G.R. No.

L-23145

November 29, 1968

TESTATE ESTATE OF IDONAH SLADE PERKINS, deceased. RENATO D. TAYAG, ancillary administratorappellee,
vs.
BENGUET CONSOLIDATED, INC., oppositor-appellant.
Cirilo F. Asperillo, Jr., for ancillary administrator-appellee.
Ross, Salcedo, Del Rosario, Bito and Misa for oppositor-appellant.
FERNANDO, J.:
Confronted by an obstinate and adamant refusal of the domiciliary administrator, the County Trust Company of
New York, United States of America, of the estate of the deceased Idonah Slade Perkins, who died in New
York City on March 27, 1960, to surrender to the ancillary administrator in the Philippines the stock certificates
owned by her in a Philippine corporation, Benguet Consolidated, Inc., to satisfy the legitimate claims of local
creditors, the lower court, then presided by the Honorable Arsenio Santos, now retired, issued on May 18,
1964, an order of this tenor: "After considering the motion of the ancillary administrator, dated February 11,
1964, as well as the opposition filed by the Benguet Consolidated, Inc., the Court hereby (1) considers as lost
for all purposes in connection with the administration and liquidation of the Philippine estate of Idonah Slade
Perkins the stock certificates covering the 33,002 shares of stock standing in her name in the books of the
Benguet Consolidated, Inc., (2) orders said certificates cancelled, and (3) directs said corporation to issue new
certificates in lieu thereof, the same to be delivered by said corporation to either the incumbent ancillary
administrator or to the Probate Division of this Court." 1
From such an order, an appeal was taken to this Court not by the domiciliary administrator, the County Trust
Company of New York, but by the Philippine corporation, the Benguet Consolidated, Inc. The appeal cannot
possibly prosper. The challenged order represents a response and expresses a policy, to paraphrase
Frankfurter, arising out of a specific problem, addressed to the attainment of specific ends by the use of
specific remedies, with full and ample support from legal doctrines of weight and significance.
The facts will explain why. As set forth in the brief of appellant Benguet Consolidated, Inc., Idonah Slade
Perkins, who died on March 27, 1960 in New York City, left among others, two stock certificates covering
33,002 shares of appellant, the certificates being in the possession of the County Trust Company of New York,
which as noted, is the domiciliary administrator of the estate of the deceased. 2 Then came this portion of the
appellant's brief: "On August 12, 1960, Prospero Sanidad instituted ancillary administration proceedings in the
Court of First Instance of Manila; Lazaro A. Marquez was appointed ancillary administrator, and on January
22, 1963, he was substituted by the appellee Renato D. Tayag. A dispute arose between the domiciary
administrator in New York and the ancillary administrator in the Philippines as to which of them was entitled to
the possession of the stock certificates in question. On January 27, 1964, the Court of First Instance of Manila
ordered the domiciliary administrator, County Trust Company, to "produce and deposit" them with the ancillary
administrator or with the Clerk of Court. The domiciliary administrator did not comply with the order, and on
February 11, 1964, the ancillary administrator petitioned the court to "issue an order declaring the certificate or
certificates of stocks covering the 33,002 shares issued in the name of Idonah Slade Perkins by Benguet
Consolidated, Inc., be declared [or] considered as lost." 3
It is to be noted further that appellant Benguet Consolidated, Inc. admits that "it is immaterial" as far as it is
concerned as to "who is entitled to the possession of the stock certificates in question; appellant opposed the
petition of the ancillary administrator because the said stock certificates are in existence, they are today in the
possession of the domiciliary administrator, the County Trust Company, in New York, U.S.A...." 4
It is its view, therefore, that under the circumstances, the stock certificates cannot be declared or considered
as lost. Moreover, it would allege that there was a failure to observe certain requirements of its by-laws before
new stock certificates could be issued. Hence, its appeal.

As was made clear at the outset of this opinion, the appeal lacks merit. The challenged order constitutes an
emphatic affirmation of judicial authority sought to be emasculated by the wilful conduct of the domiciliary
administrator in refusing to accord obedience to a court decree. How, then, can this order be stigmatized as
illegal?
As is true of many problems confronting the judiciary, such a response was called for by the realities of the
situation. What cannot be ignored is that conduct bordering on wilful defiance, if it had not actually reached it,
cannot without undue loss of judicial prestige, be condoned or tolerated. For the law is not so lacking in
flexibility and resourcefulness as to preclude such a solution, the more so as deeper reflection would make
clear its being buttressed by indisputable principles and supported by the strongest policy considerations.
It can truly be said then that the result arrived at upheld and vindicated the honor of the judiciary no less than
that of the country. Through this challenged order, there is thus dispelled the atmosphere of contingent
frustration brought about by the persistence of the domiciliary administrator to hold on to the stock certificates
after it had, as admitted, voluntarily submitted itself to the jurisdiction of the lower court by entering its
appearance through counsel on June 27, 1963, and filing a petition for relief from a previous order of March
15, 1963.
Thus did the lower court, in the order now on appeal, impart vitality and effectiveness to what was decreed.
For without it, what it had been decided would be set at naught and nullified. Unless such a blatant disregard
by the domiciliary administrator, with residence abroad, of what was previously ordained by a court order could
be thus remedied, it would have entailed, insofar as this matter was concerned, not a partial but a well-nigh
complete paralysis of judicial authority.
1. Appellant Benguet Consolidated, Inc. did not dispute the power of the appellee ancillary administrator to
gain control and possession of all assets of the decedent within the jurisdiction of the Philippines. Nor could it.
Such a power is inherent in his duty to settle her estate and satisfy the claims of local creditors. 5 As Justice
Tuason speaking for this Court made clear, it is a "general rule universally recognized" that administration,
whether principal or ancillary, certainly "extends to the assets of a decedent found within the state or country
where it was granted," the corollary being "that an administrator appointed in one state or country has no
power over property in another state or country." 6
It is to be noted that the scope of the power of the ancillary administrator was, in an earlier case, set forth by
Justice Malcolm. Thus: "It is often necessary to have more than one administration of an estate. When a
person dies intestate owning property in the country of his domicile as well as in a foreign country,
administration is had in both countries. That which is granted in the jurisdiction of decedent's last domicile is
termed the principal administration, while any other administration is termed the ancillary administration. The
reason for the latter is because a grant of administration does not ex proprio vigore have any effect beyond the
limits of the country in which it is granted. Hence, an administrator appointed in a foreign state has no authority
in the [Philippines]. The ancillary administration is proper, whenever a person dies, leaving in a country other
than that of his last domicile, property to be administered in the nature of assets of the deceased liable for his
individual debts or to be distributed among his heirs." 7
It would follow then that the authority of the probate court to require that ancillary administrator's right to "the
stock certificates covering the 33,002 shares ... standing in her name in the books of [appellant] Benguet
Consolidated, Inc...." be respected is equally beyond question. For appellant 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.
Our holding in Wells Fargo Bank and Union v. Collector of Internal Revenue 8 finds application. "In the instant
case, the actual situs of the shares of stock is in the Philippines, the corporation being domiciled [here]." To the
force of the above undeniable proposition, not even appellant is insensible. It does not dispute it. Nor could it
successfully do so even if it were so minded.

2. In the face of such incontrovertible doctrines that argue in a rather conclusive fashion for the legality of the
challenged order, how does appellant, Benguet Consolidated, Inc. propose to carry the extremely heavy
burden of persuasion of precisely demonstrating the contrary? It would assign as the basic error allegedly
committed by the lower court its "considering as lost the stock certificates covering 33,002 shares of Benguet
belonging to the deceased Idonah Slade Perkins, ..." 9 More specifically, appellant would stress that the "lower
court could not "consider as lost" the stock certificates in question when, as a matter of fact, his Honor the trial
Judge knew, and does know, and it is admitted by the appellee, that the said stock certificates are in existence
and are today in the possession of the domiciliary administrator in New York." 10
There may be an element of fiction in the above view of the lower court. That certainly does not suffice to call
for the reversal of the appealed order. Since there is a refusal, persistently adhered to by the domiciliary
administrator in New York, to deliver the shares of stocks of appellant corporation owned by the decedent to
the ancillary administrator in the Philippines, there was nothing unreasonable or arbitrary in considering them
as lost and requiring the appellant to issue new certificates in lieu thereof. Thereby, the task incumbent under
the law on the ancillary administrator could be discharged and his responsibility fulfilled.
Any other view would result in the compliance to a valid judicial order being made to depend on the
uncontrolled discretion of the party or entity, in this case domiciled abroad, which thus far has shown the
utmost persistence in refusing to yield obedience. Certainly, appellant would not be heard to contend in all
seriousness that a judicial decree could be treated as a mere scrap of paper, the court issuing it being
powerless to remedy its flagrant disregard.
It may be admitted of course that such alleged loss as found by the lower court did not correspond exactly with
the facts. To be more blunt, the quality of truth may be lacking in such a conclusion arrived at. It is to be
remembered however, again to borrow from Frankfurter, "that fictions which the law may rely upon in the
pursuit of legitimate ends have played an important part in its development." 11
Speaking of the common law in its earlier period, Cardozo could state fictions "were devices to advance the
ends of justice, [even if] clumsy and at times offensive." 12 Some of them have persisted even to the present,
that eminent jurist, noting "the quasi contract, the adopted child, the constructive trust, all of flourishing vitality,
to attest the empire of "as if" today." 13 He likewise noted "a class of fictions of another order, the fiction which is
a working tool of thought, but which at times hides itself from view till reflection and analysis have brought it to
the light."14
What cannot be disputed, therefore, is the at times indispensable role that fictions as such played in the law.
There should be then on the part of the appellant a further refinement in the catholicity of its condemnation of
such judicial technique. If ever an occasion did call for the employment of a legal fiction to put an end to the
anomalous situation of a valid judicial order being disregarded with apparent impunity, this is it. What is thus
most obvious is that this particular alleged error does not carry persuasion.
3. Appellant Benguet Consolidated, Inc. would seek to bolster the above contention by its invoking one of the
provisions of its by-laws which would set forth the procedure to be followed in case of a lost, stolen or
destroyed stock certificate; it would stress that in the event of a contest or the pendency of an action regarding
ownership of such certificate or certificates of stock allegedly lost, stolen or destroyed, the issuance of a new
certificate or certificates would await the "final decision by [a] court regarding the ownership [thereof]." 15
Such reliance is misplaced. In the first place, there is no such occasion to apply such by-law. It is admitted that
the foreign domiciliary administrator did not appeal from the order now in question. Moreover, there is likewise
the express admission of appellant that as far as it is concerned, "it is immaterial ... who is entitled to the
possession of the stock certificates ..." Even if such were not the case, it would be a legal absurdity to impart
to such a provision conclusiveness and finality. Assuming that a contrariety exists between the above by-law
and the command of a court decree, the latter is to be followed.

It is understandable, as Cardozo pointed out, that the Constitution overrides a statute, to which, however, the
judiciary must yield deference, when appropriately invoked and deemed applicable. It would be most highly
unorthodox, however, if a corporate by-law would be accorded such a high estate in the jural order that a court
must not only take note of it but yield to its alleged controlling force.
The fear of appellant of a contingent liability with which it could be saddled unless the appealed order be set
aside for its inconsistency with one of its by-laws does not impress us. Its obedience to a lawful court order
certainly constitutes a valid defense, assuming that such apprehension of a possible court action against it
could possibly materialize. Thus far, nothing in the circumstances as they have developed gives substance to
such a fear. Gossamer possibilities of a future prejudice to appellant do not suffice to nullify the lawful exercise
of judicial authority.
4. What is more the view adopted by appellant Benguet Consolidated, Inc. is fraught with implications at war
with the basic postulates of corporate theory.
We start with the undeniable premise that, "a corporation is an artificial being created by operation of
law...."16 It owes its life to the state, its birth being purely dependent on its will. As Berle so aptly stated:
"Classically, a corporation was conceived as an artificial person, owing its existence through creation by a
sovereign power."17As a matter of fact, the statutory language employed owes much to Chief Justice Marshall,
who in the Dartmouth College decision defined a corporation precisely as "an artificial being, invisible,
intangible, and existing only in contemplation of law." 18
The well-known authority Fletcher could summarize the matter thus: "A corporation is not in fact and in reality
a person, but the law treats it as though it were a person by process of fiction, or by regarding it as an artificial
person distinct and separate from its individual stockholders.... It owes its existence to law. It is an artificial
person created by law for certain specific purposes, the extent of whose existence, powers and liberties is
fixed by its charter."19 Dean Pound's terse summary, a juristic person, resulting from an association of human
beings granted legal personality by the state, puts the matter neatly.20
There is thus a rejection of Gierke's genossenchaft theory, the basic theme of which to quote from Friedmann,
"is the reality of the group as a social and legal entity, independent of state recognition and concession." 21 A
corporation as known to Philippine jurisprudence is a creature without any existence until it has received the
imprimatur of the state according to law. It is logically inconceivable therefore that it will have rights and
privileges of a higher priority than that of its creator. More than that, it cannot legitimately refuse to yield
obedience to acts of its state organs, certainly not excluding the judiciary, whenever called upon to do so.
As a matter of fact, a corporation once it comes into being, following American law still of persuasive authority
in our jurisdiction, comes more often within the ken of the judiciary than 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 as ascertained in an appropriate legal proceeding is cast upon it.
To assert that it can choose which court order to follow and which to disregard is to confer upon it not
autonomy which may be conceded but license which cannot be tolerated. It is to argue that it may, when so
minded, overrule the state, the source of its very existence; it is to contend that what any of its governmental
organs may lawfully require could be ignored at will. So extravagant a claim cannot possibly merit approval.
5. One last point. In Viloria v. Administrator of Veterans Affairs, 22 it was shown that in a guardianship
proceedings then pending in a lower court, the United States Veterans Administration filed a motion for the
refund of a certain sum of money paid to the minor under guardianship, alleging that the lower court had
previously granted its petition to consider the deceased father as not entitled to guerilla benefits according to a
determination arrived at by its main office in the United States. The motion was denied. In seeking a
reconsideration of such order, the Administrator relied on an American federal statute making his decisions
"final and conclusive on all questions of law or fact" precluding any other American official to examine the

matter anew, "except a judge or judges of the United States court." 23 Reconsideration was denied, and the
Administrator appealed.
In an opinion by Justice J.B.L. Reyes, we sustained the lower court. Thus: "We are of the opinion that the
appeal should be rejected. The provisions of the U.S. Code, invoked by the appellant, make the decisions of
the U.S. Veterans' Administrator final and conclusive when made on claims property submitted to him for
resolution; but they are not applicable to the present case, where the Administrator is not acting as a judge but
as a litigant. There is a great difference between actions against the Administrator (which must be filed strictly
in accordance with the conditions that are imposed by the Veterans' Act, including the exclusive review by
United States courts), and those actions where the Veterans' Administrator seeks a remedy from our courts
and submits to their jurisdiction by filing actions therein. Our attention has not been called to any law or treaty
that would make the findings of the Veterans' Administrator, in actions where he is a party, conclusive on our
courts. That, in effect, would deprive our tribunals of judicial discretion and render them mere subordinate
instrumentalities of the Veterans' Administrator."
It is bad enough as the Viloria decision made patent for our judiciary to accept as final and conclusive,
determinations made by foreign governmental agencies. It is infinitely worse if through the absence of any
coercive power by our courts over juridical persons within our jurisdiction, the force and effectivity of their
orders could be made to depend on the whim or caprice of alien entities. It is difficult to imagine of a situation
more offensive to the dignity of the bench or the honor of the country.
Yet that would be the effect, even if unintended, of the proposition to which appellant Benguet Consolidated
seems to be firmly committed as shown by its failure to accept the validity of the order complained of; it seeks
its reversal. Certainly we must at all pains see to it that it does not succeed. The deplorable consequences
attendant on appellant prevailing attest to the necessity of negative response from us. That is what appellant
will get.
That is all then that this case presents. It is obvious why the appeal cannot succeed. It is always easy to
conjure extreme and even oppressive possibilities. That is not decisive. It does not settle the issue. What
carries weight and conviction is the result arrived at, the just solution obtained, grounded in the soundest of
legal doctrines and distinguished by its correspondence with what a sense of realism requires. For through the
appealed order, the imperative requirement of justice according to law is satisfied and national dignity and
honor maintained.
WHEREFORE, the appealed order of the Honorable Arsenio Santos, the Judge of the Court of First Instance,
dated May 18, 1964, is affirmed. With costs against oppositor-appelant Benguet Consolidated, Inc.

ANG PUE & COMPANY, ET AL., plaintiffs-appellants,

vs.
SECRETARY OF COMMERCE AND INDUSTRY, defendant-appellee.
Felicisimo E. Escaran for plaintiffs-appellants.
Office of the Solicitor General for defendant-appellee.
DIZON, J.:
Action for declaratory relief filed in the Court of First Instance of Iloilo by Ang Pue & Company, Ang Pue and
Tan Siong against the Secretary of Commerce and Industry to secure judgment "declaring that plaintiffs could
extend for five years the term of the partnership pursuant to the provisions of plaintiffs' Amendment to the
Article of Co-partnership."
The answer filed by the defendant alleged, in substance, that the extension for another five years of the term
of the plaintiffs' partnership would be in violation of the provisions of Republic Act No. 1180.
It appears that on May 1, 1953, Ang Pue and Tan Siong, both Chinese citizens, organized the partnership Ang
Pue & Company for a term of five years from May 1, 1953, extendible by their mutual consent. The purpose of
the partnership was "to maintain the business of general merchandising, buying and selling at wholesale and
retail, particularly of lumber, hardware and other construction materials for commerce, either native or foreign."
The corresponding articles of partnership (Exhibit B) were registered in the Office of the Securities &
Exchange Commission on June 16, 1953.
On June 19, 1954 Republic Act No. 1180 was enacted to regulate the retail business. It provided, among other
things, 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.
On April 15, 1958 prior to the expiration of the five-year term of the partnership Ang Pue & Company, but
after the enactment of the Republic Act 1180, the partners already mentioned amended the original articles of
part ownership (Exhibit B) so as to extend the term of life of the partnership to another five years. When the
amended articles were presented for registration in the Office of the Securities & Exchange Commission on
April 16, 1958, registration was refused upon the ground that the extension was in violation of the aforesaid
Act.
From the decision of the lower court dismissing the action, with costs, the plaintiffs interposed this appeal.

