Act.

Art. 102 of the RPC: Subsidiary civil liability of innkeepers, tavern-keepers and proprietors ofestablishments In default of the persons criminally liable, innkeepers, tavern-keepers and anyother person or corporations shall be civilly liable for crimes committed in theirestablishments, in all cases where a violation of municipal ordinances or some general or specialpolice regulation shall have been committed by them or their employees.

Innkeepers are also subsidiarily liable for the restitution of goods taken by robbery or theft withintheir houses from guests lodging therein, or for the payment of the value therefore, provided

that such guests shall have notified in advance the innkeeper himself, or the person representinghim, of the deposit of such goods within the inn; and shall furthermore have followed thedirections which such innkeeper or his representative may have given them with respect to the careof and vigilance over such goods. No liability shall attach in case of robbery with violence against orintimidation of persons unless committed by the innkeepers employees.

Art. 103 of the RPC: Subsidiary civil liability of other persons The subsidiary liabilityestablished in the next preceding article shall also apply to employers, teachers, persons andcorporations engaged in any kind of industry for felonies committed by their servants, pupils,workmen, apprentices, or employees in the discharge of duties.

No criminal suit can lie against an accused who is a corporation. Times, Inc. v. Reyes, 39SCRA 303 (1971).

When a criminal statute forbids the corporation itself from doing an act, the prohibition extends to theboard of directors, and to each director separately and individually. People v. Concepcion, 44 Phil.129 (1922).

While it is true that a criminal case can only be filed against the officers and not against the corporationitself, it does not follow that the corporation cannot be a real-party-in-interest for the purpose of bringinga civil action for malicious prosecution for the damages incurred by the corporation for the criminalproceedings brought against its officer. Cometa v. Court of Appeals, 301 SCRA 459 (1999).

Q. Why can the corporation be held liable for tortuous acts done by its agent but not for criminalacts done outside its authority?A: Crime is not within the corporate contemplation while negligence is. Negligence could be

part of every transaction. It is an integral part of corporate transactions. For as long as people comprisethe corporation, it is within the contemplation of every corporate act.


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6. Recovery of Moral and Other Damages

A corporation, being an artificial person, cannot experience physical sufferings, mental anguish,fright, serious anxiety, wounded feelings, moral shock or social humiliation which are basis for moraldamages under Art. 2217 of the Civil Code. However, a corporation may have a good reputation which,if besmirched, may be a ground for the award of moral damages. Mambulao Lumber Co. v. Philippine

National Bank, 22 SCRA 359 (1968); APT v. Court of Appeals, 300 SCRA 579 (1998).

A corporation, being an artificial person and having existence only in legal contemplation, has nofeelings, emotions nor senses; therefore, it cannot experience physical suffering and mental anguish.Mental suffering can be experienced only by one having a nervous system and it flows from real ills,sorrows, and griefs of lifeall of which cannot be suffered by an artificial person. Prime White CementCorp. v. IAC, 220 SCRA 103 (1993); LBC Express, Inc. v. Court of Appeals, 236 SCRA 602 (1994);Acme Shoe, Rubber & Plastic Corp. v. Court of Appeals, 260 SCRA 714 (1996); Solid Homes, Inc. v.Court of Appeals, 275 SCRA 267 (1997); NPC v. Philipp Brothers Oceanic, Inc., 369 SCRA 629 (2001).

The statement in People v. Maneroand Mambulao Lumber Co. v. PNB, that a corporation mayrecover moral damages if it has a good reputation that is debased, resulting in social humiliation is anobiter dictum. Recovery of a corporation would be under Articles 19, 20 and

21 of the Civil Code, but which requires a clear proof of malice or bad faith. ABS-CBNBroadcasting Corp. v. Court of Appeals, 301 SCRA 589 (1999).

