Case Digest in Corporation Law

CORPORATION - An artificial being created by operation of law having the right of succession, and the powers, attributes and properties expressly authorized by law and incident to its existence (Sec. 2).

1. G.R. No. L-23145November 29, 1968TESTATE ESTATE OF IDONAH SLADE PERKINS, deceased. RENATO D. TAYAG,ancillary administrator-appellee,vs.BENGUET CONSOLIDATED, INC.,oppositor-appellant.

FACTS:In March 1960, Idonah Perkins died in New York. She left behind properties here and abroad. One property she left behind were two stock certificates covering 33,002 shares of stocks of the Benguet Consolidated, Inc (BCI). Said stock certificates were in the possession of the Country Trust Company of New York (CTC-NY). CTC-NY was the domiciliary administrator of the estate of Perkins (obviously in the USA). Meanwhile, in 1963, Renato Tayag was appointed as the ancillary administrator (of the properties of Perkins she left behind in the Philippines).A dispute arose between CTC-NY and Tayag as to who between them is entitled to possess the stock certificates. A case ensued and eventually, the trial court ordered CTC-NY to turn over the stock certificates to Tayag. CTC-NY refused. Tayag then filed with the court a petition to have said stock certificates be declared lost and to compel BCI to issue new stock certificates in replacement thereof. The trial court granted Tayags petition.BCI assailed said order as it averred that it cannot possibly issue new stock certificates because the two stock certificates declared lost are not actually lost; that the trial court as well Tayag acknowledged that the stock certificates exists and that they are with CTC-NY; that according to BCIs by laws, it can only issue new stock certificates, in lieu of lost, stolen, or destroyed certificates of stocks, only after court of law has issued a final and executory order as to who really owns a certificate of stock.

ISSUE:Whether or not the arguments of Benguet Consolidated, Inc. are correct?

HELD:No. Benguet Consolidated is a corporation who owes its existence to Philippine laws. It has been given rights and privileges under the law. Corollary, it also has obligations under the law and one of those is to follow valid legal court orders. It is not immune from judicial control because it is domiciled here in the Philippines. BCI is a Philippine corporation owing full allegiance and subject to the unrestricted jurisdiction of local courts. Its shares of stock cannot therefore be considered in any wise as immune from lawful court orders. Further, to allow BCIs opposition is to render the court order against CTC-NY a mere scrap of paper. It will leave Tayag without any remedy simply because CTC-NY, a foreign entity refuses to comply with a valid court order. The final recourse then is for our local courts to create a legal fiction such that the stock certificates in issue be declared lost even though in reality they exist in the hands of CTC-NY. This is valid. As held time and again, fictions which the law may rely upon in the pursuit of legitimate ends have played an important part in its development.

Further still, the argument invoked by BCI that it can only issue new stock certificates in accordance with its bylaws is misplaced. It is worth noting that CTC-NY did not appeal the order of the court it simply refused to turn over the stock certificates hence ownership can be said to have been settled in favor of estate of Perkins here. Also, assuming that there really is a conflict between BCIs bylaws and the court order, what should prevail is the lawful court order. It would be highly irregular if court orders would yield to the bylaws of a corporation. Again, a corporation is not immune from judicial orders.

2. G.R. No. L-17295 July 30, 1962ANG PUE & COMPANY, ET AL.,plaintiffs-appellants,vs.SECRETARY OF COMMERCE AND INDUSTRY,defendant-appellee.FACTS:Ang Pue and Tan Siong organized a partnership for a termof 5 years. Their agreement provides that they can extend the partnership for another 5 years by mutual consent. In 1954, RA 1180 was enacted to regulate the retail business. Said law provided that, after its enactment, a partnership not wholly formed by Filipinos could continue to engage in the retail business until the expiration of its term so registration of said Ang was refused on the ground that the extension was in violation of the aforesaid Act.Plaintiff Company filed a petition for declaratory relief contending their original articles of partnership provided that they could extend the term of their partnership; that it constitutes a property right of which the partners cannot be deprived without due process or without their consent; and that the provisions of RA 1180 cannot adversely affect them. Lower court dismissed their petition. Plaintiff Co. interposed an appeal.ISSUE:WON extension of the partnership established before the enactment of RA 1180, is in violation of the said act.HELD:The SC ruled that organizing a corporation is not a matter of right but a mere privilege which may be enjoyed under the terms providedby state / law. When the partners amended the articles of partnership, the provisions ofRA 1180 were already in force, and so the right claimed by plaintiff-appellants to extend the original term of their partnership to another five years would be in violation of the clearintent and purpose of the said law.