RULING:
Corporation law; Corporation; Concept and nature.A corporation is an artificial being created by operation of
law (Sec. 2, Act No. 1459). A corporation as known to Philippine jurisprudence is a creature without any
existence until it has received the imprimatur of the state acting according to law. It is logically inconceivable
therefore that it will have rights and privileges of a higher priority than that of its creator. More than that, it
cannot legitimately refuse to yield obedience to acts of its state organs, certainly not excluding the judiciary.
whenever called upon .to do so.
A corporation is not in fact and in reality a person, but the law treats it as though it were a person by process of
fiction, or by regarding it as an artificial icial person distinct and separate from its individual stockholders (1
Fletcher, Cyclopedia Corporations, pp. 19-20). [Tayag vs. Benguet Consolidated, Inc., 26 SCRA 242(1968)]
G.R. No. L-17295

July 30, 1962

The question before us is too clear to require an extended discussion. 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 can not 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.
WHEREFORE, the judgment appealed from is affirmed, with costs.
RULING:
Partnership; To organize not absolute right.To organize a corporation or 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. [Ang
Pue & Co. vs. Sec. of Commerce and Industry, 5 SCRA 645(1962)]

After the submission by the parties of their respective pleadings, the trial court rendered the impugned
decision. Judge Francisco Ma. Guerrero annulled not only the challenged provision, viz., Sec. 4 (1), but the
entire Pres. Decree No. 1717 on the grounds that: (1) the presidential exercise of legislative power was a
violation of the principle of separation of powers; (2) the law impaired the obligation of contracts; and (3) the
decree violated the equal protection clause. The motion for reconsideration of this decision having been
denied, the present petition was filed.: rd
The petition was originally assigned to the Third Division of this Court but because of the constitutional
questions involved it was transferred to the Court en banc. On August 30, 1988, the Court granted the
petitioner's prayer for a temporary restraining order and instructed the respondents to cease and desist from
conducting a public auction sale of the lands in question. After the Solicitor General and the private respondent
had filed their comments and the petitioners their reply, the Court gave due course to the petition and ordered
the parties to file simultaneous memoranda. Upon compliance by the parties, the case was deemed submitted.
The petitioners contend that the private respondent is now estopped from contesting the validity of the decree.
In support of this contention, it cites the recent case of Mendoza v. Agrix Marketing, Inc., 1 where the
constitutionality of Pres. Decree No. 1717 was also raised but not resolved. The Court, after noting that the
petitioners had already filed their claims with the AGRIX Claims Committee created by the decree, had simply
dismissed the petition on the ground of estoppel.
The petitioners stress that in the case at bar the private respondent also invoked the provisions of Pres.
Decree No. 1717 by filing a claim with the AGRIX Claims Committee. Failing to get results, it sought to
foreclose the real estate mortgage executed by AGRIX in its favor, which had been extinguished by the
decree. It was only when the petitioners challenged the foreclosure on the basis of Sec. 4 (1) of the decree,
that the private respondent attacked the validity of the provision. At that stage, however, consistent with
Mendoza, the private respondent was already estopped from questioning the constitutionality of the decree.
The Court does not agree that the principle of estoppel is applicable.

[G.R. Nos. 84132-33 : December 10, 1990.]

192 SCRA 257
NATIONAL 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.

It is not denied that the private respondent did file a claim with the AGRIX Claims Committee pursuant to this
decree. It must be noted, however, that this was done in 1980, when President Marcos was the absolute ruler
of this country and his decrees were the absolute law. Any judicial challenge to them would have been futile,
not to say foolhardy. The private respondent, no less than the rest of the nation, was aware of that reality and
knew it had no choice under the circumstances but to conform.: nad
It is true that there were a few venturesome souls who dared to question the dictator's decisions before the
courts of justice then. The record will show, however, that not a single act or issuance of President Marcos was
ever declared unconstitutional, not even by the highest court, as long as he was in power. To rule now that the
private respondent is estopped for having abided with the decree instead of boldly assailing it is to close our
eyes to a cynical fact of life during that repressive time.

DECISION

CRUZ, J.:

This case involves the constitutionality of a presidential decree which, like all other issuances of President
Marcos during his regime, was at that time regarded as sacrosanct. It is only now, in a freer atmosphere, that
his acts are being tested by the touchstone of the fundamental law that even then was supposed to limit
presidential action.: rd
The particular enactment in question is Pres. Decree No. 1717, which ordered the rehabilitation of the Agrix
Group of Companies to be administered mainly by the National Development Company. The law outlined the
procedure for filing claims against the Agrix companies and created a Claims Committee to process these
claims. Especially relevant to this case, and noted at the outset, is Sec. 4(1) thereof providing that "all
mortgages and other liens presently attaching to any of the assets of the dissolved corporations are hereby
extinguished."
Earlier, the Agrix Marketing, Inc. (AGRIX) had executed in favor of private respondent Philippine Veterans
Bank a real estate mortgage dated July 7, 1978, over three (3) parcels of land situated in Los Baos, Laguna.
During the existence of the mortgage, AGRIX went bankrupt. It was for the expressed purpose of salvaging
this and the other Agrix companies that the aforementioned decree was issued by President Marcos.
Pursuant thereto, the private respondent filed a claim with the AGRIX Claims Committee for the payment of its
loan credit. In the meantime, the New Agrix, Inc. and the National Development Company, petitioners herein,
invoking Sec. 4 (1) of the decree, filed a petition with the Regional Trial Court of Calamba, Laguna, for the
cancellation of the mortgage lien in favor of the private respondent. For its part, the private respondent took
steps to extrajudicially foreclose the mortgage, prompting the petitioners to file a second case with the same
court to stop the foreclosure. The two cases were consolidated.

This case must be distinguished from Mendoza, where the petitioners, after filing their claims with the AGRIX
Claims Committee, received in settlement thereof shares of stock valued at P40,000.00 without protest or
reservation. The herein private respondent has not been paid a single centavo on its claim, which was kept
pending for more than seven years for alleged lack of supporting papers. Significantly, the validity of that claim
was not questioned by the petitioner when it sought to restrain the extrajudicial foreclosure of the mortgage by
the private respondent. The petitioner limited itself to the argument that the private respondent was estopped
from questioning the decree because of its earlier compliance with its provisions.
Independently of these observations, there is the consideration that an affront to the Constitution cannot be
allowed to continue existing simply because of procedural inhibitions that exalt form over substance.
The Court is especially disturbed by Section 4(1) of the decree, quoted above, extinguishing all mortgages and
other liens attaching to the assets of AGRIX. It also notes, with equal concern, the restriction in Subsection (ii)
thereof that all "unsecured obligations shall not bear interest" and in Subsection (iii) that "all accrued interests,
penalties or charges as of date hereof pertaining to the obligations, whether secured or unsecured, shall not
be recognized."
These provisions must be read with the Bill of Rights, where it is clearly provided in Section 1 that "no person
shall be deprived of life, liberty or property without due course of law nor shall any person be denied the equal
protection of the law" and in Section 10 that "no law impairing the obligation of contracts shall be passed."
In defending the decree, the petitioners argue that property rights, like all rights, are subject to regulation
under the police power for the promotion of the common welfare. The contention is that this inherent power of
the state may be exercised at any time for this purpose so long as the taking of the property right, even if
based on contract, is done with due process of law.
This argument is an over-simplification of the problem before us. The police power is not a panacea for all
constitutional maladies. Neither does its mere invocation conjure an instant and automatic justification for
every act of the government depriving a person of his life, liberty or property.

A legislative act based on the police power requires the concurrence of a lawful subject and a lawful method.
In more familiar words, a) the interests of the public generally, as distinguished from those of a particular class,
should justify the interference of the state; and b) the means employed are reasonably necessary for the
accomplishment of the purpose and not unduly oppressive upon individuals. 2
Applying these criteria to the case at bar, the Court finds first of all that the interests of the public are not
sufficiently involved to warrant the interference of the government with the private contracts of AGRIX. The
decree speaks vaguely of the "public, particularly the small investors," who would be prejudiced if the
corporation were not to be assisted. However, the record does not state how many there are of such investors,
and who they are, and why they are being preferred to the private respondent and other creditors of AGRIX
with vested property rights.:-cralaw
The public interest supposedly involved is not identified or explained. It has not been shown that by the
creation of the New Agrix, Inc. and the extinction of the property rights of the creditors of AGRIX, the interests
of the public as a whole, as distinguished from those of a particular class, would be promoted or protected.
The indispensable link to the welfare of the greater number has not been established. On the contrary, it would
appear that the decree was issued only to favor a special group of investors who, for reasons not given, have
been preferred to the legitimate creditors of AGRIX.
Assuming there is a valid public interest involved, the Court still finds that the means employed to rehabilitate
AGRIX fall far short of the requirement that they shall not be unduly oppressive. The oppressiveness is patent
on the face of the decree. The right to property in all mortgages, liens, interests, penalties and charges owing
to the creditors of AGRIX is arbitrarily destroyed. No consideration is paid for the extinction of the mortgage
rights. The accrued interests and other charges are simply rejected by the decree. The right to property is
dissolved by legislative fiat without regard to the private interest violated and, worse, in favor of another private
interest.
A mortgage lien is a property right derived from contract and so comes under the protection of the Bill of
Rights. So do interests on loans, as well as penalties and charges, which are also vested rights once they
accrue. Private property cannot simply be taken by law from one person and given to another without
compensation and any known public purpose. This is plain arbitrariness and is not permitted under the
Constitution.
And not only is there arbitrary taking, there is discrimination as well. In extinguishing the mortgage and other
liens, the decree lumps the secured creditors with the unsecured creditors and places them on the same level
in the prosecution of their respective claims. In this respect, all of them are considered unsecured creditors.
The only concession given to the secured creditors is that their loans are allowed to earn interest from the date
of the decree, but that still does not justify the cancellation of the interests earned before that date. Such
interests, whether due to the secured or the unsecured creditors, are all extinguished by the decree. Even
assuming such cancellation to be valid, we still cannot see why all kinds of creditors, regardless of security,
are treated alike.
Under the equal protection clause, all persons or things similarly situated must be treated alike, both in the
privileges conferred and the obligations imposed. Conversely, all persons or things differently situated should
be treated differently. In the case at bar, persons differently situated are similarly treated, in disregard of the
principle that there should be equality only among equals.- nad
One may also well wonder why AGRIX was singled out for government help, among other corporations where
the stockholders or investors were also swindled. It is not clear why other companies entitled to similar
concern were not similarly treated. And surely, the stockholders of the private respondent, whose mortgage
lien had been cancelled and legitimate claims to accrued interests rejected, were no less deserving of
protection, which they did not get. The decree operated, to use the words of a celebrated case, 3 "with an evil
eye and an uneven hand."
On top of all this, New Agrix, Inc. was created by special decree notwithstanding the provision of Article XIV,
Section 4 of the 1973 Constitution, then in force, that:
SEC. 4. The Batasang Pambansa shall not, except by general law, provide for the formation, organization, or
regulation of private corporations, unless such corporations are owned or controlled by the Government or any
subdivision or instrumentality thereof. 4
The new corporation is neither owned nor controlled by the government. The National Development
Corporation was merely required to extend a loan of not more than P10,000,000.00 to New Agrix, Inc. Pending
payment thereof, NDC would undertake the management of the corporation, but with the obligation of making
periodic reports to the Agrix board of directors. After payment of the loan, the said board can then appoint its
own management. The stocks of the new corporation are to be issued to the old investors and stockholders of
AGRIX upon proof of their claims against the abolished corporation. They shall then be the owners of the new
corporation. New Agrix, Inc. is entirely private and so should have been organized under the Corporation Law
in accordance with the above-cited constitutional provision.

The Court also feels that the decree impairs the obligation of the contract between AGRIX and the private
respondent without justification. While it is true that the police power is superior to the impairment clause, the
principle will apply only where the contract is so related to the public welfare that it will be considered
congenitally susceptible to change by the legislature in the interest of the greater number. 5 Most present-day
contracts are of that nature. But as already observed, the contracts of loan and mortgage executed by AGRIX
are purely private transactions and have not been shown to be affected with public interest. There was
therefore no warrant to amend their provisions and deprive the private respondent of its vested property rights.
It is worth noting that only recently in the case of the Development Bank of the Philippines v. NLRC, 6 we
sustained the preference in payment of a mortgage creditor as against the argument that the claims of
laborers should take precedence over all other claims, including those of the government. In arriving at this
ruling, the Court recognized the mortgage lien as a property right protected by the due process and contract
clauses notwithstanding the argument that the amendment in Section 110 of the Labor Code was a proper
exercise of the police power.: nad
The Court reaffirms and applies that ruling in the case at bar.
Our finding, in sum, is that Pres. Decree No. 1717 is an invalid exercise of the police power, not being in
conformity with the traditional requirements of a lawful subject and a lawful method. The extinction of the
mortgage and other liens and of the interest and other charges pertaining to the legitimate creditors of AGRIX
constitutes taking without due process of law, and this is compounded by the reduction of the secured
creditors to the category of unsecured creditors in violation of the equal protection clause. Moreover, the new
corporation, being neither owned nor controlled by the Government, should have been created only by general
and not special law. And insofar as the decree also interferes with purely private agreements without any
demonstrated connection with the public interest, there is likewise an impairment of the obligation of the
contract.
With the above pronouncements, we feel there is no more need to rule on the authority of President Marcos to
promulgate Pres. Decree No. 1717 under Amendment No. 6 of the 1973 Constitution. Even if he had such
authority, the decree must fall just the same because of its violation of the Bill of Rights.
WHEREFORE, the petition is DISMISSED. Pres. Decree No. 1717 is declared UNCONSTITUTIONAL. The
temporary restraining order dated August 30, 1988, is LIFTED. Costs against the petitioners.- nad
SO ORDERED.
RULING:
Same; Same; Presidential Decree No. 1717; Presidential Decree 1717 is an invalid exercise of police power,
not being in conformity with the traditional requirements of a lawful subject and a lawful method.Our finding,
in sum, is that Pres. Decree No. 1717 is an invalid exercise of the police power, not being in conformity with
the traditional requirements of a lawful subject and a lawful method. The extinction of the mortgage and other
liens and of the interest and other charges pertaining to the legitimate creditors of AGRIX constitutes taking
without due process of law, and this is compounded by the reduction of the secured creditors to the category
of unsecured creditors in violation of the equal protection clause. Moreover, the new corporation, being neither
owned nor controlled by the Government, should have been created only by general and not special law. And
insofar as the decree also interferes with purely private agreements without any demonstrated connection with
the public interest, there is likewise an impairment of the obligation of the contract. [National Development
Company vs. Philippine Veterans Bank, 192 SCRA 257(1990)]
G.R. No. 147402

January 14, 2004

ENGR. 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.

DECISION

CARPIO, J.:

2. Whether Section 20 of PD 198, as amended, prohibits COAs certified public accountants from
auditing local water districts; and
The Case

This is a petition for certiorari1 to annul the Commission on Audits ("COA") Resolution dated 3 January 2000
and the Decision dated 30 January 2001 denying the Motion for Reconsideration. The COA denied petitioner
Ranulfo C. Felicianos request for COA to cease all audit services, and to stop charging auditing fees, to Leyte
Metropolitan Water District ("LMWD"). The COA also denied petitioners request for COA to refund all auditing
fees previously paid by LMWD.
Antecedent Facts
A Special Audit Team from COA Regional Office No. VIII audited the accounts of LMWD. Subsequently, LMWD
received a letter from COA dated 19 July 1999 requesting payment of auditing fees. As General Manager of
LMWD, petitioner sent a reply dated 12 October 1999 informing COAs Regional Director that the water district
could not pay the auditing fees. Petitioner cited as basis for his action Sections 6 and 20 of Presidential
Decree 198 ("PD 198")2, as well as Section 18 of Republic Act No. 6758 ("RA 6758"). The Regional Director
referred petitioners reply to the COA Chairman on 18 October 1999.
On 19 October 1999, petitioner wrote COA through the Regional Director asking for refund of all auditing fees
LMWD previously paid to COA.
On 16 March 2000, petitioner received COA Chairman Celso D. Gangans Resolution dated 3 January 2000
denying his requests. Petitioner filed a motion for reconsideration on 31 March 2000, which COA denied on 30
January 2001.
On 13 March 2001, petitioner filed this instant petition. Attached to the petition were resolutions of the Visayas
Association of Water Districts (VAWD) and the Philippine Association of Water Districts (PAWD) supporting the
petition.
The Ruling of the Commission on Audit
The COA ruled that this Court has already settled COAs audit jurisdiction over local water districts in Davao
City Water District v. Civil Service Commission and Commission on Audit,3 as follows:
The above-quoted provision [referring to Section 3(b) PD 198] definitely sets to naught petitioners
contention that they are private corporations. It is clear therefrom that the power to appoint the
members who will comprise the members of the Board of Directors belong to the local executives
of the local subdivision unit where such districts are located. In contrast, the members of the Board
of Directors or the trustees of a private corporation are elected from among members or
stockholders thereof. It would not be amiss at this point to emphasize that a private corporation is
created for the private purpose, benefit, aim and end of its members or stockholders. Necessarily,
said members or stockholders should be given a free hand to choose who will compose the
governing body of their corporation. But this is not the case here and this clearly indicates that
petitioners are not private corporations.
The COA also denied petitioners request for COA to stop charging auditing fees as well as petitioners request
for COA to refund all auditing fees already paid.

3. Whether Section 18 of RA 6758 prohibits the COA from charging government-owned and
controlled corporations auditing fees.
The Ruling of the Court
The petition lacks merit.
The Constitution and existing laws4 mandate COA to audit all government agencies, including governmentowned and controlled corporations ("GOCCs") with original charters. An LWD is a GOCC with an original
charter. Section 2(1), Article IX-D of the Constitution provides for COAs audit jurisdiction, as follows:
SECTION 2. (1) The Commission on Audit shall have the power, authority and duty to examine,
audit, and settle all accounts pertaining to the revenue and receipts of, and expenditures or uses of
funds and property, owned or held in trust by, or pertaining to, the Government, or any of its
subdivisions, agencies, or instrumentalities, including government-owned and controlled
corporations with original charters, and on a post-audit basis: (a) constitutional bodies,
commissions and offices that have been granted fiscal autonomy under this Constitution; (b)
autonomous state colleges and universities; (c) other government-owned or controlled
corporations and their subsidiaries; and (d) such non-governmental entities receiving subsidy or
equity, directly or indirectly, from or through the government, which are required by law or the
granting institution to submit to such audit as a condition of subsidy or equity. However, where the
internal control system of the audited agencies is inadequate, the Commission may adopt such
measures, including temporary or special pre-audit, as are necessary and appropriate to correct
the deficiencies. It shall keep the general accounts of the Government and, for such period as may
be provided by law, preserve the vouchers and other supporting papers pertaining thereto.
(Emphasis supplied)
The COAs audit jurisdiction extends not only to government "agencies or instrumentalities," but also to
"government-owned and controlled corporations with original charters" as well as "other government-owned or
controlled corporations" without original charters.
Whether LWDs are Private or Government-Owned
and Controlled Corporations with Original Charters
Petitioner seeks to revive a well-settled issue. Petitioner asks for a re-examination of a doctrine backed by a
long line of cases culminating in Davao City Water District v. Civil Service Commission 5 and just recently
reiterated in De Jesus v. Commission on Audit.6 Petitioner maintains that LWDs are not government-owned
and controlled corporations with original charters. Petitioner even argues that LWDs are private corporations.
Petitioner asks the Court to consider certain interpretations of the applicable laws, which would give a "new
perspective to the issue of the true character of water districts." 7
Petitioner theorizes that what PD 198 created was the Local Waters Utilities Administration ("LWUA") and not
the LWDs. Petitioner claims that LWDs are created "pursuant to" and not created directly by PD 198. Thus,
petitioner concludes that PD 198 is not an "original charter" that would place LWDs within the audit jurisdiction
of COA as defined in Section 2(1), Article IX-D of the Constitution. Petitioner elaborates that PD 198 does not
create LWDs since it does not expressly direct the creation of such entities, but only provides for their
formation on an optional or voluntary basis. 8 Petitioner adds that the operative act that creates an LWD is the
approval of the Sanggunian Resolution as specified in PD 198.