7. CORPORATE NATIONALITY: UNDER WHOSE LAWS INCORPORATED(Sec. 123)

Section 123: Definition and rights of foreign corporations For the purposes of this Code, aforeign corporation is one formed, organized or existing under any laws other than those of thePhilippines and whose laws allow Filipino citizens and corporations to do business in the Philippinesafter it shall have obtained a license to transact business in this country in accordance with thisCode and a certificate of authority from the appropriate government agency.

There are three tests to determine the nationality of the corporation, namely:

1.) Place of incorporation that a corporation is of the nationality of the country under whose laws ithas been organized and registered, embodied in Sec. 123 of the Corporation Code.

2.) Control test nationality determined by the nationality of the majority stockholders, wherein control isvested.

Situation #1: 51% Filipino 49% Japanese: Under the control test, the nationality cannot bedetermined because for a group of stockholders to exercise control over a corporation it is required bythe Corporation Code that they at least control 60% of the corporation.

Why 60%? Because under the Corporation Code for a group of persons to incorporate acorporation, at least 5 persons are required by law. A majority of the 5 is 3 and converting it into

percent, one gets 60%. We can say that in fact 51% is majority but in a group of 5 people 51% is 2 &1/5, there really is no 1/5 of a person.

the control test, this is considered a Filipinocorporation

3.) Principal place of business applied to determine whether a State has jurisdiction over the existenceand legal character of a corporation, its capacity or powers, internal organizations, capital structure,rights and liabilities of directors.


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Q: Do all three tests apply in the Philippines?A: Yes. The first test is considered the primary test, the second one is used to determine whether acorporation can engage in nationalized activities in the country, and the third one is used to determine the

jurisdiction of the State to enforce for instance taxation laws.

Q: What is the importance of determining the nationality of the corporation?A: It is necessary so as to determine whether or not a corporation can enter into various transactions orengage in different industries. And also, the legal fiction supporting a corporation is valid only withinPhilippine territory.

Q: It was said that the place of incorporation is the primary test to determine the nationality of thecorporation, why then are there other tests used?A: There are certain aspects of the Philippine economy that require that the controlling test incorporations engaging in said type of business be that of Filipinos. The nationalized economic sectors areprimarily focused at making Filipino interests benefit directly from the bounties of this country. The placeof incorporation test need not have been expressly provided by the Constitution since it is an integral partof our law specifically the power of Congress to grant primary franchise to corporations. The place of

incorporation test is deemed the primary test. It is a true test of nationality. Being a creature of law of theplace where it was incorporated, the corporation cannot escape said law. By providing for the controltest, the Constitution is providing for a secondary test to determine which corporations are entitled toentry in nationalized sectors.

Q: What is the implication of having a primary test and a secondary test?A: Simply put, if a corporation does not pass the first test, which the place of incorporation test,automatically it is deemed to be a foreign corporation. However, having passed the first test, thenationality of the corporation may have been established but this does not mean that the corporation isentitled to enter every single economic sector of the Philippines. The control test determines now whetherthe corporation fulfills the equity requirements of the Constitution. In doing this, the other tests are madesuch as: war-time test, investment test and grandfather rule.

EXCEPTIONS: TEST OF CONTROLLING OWNERSHIPalso applies in:

(a) Exploitation of Natural Resources (Sec. 140; Sec. 2, Article XII, 1987 Constitution; a RomanCatholic Apostolic Administrator of Davao, Inc. v. The LRC and the Register of Deeds of Davao, 102Phil. 596 [1957]).

Sec. 140 Stock ownership in certain corporations Pursuant to the duties specified by Article XIVof the Constitution, the National Economic Development Authority shall, from time to time, make adetermination of whether the corporate vehicle has been used by any corporation of by business orindustry to frustrate the provisions thereof or of applicable laws, and shall submit to the BatasangPambansa, whenever deemed necessary, a report of its findings, including recommendations for theirprevention or correction.