To organize a corporation or a partnership that could claim a juridical personality of its own and transact business as such, is not a matter of absolute right but a privilege which may be enjoyed only under such terms as the State may deem necessary to impose. That the State, through Congress, and in the manner provided by law, had the right to enact Republic Act No. 1180 and to provide therein that only Filipinos and concerns wholly owned by Filipinos may engage in the retail business cannot be seriously disputed. That this provision was clearly intended to apply to partnership already existing at the time of the enactment of the law is clearly showing by its provision giving them the right to continue engaging in their retail business until the expiration of their term or life.

To argue that because the original articles of partnership provided that the partners could extend the term of the partnership, the provisions of Republic Act 1180 cannot be adversely affect appellants herein, is to erroneously assume that the aforesaid provision constitute a property right of which the partners can not be deprived without due process or without their consent. The agreement contain therein must be deemed subject to the law existing at the time when the partners came to agree regarding the extension. In the present case, as already stated, when the partners amended the articles of partnership, the provisions of Republic Act 1180 were already in force, and there can be not the slightest doubt that the right claimed by appellants to extend the original term of their partnership to another five years would be in violation of the clear intent and purpose of the law aforesaid.

THEORIES ON FORMATION OF A CORPORATION

1. Concession TheoryA corporation is an artificial creature without any existence until it has received the imprimatur of the state acting according to law, through the SEC (Tayag vs. Benguet Consolidated, Inc., 26 SCRA 242). Tayag rejects the Genossenschaft Theory which treats a corporation as the reality of the group as a social and legal entity, independent of state recognition and concession.

2. Theory of corporate enterprise or economic unitThe corporation is not merely an artificial being, but more of an aggregation of persons doing business, or an underlying business unit (Philippine Corporate Law, Cesar Villanueva, 2001 ed.). The theory draws its vitality from the fact that it is not legal fiction alone that creates a corporate entity but also the consent of those who will form the corporation to engage in a common venture or business for profit.

CREATURE OF THE LAWSection 16, Art. XII of the 1987 Philippine ConstitutionThe Congress shall not, except by general law, provide for the formation, organization, or regulation of private corporations. Government-owned or controlled corporations may be created or established by special charters in the interest of the common good and subject to the test of economic viability.

3. G.R. Nos. 84132-33 :December 10, 1990192 SCRA 257NATIONAL DEVELOPMENT COMPANY AND NEW AGRIX, INC., Petitioners,vs.PHILIPPINE VETERANS BANK, THE EX-OFFICIO SHERIFF and GODOFREDO QUILING, in his capacity as Deputy Sheriff of Calamba, Laguna, Respondents.

FACTS:Agrix Marketing executed in favor of respondent a real estate mortgage overthree parcels of land. Agrix later on went bankrupt. In order to rehabilitate the company, then President Marcos issued Presidential Decree No. 1717 which mandated, among others, the extinguishment of all the mortgages and liens attaching to the property of AGRIX, and creating Claims Committee to process claims against the company to administered by NDC. Respondent thereon filed claims against the company to be administered mainly by NDC. Respondent thereonfiledaclaimagainstthecompanybefore the Committee. Petitioners however filed a petition withthe RTC of Calamba, Laguna invoking theprovision ofthe law which cancels all mortgage liens against it. Respondent took measures to extra-judicially foreclose which the petitioners opposed by filing another case inthe same court. These cases were consolidated. The RTC held in favor of the respondent on the ground of unconstitutionality of the decree; mainly violation ofthe separation of powers, impairment of obligation of contracts, and violation ofthe equal protection clause.