The Issues
Petitioners contention deserves scant consideration.
Petitioner contends that COA committed grave abuse of discretion amounting to lack or excess of jurisdiction
by auditing LMWD and requiring it to pay auditing fees. Petitioner raises the following issues for resolution:
1. Whether a Local Water District ("LWD") created under PD 198, as amended, is a governmentowned or controlled corporation subject to the audit jurisdiction of COA;

We begin by explaining the general framework under the fundamental law. The Constitution recognizes two
classes of corporations. The first refers to private corporations created under a general law. The second refers
to government-owned or controlled corporations created by special charters. Section 16, Article XII of the
Constitution provides:

Sec. 16. The 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.
The Constitution emphatically prohibits the creation of private corporations except by a general law applicable
to all citizens.9 The purpose of this constitutional provision is to ban private corporations created by special
charters, which historically gave certain individuals, families or groups special privileges denied to other
citizens.10
In short, Congress cannot enact a law creating a private corporation with a special charter. Such legislation
would be unconstitutional. Private corporations may exist only under a general law. If the corporation is
private, it must necessarily exist under a general law. Stated differently, only corporations created under a
general law can qualify as private corporations. Under existing laws, that general law is the Corporation
Code,11 except that the Cooperative Code governs the incorporation of cooperatives. 12
The Constitution authorizes Congress to create government-owned or controlled corporations through special
charters. Since private corporations cannot have special charters, it follows that Congress can create
corporations with special charters only if such corporations are government-owned or controlled.
Obviously, LWDs are not private corporations because they are not created under the Corporation Code.
LWDs are not registered with the Securities and Exchange Commission. Section 14 of the Corporation Code
states that "[A]ll corporations organized under this code shall file with the Securities and Exchange
Commission articles of incorporation x x x." LWDs have no articles of incorporation, no incorporators and no
stockholders or members. There are no stockholders or members to elect the board directors of LWDs as in
the case of all corporations registered with the Securities and Exchange Commission. The local mayor or the
provincial governor appoints the directors of LWDs for a fixed term of office. This Court has ruled that LWDs
are not created under the Corporation Code, thus:
From the foregoing pronouncement, it is clear that what has been excluded from the coverage of
the CSC are those corporations created pursuant to the Corporation Code. Significantly,
petitioners are not created under the said code, but on the contrary, they were created
pursuant to a special law and are governed primarily by its provision.13 (Emphasis supplied)
LWDs exist by virtue of PD 198, which constitutes their special charter. Since under the Constitution only
government-owned or controlled corporations may have special charters, LWDs can validly exist only if they
are government-owned or controlled. To claim that LWDs are private corporations with a special charter is to
admit that their existence is constitutionally infirm.
Unlike private corporations, which derive their legal existence and power from the Corporation Code, LWDs
derive their legal existence and power from PD 198. Sections 6 and 25 of PD 198 14 provide:
Section 6. Formation of District. This Act is the source of authorization and power to form
and maintain a district. For purposes of this Act, a district shall be considered as a quasipublic corporation performing public service and supplying public wants. As such, a
district shall exercise the powers, rights and privileges given to private corporations under
existing laws, in addition to the powers granted in, and subject to such restrictions
imposed, under this Act.
(a) The name of the local water district, which shall include the name of the city, municipality, or
province, or region thereof, served by said system, followed by the words "Water District".
(b) A description of the boundary of the district. In the case of a city or municipality, such boundary
may include all lands within the city or municipality. A district may include one or more
municipalities, cities or provinces, or portions thereof.
(c) A statement completely transferring any and all waterworks and/or sewerage facilities
managed, operated by or under the control of such city, municipality or province to such district
upon the filing of resolution forming the district.

(d) A statement identifying the purpose for which the district is formed, which shall include those
purposes outlined in Section 5 above.
(e) The names of the initial directors of the district with the date of expiration of term of office for
each.
(f) A statement that the district may only be dissolved on the grounds and under the conditions set
forth in Section 44 of this Title.
(g) A statement acknowledging the powers, rights and obligations as set forth in Section 36 of this
Title.
Nothing in the resolution of formation shall state or infer that the local legislative body has the
power to dissolve, alter or affect the district beyond that specifically provided for in this Act.
If two or more cities, municipalities or provinces, or any combination thereof, desire to form a single
district, a similar resolution shall be adopted in each city, municipality and province.
xxx
Sec. 25. Authorization. The district may exercise all the powers which are expressly
granted by this Title or which are necessarily implied from or incidental to the powers and
purposes herein stated. For the purpose of carrying out the objectives of this Act, a district is
hereby granted the power of eminent domain, the exercise thereof shall, however, be subject to
review by the Administration. (Emphasis supplied)
Clearly, LWDs exist as corporations only by virtue of PD 198, which expressly confers on LWDs corporate
powers. Section 6 of PD 198 provides that LWDs "shall exercise the powers, rights and privileges given to
private corporations under existing laws." Without PD 198, LWDs would have no corporate powers. Thus, PD
198 constitutes the special enabling charter of LWDs. The ineluctable conclusion is that LWDs are
government-owned and controlled corporations with a special charter.
The phrase "government-owned and controlled corporations with original charters" means GOCCs created
under special laws and not under the general incorporation law. There is no difference between the term
"original charters" and "special charters." The Court clarified this in National Service Corporation v.
NLRC15 by citing the deliberations in the Constitutional Commission, as follows:
THE PRESIDING OFFICER (Mr. Trenas). The session is resumed.
Commissioner Romulo is recognized.
MR. ROMULO. Mr. Presiding Officer, I am amending my original proposed amendment to now
read as follows: "including government-owned or controlled corporations WITH ORIGINAL
CHARTERS." The purpose of this amendment is to indicate that government corporations such as
the GSIS and SSS, which have original charters, fall within the ambit of the civil service. However,
corporations which are subsidiaries of these chartered agencies such as the Philippine Airlines,
Manila Hotel and Hyatt are excluded from the coverage of the civil service.
THE PRESIDING OFFICER (Mr. Trenas). What does the Committee say?
MR. FOZ. Just one question, Mr. Presiding Officer. By the term "original charters," what
exactly do we mean?
MR. ROMULO. We mean that they were created by law, by an act of Congress, or by special
law.

MR. FOZ. And not under the general corporation law.

MR. ROMULO. That is correct. Mr. Presiding Officer.
MR. FOZ. With that understanding and clarification, the Committee accepts the amendment.
MR. NATIVIDAD. Mr. Presiding Officer, so those created by the general corporation law are out.
MR. ROMULO. That is correct. (Emphasis supplied)
Again, in Davao City Water District v. Civil Service Commission,16 the Court reiterated the meaning of the
phrase "government-owned and controlled corporations with original charters" in this wise:
By "government-owned or controlled corporation with original charter," We mean
government owned or controlled corporation created by a special law and not under the
Corporation Code of the Philippines. Thus, in the case of Lumanta v. NLRC (G.R. No. 82819,
February 8, 1989, 170 SCRA 79, 82), We held:
"The Court, in National Service Corporation (NASECO) v. National Labor
Relations Commission, G.R. No. 69870, promulgated on 29 November 1988,
quoting extensively from the deliberations of the 1986 Constitutional
Commission in respect of the intent and meaning of the new phrase with
original charter, in effect held that government-owned and controlled
corporations with original charter refer to corporations chartered by special law
as distinguished from corporations organized under our general incorporation
statute the Corporation Code. In NASECO, the company involved had been
organized under the general incorporation statute and was a subsidiary of the National
Investment Development Corporation (NIDC) which in turn was a subsidiary of the
Philippine National Bank, a bank chartered by a special statute. Thus, governmentowned or controlled corporations like NASECO are effectively, excluded from the scope
of the Civil Service." (Emphasis supplied)
Petitioners contention that the Sangguniang Bayan resolution creates the LWDs assumes that the
Sangguniang Bayan has the power to create corporations. This is a patently baseless assumption. The Local
Government Code17 does not vest in the Sangguniang Bayan the power to create corporations. 18 What the
Local Government Code empowers the Sangguniang Bayan to do is to provide for the establishment of a
waterworks system "subject to existing laws." Thus, Section 447(5)(vii) of the Local Government Code
provides:
SECTION 447. Powers, Duties, Functions and Compensation. (a) The sangguniang bayan, as
the legislative body of the municipality, shall enact ordinances, approve resolutions and
appropriate funds for the general welfare of the municipality and its inhabitants pursuant to Section
16 of this Code and in the proper exercise of the corporate powers of the municipality as provided
for under Section 22 of this Code, and shall:
xxx
(vii) Subject to existing laws, provide for the establishment, operation, maintenance,
and repair of an efficient waterworks system to supply water for the inhabitants;
regulate the construction, maintenance, repair and use of hydrants, pumps, cisterns
and reservoirs; protect the purity and quantity of the water supply of the municipality
and, for this purpose, extend the coverage of appropriate ordinances over all territory
within the drainage area of said water supply and within one hundred (100) meters of
the reservoir, conduit, canal, aqueduct, pumping station, or watershed used in
connection with the water service; and regulate the consumption, use or wastage of
water;
x x x. (Emphasis supplied)

The Sangguniang Bayan may establish a waterworks system only in accordance with the provisions of PD
198. The Sangguniang Bayan has no power to create a corporate entity that will operate its waterworks
system. However, the Sangguniang Bayan may avail of existing enabling laws, like PD 198, to form and
incorporate a water district. Besides, even assuming for the sake of argument that the Sangguniang Bayan
has the power to create corporations, the LWDs would remain government-owned or controlled corporations
subject to COAs audit jurisdiction. The resolution of the Sangguniang Bayan would constitute an LWDs
special charter, making the LWD a government-owned and controlled corporation with an original charter. In
any event, the Court has already ruled in Baguio Water District v. Trajano19 that the Sangguniang Bayan
resolution is not the special charter of LWDs, thus:
While it is true that a resolution of a local sanggunian is still necessary for the final creation of a
district, this Court is of the opinion that said resolution cannot be considered as its charter, the
same being intended only to implement the provisions of said decree.
Petitioner further contends that a law must create directly and explicitly a GOCC in order that it may have an
original charter. In short, petitioner argues that one special law cannot serve as enabling law for several
GOCCs but only for one GOCC. Section 16, Article XII of the Constitution mandates that "Congress shall not,
except by general law,"20 provide for the creation of private corporations. Thus, the Constitution prohibits one
special law to create one private corporation, requiring instead a "general law" to create private corporations.
In contrast, the same Section 16 states that "Government-owned or controlled corporations may be created or
established by special charters." Thus, the Constitution permits Congress to create a GOCC with a special
charter. There is, however, no prohibition on Congress to create several GOCCs of the same class under one
special enabling charter.
The rationale behind the prohibition on private corporations having special charters does not apply to GOCCs.
There is no danger of creating special privileges to certain individuals, families or groups if there is one special
law creating each GOCC. Certainly, such danger will not exist whether one special law creates one GOCC, or
one special enabling law creates several GOCCs. Thus, Congress may create GOCCs either by special
charters specific to each GOCC, or by one special enabling charter applicable to a class of GOCCs, like PD
198 which applies only to LWDs.
Petitioner also contends that LWDs are private corporations because Section 6 of PD 198 21 declares that
LWDs "shall be considered quasi-public" in nature. Petitioners rationale is that only private corporations may
be deemed "quasi-public" and not public corporations. Put differently, petitioner rationalizes that a public
corporation cannot be deemed "quasi-public" because such corporation is already public. Petitioner concludes
that the term "quasi-public" can only apply to private corporations. Petitioners argument is inconsequential.
Petitioner forgets that the constitutional criterion on the exercise of COAs audit jurisdiction depends on the
governments ownership or control of a corporation. The nature of the corporation, whether it is private, quasipublic, or public is immaterial.
The Constitution vests in the COA audit jurisdiction over "government-owned and controlled corporations with
original charters," as well as "government-owned or controlled corporations" without original charters. GOCCs
with original charters are subject to COA pre-audit, while GOCCs without original charters are subject to COA
post-audit. GOCCs without original charters refer to corporations created under the Corporation Code but are
owned or controlled by the government. The nature or purpose of the corporation is not material in determining
COAs audit jurisdiction. Neither is the manner of creation of a corporation, whether under a general or special
law.
The determining factor of COAs audit jurisdiction is government ownership or control of the corporation.
InPhilippine Veterans Bank Employees Union-NUBE v. Philippine Veterans Bank,22 the Court even ruled
that the criterion of ownership and control is more important than the issue of original charter, thus:
This point is important because the Constitution provides in its Article IX-B, Section 2(1) that "the
Civil Service embraces all branches, subdivisions, instrumentalities, and agencies of the
Government, including government-owned or controlled corporations with original charters." As
the Bank is not owned or controlled by the Government although it does have an original
charter in the form of R.A. No. 3518,23 it clearly does not fall under the Civil Service and
should be regarded as an ordinary commercial corporation. Section 28 of the said law so
provides. The consequence is that the relations of the Bank with its employees should be

governed by the labor laws, under which in fact they have already been paid some of their claims.
(Emphasis supplied)
Certainly, the government owns and controls LWDs. The government organizes LWDs in accordance with a
specific law, PD 198. There is no private party involved as co-owner in the creation of an LWD. Just prior to the
creation of LWDs, the national or local government owns and controls all their assets. The government
controls LWDs because under PD 198 the municipal or city mayor, or the provincial governor, appoints all the
board directors of an LWD for a fixed term of six years.24 The board directors of LWDs are not co-owners of the
LWDs. LWDs have no private stockholders or members. The board directors and other personnel of LWDs are
government employees subject to civil service laws25 and anti-graft laws.26
While Section 8 of PD 198 states that "[N]o public official shall serve as director" of an LWD, it only means that
the appointees to the board of directors of LWDs shall come from the private sector. Once such private sector
representatives assume office as directors, they become public officials governed by the civil service law and
anti-graft laws. Otherwise, Section 8 of PD 198 would contravene Section 2(1), Article IX-B of the Constitution
declaring that the civil service includes "government-owned or controlled corporations with original charters."
If LWDs are neither GOCCs with original charters nor GOCCs without original charters, then they would fall
under the term "agencies or instrumentalities" of the government and thus still subject to COAs audit
jurisdiction. However, the stark and undeniable fact is that the government owns LWDs. Section 45 27 of PD
198 recognizes government ownership of LWDs when Section 45 states that the board of directors may
dissolve an LWD only on the condition that "another public entity has acquired the assets of the district and
has assumed all obligations and liabilities attached thereto." The implication is clear that an LWD is a public
and not a private entity.
Petitioner does not allege that some entity other than the government owns or controls LWDs. Instead,
petitioner advances the theory that the "Water Districts owner is the District itself." 28 Assuming for the sake of
argument that an LWD is "self-owned,"29 as petitioner describes an LWD, the government in any event controls
all LWDs. First, government officials appoint all LWD directors to a fixed term of office. Second, any per
diem of LWD directors in excess of P50 is subject to the approval of the Local Water Utilities Administration,
and directors can receive no other compensation for their services to the LWD. 30 Third, the Local Water
Utilities Administration can require LWDs to merge or consolidate their facilities or operations. 31 This element
of government control subjects LWDs to COAs audit jurisdiction.
Petitioner argues that upon the enactment of PD 198, LWDs became private entities through the transfer of
ownership of water facilities from local government units to their respective water districts as mandated by PD
198. Petitioner is grasping at straws. Privatization involves the transfer of government assets to a private
entity. Petitioner concedes that the owner of the assets transferred under Section 6 (c) of PD 198 is no other
than the LWD itself.32 The transfer of assets mandated by PD 198 is a transfer of the water systems facilities
"managed, operated by or under the control of such city, municipality or province to such (water) district." 33 In
short, the transfer is from one government entity to another government entity. PD 198 is bereft of any
indication that the transfer is to privatize the operation and control of water systems.
Finally, petitioner claims that even on the assumption that the government owns and controls LWDs, Section
20 of PD 198 prevents COA from auditing LWDs. 34 Section 20 of PD 198 provides:
Sec. 20. System of Business Administration. The Board shall, as soon as practicable, prescribe
and define by resolution a system of business administration and accounting for the district, which
shall be patterned upon and conform to the standards established by the Administration. Auditing
shall be performed by a certified public accountant not in the government service. The
Administration may, however, conduct annual audits of the fiscal operations of the district to be
performed by an auditor retained by the Administration. Expenses incurred in connection therewith
shall be borne equally by the water district concerned and the Administration. 35 (Emphasis
supplied)

PD 198 cannot prevail over the Constitution. No amount of clever legislation can exclude GOCCs like LWDs
from COAs audit jurisdiction. Section 3, Article IX-C of the Constitution outlaws any scheme or devise to
escape COAs audit jurisdiction, thus:
Sec. 3. 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. (Emphasis supplied)
The framers of the Constitution added Section 3, Article IX-D of the Constitution precisely to annul provisions
of Presidential Decrees, like that of Section 20 of PD 198, that exempt GOCCs from COA audit. The following
exchange in the deliberations of the Constitutional Commission elucidates this intent of the framers:
MR. OPLE: I propose to add a new section on line 9, page 2 of the amended committee report
which reads: NO LAW SHALL BE PASSED EXEMPTING ANY ENTITY OF THE GOVERNMENT
OR ITS SUBSIDIARY IN ANY GUISE WHATEVER, OR ANY INVESTMENTS OF PUBLIC FUNDS,
FROM THE JURISDICTION OF THE COMMISSION ON AUDIT.
May I explain my reasons on record.
We know that a number of entities of the government took advantage of the absence of a
legislature in the past to obtain presidential decrees exempting themselves from the
jurisdiction of the Commission on Audit, one notable example of which is the Philippine
National Oil Company which is really an empty shell. It is a holding corporation by itself, and strictly
on its own account. Its funds were not very impressive in quantity but underneath that shell there
were billions of pesos in a multiplicity of companies. The PNOC the empty shell under a
presidential decree was covered by the jurisdiction of the Commission on Audit, but the billions of
pesos invested in different corporations underneath it were exempted from the coverage of the
Commission on Audit.
Another example is the United Coconut Planters Bank. The Commission on Audit has determined
that the coconut levy is a form of taxation; and that, therefore, these funds attributed to the shares
of 1,400,000 coconut farmers are, in effect, public funds. And that was, I think, the basis of the
PCGG in undertaking that last major sequestration of up to 94 percent of all the shares in the
United Coconut Planters Bank. The charter of the UCPB, through a presidential decree, exempted
it from the jurisdiction of the Commission on Audit, it being a private organization.
So these are the fetuses of future abuse that we are slaying right here with this additional section.
May I repeat the amendment, Madam President: NO LAW SHALL BE PASSED EXEMPTING ANY
ENTITY OF THE GOVERNMENT OR ITS SUBSIDIARY IN ANY GUISE WHATEVER, OR ANY
INVESTMENTS OF PUBLIC FUNDS, FROM THE JURISDICTION OF THE COMMISSION ON
AUDIT.
THE PRESIDENT: May we know the position of the Committee on the proposed amendment of
Commissioner Ople?
MR. JAMIR: If the honorable Commissioner will change the number of the section to 4, we will
accept the amendment.
MR. OPLE: Gladly, Madam President. Thank you.
MR. DE CASTRO: Madam President, point of inquiry on the new amendment.