Maximum limits may be set by the Batasang Pambansa for stockholdings in corporationsdeclared by it to be vested with a public interest pursuant to the provisions of this section,belonging to the individuals or groups of individuals related to each other by consanguinity or affinity orby close business interests, or whenever it is necessary to achieve national objectives, prevent illegalmonopolies or combinations in restrain or trade, to implement national economic policies declared inlaws, rules and regulations designed to promote the general welfare and foster economicdevelopment.

In recommending to the Batasang Pambansa corporations, business or industries to be declared vested


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with a public interest and in formulating proposals for limitations on stock ownership, the NationalEconomic and Development Authority shall consider the type and nature of the industry, the size of theenterprise, the economies of scale, the geographic location, the extent of Filipino ownership, the laborintensity of the activity, the export potential, as well as the other factors which are germane to therealization and promotion of business and industry.

Sec. 2 Art. XIIAll lands of the public domain, waters, minerals, coal, petroleum and other mineral oils, all forces ofpotential energy, fisheries, forests or timber, wildlife, flora and fauna and other natural resources areowned by the State. With the exception of agricultural lands, all other national resources shall under thefull control and supervision of the State. The State may directly undertake such activities or it may enterinto co- production, joint venture, or production-sharing agreements with Filipino citizens, or corporationsor associations at least sixty percentum of whose capital is owned by such citizens. Such agreementsmay be for a period not exceeding twenty-five years, renewable for not more than twenty-five years, andunder such terms and conditions as may be provided by law. In cases of water rights for irrigation, watersupply, fisheries, or industrial uses other than the development of water power, beneficial use may be themeasure and limit of the grant.

The State shall protect the nations marine wealth in its archipelagic waters, territorial sea, and exclusive

economic zone, and reserve its use and enjoyment exclusively to Filipino citizens.The Congress may, by law, allow small-scale utilization of natural resources by Filipino citizens, as wellas cooperative fish farming, with priority to subsistence fishermen and fishworkers in rivers, lakes, baysand lagoons

The President may enter into agreements with foreign-owned corporations involving either technical orfinancial assistance for large-scale exploration, development and utilization of minerals, petroleum andother mineral oils according to the general terms and conditions provided by law, based on realcontributions to the economic growth and general welfare of the country. In such agreements, the Stateshall promote the development and use of local scientific and technical resources.

The President shall notify the Congress of every contract entered into in accordance with this provisionwithin thirty days from its execution.

ROMAN CATHOLIC APOSTOLIC ADMINISTRATOR OF DAVAO v THE LRCFacts:Mateo Rodis, a Filipino citizen and resident of Davao, executed a deed of sale of a parcel of landlocated in the same city in favor of the Roman Catholic Administrator of Davao, a corporationsole organized and existing in accordance with Philippine laws. The incumbent administrator is Msgr.Clovis Thibault, a Canadian citizen. When the deed was presented to the Register of Deeds forregistration, it required them to submit an affidavit stating that the ownership of the corporation is 60%Filipino citizens as required under the Constitution. Roman Catholic stated that it was a corporation sole(meaning only one incorporator) and that the totality of the Catholic population in Davao would becomethe owner of the property. Register of Deeds doubted this and submitted the case for enconsulta in the Land Registration Commission. LRC ruled that the requirement of the Constitution mustbe followed and since the 60% cannot be complied with, the registration should be denied. Hence,

this appeal.

Issue: WON the Roman Catholic Apostolic Church, being a corporation sole, can lawfully acquirelands in the Philippines.

Held: YES.

Corporation sole a special form of corporation usually associated with the clergy designed tofacilitate the exercise of the functions of ownership of the church which was registered as property


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owner. It is created not only to administer the temporalities of the church or religious society where thecorporator belongs, but also to hold and transmit the same to his successor in said officer.

The incumbent administrator is not the actual owner of the land but the constituents or those thatmake up the church, thus it is their nationality that has to be taken into consideration. The corporationsole only holds the property in trust for the benefit of the Roman Catholic faithful.