Hence this petition.

ISSUE: WON the respondent estopped from questioning the constitutionality of the lawsince they first abided byit by filing aclaim with the Committee? WON PD 1717 unconstitutional?

HELD:On the issue of estoppel, the Court held that it could not apply in the present case since when the respondent filed his claim, President Marcos was the supreme ruler of the country and they could not question his acts even before the courts because of his absolute power over all government institutions when he was the President.The creation of New Agrix as mandated by the decree was also ruled as unconstitutional sinceitviolatedtheprohibitionthat the BatasangPambansa (Congress) shall not provide for the formation, organization, or regulation of private corporations unless such corporations are owned and controlled by the government. PD 1717 was held as unconstitutional on the other grounds that it was an invalid exercise of police power, It had no lawful subject and no lawful method. It violated due process by extinguishing all mortgages and liens and interests which are property rights unjustly taken. It also violated the equal protection clause bylumpingtogetherallsecuredandunsecuredcreditors.Italsoimpairedtheobligation of contracts, even thoughit only involved purely private interests.

4. G.R. No. 147402 January 14, 2004ENGR. RANULFO C. FELICIANO, in his capacity as General Manager of the Leyte Metropolitan Water District (LMWD), Tacloban City,petitioner,vs.COMMISSION ON AUDIT, Chairman CELSO D. GANGAN, Commissioners RAUL C. FLORES and EMMANUEL M. DALMAN, and Regional Director of COA Region VIII,respondents.

FACTS:A Special Audit Team from COA Regional Office No. VIII audited the accounts of Leyte Metropolitan Water District (LMWD). For its auditing services, COA requested payment but was denied by Petitioner Feliciano as General Manager of LMWD, citing PD198 and Section 18 of RA 6758. He further requested that COA cease all audit services, stop charging auditing fees and refund all auditing fees previously paid by LMWD.

On March 16, 2000, petitioner received the Resolution of COA Chairman Celso Gangan, holding that local water districts are not private corporations, and are therefore under its audit jurisdiction, as pronounced by the Supreme Court in the case of Davao City Water District vs. CSC and COA.

ISSUES: Whether or not a local water district created under PD198, as amended, is a government-owned or controlled corporation subject to the audit jurisdiction of COA; Whether or not Section 20 of PD 198, as amended, prohibits COAs certified public accountants from auditing local water districts; and Whether or not Section 18 of RA 6758 prohibits COA from charging government-owned and controlled corporations auditing fees.

HELD:The petition lacks merit. A local water district is considered a GOCC with an original charter. It exists as a corporation only by virtue of PD198, which expressly confers on LWDs corporate powers. Without PD198, LWDs would have no corporate powers. PD 198 constitutes the special enabling charter of LWDs. Thus, LWDs are government-owned and controlled corporations with a special charter, and not private corporations created under the Corporation Code.

LWDs, therefore, are subject to the audit jurisdiction of COA, as provided under Section 2(1), Article IX-D of the Constitution, which mandates the latter to audit all government agencies or instrumentalities, including government-owned and controlled corporations (GOCCs) with original charters, as well as other government-owned or controlled corporations without original charters.

As regards the second issue, the petitioner argues that PD 198 expressly prohibits COA auditors, or any government auditor for that matter, from auditing LWDs, as stated in Section 18 of the aforementioned law, which provides in part that auditing shall be performed by a certified public accountant not in the government service.

The Supreme Court however ruled that PD 198 cannot prevail over the Constitution, as it provides in Section 3, Article IX-C that no law shall be passed exempting any entity of the government or its subsidiary in any guise whatever, or any investment of public funds, from the jurisdiction of the Commission on Audit. And since there is an irreconcilable conflict between Section 20 of PD 198, prohibiting COA auditors from auditing LWDs, and Sections 2(1) and 3, Article IX-D of the Constitution, vesting in COA the power to audit all GOCCs, it is ruled that the second sentence of Section 20 of PD 198 is unconstitutional since it violates the aforementioned section of the Constitution.