Petitioner argues that PD 198 expressly prohibits COA auditors, or any government auditor for that matter,
from auditing LWDs. Petitioner asserts that this is the import of the second sentence of Section 20 of PD 198
when it states that "[A]uditing shall be performed by a certified public accountant not in the government
service."36

THE PRESIDENT: Commissioner de Castro is recognized.

MR. DE CASTRO: Thank you. May I just ask a few questions of Commissioner Ople.

Is that not included in Section 2 (1) where it states: "(c) government-owned or controlled
corporations and their subsidiaries"? So that if these government-owned and controlled
corporations and their subsidiaries are subjected to the audit of the COA, any law exempting
certain government corporations or subsidiaries will be already unconstitutional.

its appropriations and contributions, and (2) government entities, including GOCCs,
government financial institutions and local government units from assessing or billing other
government entities, GOCCs, government financial institutions or local government units for
services rendered by the latters officials and employees as part of their regular functions for
purposes of paying additional compensation to said officials and employees.

So I believe, Madam President, that the proposed amendment is unnecessary.

xxx
MR. MONSOD: Madam President, since this has been accepted, we would like to reply to the
point raised by Commissioner de Castro.

The first aspect of the strategy is directed to the COA itself, while the second aspect is addressed
directly against the GOCCs and government financial institutions. Under the first, COA personnel
assigned to auditing units of GOCCs or government financial institutions can receive only
such salaries, allowances or fringe benefits paid directly by the COA out of its
appropriations and contributions. The contributions referred to are the cost of audit
services earlier mentioned which cannot include the extra emoluments or benefits now
claimed by petitioners. The COA is further barred from assessing or billing GOCCs and
government financial institutions for services rendered by its personnel as part of their regular audit
functions for purposes of paying additional compensation to such personnel. x x x. (Emphasis
supplied)

THE PRESIDENT: Commissioner Monsod will please proceed.

MR. MONSOD: I think the Commissioner is trying to avoid the situation that happened in the past,
because the same provision was in the 1973 Constitution and yet somehow a law or a decree was
passed where certain institutions were exempted from audit. We are just reaffirming, emphasizing,
the role of the Commission on Audit so that this problem will never arise in the future. 37
There is an irreconcilable conflict between the second sentence of 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. We rule that the second sentence of Section 20 of PD 198 is unconstitutional since it
violates Sections 2(1) and 3, Article IX-D of the Constitution.

In Tejada, the Court explained the meaning of the word "contributions" in Section 18 of RA 6758, which
allows COA to charge GOCCs the cost of its audit services:
x x x the contributions from the GOCCs are limited to the cost of audit services which are based on
the actual cost of the audit function in the corporation concerned plus a reasonable rate to cover
overhead expenses. The actual audit cost shall include personnel services, maintenance and other
operating expenses, depreciation on capital and equipment and out-of-pocket expenses. In respect
to the allowances and fringe benefits granted by the GOCCs to the COA personnel assigned to the
formers auditing units, the same shall be directly defrayed by COA from its own appropriations x x
x. 41

On the Legality of COAs

Practice of Charging Auditing Fees
Petitioner claims that the auditing fees COA charges LWDs for audit services violate the prohibition in Section
18 of RA 6758,38 which states:
Sec. 18. Additional Compensation of Commission on Audit Personnel and of other Agencies. In
order to preserve the independence and integrity of the Commission on Audit (COA), its officials
and employees are prohibited from receiving salaries, honoraria, bonuses, allowances or other
emoluments from any government entity, local government unit, government-owned or controlled
corporations, and government financial institutions, except those compensation paid directly by
COA out of its appropriations andcontributions.
Government entities, including government-owned or controlled corporations including financial
institutions and local government units are hereby prohibited from assessing or billing other
government entities, including government-owned or controlled corporations including financial
institutions or local government units for services rendered by its officials and employees as part of
their regular functions for purposes of paying additional compensation to said officials and
employees. (Emphasis supplied)
Claiming that Section 18 is "absolute and leaves no doubt," 39 petitioner asks COA to discontinue its practice of
charging auditing fees to LWDs since such practice allegedly violates the law.
Petitioners claim has no basis.
Section 18 of RA 6758 prohibits COA personnel from receiving any kind of compensation from any
government entity except "compensation paid directly by COA out of its appropriations and
contributions." Thus, RA 6758 itself recognizes an exception to the statutory ban on COA personnel receiving
compensation from GOCCs. In Tejada v. Domingo,40 the Court declared:
There can be no question that Section 18 of Republic Act No. 6758 is designed to strengthen
further the policy x x x to preserve the independence and integrity of the COA, by explicitly
PROHIBITING: (1) COA officials and employees from receiving salaries, honoraria, bonuses,
allowances or other emoluments from any government entity, local government unit, GOCCs and
government financial institutions, except such compensation paid directly by the COA out of

COA may charge GOCCs "actual audit cost" but GOCCs must pay the same directly to COA and not to COA
auditors. Petitioner has not alleged that COA charges LWDs auditing fees in excess of COAs "actual audit
cost." Neither has petitioner alleged that the auditing fees are paid by LWDs directly to individual COA
auditors. Thus, petitioners contention must fail.
WHEREFORE, the Resolution of the Commission on Audit dated 3 January 2000 and the Decision dated 30
January 2001 denying petitioners Motion for Reconsideration are AFFIRMED. The second sentence of
Section 20 of Presidential Decree No. 198 is declared VOID for being inconsistent with Sections 2 (1) and 3,
Article IX-D of the Constitution. No costs.
RULING:
Corporation Law; Congress cannot enact a law creating a private corporation with a special charter; Since
private corporations cannot have special charters, it follows that Congress can create corporations with special
charters only if such corporations are government-owned or controlled.In short, Congress cannot enact a
law creating a private corporation with a special charter. Such legislation would be unconstitutional. Private
corporations may exist only under a general law. If the corporation is private, it must necessarily exist under a
general law. Stated differently, only corporations created under a general law can qualify as private
corporations. Under existing laws, that general law is the Corporation Code, except that the Cooperative Code
governs the incorporation of cooperatives. The Constitution authorizes Congress to create government-owned
or controlled corporations through special charters. Since private corporations cannot have special charters, it
follows that Congress can create corporations with special charters only if such corporations are governmentowned or controlled. [Feliciano vs. Commission on Audit, 419 SCRA 363(2004)]
SO ORDERED.
G.R. No. L-19891

July 31, 1964

J.R.S. BUSINESS CORPORATION, J.R. DA SILVA and A.J. BELTRAN, petitioners,

vs.
IMPERIAL INSURANCE, INC., MACARIO M. OFILADA, Sheriff of Manila and
HON. 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) Principal
b) Interest at 12% per annum
c) Liquidated damages at 7% per annum
d) Costs of suit

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
the Business 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.

e) Attorney's fees

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. 1wph1.t
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

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 by certiorari (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 way is especially
decreed and 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 of Gulf 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 corporation and 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).

Same; Same; Same; Effect of absence of special decree.Where the judgment does not contain
any special decree making the franchise of a private corporation answerable for its judgment debt, the
inclusion of said corporation's franchise, trade name and capital stocks in the execution sale of its
properties has no justification and such sale should be set aside in so far as it authorizes such levy
and sale. [J.R.S. Business Corp. vs. Imperial Insurance, Inc., 11 SCRA 634(1964)]

[G.R. No. 125027. August 12, 2002]

ANITA MANGILA, petitioner, vs. COURT OF APPEALS and LORETA GUINA, respondents.
DECISION
CARPIO, J.:
The Case

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.
Ruling:
Corporation law; Secondary franchise; Messenger service.The right to operate a messenger
and delivery service by virtue of a legislative enactment is a secondary franchise.
Same; Same; Subject to execution sale.A secondary franchise is subject to levy and sale on
execution together with all the property necessary for the enjoyment thereof.
Same; Same; Same; Procedure.A secondary franchise and the property necessary for its
enjoyment can be sold under execution only when such sale is especially decreed and ordered in the
judgment and it becomes effective only when such sale is confirmed by the Court after due notice.

This is a petition fore review on certiorari under Rule 45 of the Rules of Court, seeking to set aside the
Decision[1] of the Court of Appeals affirming the Decision [2] of the Regional Trial Court, Branch 108, Pasay City.
The trial court upheld the writ of attachment and the declaration of default on petitioner while ordering her to
pay private respondent P109,376.95 plus 18 percent interest per annum, 25 percent attorneys fees and costs
of suit.
The Facts
Petitioner Anita Mangila (petitioner for brevity) is an exporter of sea foods and doing business under the
name and style of Seafoods Products. Private respondent Loreta Guina (private respondent for brevity) is the
President and General Manager of Air Swift International, a single registered proprietorship engaged in the
freight forwarding business.
Sometime in January 1988, petitioner contracted the freight forwarding services of private respondent
for shipment of petitioners products, such as crabs, prawns and assorted fishes, to Guam (USA) where
petitioner maintains an outlet. Petitioner agreed to pay private respondent cash on delivery. Private
respondents invoice stipulates a charge of 18 percent interest per annum on all overdue accounts. In case of
suit, the same invoice stipulates attorneys fees equivalent to 25 percent of the amount due plus costs of suit. [3]
On the first shipment, petitioner requested for seven days within which to pay private respondent.
However, for the next three shipments, March 17, 24 and 31, 1988, petitioner failed to pay private respondent
shipping charges amounting to P109, 376.95. [4]
Despite several demands, petitioner never paid private respondent. Thus, on June 10, 1988, private
respondent filed Civil Case No. 5875 before the Regional Trial Court of Pasay City for collection of sum of
money.
On August 1, 1988, the sheriff filed his Sheriffs Return showing that summons was not served on
petitioner. A woman found at petitioners house informed the sheriff that petitioner transferred her residence to
Sto. Nio, Guagua, Pampanga. The sheriff found out further that petitioner had left the Philippines for Guam. [5]
Thus, on September 13, 1988, construing petitioners departure from the Philippines as done with intent
to defraud her creditors, private respondent filed a Motion for Preliminary Attachment. On September 26,

1988, the trial court issued an Order of Preliminary Attachment [6] against petitioner. The following day, the trial
court issued a Writ of Preliminary Attachment.
The trial court granted the request of its sheriff for assistance from their counterparts in RTC,
Pampanga. Thus, on October 28, 1988, Sheriff Alfredo San Miguel of RTC Pampanga served on petitioners
household help in San Fernando, Pampanga, the Notice of Levy with the Order, Affidavit and Bond. [7]
On November 7, 1988, petitioner filed an Urgent Motion to Discharge Attachment [8] without submitting
herself to the jurisdiction of the trial court. She pointed out that up to then, she had not been served a copy of
the Complaint and the summons. Hence, petitioner claimed the court had not acquired jurisdiction over her
person.[9]
In the hearing of the Urgent Motion to Discharge Attachment on November 11, 1988, private
respondent sought and was granted a re-setting to December 9, 1988. On that date, private respondents
counsel did not appear, so the Urgent Motion to Discharge Attachment was deemed submitted for resolution.
[10]

The trial court granted the Motion to Discharge Attachment on January 13, 1989 upon filing of
petitioners counter-bond. The trial court, however, did not rule on the question of jurisdiction and on the validity
of the writ of preliminary attachment.
On December 26, 1988, private respondent applied for an alias summons, which the trial court issued
on January 19, 1989.[11] It was only on January 26, 1989 that summons was finally served on petitioner.[12]
On February 9, 1989, petitioner filed a Motion to Dismiss the Complaint on the ground of improper
venue. Private respondents invoice for the freight forwarding service stipulates that if court litigation becomes
necessary to enforce collection xxx the agreed venue for such action is Makati, Metro Manila. [13] Private
respondent filed an Opposition asserting that although Makati appears as the stipulated venue, the same was
merely an inadvertence by the printing press whose general manager executed an affidavit [14] admitting such
inadvertence. Moreover, private respondent claimed that petitioner knew that private respondent was holding
office in Pasay City and not in Makati. [15] The lower court, finding credence in private respondents assertion,
denied the Motion to Dismiss and gave petitioner five days to file her Answer. Petitioner filed a Motion for
Reconsideration but this too was denied.
Petitioner filed her Answer
improperly laid.

[16]

on June 16, 1989, maintaining her contention that the venue was

On June 26, 1989, the trial court issued an Order setting the pre-trial for July 18, 1989 at 8:30 a.m. and
requiring the parties to submit their pre-trial briefs. Meanwhile, private respondent filed a Motion to Sell
Attached Properties but the trial court denied the motion.

transcript of stenographic notes, and was late because of heavy traffic. Petitioner claims that the lower court
erred in allowing private respondent to present evidenceex-parte since there was no Order considering the
petitioner as in default. Petitioner contends that the Order of August 24, 1989 did not state that petitioner was
declared as in default but still the court allowed private respondent to present evidence ex-parte. [18]
On October 6, 1989, the trial court denied the Motion for Reconsideration and scheduled the
presentation of private respondents evidence ex-parte on October 10, 1989.
On October 10, 1989, petitioner filed an Omnibus Motion stating that the presentation of evidence exparte should be suspended because there was no declaration of petitioner as in default and petitioners
counsel was not absent, but merely late.
On October 18, 1989, the trial court denied the Omnibus Motion. [19]
On November 20, 1989, the petitioner received a copy of the Decision of November 10, 1989, ordering
petitioner to pay respondent P109,376.95 plus 18 percent interest per annum, 25 percent attorneys fees and
costs of suit. Private respondent filed a Motion for Execution Pending Appeal but the trial court denied the
same.
The Ruling of the Court of Appeals
On December 15, 1995, the Court of Appeals rendered a decision affirming the decision of the trial
court. The Court of Appeals upheld the validity of the issuance of the writ of attachment and sustained the filing
of the action in the RTC of Pasay. The Court of Appeals also affirmed the declaration of default on petitioner
and concluded that the trial court did not commit any reversible error.
Petitioner filed a Motion for Reconsideration on January 5, 1996 but the Court of Appeals denied the
same in a Resolution dated May 20, 1996.
Hence, this petition.
The Issues
The issues raised by petitioner may be re-stated as follows:
I.
WHETHER RESPONDENT COURT ERRED IN NOT HOLDING THAT THE WRIT OF ATTACHMENT WAS
IMPROPERLY ISSUED AND SERVED;

On motion of petitioner, the trial court issued an Order resetting the pre-trial from July 18, 1989 to
August 24, 1989 at 8:30 a.m..
On August 24, 1989, the day of the pre-trial, the trial court issued an Order [17] terminating the pre-trial
and allowing the private respondent to present evidence ex-parte on September 12, 1989 at 8:30 a.m.. The
Order stated that when the case was called for pre-trial at 8:31 a.m., only the counsel for private respondent
appeared. Upon the trial courts second call 20 minutes later, petitioners counsel was still nowhere to be found.
Thus, upon motion of private respondent, the pre-trial was considered terminated.

II.
WHETHER THERE WAS A VALID DECLARATION OF DEFAULT;
III.
WHETHER THERE WAS IMPROPER VENUE.

On September 12, 1989, petitioner filed her Motion for Reconsideration of the Order terminating the
pre-trial. Petitioner explained that her counsel arrived 5 minutes after the second call, as shown by the

IV.

WHETHER RESPONDENT COURT ERRED IN DECLARING THAT PETITIONER IS OBLIGED TO PAY

P109, 376.95, PLUS ATTORNEYS FEES. [20]
The Ruling of the Court
Improper Issuance and Service of Writ of Attachment
Petitioner ascribes several errors to the issuance and implementation of the writ of attachment. Among
petitioners arguments are: first, there was no ground for the issuance of the writ since the intent to defraud her
creditors had not been established; second, the value of the properties levied exceeded the value of private
respondents claim. However, the crux of petitioners arguments rests on the question of the validity of the writ
of attachment. Because of failure to serve summons on her before or simultaneously with the writs
implementation, petitioner claims that the trial court had not acquired jurisdiction over her person and thus the
service of the writ is void.
As a preliminary note, a distinction should be made between issuance and implementation of the writ of
attachment. It is necessary to distinguish between the two to determine when jurisdiction over the person of
the defendant should be acquired to validly implement the writ. This distinction is crucial in resolving whether
there is merit in petitioners argument.
This Court has long settled the issue of when jurisdiction over the person of the defendant should be
acquired in cases where a party resorts to provisional remedies. A party to a suit may, at any time after filing
the complaint, avail of the provisional remedies under the Rules of Court. Specifically, Rule 57 on preliminary
attachment speaks of the grant of the remedy at the commencement of the action or at any time
thereafter.[21] This phrase refers to the date of filing of the complaint which is the moment that marks the
commencement of the action. The reference plainly is to a time before summons is served on the defendant,
or even before summons issues.
In Davao Light & Power Co., Inc. v. Court of Appeals, [22] this Court clarified the actual time when
jurisdiction should be had:
It goes without saying that whatever be the acts done by the Court prior to the acquisition of jurisdiction over
the person of defendant - issuance of summons, order of attachment and writ of attachment - these do not
and cannot bind and affect the defendant until and unless jurisdiction over his person is eventually
obtained by the court, either by service on him of summons or other coercive process or his voluntary
submission to the courts authority. Hence, when the sheriff or other proper officer
commences implementation of the writ of attachment, it is essential that he serve on the defendant not only a
copy of the applicants affidavit and attachment bond, and of the order of attachment, as explicitly required by
Section 5 of Rule 57, but also the summons addressed to said defendant as well as a copy of the complaint
xxx. (Emphasis supplied.)
Furthermore, we have held that the grant of the provisional remedy of attachment involves three stages: first,
the court issues the order granting the application; second, the writ of attachment issues pursuant to the order
granting the writ; and third, the writ is implemented. For the initial two stages, it is not necessary that
jurisdiction over the person of the defendant be first obtained. However, once the implementation of
the writ commences, the court must have acquired jurisdiction over the defendant for without such
jurisdiction, the court has no power and authority to act in any manner against the defendant. Any order
issuing from the Court will not bind the defendant. [23]
In the instant case, the Writ of Preliminary Attachment was issued on September 27, 1988 and
implemented on October 28, 1988. However, the alias summons was served only on January 26, 1989 or
almost three months after the implementation of the writ of attachment.