60% of their capital owned by Filipino citizens, the constitution manifestly disregarded the corporatefiction i.e. the juridical personality of such corporation or associations. It went behind thecorporate entity and looked at the natural persons that composed it, and demanded that a clearmajority in interest (60%) should be Filipino. Since under the rules governing corporation sole, themembers of the religious association cannot overrule or override the decisions of the solecorporator, then it would be wrong to conclude that the control of the corporation sole would be in themembers of the religious association.

NOTE: The Roman Catholic Church is a corporation by prescription, with acknowledged juridicalpersonality inasmuch as it is an institution which antedated almost a thousand years any otherpersonality in Europe, and which existed when Grecian eloquence still flourished in Antioch and when

idiots were still worshipped in the temple of Mecca. Since it is a corporation by prescription, it has nonationality, and hence, the nationality test does not apply. (But refer to below.)

Q: Why is this case relevant to us?A: It is relevant because while it tells us that a corporation sole is not subject to the nationality test, it mustbe further qualified to mean that this is the case only insofar as the control test is concerned. Nationality isirrelevant insofar as this test is concerned. However, it becomes relevant when the place of incorporationcomes into play since the case never sought to touch the place of incorporation test.

The registration of the donation of land to an unincorporated religious organization, whose trusteesare foreigners, would violate constitutional prohibition and the refusal would not be in violation ofthe freedom of religion clause. The fact that the religious association has no capital stock does notsuffice to escape the constitutional inhibition, since it is admitted that its members are of foreignnationality. . . and the spirit of the Constitution demands that in the absence of capital stock, thecontrolling membership should be composed of Filipino citizens. Register of Deeds of Rizal v. Ung SuiSi Temple,97 Phil. 58 (1955).

(b) Public Utilities(Sec. 11, Art. XII, Constitution; a People v. Quasha, 93 Phil. 333)

Sec. 11 Art. XIINo franchise, certificate or any other form of authorization for the operation of public utility shall begranted except to citizens of the Philippines or to corporations or associations organized under the lawsof the Philippines at least sixty per centumof whose capital is owned by such citizens, nor shall suchfranchise, certificate or authorization be exclusive in character or for a longer period than fifty years.Neither shall any such franchise or right be granted except under the condition that it shall be subject to

amendment, alteration or repeal by the Congress when the common good so requires. The State shallencourage equity participation in public utilities by the general public. The participation of foreigninvestors in the governing body of any public utility enterprise shall be limited to their proportionate sharein its capital, and all the executive and managing officers of such corporation or association must becitizens of the Philippines.

NOTE: Stock ownership must at least be 60% Filipino but management must be 100% Filipino for suchcorporation to operate in industries concerning public utilities.


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PEOPLE v QUASHAFacts:William Quasha, a member of the Philippine Bar was charged with falsification of public andcommercial documents in the CFI. He was entrusted with the preparation and registration of the articlesof incorporation of Pacific Airways Corporation but he caused it to appear that Arsenio Baylon, a

Filipino had subscribed to and was the owner of 60% of subscribed capital stock. Such was not casebecause the real owners of said portions were really American citizens. The purpose of such falsestatement was to circumvent the Constitutional mandate that no corporation shall be authorized tooperate as a public utility in the Philippines unless60% of its capital is owned by Filipinos.

Held:

The falsification imputed to Quasha consists in not disclosing in the Articles of Incorporation thatBaylon was a mere trustee of the Americans, thus giving the impression that Baylon subscribed to60% of the capital stock. But contrary to the lower courts assumption, the Constitution does notprohibit the mere formation of a public utility corporation without the required proportion of Filipinocapital. What it does prohibit is the granting of a franchise or other form of authorization for the

operation of a public utility to a corporation already in existence but without the requisite proportionof Filipino capital. From the language of the text, the terms franchise, certificate, and other form ofauthorization are qualified by the phrase for the operation of public utility. As such, these terms cannotand do not refer to the corporations primary franchise, which vests a body of men with corporateexistence, but to its secondary franchise, or the privilege to operate as public utility after thecorporation has already gone into being.

Primary fran

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