The third issue is likewise bereft of merit. COA is not prohibited from charging GOCCs auditing fees. As opposed to petitioners contention, COA may charge GOCCs actual audit cost, but the same must be paid directly to COA and not to COA auditors. What Section 18 of RA 6758 prohibits is the receiving of COA personnel of any kind of compensation from any government entity except compensation paid directly by COA out of its appropriations and contributions. Petitioner has not alleged that COA charges LWDs auditing fees in excess of COAs actual audit cost. Neither has he alleged that the auditing fees are paid by LWDs directly to individual COA auditors.

5. G.R. No. L-19891 July 31, 1964J.R.S. BUSINESS CORPORATION, J.R. DA SILVA and A.J. BELTRAN,petitioners,vs.IMPERIAL INSURANCE, INC., MACARIO M. OFILADA, Sheriff of Manila andHON. AGUSTIN MONTESA, Judge of the Court of First Instance of Manila,respondents.Felipe N. Aurea for petitioners.Taada, Teehankee and Carreon for respondent Imperial Insurance, Inc.PAREDES,J.:

Petitioner J. R. Da Silva, is the President of the J.R.S. Business Corporation, an establishment duly franchised by the Congress of the Philippines, to conduct a messenger and delivery express service. On July 12, 1961, the respondent Imperial Insurance, Inc., presented with the CFI of Manila a complaint (Civ. Case No. 47520), for sum of money against the petitioner corporation. After the defendants therein have submitted their Answer, the parties entered into a Compromise Agreement, assisted by their respective counsels, the pertinent portions of which recite:

1) WHEREAS, the DEFENDANTS admit and confess their joint and solidary indebtedness to the PLAINTIFF in the full sum of PESOS SIXTY ONE THOUSAND ONE HUNDRED SEVENTY-TWO & 32/100 (P61,172.32), Philippine Currency, itemized as follows:a) PrincipalP50,000.00

b) Interest at 12% per annum5,706.14

c) Liquidated damages at 7% per annum3,330.58

d) Costs of suit135.60

e) Attorney's fees2,000.00

2) WHEREAS, the DEFENDANTS bind themselves, jointly and severally, and hereby promise to pay their aforementioned obligation to the PLAINTIFF at its business address at 301-305 Banquero St., (Ground Floor), Regina Building, Escolta, Manila, within sixty (60) days from March 16, 1962 or on or before May 14, 1962;3) WHEREAS, in the event the DEFENDANTS FAIL to pay in full the total amount of PESOS SIXTY ONE THOUSAND ONE HUNDRED SEVENTY TWO & 32/100 (P61,172.32), Philippine Currency, for any reason whatsoever, on May 14, 1962, the PLAINTIFF shall be entitled, as a matter of right, to move for the execution of the decision to be rendered in the above-entitled case by this Honorable Court based on this COMPROMISE AGREEMENT.

On March 17, 1962, the lower court rendered judgment embodying the contents of the said compromise agreement, the dispositive portion of which reads WHEREFORE, the Court hereby approves the above-quoted compromise agreement and renders judgment in accordance therewith, enjoining the parties to comply faithfully and strictly with the terms and conditions thereof, without special pronouncement as to costs.Wherefore, the parties respectfully pray that the foregoing stipulation of facts be admitted and approved by this Honorable Court, without prejudice to the parties adducing other evidence to prove their case not covered by this stipulation of facts.