The trial court had the authority to issue the Writ of Attachment on September 27 since a motion for its
issuance can be filed at the commencement of the action. However, on the day the writ was implemented, the
trial court should have, previously or simultaneously with the implementation of the writ, acquired jurisdiction
over the petitioner. Yet, as was shown in the records of the case, the summons was actually served on
petitioner several months after the writ had been implemented.
Private respondent, nevertheless, claims that the prior or contemporaneous service of summons
contemplated in Section 5 of Rule 57 provides for exceptions. Among such exceptions are where the
summons could not be served personally or by substituted service despite diligent efforts or where the
defendant is a resident temporarily absent therefrom x x x. Private respondent asserts that when she
commenced this action, she tried to serve summons on petitioner but the latter could not be located at her
customary address in Kamuning, Quezon City or at her new address in Guagua, Pampanga. [24] Furthermore,
respondent claims that petitioner was not even in Pampanga; rather, she was in Guam purportedly on a
business trip.
Private respondent never showed that she effected substituted service on petitioner after her personal
service failed. Likewise, if it were true that private respondent could not ascertain the whereabouts of petitioner
after a diligent inquiry, still she had some other recourse under the Rules of Civil Procedure.
The rules provide for certain remedies in cases where personal service could not be effected on a party.
Section 14, Rule 14 of the Rules of Court provides that whenever the defendants whereabouts are unknown
and cannot be ascertained by diligent inquiry, service may, by leave of court, be effected upon him by
publication in a newspaper of general circulation x x x. Thus, if petitioners whereabouts could not be
ascertained after the sheriff had served the summons at her given address, then respondent could have
immediately asked the court for service of summons by publication on petitioner.[25]
Moreover, as private respondent also claims that petitioner was abroad at the time of the service of
summons, this made petitioner a resident who is temporarily out of the country. This is the exact situation
contemplated in Section 16,[26] Rule 14 of the Rules of Civil Procedure, providing for service of summons by
publication.
In conclusion, we hold that the alias summons belatedly served on petitioner cannot be deemed to
have cured the fatal defect in the enforcement of the writ. The trial court cannot enforce such a coercive
process on petitioner without first obtaining jurisdiction over her person. The preliminary writ of attachment
must be served after or simultaneous with the service of summons on the defendant whether by personal
service, substituted service or by publication as warranted by the circumstances of the case. [27] The
subsequent service of summons does not confer a retroactive acquisition of jurisdiction over her person
because the law does not allow for retroactivity of a belated service.
Improper Venue
Petitioner assails the filing of this case in the RTC of Pasay and points to a provision in private
respondents invoice which contains the following:
3. If court litigation becomes necessary to enforce collection, an additional equivalent (sic) to 25% of the
principal amount will be charged. The agreed venue for such action is Makati, Metro Manila, Philippines. [28]
Based on this provision, petitioner contends that the action should have been instituted in the RTC of
Makati and to do otherwise would be a ground for the dismissal of the case.
We resolve to dismiss the case on the ground of improper venue but not for the reason stated by
petitioner.

The Rules of Court provide that parties to an action may agree in writing on the venue on which an
action should be brought.[29] However, a mere stipulation on the venue of an action is not enough to preclude
parties from bringing a case in other venues. [30] The parties must be able to show that such stipulation
is exclusive. Thus, absent words that show the parties intention to restrict the filing of a suit in a particular
place, courts will allow the filing of a case in any venue, as long as jurisdictional requirements are followed.
Venue stipulations in a contract, while considered valid and enforceable, do not as a rule supersede the
general rule set forth in Rule 4 of the Revised Rules of Court. [31] In the absence of qualifying or restrictive
words, they should be considered merely as an agreement on additional forum, not as limiting venue to the
specified place.[32]
In the instant case, the stipulation does not limit the venue exclusively to Makati. There are no
qualifying or restrictive words in the invoice that would evince the intention of the parties that Makati is the only
or exclusive venue where the action could be instituted. We therefore agree with private respondent that
Makati is not the only venue where this case could be filed.
Nevertheless, we hold that Pasay is not the proper venue for this case.
Under the 1997 Rules of Civil Procedure, the general rule is venue in personal actions is where the
defendant or any of the defendants resides or may be found, or where the plaintiff or any of the plaintiffs
resides, at the election of the plaintiff. [33] The exception to this rule is when the parties agree on an exclusive
venue other than the places mentioned in the rules. But, as we have discussed, this exception is not
applicable in this case. Hence, following the general rule, the instant case may be brought in the place of
residence of the plaintiff or defendant, at the election of the plaintiff (private respondent herein).
In the instant case, the residence of private respondent (plaintiff in the lower court) was not alleged in
the complaint. Rather, what was alleged was the postal address of her sole proprietorship, Air Swift
International. It was only when private respondent testified in court, after petitioner was declared in default,
that she mentioned her residence to be in Better Living Subdivision, Paraaque City.
In the earlier case of Sy v. Tyson Enterprises, Inc., [34] the reverse happened. The plaintiff in that case
was Tyson Enterprises, Inc., a corporation owned and managed by Dominador Ti. The complaint, however, did
not allege the office or place of business of the corporation, which was in Binondo, Manila. What was alleged
was the residence of Dominador Ti, who lived in San Juan, Rizal. The case was filed in the Court of First
Instance of Rizal, Pasig. The Court there held that the evident purpose of alleging the address of the
corporations president and manager was to justify the filing of the suit in Rizal, Pasig instead of in Manila.
Thus, the Court ruled that there was no question that venue was improperly laid in that case and held that the
place of business of Tyson Enterpises, Inc. is considered as its residence for purposes of venue. Furthermore,
the Court held that the residence of its president is not the residence of the corporation because a corporation
has a personality separate and distinct from that of its officers and stockholders.
In the instant case, it was established in the lower court that petitioner resides in San Fernando,
Pampanga[35] while private respondent resides in Paraaque City.[36] However, this case was brought in Pasay
City, where the business of private respondent is found. This would have been permissible had private
respondents business been a corporation, just like the case inSy v. Tyson Enterprises, Inc. However, as
admitted by private respondent in her Complaint[37] in the lower court, her business is a sole proprietorship,
and as such, does not have a separate juridical personality that could enable it to file a suit in court. [38] In fact,
there is no law authorizing sole proprietorships to file a suit in court. [39]
A sole proprietorship does not possess a juridical personality separate and distinct from the personality
of the owner of the enterprise. [40] The law merely recognizes the existence of a sole proprietorship as a form of
business organization conducted for profit by a single individual and requires its proprietor or owner to secure
licenses and permits, register its business name, and pay taxes to the national government. [41] The law does
not vest a separate legal personality on the sole proprietorship or empower it to file or defend an action in
court.[42]

Thus, not being vested with legal personality to file this case, the sole proprietorship is not the plaintiff
in this case but rather Loreta Guina in her personal capacity. In fact, the complaint in the lower court
acknowledges in its caption that the plaintiff and defendant are Loreta Guina and Anita Mangila, respectively.
The title of the petition before us does not state, and rightly so, Anita Mangila v. Air Swift International, but
rather Anita Mangila v. Loreta Guina. Logically then, it is the residence of private respondent Guina,
the proprietor with the juridical personality, which should be considered as one of the proper venues for this
case.
All these considered, private respondent should have filed this case either in San Fernando, Pampanga
(petitioners residence) or Paraaque (private respondents residence). Since private respondent (complainant
below) filed this case in Pasay, we hold that the case should be dismissed on the ground of improper venue.
Although petitioner filed an Urgent Motion to Discharge Attachment in the lower court, petitioner
expressly stated that she was filing the motion without submitting to the jurisdiction of the court. At that time,
petitioner had not been served the summons and a copy of the complaint. [43] Thereafter, petitioner timely filed a
Motion to Dismiss[44] on the ground of improper venue. Rule 16, Section 1 of the Rules of Court provides that a
motion to dismiss may be filed [W]ithin the time for but before filing the answer to the complaint or pleading
asserting a claim. Petitioner even raised the issue of improper venue in his Answer [45] as a special and
affirmative defense. Petitioner also continued to raise the issue of improper venue in her Petition for
Review[46] before this Court. We thus hold that the dismissal of this case on the ground of improper venue is
warranted.
The rules on venue, like other procedural rules, are designed to insure a just and orderly administration
of justice or the impartial and evenhanded determination of every action and proceeding. Obviously, this
objective will not be attained if the plaintiff is given unrestricted freedom to choose where to file the complaint
or petition.[47]
We find no reason to rule on the other issues raised by petitioner.
WHEREFORE, the petition is GRANTED on the grounds of improper venue and invalidity of the service
of the writ of attachment. The decision of the Court of Appeals and the order of respondent judge denying the
motion to dismiss are REVERSED and SET ASIDE. Civil Case No. 5875 is hereby dismissed without prejudice
to refiling it in the proper venue. The attached properties of petitioner are ordered returned to her immediately.
SO ORDERED.
RULING:
Same; Same; Parties; Sole Proprietorships; A sole proprietorship does not have a separate juridical
personality that could enable it to file a suit in courtthere is no law authorizing sole proprietorships to file a
suit in court.In the instant case, it was established in the lower court that petitioner resides in San Fernando,
Pampanga while private respondent resides in Paraaque City. However, this case was brought in Pasay City,
where the business of private respondent is found. This would have been permissible had private respondents
business been a corporation, just like the case in Sy v. Tyson Enterprises, Inc. However, as admitted by
private respondent in her Complaint in the lower court, her business is a sole proprietorship, and as such,
does not have a separate juridical personality that could enable it to file a suit in court. In fact, there is no law
authorizing sole proprietorships to file a suit in court. A sole proprietorship does not possess a juridical
personality separate and distinct from the personality of the owner of the enterprise. The law merely
recognizes the existence of a sole proprietorship as a form of business organization conducted for profit by a
single individual and requires its proprietor or owner to licenses and permits, register its business name, and
pay taxes to the national government. The law does not vest a separate legal personality on the sole
proprietorship or empower it to file or defend an action in court. [Mangila vs. Court of Appeals, 387 SCRA
162(2002)]

II. The trial court erred in admitting the third amended complaint.
III. The trial court erred in denying defendant's motion to strike.
IV. The trial court erred in including in its decision land not involved in the litigation.
V. The trial court erred in holding that the land in dispute is covered by transfer certificates of Title
Nos. 37686 and 37677.
G.R. No. L-4935

May 28, 1954

Vl. The trial court erred in not finding that the defendant is the true and lawful owner of the land.

J. M. TUASON & CO., INC., represented by it Managing PARTNER, GREGORIA ARANETA, INC., plaintiffappellee,
vs.
QUIRINO BOLAOS, defendant-appellant.
Araneta and Araneta for appellee.
Jose A. Buendia for appellant.
REYES, J.:
This is an action originally brought in the Court of First Instance of Rizal, Quezon City Branch, to recover
possesion of registered land situated in barrio Tatalon, Quezon City.
Plaintiff's complaint was amended three times with respect to the extent and description of the land sought to
be recovered. The original complaint described the land as a portion of a lot registered in plaintiff's name under
Transfer Certificate of Title No. 37686 of the land record of Rizal Province and as containing an area of 13
hectares more or less. But the complaint was amended by reducing the area of 6 hectares, more or less, after
the defendant had indicated the plaintiff's surveyors the portion of land claimed and occupied by him. The
second amendment became necessary and was allowed following the testimony of plaintiff's surveyors that a
portion of the area was embraced in another certificate of title, which was plaintiff's Transfer Certificate of Title
No. 37677. And still later, in the course of trial, after defendant's surveyor and witness, Quirino Feria, had
testified that the area occupied and claimed by defendant was about 13 hectares, as shown in his Exhibit 1,
plaintiff again, with the leave of court, amended its complaint to make its allegations conform to the evidence.
Defendant, in his answer, sets up prescription and title in himself thru "open, continuous, exclusive and public
and notorious possession (of land in dispute) under claim of ownership, adverse to the entire world by
defendant and his predecessor in interest" from "time in-memorial". The answer further alleges that registration
of the land in dispute was obtained by plaintiff or its predecessors in interest thru "fraud or error and without
knowledge (of) or interest either personal or thru publication to defendant and/or predecessors in interest." The
answer therefore prays that the complaint be dismissed with costs and plaintiff required to reconvey the land to
defendant or pay its value.
After trial, the lower court rendered judgment for plaintiff, declaring defendant to be without any right to the
land in question and ordering him to restore possession thereof to plaintiff and to pay the latter a monthly rent
of P132.62 from January, 1940, until he vacates the land, and also to pay the costs.
Appealing directly to this court because of the value of the property involved, defendant makes the following
assignment or errors:
I. The trial court erred in not dismissing the case on the ground that the case was not brought by
the real property in interest.

VII. The trial court erred in finding that the defendant is liable to pay the plaintiff the amount of
P132.62 monthly from January, 1940, until he vacates the premises.
VIII. The trial court erred in not ordering the plaintiff to reconvey the land in litigation to the
defendant.
As to the first assigned error, there is nothing to the contention that the present action is not brought by the
real party in interest, that is, by J. M. Tuason and Co., Inc. What the Rules of Court require is that an action be
brought in the name of, but not necessarily by, the real party in interest. (Section 2, Rule 2.) In fact the practice
is for an attorney-at-law to bring the action, that is to file the complaint, in the name of the plaintiff. That
practice appears to have been followed in this case, since the complaint is signed by the law firm of Araneta
and Araneta, "counsel for plaintiff" and commences with the statement "comes now plaintiff, through its
undersigned counsel." It is true that the complaint also states that the plaintiff is "represented herein by its
Managing Partner Gregorio Araneta, Inc.", another corporation, but there is nothing against one corporation
being represented by another person, natural or juridical, in a suit in court. The contention that Gregorio
Araneta, Inc. can not act as managing partner for plaintiff on the theory that it is illegal for two corporations to
enter into a partnership is without merit, for the true rule is that "though a corporation has no power to enter
into a partnership, it may nevertheless enter into a joint venture with another where the nature of that venture
is in line with the business authorized by its charter." (Wyoming-Indiana Oil Gas Co. vs. Weston, 80 A. L. R.,
1043, citing 2 Fletcher Cyc. of Corp., 1082.) There is nothing in the record to indicate that the venture in which
plaintiff is represented by Gregorio Araneta, Inc. as "its managing partner" is not in line with the corporate
business of either of them.
Errors II, III, and IV, referring to the admission of the third amended complaint, may be answered by mere
reference to section 4 of Rule 17, Rules of Court, which sanctions such amendment. It reads:
Sec. 4. Amendment to conform to evidence. When issues not raised by the pleadings are tried
by express or implied consent of the parties, they shall be treated in all respects, as if they had
been raised in the pleadings. Such amendment of the pleadings as may be necessary to cause
them to conform to the evidence and to raise these issues may be made upon motion of any party
at my time, even of the trial of these issues. If evidence is objected to at the trial on the ground that
it is not within the issues made by the pleadings, the court may allow the pleadings to be amended
and shall be so freely when the presentation of the merits of the action will be subserved thereby
and the objecting party fails to satisfy the court that the admission of such evidence would
prejudice him in maintaining his action or defense upon the merits. The court may grant a
continuance to enable the objecting party to meet such evidence.
Under this provision amendment is not even necessary for the purpose of rendering judgment on issues
proved though not alleged. Thus, commenting on the provision, Chief Justice Moran says in this Rules of
Court:

Under this section, American courts have, under the New Federal Rules of Civil Procedure, ruled
that where the facts shown entitled plaintiff to relief other than that asked for, no amendment to the
complaint is necessary, especially where defendant has himself raised the point on which recovery
is based, and that the appellate court treat the pleadings as amended to conform to the evidence,
although the pleadings were not actually amended. (I Moran, Rules of Court, 1952 ed., 389-390.)

ownership, while the present one is for recovery of possession. And while appellant claims that he is also
involved in that order action because it is a class suit, the complaint does not show that such is really the case.
On the contrary, it appears that the action seeks relief for each individual plaintiff and not relief for and on
behalf of others. The motion for dismissal is clearly without merit.
Wherefore, the judgment appealed from is affirmed, with costs against the plaintiff.

Our conclusion therefore is that specification of error II, III, and IV are without merit..
Ruling:
Let us now pass on the errors V and VI. Admitting, though his attorney, at the early stage of the trial, that the
land in dispute "is that described or represented in Exhibit A and in Exhibit B enclosed in red pencil with the
name Quirino Bolaos," defendant later changed his lawyer and also his theory and tried to prove that the land
in dispute was not covered by plaintiff's certificate of title. The evidence, however, is against defendant, for it
clearly establishes that plaintiff is the registered owner of lot No. 4-B-3-C, situate in barrio Tatalon, Quezon
City, with an area of 5,297,429.3 square meters, more or less, covered by transfer certificate of title No. 37686
of the land records of Rizal province, and of lot No. 4-B-4, situated in the same barrio, having an area of
74,789 square meters, more or less, covered by transfer certificate of title No. 37677 of the land records of the
same province, both lots having been originally registered on July 8, 1914 under original certificate of title No.
735. The identity of the lots was established by the testimony of Antonio Manahan and Magno Faustino,
witnesses for plaintiff, and the identity of the portion thereof claimed by defendant was established by the
testimony of his own witness, Quirico Feria. The combined testimony of these three witnesses clearly shows
that the portion claimed by defendant is made up of a part of lot 4-B-3-C and major on portion of lot 4-B-4, and
is well within the area covered by the two transfer certificates of title already mentioned. This fact also appears
admitted in defendant's answer to the third amended complaint.
As the land in dispute is covered by plaintiff's Torrens certificate of title and was registered in 1914, the decree
of registration can no longer be impugned on the ground of fraud, error or lack of notice to defendant, as more
than one year has already elapsed from the issuance and entry of the decree. Neither court the decree be
collaterally attacked by any person claiming title to, or interest in, the land prior to the registration proceedings.
(Sorogon vs. Makalintal,1 45 Off. Gaz., 3819.) Nor could title to that land in derogation of that of plaintiff, the
registered owner, be acquired by prescription or adverse possession. (Section 46, Act No. 496.) Adverse,
notorious and continuous possession under claim of ownership for the period fixed by law is ineffective against
a Torrens title. (Valiente vs. Judge of CFI of Tarlac,2 etc., 45 Off. Gaz., Supp. 9, p. 43.) And it is likewise settled
that the right to secure possession under a decree of registration does not prescribed. (Francisco vs. Cruz, 43
Off. Gaz., 5105, 5109-5110.) A recent decision of this Court on this point is that rendered in the case of Jose
Alcantara et al., vs. Mariano et al., 92 Phil., 796. This disposes of the alleged errors V and VI.
As to error VII, it is claimed that `there was no evidence to sustain the finding that defendant should be
sentenced to pay plaintiff P132.62 monthly from January, 1940, until he vacates the premises.' But it appears
from the record that that reasonable compensation for the use and occupation of the premises, as stipulated at
the hearing was P10 a month for each hectare and that the area occupied by defendant was 13.2619
hectares. The total rent to be paid for the area occupied should therefore be P132.62 a month. It is appears
from the testimony of J. A. Araneta and witness Emigdio Tanjuatco that as early as 1939 an action of ejectment
had already been filed against defendant. And it cannot be supposed that defendant has been paying rents,
for he has been asserting all along that the premises in question 'have always been since time immemorial in
open, continuous, exclusive and public and notorious possession and under claim of ownership adverse to the
entire world by defendant and his predecessors in interest.' This assignment of error is thus clearly without
merit.

ID.; CORPORATION AS PARTY MAY BE REPRESENTED BY ANOTHER PERSON, NATURAL OR

JUDICIAL.There is nothing against one corporation being represented by another person, natural or
juridical, in a suit in court, for the true rule is that "although a corporation has no power to enter into a
partnership, it may nevertheless enter into a joint venture with another where the nature of that venture is in
line with the business authorized by its charter." (Wyoming-Indiana Oil Gas Co. vs. Weston, 80 A. L. R., 1043,
citing 2, Fletcher Cyc. E. 1082.) [Tuason vs. Bolaos, 95 Phil. 106(1954)]
G.R. No. 75875 December 15, 1989
WOLRGANG AURBACH, JOHN GRIFFIN, DAVID P. WHITTINGHAM and CHARLES
CHAMSAY, petitioners,
vs.
SANITARY WARES MANUFACTURING CORPORATOIN, ERNESTO V. LAGDAMEO, ERNESTO R.
LAGDAMEO, JR., ENRIQUE R. LAGDAMEO, GEORGE F. LEE, RAUL A. BONCAN, BALDWIN YOUNG
and AVELINO V. CRUZ, respondents.
G.R. No. 75951 December 15, 1989
SANITARY WARES MANUFACTURING CORPORATION, ERNESTO R. LAGDAMEO, ENRIQUE B.
LAGDAMEO, GEORGE FL .EE RAUL A. BONCAN, BALDWIN YOUNG and AVELINO V.
CRUX, petitioners,
vs.
THE COURT OF APPEALS, WOLFGANG AURBACH, JOHN GRIFFIN, DAVID P. WHITTINGHAM,
CHARLES CHAMSAY and LUCIANO SALAZAR, respondents.
G.R. Nos. 75975-76 December 15, 1989
LUCIANO E. SALAZAR, petitioner,
vs.
SANITARY WARES MANUFACTURING CORPORATION, ERNESTO V. LAGDAMEO, ERNESTO R.
LAGDAMEO, JR., ENRIQUE R. LAGDAMEO, GEORGE F. LEE, RAUL A. BONCAN, BALDWIN YOUNG,
AVELINO V. CRUZ and the COURT OF APPEALS, respondents.
Belo, Abiera & Associates for petitioners in 75875.
Sycip, Salazar, Hernandez & Gatmaitan for Luciano E. Salazar.

Error No. VIII is but a consequence of the other errors alleged and needs for further consideration.
During the pendency of this case in this Court appellant, thru other counsel, has filed a motion to dismiss
alleging that there is pending before the Court of First Instance of Rizal another action between the same
parties and for the same cause and seeking to sustain that allegation with a copy of the complaint filed in said
action. But an examination of that complaint reveals that appellant's allegation is not correct, for the pretended
identity of parties and cause of action in the two suits does not appear. That other case is one for recovery of

GUTIERREZ, JR., J.:

These consolidated petitions seek the review of the amended decision of the Court of Appeals in CA-G.R. SP
Nos. 05604 and 05617 which set aside the earlier decision dated June 5, 1986, of the then Intermediate
Appellate Court and directed that in all subsequent elections for directors of Sanitary Wares Manufacturing
Corporation (Saniwares), American Standard Inc. (ASI) cannot nominate more than three (3) directors; that the
Filipino stockholders shall not interfere in ASI's choice of its three (3) nominees; that, on the other hand, the
Filipino stockholders can nominate only six (6) candidates and in the event they cannot agree on the six (6)
nominees, they shall vote only among themselves to determine who the six (6) nominees will be, with
cumulative voting to be allowed but without interference from ASI.
The antecedent facts can be summarized as follows:
In 1961, Saniwares, a domestic corporation was incorporated for the primary purpose of manufacturing and
marketing sanitary wares. One of the incorporators, Mr. Baldwin Young went abroad to look for foreign
partners, European or American who could help in its expansion plans. On August 15, 1962, ASI, a foreign
corporation domiciled in Delaware, United States entered into an Agreement with Saniwares and some Filipino
investors whereby ASI and the Filipino investors agreed to participate in the ownership of an enterprise which
would engage primarily in the business of manufacturing in the Philippines and selling here and abroad
vitreous china and sanitary wares. The parties agreed that the business operations in the Philippines shall be
carried on by an incorporated enterprise and that the name of the corporation shall initially be "Sanitary Wares
Manufacturing Corporation."
The Agreement has the following provisions relevant to the issues in these cases on the nomination and
election of the directors of the corporation:
3. Articles of Incorporation
(a) The Articles of Incorporation of the Corporation shall be substantially in the form
annexed hereto as Exhibit A and, insofar as permitted under Philippine law, shall
specifically provide for
(1) Cumulative voting for directors:
xxx xxx xxx
5. Management
(a) The management of the Corporation shall be vested in a Board of Directors, which
shall consist of nine individuals. As long as American-Standard shall own at least 30%
of the outstanding stock of the Corporation, three of the nine directors shall be
designated by American-Standard, and the other six shall be designated by the other
stockholders of the Corporation. (pp. 51 & 53, Rollo of 75875)
At the request of ASI, the agreement contained provisions designed to protect it as a minority group, including
the grant of veto powers over a number of corporate acts and the right to designate certain officers, such as a
member of the Executive Committee whose vote was required for important corporate transactions.
Later, the 30% capital stock of ASI was increased to 40%. The corporation was also registered with the Board
of Investments for availment of incentives with the condition that at least 60% of the capital stock of the
corporation shall be owned by Philippine nationals.
The joint enterprise thus entered into by the Filipino investors and the American corporation prospered.
Unfortunately, with the business successes, there came a deterioration of the initially harmonious relations

between the two groups. According to the Filipino group, a basic disagreement was due to their desire to
expand the export operations of the company to which ASI objected as it apparently had other subsidiaries of
joint joint venture groups in the countries where Philippine exports were contemplated. On March 8, 1983, the
annual stockholders' meeting was held. The meeting was presided by Baldwin Young. The minutes were taken
by the Secretary, Avelino Cruz. After disposing of the preliminary items in the agenda, the stockholders then
proceeded to the election of the members of the board of directors. The ASI group nominated three persons
namely; Wolfgang Aurbach, John Griffin and David P. Whittingham. The Philippine investors nominated six,
namely; Ernesto Lagdameo, Sr., Raul A. Boncan, Ernesto R. Lagdameo, Jr., George F. Lee, and Baldwin
Young. Mr. Eduardo R, Ceniza then nominated Mr. Luciano E. Salazar, who in turn nominated Mr. Charles
Chamsay. The chairman, Baldwin Young ruled the last two nominations out of order on the basis of section 5
(a) of the Agreement, the consistent practice of the parties during the past annual stockholders' meetings to
nominate only nine persons as nominees for the nine-member board of directors, and the legal advice of
Saniwares' legal counsel. The following events then, transpired:
... There were protests against the action of the Chairman and heated arguments
ensued. An appeal was made by the ASI representative to the body of stockholders
present that a vote be taken on the ruling of the Chairman. The Chairman, Baldwin
Young, declared the appeal out of order and no vote on the ruling was taken. The
Chairman then instructed the Corporate Secretary to cast all the votes present and
represented by proxy equally for the 6 nominees of the Philippine Investors and the 3
nominees of ASI, thus effectively excluding the 2 additional persons nominated,
namely, Luciano E. Salazar and Charles Chamsay. The ASI representative, Mr. Jaqua
protested the decision of the Chairman and announced that all votes accruing to ASI
shares, a total of 1,329,695 (p. 27, Rollo, AC-G.R. SP No. 05617) were being
cumulatively voted for the three ASI nominees and Charles Chamsay, and instructed
the Secretary to so vote. Luciano E. Salazar and other proxy holders announced that
all the votes owned by and or represented by them 467,197 shares (p. 27, Rollo, ACG.R. SP No. 05617) were being voted cumulatively in favor of Luciano E. Salazar. The
Chairman, Baldwin Young, nevertheless instructed the Secretary to cast all votes
equally in favor of the three ASI nominees, namely, Wolfgang Aurbach, John Griffin and
David Whittingham and the six originally nominated by Rogelio Vinluan, namely,
Ernesto Lagdameo, Sr., Raul Boncan, Ernesto Lagdameo, Jr., Enrique Lagdameo,
George F. Lee, and Baldwin Young. The Secretary then certified for the election of the
following Wolfgang Aurbach, John Griffin, David Whittingham Ernesto Lagdameo, Sr.,
Ernesto Lagdameo, Jr., Enrique Lagdameo, George F. Lee, Raul A. Boncan, Baldwin
Young. The representative of ASI then moved to recess the meeting which was duly
seconded. There was also a motion to adjourn (p. 28, Rollo, AC-G.R. SP No. 05617).
This motion to adjourn was accepted by the Chairman, Baldwin Young, who
announced that the motion was carried and declared the meeting adjourned. Protests
against the adjournment were registered and having been ignored, Mr. Jaqua the ASI
representative, stated that the meeting was not adjourned but only recessed and that
the meeting would be reconvened in the next room. The Chairman then threatened to
have the stockholders who did not agree to the decision of the Chairman on the casting
of votes bodily thrown out. The ASI Group, Luciano E. Salazar and other stockholders,
allegedly representing 53 or 54% of the shares of Saniwares, decided to continue the
meeting at the elevator lobby of the American Standard Building. The continued
meeting was presided by Luciano E. Salazar, while Andres Gatmaitan acted as
Secretary. On the basis of the cumulative votes cast earlier in the meeting, the ASI
Group nominated its four nominees; Wolfgang Aurbach, John Griffin, David
Whittingham and Charles Chamsay. Luciano E. Salazar voted for himself, thus the said
five directors were certified as elected directors by the Acting Secretary, Andres
Gatmaitan, with the explanation that there was a tie among the other six (6) nominees
for the four (4) remaining positions of directors and that the body decided not to break
the tie. (pp. 37-39, Rollo of 75975-76)
These incidents triggered off the filing of separate petitions by the parties with the Securities and Exchange
Commission (SEC). The first petition filed was for preliminary injunction by Saniwares, Emesto V. Lagdameo,

Baldwin Young, Raul A. Bonean Ernesto R. Lagdameo, Jr., Enrique Lagdameo and George F. Lee against
Luciano Salazar and Charles Chamsay. The case was denominated as SEC Case No. 2417. The second
petition was for quo warranto and application for receivership by Wolfgang Aurbach, John Griffin, David
Whittingham, Luciano E. Salazar and Charles Chamsay against the group of Young and Lagdameo
(petitioners in SEC Case No. 2417) and Avelino F. Cruz. The case was docketed as SEC Case No. 2718. Both
sets of parties except for Avelino Cruz claimed to be the legitimate directors of the corporation.
The two petitions were consolidated and tried jointly by a hearing officer who rendered a decision upholding
the election of the Lagdameo Group and dismissing the quo warranto petition of Salazar and Chamsay. The
ASI Group and Salazar appealed the decision to the SEC en banc which affirmed the hearing officer's
decision.
The SEC decision led to the filing of two separate appeals with the Intermediate Appellate Court by Wolfgang
Aurbach, John Griffin, David Whittingham and Charles Chamsay (docketed as AC-G.R. SP No. 05604) and by
Luciano E. Salazar (docketed as AC-G.R. SP No. 05617). The petitions were consolidated and the appellate
court in its decision ordered the remand of the case to the Securities and Exchange Commission with the
directive that a new stockholders' meeting of Saniwares be ordered convoked as soon as possible, under the
supervision of the Commission.
Upon a motion for reconsideration filed by the appellees Lagdameo Group) the appellate court (Court of
Appeals) rendered the questioned amended decision. Petitioners Wolfgang Aurbach, John Griffin, David P.
Whittingham and Charles Chamsay in G.R. No. 75875 assign the following errors:
I. THE COURT OF APPEALS, IN EFFECT, UPHELD THE ALLEGED ELECTION OF
PRIVATE RESPONDENTS AS MEMBERS OF THE BOARD OF DIRECTORS OF
SANIWARES WHEN IN FACT THERE WAS NO ELECTION AT ALL.
II. THE COURT OF APPEALS PROHIBITS THE STOCKHOLDERS FROM
EXERCISING THEIR FULL VOTING RIGHTS REPRESENTED BY THE NUMBER OF
SHARES IN SANIWARES, THUS DEPRIVING PETITIONERS AND THE
CORPORATION THEY REPRESENT OF THEIR PROPERTY RIGHTS WITHOUT
DUE PROCESS OF LAW.
III. THE COURT OF APPEALS IMPOSES CONDITIONS AND READS PROVISIONS
INTO THE AGREEMENT OF THE PARTIES WHICH WERE NOT THERE, WHICH
ACTION IT CANNOT LEGALLY DO. (p. 17, Rollo-75875)
Petitioner Luciano E. Salazar in G.R. Nos. 75975-76 assails the amended decision on the following grounds:
11.1. ThatAmendedDecisionwouldsanctiontheCA'sdisregard of binding contractual
agreements entered into by stockholders and the replacement of the conditions of such
agreements with terms never contemplated by the stockholders but merely dictated by
the CA .
11.2. The Amended decision would likewise sanction the deprivation of the property
rights of stockholders without due process of law in order that a favored group of
stockholders may be illegally benefitted and guaranteed a continuing monopoly of the
control of a corporation. (pp. 14-15, Rollo-75975-76)
On the other hand, the petitioners in G.R. No. 75951 contend that:
I

THE AMENDED DECISION OF THE RESPONDENT COURT, WHILE RECOGNIZING

THAT THE STOCKHOLDERS OF SANIWARES ARE DIVIDED INTO TWO BLOCKS,
FAILS TO FULLY ENFORCE THE BASIC INTENT OF THE AGREEMENT AND THE
LAW.
II
THE AMENDED DECISION DOES NOT CATEGORICALLY RULE THAT PRIVATE
PETITIONERS HEREIN WERE THE DULY ELECTED DIRECTORS DURING THE 8
MARCH 1983 ANNUAL STOCKHOLDERS MEETING OF SANTWARES. (P. 24, Rollo75951)
The issues raised in the petitions are interrelated, hence, they are discussed jointly.
The main issue hinges on who were the duly elected directors of Saniwares for the year 1983 during its annual
stockholders' meeting held on March 8, 1983. To answer this question the following factors should be
determined: (1) the nature of the business established by the parties whether it was a joint venture or a
corporation and (2) whether or not the ASI Group may vote their additional 10% equity during elections of
Saniwares' board of directors.
The rule is that whether the parties to a particular contract have thereby established among themselves a joint
venture or some other relation depends upon their actual intention which is determined in accordance with the
rules governing the interpretation and construction of contracts. (Terminal Shares, Inc. v. Chicago, B. and Q.R.
Co. (DC MO) 65 F Supp 678; Universal Sales Corp. v. California Press Mfg. Co. 20 Cal. 2nd 751, 128 P 2nd
668)
The ASI Group and petitioner Salazar (G.R. Nos. 75975-76) contend that the actual intention of the parties
should be viewed strictly on the "Agreement" dated August 15,1962 wherein it is clearly stated that the parties'
intention was to form a corporation and not a joint venture.
They specifically mention number 16 under Miscellaneous Provisions which states:
xxx xxx xxx
c) nothing herein contained shall be construed to constitute any of the parties hereto
partners or joint venturers in respect of any transaction hereunder. (At P. 66, Rollo-GR
No. 75875)
They object to the admission of other evidence which tends to show that the parties' agreement was to
establish a joint venture presented by the Lagdameo and Young Group on the ground that it contravenes the
parol evidence rule under section 7, Rule 130 of the Revised Rules of Court. According to them, the
Lagdameo and Young Group never pleaded in their pleading that the "Agreement" failed to express the true
intent of the parties.
The parol evidence Rule under Rule 130 provides:
Evidence of written agreements-When the terms of an agreement have been reduced
to writing, it is to be considered as containing all such terms, and therefore, there can
be, between the parties and their successors in interest, no evidence of the terms of
the agreement other than the contents of the writing, except in the following cases:

(a) Where a mistake or imperfection of the writing, or its failure to express the true
intent and agreement of the parties or the validity of the agreement is put in issue by
the pleadings.
(b) When there is an intrinsic ambiguity in the writing.
Contrary to ASI Group's stand, the Lagdameo and Young Group pleaded in their Reply and Answer to
Counterclaim in SEC Case No. 2417 that the Agreement failed to express the true intent of the parties, to wit:

The Agreement also requires a 75% super-majority vote for the amendment of the
articles and by-laws of Saniwares [Sec. 3 (a) (iv) and (b) (iii)]. ASI is also given the right
to designate the president and plant manager [Sec. 5 (6)]. The Agreement further
provides that the sales policy of Saniwares shall be that which is normally followed by
ASI [Sec. 13 (a)] and that Saniwares should not export "Standard" products otherwise
than through ASI's Export Marketing Services [Sec. 13 (6)]. Under the Agreement, ASI
agreed to provide technology and know-how to Saniwares and the latter paid royalties
for the same. (At p. 2).
xxx xxx xxx

xxx xxx xxx

4. While certain provisions of the Agreement would make it appear that the parties
thereto disclaim being partners or joint venturers such disclaimer is directed at third
parties and is not inconsistent with, and does not preclude, the existence of two distinct
groups of stockholders in Saniwares one of which (the Philippine Investors) shall
constitute the majority, and the other ASI shall constitute the minority stockholder. In
any event, the evident intention of the Philippine Investors and ASI in entering into the
Agreement is to enter into ajoint venture enterprise, and if some words in the
Agreement appear to be contrary to the evident intention of the parties, the latter shall
prevail over the former (Art. 1370, New Civil Code). The various stipulations of a
contract shall be interpreted together attributing to the doubtful ones that sense which
may result from all of them taken jointly (Art. 1374, New Civil Code). Moreover, in order
to judge the intention of the contracting parties, their contemporaneous and
subsequent acts shall be principally considered. (Art. 1371, New Civil Code). (Part I,
Original Records, SEC Case No. 2417)

It is pertinent to note that the provisions of the Agreement requiring a 7 out of 9 votes of
the board of directors for certain actions, in effect gave ASI (which designates 3
directors under the Agreement) an effective veto power. Furthermore, the grant to ASI
of the right to designate certain officers of the corporation; the super-majority voting
requirements for amendments of the articles and by-laws; and most significantly to the
issues of tms case, the provision that ASI shall designate 3 out of the 9 directors and
the other stockholders shall designate the other 6, clearly indicate that there are two
distinct groups in Saniwares, namely ASI, which owns 40% of the capital stock and the
Philippine National stockholders who own the balance of 60%, and that 2) ASI is given
certain protections as the minority stockholder.
Premises considered, we believe that under the Agreement there are two groups of
stockholders who established a corporation with provisions for a special contractual
relationship between the parties, i.e., ASI and the other stockholders. (pp. 4-5)
Section 5 (a) of the agreement uses the word "designated" and not "nominated" or "elected" in the selection of
the nine directors on a six to three ratio. Each group is assured of a fixed number of directors in the board.