On May 15, 1962, one day after the date fixed in the compromise agreement, within which the judgment debt would be paid, but was not, respondent Imperial Insurance Inc., filed a "Motion for the Insurance of a Writ of Execution". On May 23, 1962, a Writ of Execution was issued by respondent Sheriff of Manila and on May 26, 1962, Notices of Sale were sent out for the auction of the personal properties of the petitioner J.R.S. Business Corporation. On June 2, 1962, a Notice of Sale of the "whole capital stocks of the defendants JRS Business Corporation, the business name, right of operation, the whole assets, furnitures and equipments, the total liabilities, and Net Worth, books of accounts, etc., etc." of the petitioner corporation was, handed down. On June 9, the petitioner, thru counsel, presented an "Urgent Petition for Postponement of Auction Sale and for Release of Levy on the Business Name and Right to Operate of Defendant JRS Business Corporation", stating that petitioners were busy negotiating for a loan with which to pay the judgment debt; that the judgment was for money only and, therefore, plaintiff (respondent Insurance Company) was not authorized to take over and appropriate for its own use, the business name of the defendants; that the right to operate under the franchise, was not transferable and could not be considered a personal or immovable, property, subject to levy and sale. On June 10, 1962, a Supplemental Motion for Release of Execution, was filed by counsel of petitioner JRS Business Corporation, claiming that the capital stocks thereof, could not be levied upon and sold under execution. Under date of June 20, 1962, petitioner's counsel presented a pleading captioned "Very Urgent Motion for Postponement of Public Auction Sale and for Ruling on Motion for Release of Levy on theBusiness Name, Right to Operate and Capital Stocks of JRS Business Corporation". The auction sale was set for June 21, 1962. In said motion, petitioners alleged that the loan they had applied for, was to be secured within the next ten (10) days, and they would be able to discharge the judgment debt. Respondents opposed the said motion and on June 21, 1962, the lower court denied the motion for postponement of the auction sale.

In the sale which was conducted in the premises of the JRS Business Corporation at 1341 Perez St., Paco, Manila, all the properties of said corporation contained in the Notices of Sale dated May 26, 1962, and June 2, 1962 (the latter notice being for the whole capital stocks of the defendant, JRS Business Corporation, the business name, right of operation, the whole assets, furnitures and equipments, the total liabilities and Net Worth, books of accounts, etc., etc.), were bought by respondent Imperial Insurance, Inc., for P10,000.00, which was the highest bid offered. Immediately after the sale, respondent Insurance Company took possession of the proper ties and started running the affairs and operating the business of the JRS Business Corporation. Hence, the present appeal.

It would seem that the matters which need determination are (1) whether the respondent Judge acted without or in excess of his jurisdiction or with grave abuse of discretion in promulgating the Order of June 21, 1962, denying the motion for postponement of the scheduled sale at public auction, of the properties of petitioner; and (2) whether the business name or trade name, franchise (right to operate) and capital stocks of the petitioner are properties or property rights which could be the subject of levy, execution and sale.

The respondent Court's act of postponing the scheduled sale was within the discretion of respondent Judge, the exercise of which, one way or the other, did not constitute grave abuse of discretion and/or excess of jurisdiction. There was a decision rendered and the corresponding writ of execution was issued. Respondent Judge had jurisdiction over the matter and erroneous conclusions of law or fact, if any, committed in the exercise of such jurisdiction are merely errors of judgment, not correctible bycertiorari(Villa Rey Transit v. Bello, et al., L-18957, April 23, 1963, and cases cited therein.)

The corporation law, on forced sale of franchises, provides Any franchise granted to a corporation to collect tolls or to occupy, enjoy, or use public property or any portion of the public domain or any right of way over public property or the public domain, and any rights and privileges acquired under such franchise may be levied upon and sold under execution, together with the property necessary for the enjoyment, the exercise of the powers, and the receipt of the proceeds of such franchise or right of way, in the same manner and with like effect as any other property to satisfy any judgment against the corporation:Provided, That the sale of the franchise or right of way and the property necessary for the enjoyment, the exercise of the powers, and the receipt of the proceeds of said franchise or right of wayis especially decreedand ordered in the judgment: And provided, further, That the sale shall not become effective until confirmed by the court after due notice. (Sec. 56, Corporation Law.)

In the case ofGulf Refining Co. v. Cleveland Trust Co., 108 So., 158, it was held The first question then for decision is the meaning of the word "franchise" in the statute."A franchise is a special privilege conferred by governmental authority, and which does not belong to citizens of the country generally as a matter of common right. ... Its meaning depends more or less upon the connection in which the word is employed and the property and corporation to which it is applied. It may have different significations.