It has been ruled:

In an action at law, where there is evidence tending to prove that the parties joined
their efforts in furtherance of an enterprise for their joint profit, the question whether
they intended by their agreement to create a joint adventure, or to assume some other
relation is a question of fact for the jury. (Binder v. Kessler v 200 App. Div. 40,192 N Y S
653; Pyroa v. Brownfield (Tex. Civ. A.) 238 SW 725; Hoge v. George, 27 Wyo, 423, 200
P 96 33 C.J. p. 871)
In the instant cases, our examination of important provisions of the Agreement as well as the testimonial
evidence presented by the Lagdameo and Young Group shows that the parties agreed to establish a joint
venture and not a corporation. The history of the organization of Saniwares and the unusual arrangements
which govern its policy making body are all consistent with a joint venture and not with an ordinary corporation.
As stated by the SEC:
According to the unrebutted testimony of Mr. Baldwin Young, he negotiated the
Agreement with ASI in behalf of the Philippine nationals. He testified that ASI agreed to
accept the role of minority vis-a-vis the Philippine National group of investors, on the
condition that the Agreement should contain provisions to protect ASI as the minority.
An examination of the Agreement shows that certain provisions were included to
protect the interests of ASI as the minority. For example, the vote of 7 out of 9 directors
is required in certain enumerated corporate acts [Sec. 3 (b) (ii) (a) of the Agreement].
ASI is contractually entitled to designate a member of the Executive Committee and
the vote of this member is required for certain transactions [Sec. 3 (b) (i)].

Moreover, ASI in its communications referred to the enterprise as joint venture. Baldwin Young also testified
that Section 16(c) of the Agreement that "Nothing herein contained shall be construed to constitute any of the
parties hereto partners or joint venturers in respect of any transaction hereunder" was merely to obviate the
possibility of the enterprise being treated as partnership for tax purposes and liabilities to third parties.
Quite often, Filipino entrepreneurs in their desire to develop the industrial and manufacturing capacities of a
local firm are constrained to seek the technology and marketing assistance of huge multinational corporations
of the developed world. Arrangements are formalized where a foreign group becomes a minority owner of a
firm in exchange for its manufacturing expertise, use of its brand names, and other such assistance. However,
there is always a danger from such arrangements. The foreign group may, from the start, intend to establish its
own sole or monopolistic operations and merely uses the joint venture arrangement to gain a foothold or test
the Philippine waters, so to speak. Or the covetousness may come later. As the Philippine firm enlarges its
operations and becomes profitable, the foreign group undermines the local majority ownership and actively
tries to completely or predominantly take over the entire company. This undermining of joint ventures is not
consistent with fair dealing to say the least. To the extent that such subversive actions can be lawfully
prevented, the courts should extend protection especially in industries where constitutional and legal
requirements reserve controlling ownership to Filipino citizens.
The Lagdameo Group stated in their appellees' brief in the Court of Appeal
In fact, the Philippine Corporation Code itself recognizes the right of stockholders to
enter into agreements regarding the exercise of their voting rights.
Sec. 100. Agreements by stockholders.-

xxx xxx xxx

2. An agreement between two or more stockholders, if in writing and signed by the
parties thereto, may provide that in exercising any voting rights, the shares held by
them shall be voted as therein provided, or as they may agree, or as determined in
accordance with a procedure agreed upon by them.
Appellants contend that the above provision is included in the Corporation Code's
chapter on close corporations and Saniwares cannot be a close corporation because it
has 95 stockholders. Firstly, although Saniwares had 95 stockholders at the time of the
disputed stockholders meeting, these 95 stockholders are not separate from each
other but are divisible into groups representing a single Identifiable interest. For
example, ASI, its nominees and lawyers count for 13 of the 95 stockholders. The
YoungYutivo family count for another 13 stockholders, the Chamsay family for 8
stockholders, the Santos family for 9 stockholders, the Dy family for 7 stockholders,
etc. If the members of one family and/or business or interest group are considered as
one (which, it is respectfully submitted, they should be for purposes of determining how
closely held Saniwares is there were as of 8 March 1983, practically only 17
stockholders of Saniwares. (Please refer to discussion in pp. 5 to 6 of appellees'
Rejoinder Memorandum dated 11 December 1984 and Annex "A" thereof).
Secondly, even assuming that Saniwares is technically not a close corporation because
it has more than 20 stockholders, the undeniable fact is that it is a closeheld corporation. Surely, appellants cannot honestly claim that Saniwares is a public
issue or a widely held corporation.
In the United States, many courts have taken a realistic approach to joint venture
corporations and have not rigidly applied principles of corporation law designed
primarily for public issue corporations. These courts have indicated that express
arrangements between corporate joint ventures should be construed with less
emphasis on the ordinary rules of law usually applied to corporate entities and with
more consideration given to the nature of the agreement between the joint venturers
(Please see Wabash Ry v. American Refrigerator Transit Co., 7 F 2d 335; Chicago, M
& St. P. Ry v. Des Moines Union Ry; 254 Ass'n. 247 US. 490'; Seaboard Airline Ry v.
Atlantic Coast Line Ry; 240 N.C. 495,.82 S.E. 2d 771; Deboy v. Harris, 207 Md.,
212,113 A 2d 903; Hathway v. Porter Royalty Pool, Inc., 296 Mich. 90, 90, 295 N.W.
571; Beardsley v. Beardsley, 138 U.S. 262; "The Legal Status of Joint Venture
Corporations", 11 Vand Law Rev. p. 680,1958). These American cases dealt with legal
questions as to the extent to which the requirements arising from the corporate form of
joint venture corporations should control, and the courts ruled that substantial justice
lay with those litigants who relied on the joint venture agreement rather than the
litigants who relied on the orthodox principles of corporation law.
As correctly held by the SEC Hearing Officer:
It is said that participants in a joint venture, in organizing the joint venture deviate from
the traditional pattern of corporation management. A noted authority has pointed out
that just as in close corporations, shareholders' agreements in joint venture
corporations often contain provisions which do one or more of the following: (1) require
greater than majority vote for shareholder and director action; (2) give certain
shareholders or groups of shareholders power to select a specified number of
directors; (3) give to the shareholders control over the selection and retention of
employees; and (4) set up a procedure for the settlement of disputes by arbitration
(See I O' Neal, Close Corporations, 1971 ed., Section 1.06a, pp. 15-16) (Decision of
SEC Hearing Officer, P. 16)

Thirdly paragraph 2 of Sec. 100 of the Corporation Code does not necessarily imply
that agreements regarding the exercise of voting rights are allowed only in close
corporations. As Campos and Lopez-Campos explain:
Paragraph 2 refers to pooling and voting agreements in particular. Does this provision
necessarily imply that these agreements can be valid only in close corporations as
defined by the Code? Suppose that a corporation has twenty five stockholders, and
therefore cannot qualify as a close corporation under section 96, can some of them
enter into an agreement to vote as a unit in the election of directors? It is submitted that
there is no reason for denying stockholders of corporations other than close ones the
right to enter into not voting or pooling agreements to protect their interests, as long as
they do not intend to commit any wrong, or fraud on the other stockholders not parties
to the agreement. Of course, voting or pooling agreements are perhaps more useful
and more often resorted to in close corporations. But they may also be found
necessary even in widely held corporations. Moreover, since the Code limits the legal
meaning of close corporations to those which comply with the requisites laid down by
section 96, it is entirely possible that a corporation which is in fact a close corporation
will not come within the definition. In such case, its stockholders should not be
precluded from entering into contracts like voting agreements if these are otherwise
valid. (Campos & Lopez-Campos, op cit, p. 405)
In short, even assuming that sec. 5(a) of the Agreement relating to the designation or
nomination of directors restricts the right of the Agreement's signatories to vote for
directors, such contractual provision, as correctly held by the SEC, is valid and binding
upon the signatories thereto, which include appellants. (Rollo No. 75951, pp. 90-94)
In regard to the question as to whether or not the ASI group may vote their additional equity during elections of
Saniwares' board of directors, the Court of Appeals correctly stated:
As in other joint venture companies, the extent of ASI's participation in the
management of the corporation is spelled out in the Agreement. Section 5(a) hereof
says that three of the nine directors shall be designated by ASI and the remaining six
by the other stockholders, i.e., the Filipino stockholders. This allocation of board seats
is obviously in consonance with the minority position of ASI.
Having entered into a well-defined contractual relationship, it is imperative that the
parties should honor and adhere to their respective rights and obligations thereunder.
Appellants seem to contend that any allocation of board seats, even in joint venture
corporations, are null and void to the extent that such may interfere with the
stockholder's rights to cumulative voting as provided in Section 24 of the Corporation
Code. This Court should not be prepared to hold that any agreement which curtails in
any way cumulative voting should be struck down, even if such agreement has been
freely entered into by experienced businessmen and do not prejudice those who are
not parties thereto. It may well be that it would be more cogent to hold, as the
Securities and Exchange Commission has held in the decision appealed from, that
cumulative voting rights may be voluntarily waived by stockholders who enter into
special relationships with each other to pursue and implement specific purposes, as in
joint venture relationships between foreign and local stockholders, so long as such
agreements do not adversely affect third parties.
In any event, it is believed that we are not here called upon to make a general rule on
this question. Rather, all that needs to be done is to give life and effect to the particular
contractual rights and obligations which the parties have assumed for themselves.

On the one hand, the clearly established minority position of ASI and the contractual
allocation of board seats Cannot be disregarded. On the other hand, the rights of the
stockholders to cumulative voting should also be protected.
In our decision sought to be reconsidered, we opted to uphold the second over the first.
Upon further reflection, we feel that the proper and just solution to give due
consideration to both factors suggests itself quite clearly. This Court should recognize
and uphold the division of the stockholders into two groups, and at the same time
uphold the right of the stockholders within each group to cumulative voting in the
process of determining who the group's nominees would be. In practical terms, as
suggested by appellant Luciano E. Salazar himself, this means that if the Filipino
stockholders cannot agree who their six nominees will be, a vote would have to be
taken among the Filipino stockholders only. During this voting, each Filipino
stockholder can cumulate his votes. ASI, however, should not be allowed to interfere in
the voting within the Filipino group. Otherwise, ASI would be able to designate more
than the three directors it is allowed to designate under the Agreement, and may even
be able to get a majority of the board seats, a result which is clearly contrary to the
contractual intent of the parties.
Such a ruling will give effect to both the allocation of the board seats and the
stockholder's right to cumulative voting. Moreover, this ruling will also give due
consideration to the issue raised by the appellees on possible violation or
circumvention of the Anti-Dummy Law (Com. Act No. 108, as amended) and the
nationalization requirements of the Constitution and the laws if ASI is allowed to
nominate more than three directors. (Rollo-75875, pp. 38-39)
The ASI Group and petitioner Salazar, now reiterate their theory that the ASI Group has the right to vote their
additional equity pursuant to Section 24 of the Corporation Code which gives the stockholders of a corporation
the right to cumulate their votes in electing directors. Petitioner Salazar adds that this right if granted to the ASI
Group would not necessarily mean a violation of the Anti-Dummy Act (Commonwealth Act 108, as amended).
He cites section 2-a thereof which provides:
And provided finally that the election of aliens as members of the board of directors or
governing body of corporations or associations engaging in partially nationalized
activities shall be allowed in proportion to their allowable participation or share in the
capital of such entities. (amendments introduced by Presidential Decree 715, section 1,
promulgated May 28, 1975)
The ASI Group's argument is correct within the context of Section 24 of the Corporation Code. The point of
query, however, is whether or not that provision is applicable to a joint venture with clearly defined
agreements:
The legal concept of ajoint venture is of common law origin. It has no precise legal
definition but it has been generally understood to mean an organization formed for
some temporary purpose. (Gates v. Megargel, 266 Fed. 811 [1920]) It is in fact hardly
distinguishable from the partnership, since their elements are similar community of
interest in the business, sharing of profits and losses, and a mutual right of control.
Blackner v. Mc Dermott, 176 F. 2d. 498, [1949]; Carboneau v. Peterson, 95 P. 2d., 1043
[1939]; Buckley v. Chadwick, 45 Cal. 2d. 183, 288 P. 2d. 12 289 P. 2d. 242 [1955]). The
main distinction cited by most opinions in common law jurisdictions is that the
partnership contemplates a general business with some degree of continuity, while the
joint venture is formed for the execution of a single transaction, and is thus of a
temporary nature. (Tufts v. Mann 116 Cal. App. 170, 2 P. 2d. 500 [1931]; Harmon v.
Martin, 395 111. 595, 71 NE 2d. 74 [1947]; Gates v. Megargel 266 Fed. 811 [1920]).
This observation is not entirely accurate in this jurisdiction, since under the Civil Code,

a partnership may be particular or universal, and a particular partnership may have for
its object a specific undertaking. (Art. 1783, Civil Code). It would seem therefore that
under Philippine law, a joint venture is a form of partnership and should thus be
governed by the law of partnerships. The Supreme Court has however recognized a
distinction between these two business forms, and has held that although a corporation
cannot enter into a partnership contract, it may however engage in a joint venture with
others. (At p. 12, Tuazon v. Bolanos, 95 Phil. 906 [1954]) (Campos and Lopez-Campos
Comments, Notes and Selected Cases, Corporation Code 1981)
Moreover, the usual rules as regards the construction and operations of contracts generally apply to a contract
of joint venture. (O' Hara v. Harman 14 App. Dev. (167) 43 NYS 556).
Bearing these principles in mind, the correct view would be that the resolution of the question of whether or not
the ASI Group may vote their additional equity lies in the agreement of the parties.
Necessarily, the appellate court was correct in upholding the agreement of the parties as regards the allocation
of director seats under Section 5 (a) of the "Agreement," and the right of each group of stockholders to
cumulative voting in the process of determining who the group's nominees would be under Section 3 (a) (1) of
the "Agreement." As pointed out by SEC, Section 5 (a) of the Agreement relates to the manner of nominating
the members of the board of directors while Section 3 (a) (1) relates to the manner of voting for these
nominees.
This is the proper interpretation of the Agreement of the parties as regards the election of members of the
board of directors.
To allow the ASI Group to vote their additional equity to help elect even a Filipino director who would be
beholden to them would obliterate their minority status as agreed upon by the parties. As aptly stated by the
appellate court:
... ASI, however, should not be allowed to interfere in the voting within the Filipino
group. Otherwise, ASI would be able to designate more than the three directors it is
allowed to designate under the Agreement, and may even be able to get a majority of
the board seats, a result which is clearly contrary to the contractual intent of the
parties.
Such a ruling will give effect to both the allocation of the board seats and the
stockholder's right to cumulative voting. Moreover, this ruling will also give due
consideration to the issue raised by the appellees on possible violation or
circumvention of the Anti-Dummy Law (Com. Act No. 108, as amended) and the
nationalization requirements of the Constitution and the laws if ASI is allowed to
nominate more than three directors. (At p. 39, Rollo, 75875)
Equally important as the consideration of the contractual intent of the parties is the consideration as regards
the possible domination by the foreign investors of the enterprise in violation of the nationalization
requirements enshrined in the Constitution and circumvention of the Anti-Dummy Act. In this regard, petitioner
Salazar's position is that the Anti-Dummy Act allows the ASI group to elect board directors in proportion to
their share in the capital of the entity. It is to be noted, however, that the same law also limits the election of
aliens as members of the board of directors in proportion to their allowance participation of said entity. In the
instant case, the foreign Group ASI was limited to designate three directors. This is the allowable participation
of the ASI Group. Hence, in future dealings, this limitation of six to three board seats should always be
maintained as long as the joint venture agreement exists considering that in limiting 3 board seats in the 9man board of directors there are provisions already agreed upon and embodied in the parties' Agreement to
protect the interests arising from the minority status of the foreign investors.

With these findings, we the decisions of the SEC Hearing Officer and SEC which were impliedly affirmed by
the appellate court declaring Messrs. Wolfgang Aurbach, John Griffin, David P Whittingham, Emesto V.
Lagdameo, Baldwin young, Raul A. Boncan, Emesto V. Lagdameo, Jr., Enrique Lagdameo, and George F. Lee
as the duly elected directors of Saniwares at the March 8,1983 annual stockholders' meeting.

Before us is a Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil Procedure of the
Decision1 of the Court of Appeals (CA) in CA-G.R. CV No. 69200 and its Resolution 2 denying petitioners
motion for reconsideration thereof.
The factual and procedural antecedents are as follows:

On the other hand, the Lagdameo and Young Group (petitioners in G.R. No. 75951) object to a cumulative
voting during the election of the board of directors of the enterprise as ruled by the appellate court and submits
that the six (6) directors allotted the Filipino stockholders should be selected by consensus pursuant to section
5 (a) of the Agreement which uses the word "designate" meaning "nominate, delegate or appoint."
They also stress the possibility that the ASI Group might take control of the enterprise if the Filipino
stockholders are allowed to select their nominees separately and not as a common slot determined by the
majority of their group.
Section 5 (a) of the Agreement which uses the word designates in the allocation of board directors should not
be interpreted in isolation. This should be construed in relation to section 3 (a) (1) of the Agreement. As we
stated earlier, section 3(a) (1) relates to the manner of voting for these nominees which is cumulative
voting while section 5(a) relates to the manner of nominating the members of the board of directors. The
petitioners in G.R. No. 75951 agreed to this procedure, hence, they cannot now impugn its legality.
The insinuation that the ASI Group may be able to control the enterprise under the cumulative voting
procedure cannot, however, be ignored. The validity of the cumulative voting procedure is dependent on the
directors thus elected being genuine members of the Filipino group, not voters whose interest is to increase
the ASI share in the management of Saniwares. The joint venture character of the enterprise must always be
taken into account, so long as the company exists under its original agreement. Cumulative voting may not be
used as a device to enable ASI to achieve stealthily or indirectly what they cannot accomplish openly. There
are substantial safeguards in the Agreement which are intended to preserve the majority status of the Filipino
investors as well as to maintain the minority status of the foreign investors group as earlier discussed. They
should be maintained.
WHEREFORE, the petitions in G.R. Nos. 75975-76 and G.R. No. 75875 are DISMISSED and the petition in
G.R. No. 75951 is partly GRANTED. The amended decision of the Court of Appeals is MODIFIED in that
Messrs. Wolfgang Aurbach John Griffin, David Whittingham Emesto V. Lagdameo, Baldwin Young, Raul A.
Boncan, Ernesto R. Lagdameo, Jr., Enrique Lagdameo, and George F. Lee are declared as the duly elected
directors of Saniwares at the March 8,1983 annual stockholders' meeting. In all other respects, the questioned
decision is AFFIRMED. Costs against the petitioners in G.R. Nos. 75975-76 and G.R. No. 75875.