"For practical purposes, franchises, so far as relating to corporations, are divisible into (1) corporate or general franchises; and (2) special or secondary franchises. The former is the franchise to exist as a corporation, while the latter are certain rights and privileges conferred upon existing corporations, such as the right to use the streets of a municipality to lay pipes or tracks, erect poles or string wires." 2 Fletcher's Cyclopedia Corp. See. 1148; 14 C.J. p. 160; Adams v. Yazon & M. V. R. Co., 24 So. 200, 317, 28 So. 956, 77 Miss. 253, 60 L.R.A. 33 et seq.

The primary franchise of a corporation that is, the right to exist as such, is vested "in the individuals who compose the corporationand not in the corporation itself" (14 C.J. pp. 160, 161; Adams v. Railroad,supra; 2 Fletcher's Cyclopedia Corp. Secs. 1153, 1158; 3 Thompson on Corporations 2d Ed.] Secs. 2863, 2864),and cannot be conveyed in the absence of a legislative authority so to do(14A CJ. 543, 577; 1 Fletcher's Cyc. Corp. Sec. 1224; Memphis & L.R.R. Co. v. Berry 5 S. Ct. 299, 112 U.S. 609, 28 L.E.d. 837; Vicksburg Waterworks Co. v. Vicksburg, 26 S. Ct. 660, 202 U.S. 453, 50 L.E.d. 1102, 6 Ann. Cas. 253; Arthur v. Commercial & Railroad Bank, 9 Smedes & M. 394, 48 Am. Dec. 719),but the specify or secondary franchises of a corporation are vested in the corporation and may ordinarily be conveyed or mortgaged under a general power granted to a corporation to dispose of its property(Adams v. Railroad,supra; 14A C.J. 542, 557; 3 Thompson on Corp. [2nd Ed.] Sec. 2909),except such special or secondary franchises as are charged with a public use(2 Fletcher's Cyc. Corp. see. 1225; 14A C.J. 544; 3 Thompson on Corp. [2d Ed.] sec. 2908; Arthur v. Commercial & R.R. Bank,supra; McAllister v. Plant, 54 Miss. 106).

The right to operate a messenger and express delivery service, by virtue of a legislative enactment, is admittedly a secondary franchise (R.A. No. 3260, entitled "An Act granting the JRS Business Corporation a franchise to conduct a messenger and express service)" and, as such, under our corporation law, is subject to levy and sale on execution together and including all the property necessary for the enjoyment thereof. The law, however, indicates the procedure under which the same (secondary franchise and the properties necessary for its enjoyment) may be sold under execution. Said franchise can be sold under execution, when such sale is especially decreed and ordered in the judgment and it becomes effective only when the sale is confirmed by the Court after due notice (Sec. 56, Corp. Law). The compromise agreement and the judgment based thereon, do not contain any special decree or order making the franchise answerable for the judgment debt. The same thing may be stated with respect to petitioner's trade name or business name and its capital stock. Incidentally, the trade name or business name corresponds to the initials of the President of the petitioner corporation and there can be no serious dispute regarding the fact that a trade name or business name and capital stock are necessarily included in the enjoyment of the franchise. Like that of a franchise, the law mandates, that property necessary for the enjoyment of said franchise, can only be sold to satisfy a judgment debt if the decision especially so provides. As We have stated heretofore, no such directive appears in the decision. Moreover, a trade name or business name cannot be sold separately from the franchise, and the capital stock of the petitioner corporation or any other corporation, for the matter, represents the interest and is the property of stockholders in the corporation, who can only be deprived thereof in the manner provided by law (Therbee v. Baker, 35 N.E. Eq. [8 Stew.] 501, 505; In re Wells' Estate, 144 N.W. 174, 177, Wis. 294, cited in 6 Words and Phrases, 109).

It, therefore, results that the inclusion of the franchise, the trade name and/or business name and the capital stock of the petitioner corporation, in the sale of the properties of the JRS Business Corporation, has no justification. The sale of the properties of petitioner corporation is set aside, in so far as it authorizes the levy and sale of its franchise, trade name and capital stocks. Without pronouncement as to costs.

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