Primelink Properties and Development Corporation (Primelink for brevity) is a domestic corporation engaged
in real estate development. Rafaelito W. Lopez is its President and Chief Executive Officer.3
Ma. Clara T. Lazatin-Magat and her brothers, Jose Serafin T. Lazatin, Jaime T. Lazatin and Jose Marcos T.
Lazatin (the Lazatins for brevity), are co-owners of two (2) adjoining parcels of land, with a combined area of
30,000 square meters, located in Tagaytay City and covered by Transfer Certificate of Title (TCT) No. T108484of the Register of Deeds of Tagaytay City.
On March 10, 1994, the Lazatins and Primelink, represented by Lopez, in his capacity as President, entered
into a Joint Venture Agreement5 (JVA) for the development of the aforementioned property into a residential
subdivision to be known as "Tagaytay Garden Villas." Under the JVA, the Lazatin siblings obliged themselves
to contribute the two parcels of land as their share in the joint venture. For its part, Primelink undertook to
contribute money, labor, personnel, machineries, equipment, contractors pool, marketing activities,
managerial expertise and other needed resources to develop the property and construct therein the units for
sale to the public. Specifically, Primelink bound itself to accomplish the following, upon the execution of the
deed:
a.) Survey the land, and prepare the projects master plans, engineering designs, structural and
architectural plans, site development plans, and such other need plans in accordance with existing
laws and the rules and regulations of appropriate government institutions, firms or agencies;
b.) Secure and pay for all the licenses, permits and clearances needed for the projects;
c.) Furnish all materials, equipment, labor and services for the development of the land in
preparation for the construction and sale of the different types of units (single-detached,
duplex/twin, cluster and row house);
d.) Guarantee completion of the land development work if not prevented by force majeure or
fortuitous event or by competent authority, or other unavoidable circumstances beyond the
DEVELOPERS control, not to exceed three years from the date of the signing of this Joint Venture
Agreement, except the installation of the electrical facilities which is solely MERALCOS
responsibility;
e.) Provide necessary manpower resources, like executive and managerial officers, support
personnel and marketing staff, to handle all services related to land and housing development
(administrative and construction) and marketing (sales, advertising and promotions). 6

SO ORDERED.

The Lazatins and Primelink covenanted that they shall be entitled to draw allowances/advances as follows:
G.R. No. 167379

June 27, 2006

PRIMELINK PROPERTIES AND DEVELOPMENT CORPORATION and RAFAELITO W.

LOPEZ, Petitioners,
vs.
MA. CLARITA T. LAZATIN-MAGAT, JOSE SERAFIN T. LAZATIN, JAIME TEODORO T. LAZATIN and JOSE
MARCOS T. LAZATIN, Respondents.
DECISION
CALLEJO, SR., J.:

1. During the first two years of the Project, the DEVELOPER and the LANDOWNER can draw
allowances or make advances not exceeding a total of twenty percent (20%) of the net revenue for
that period, on the basis of sixty percent (60%) for the DEVELOPER and forty percent (40%) for
the LANDOWNERS.
The drawing allowances/advances are limited to twenty percent (20%) of the net revenue for the
first two years, in order to have sufficient reserves or funds to protect and/or guarantee the
construction and completion of the different types of units mentioned above.
2. After two years, the DEVELOPER and the LANDOWNERS shall be entitled to drawing
allowances and/or advances equivalent to sixty percent (60%) and forty percent (40%),
respectively, of the total net revenue or income of the sale of the units. 7

They also agreed to share in the profits from the joint venture, thus:
1. The DEVELOPER shall be entitled to sixty percent (60%) of the net revenue or income of the
Joint Venture project, after deducting all expenses incurred in connection with the land
development (such as administrative management and construction expenses), and marketing
(such as sales, advertising and promotions), and
2. The LANDOWNERS shall be entitled to forty percent (40%) of the net revenue or income of the
Joint Venture project, after deducting all the above-mentioned expenses. 8

SALES-INCOME-COST PROJECTION
lawphil.net
COST PRICE

A2 1,260,000

1,940,000 x 24

B2 960,000

1,540,000 x 24

C2 1,400,000

2,100,000 x 16

D2 700,000

900,000 x 24

ROW-TYPE TOWNHOMES:
D1 1,600,000

21,600,000.00

P231,200,000.00

Total Building Expense (A2+B2+C2+D2)

92,480,000.00

COMPUTATION OF ADDL. INCOME ON INTEREST

=

P 69,360,000

Balance = 70%

161,840,000

P238,409,740

x .03069 x 48

Total Amount (TCP + int. earn.)

P 69,360,000.00

238,409,740.00
P307,769,740.00

EXPENSES:
less: A

The parties agreed that any unsettled or unresolved misunderstanding or conflicting opinions between the
parties relative to the interpretation, scope and reach, and the enforcement/implementation of any provision of
the agreement shall be referred to Voluntary Arbitration in accordance with the Arbitration Law. 10

In a Letter13 dated April 10, 1997, the Lazatins, through counsel, demanded that Primelink comply with its
obligations under the JVA, otherwise the appropriate action would be filed against it to protect their rights and
interests. This impelled the officers of Primelink to meet with the Lazatins and enabled the latter to review its
33,600,000.00 business records/papers. In another Letter14 dated October 22, 1997, the Lazatins informed Primelink that they
had decided to rescind the JVA effective upon its receipt of the said letter. The Lazatins demanded that
Primelink cease and desist from further developing the property.

Total Cash Price (A1+B1+C1+D1)

TCP x 30% D/P

P175,545,740.009

36,960,000.00

P138,720,000.00
(GROSS)

132,224,000.00

The Lazatins agreed to subject the title over the subject property to an escrow agreement. Conformably with
the escrow agreement, the owners duplicate of the title was deposited with the China Banking
P 46,560,000.00 Corporation.11However, Primelink failed to immediately secure a Development Permit from Tagaytay City, and
applied the permit only on August 30, 1995. On October 12, 1995, the City issued a Development Permit to
Primelink.12

SINGLE:
C1 3,500,000

less:

P307,769,740.00

INCOME

TWIN:
B1 2,500,000

Total Projected Income (incl. income from interest earn.)

DIFFERENCE

CLUSTER:
A1 3,200,000

P132,224,000.00

RECONCILIATION OF INCOME VS. EXPENSES

Total Expenses

Primelink submitted to the Lazatins its Projection of the Sales-Income-Cost of the project:

SELLING PRICE

TOTAL EXPENSES (A+B+C+D+E)

Building expenses

Subsequently, on January 19, 1998, the Lazatins filed, with the Regional Trial Court (RTC) of Tagaytay City,
Branch 18, a complaint for rescission accounting and damages, with prayer for temporary restraining order
and/or preliminary injunction against Primelink and Lopez. The case was docketed as Civil Case No. TG-1776.
Plaintiffs alleged, among others, that, despite the lapse of almost four (4) years from the execution of the JVA
and the delivery of the title and possession of the land to defendants, the land development aspect of the
project had not yet been completed, and the construction of the housing units had not yet made any headway,
based on the following facts, namely: (a) of the 50 housing units programmed for Phase I, only the following
types of houses appear on the site in these condition: (aa) single detached, one completed and two units
uncompleted; (bb) cluster houses, one unit nearing completion; (cc) duplex, two units completed and two units
unfinished; and (dd) row houses, two units, completed; (b) in Phase II thereof, all that was done by the
defendants was to grade the area; the units so far constructed had been the object of numerous complaints by
their owners/purchasers for poor workmanship and the use of sub-standard materials in their construction,
thus, undermining the projects marketability. Plaintiffs also alleged that defendants had, without justifiable
reason, completely disregarded previously agreed accounting and auditing procedures, checks and balances
system installed for the mutual protection of both parties, and the scheduled regular meetings were seldom
held to the detriment and disadvantage of plaintiffs. They averred that they sent a letter through counsel,
demanding compliance of what was agreed upon under the agreement but defendants refused to heed said
demand. After a succession of letters with still no action from defendants, plaintiffs sent a letter on October 22,
1997, a letter formally rescinding the JVA.

P 92,480,000.00

Commission (8% of TCP)

Admin. & Mgmt. expenses (2% of TCP)

Advertising & Promo exp. (2% of TCP)

Plaintiffs also claimed that in a sales-income-costs projection prepared and submitted by defendants, they
18,496,000.00 (plaintiffs) stood to receive the amount of P70,218,296.00 as their net share in the joint venture project; to
date, however, after almost four (4) years and despite the undertaking in the JVA that plaintiffs shall initially get
4,624,000.00 20% of the agreed net revenue during the first two (2) years (on the basis of the 60%-40% sharing) and their
full 40% share thereafter, defendants had yet to deliver these shares to plaintiffs which by conservative
4,624,000.00 estimates would amount to no less than P40,000,000.00.15

Building expenses for the open

spaces and Amenities (Development
cost not incl. Housing) 400 x 30,000 sqms.

12,000,000.00

Plaintiffs prayed that, after due proceedings, judgment be rendered in their favor, thus:
WHEREFORE, it is respectfully prayed of this Honorable Court that a temporary restraining order be forthwith
issued enjoining the defendants to immediately stop their land development, construction and marketing of the

housing units in the aforesaid project; after due proceedings, to issue a writ of preliminary injunction enjoining
and prohibiting said land development, construction and marketing of housing units, pending the disposition of
the instant case.
After trial, a decision be rendered:
1. Rescinding the Joint Venture Agreement executed between the plaintiffs and the defendants;
2. Immediately restoring to the plaintiffs possession of the subject parcels of land;
3. Ordering the defendants to render an accounting of all income generated as well as expenses
incurred and disbursement made in connection with the project;
4. Making the Writ of Preliminary Injunction permanent;
5. Ordering the defendants, jointly and severally, to pay the plaintiffs the amount Forty Million
Pesos (P40,000,000.00) in actual and/or compensatory damages;
6. Ordering the defendants, jointly and severally, to pay the plaintiffs the amount of Two Million
Pesos (P2,000,000.00) in exemplary damages;
7. Ordering the defendants, jointly and severally, to pay the plaintiffs the amount equivalent to ten
percent (10%) of the total amount due as and for attorneys fees; and
8. To pay the costs of this suit.
Other reliefs and remedies as are just and equitable are likewise being prayed for. 16
Defendants opposed plaintiffs plea for a writ of preliminary injunction on the ground that plaintiffs complaint
was premature, due to their failure to refer their complaint to a Voluntary Arbitrator pursuant to the JVA in
relation to Section 2 of Republic Act No. 876 before filing their complaint in the RTC. They prayed for the
dismissal of the complaint under Section 1(j), Rule 16 of the Rules of Court:
WHEREFORE, it is respectfully prayed that an Order be issued:
a) dismissing the Complaint on the basis of Section 1(j), Rule 16 of the aforecited Rules of Court,
or, in the alternative,

prayed for a series of 15-day extensions in eight (8) successive motions for extensions on the same
justification.20 The RTC again granted the additional time prayed for, but in granting the last extension, it
warned against further extension. 21Despite the admonition, defendants again moved for another 15-day
extension,22 which, this time, the RTC denied. No answer having been filed, plaintiffs moved to declare the
defendants in default,23 which the RTC granted in its Order24 dated June 24, 1998.
On June 25, 1998, defendants filed, via registered mail, their "Answer with Counterclaim and Opposition to the
Prayer for the Issuance of a Writ of Preliminary Injunction." 25 On July 8, 1998, defendants filed a Motion to Set
Aside the Order of Default.26 This was opposed by plaintiffs.27 In an Order28 dated July 14, 1998, the RTC
denied defendants motion to set aside the order of default and ordered the reception of plaintiffs evidence ex
parte. Defendants filed a motion for reconsideration 29 of the July 14, 1998 Order, which the RTC denied in its
Order30 dated October 21, 1998.
Defendants thereafter interposed an appeal to the CA assailing the Order declaring them in default, as well as
the Order denying their motion to set aside the order of default, alleging that these were contrary to facts of the
case, the law and jurisprudence.31 On September 16, 1999, the appellate court issued a
Resolution32 dismissing the appeal on the ground that the Orders appealed from were interlocutory in
character and, therefore, not appealable. No motion for reconsideration of the Order of the dismissal was filed
by defendants.
In the meantime, plaintiffs adduced ex parte their testimonial and documentary evidence. On April 17, 2000,
the RTC rendered a Decision, the dispositive part of which reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against the defendants as follows:
1. Ordering the rescission of the Joint Venture Agreement as of the date of filing of this complaint;
2. Ordering the defendants to return possession, including all improvements therein, of the real
estate property belonging to the plaintiffs which is described in, and covered by Transfer Certificate
of Title No. T-10848 of the Register of Deeds of Tagaytay City, and located in Barangay Anulin, City
of Tagaytay;
3. Ordering the defendants to turn over all documents, records or papers that have been executed,
prepared and retained in connection with any contract to sell or deed of sale of all lots/units sold
during the effectivity of the joint venture agreement;
4. Ordering the defendants to pay the plaintiffs the sum of P1,041,524.26 representing their share
of the net income of the P2,603,810.64 as of September 30, 1995, as stipulated in the joint venture
agreement;
5. Ordering the defendants to pay the plaintiffs attorneys fees in the amount of P104,152.40;

b) requiring the plaintiffs to make initiatory step for arbitration by filing the demand to arbitrate, and
then asking the parties to resolve their controversies, pursuant to the Arbitration Law, or in the
alternative;
c) staying or suspending the proceedings in captioned case until the completion of the arbitration,
and
d) denying the plaintiffs prayer for the issuance of a temporary restraining order or writ of
preliminary injunction.
Other reliefs and remedies just and equitable in the premises are prayed for.17
In the meantime, before the expiration of the reglementary period to answer the complaint, defendants,
invoking their counsels heavy workload, prayed for a 15-day extension 18 within which to file their answer. The
additional time prayed for was granted by the RTC.19 However, instead of filing their answer, defendants

6. Ordering the defendants to pay the costs.

SO ORDERED.33
The trial court anchored its decision on the following findings:
x x x Evidence on record have shown patent violations by the defendants of the stipulations particularly
paragraph II covering Developers (defendant) undertakings, as well as paragraph III and paragraph V of the
JVA. These violations are not limited to those made against the plaintiffs alone as it appears that some of the
unit buyers themselves have their own separate gripes against the defendants as typified by the letters
(Exhibits "G" and "H") of Mr. Emmanuel Enciso.
xxxx

Rummaging through the evidence presented in the course of the testimony of Mrs. Maminta on August 6, 1998
(Exhibits "N," "O," "P," "Q" and "R" as well as submarkings, pp. 60 to 62, TSN August 6, 1998) this court has
observed, and is thus convinced, that a pattern of what appears to be a scheme or plot to reduce and
eventually blot out the net income generated from sales of housing units by defendants, has been established.
Exhibit "P-2" is explicit in declaring that, as of September 30, 1995, the joint venture project earned a net
income of aboutP2,603,810.64. This amount, however, was drastically reduced in a subsequent financial
report submitted by the defendants to P1,954,216.39. Shortly thereafter, and to the dismay of the plaintiffs, the
defendants submitted an income statement and a balance sheet (Exhibits "R" and "R-1") indicating a net loss
of P5,122,906.39 as of June 30, 1997.
Of the reported net income of P2,603,810.64 (Exhibit "P-2") the plaintiffs should have received the sum
ofP1,041,524.26 representing their 40% share under paragraph II and V of the JVA. But this was not to be so.
Even before the plaintiffs could get hold of their share as indicated above, the defendants closed the chance
altogether by declaring a net loss. The court perceives this to be one calculated coup-de-grace that would put
to thin air plaintiffs hope of getting their share in the profit under the JVA.
That this matter had reached the court is no longer a cause for speculation. The way the defendants treated
the JVA and the manner by which they handled the project itself vis--vis their partners, the plaintiffs herein,
there is bound to be certain conflict as the latter repeatedly would received the losing end of the bargain.
Under the intolerable circumstances, the plaintiffs could not have opted for some other recourse but to file the
present action to enforce their rights. x x x34
On May 15, 2000, plaintiffs filed a Motion for Execution Pending Appeal 35 alleging defendants dilatory tactics
for its allowance. This was opposed by defendants.36
On May 22, 2000, the RTC resolved the motion for execution pending appeal in favor of plaintiffs. 37 Upon
posting a bond of P1,000,000.00 by plaintiffs, a writ of execution pending appeal was issued on June 20,
2000.38
Defendants appealed the decision to the CA on the following assignment of errors:
I
THE TRIAL COURT ERRED IN DECIDING THE CASE WITHOUT FIRST REFERRING THE COMPLAINT
FOR VOLUNTARY ARBITRATION (RA NO. 876), CONTRARY TO THE MANDATED VOLUNTARY
ARBITRATION CLAUSE UNDER THE JOINT VENTURE AGREEMENT, AND THE DOCTRINE IN
"MINDANAO PORTLAND CEMENT CORPORATION V. MCDONOUGH CONSTRUCTION COMPANY OF
FLORIDA" (19 SCRA 814-815).
II
THE TRIAL COURT ERRED IN ISSUING A WRIT OF EXECUTION PENDING APPEAL EVEN IN THE
ABSENCE OF GOOD AND COMPELLING REASONS TO JUSTIFY SAID ISSUANCE, AND DESPITE
PRIMELINKS STRONG OPPOSITION THERETO.
III
THE TRIAL COURT ERRED IN REFUSING TO DECIDE PRIMELINKS MOTION TO QUASH THE WRIT OF
EXECUTION PENDING APPEAL AND THE MOTION FOR RECONSIDERATION, ALTHOUGH THE COURT
HAS RETAINED ITS JURISDICTION TO RULE ON ALL QUESTIONS RELATED TO EXECUTION.
IV
THE TRIAL COURT ERRED IN RESCINDING THE JOINT VENTURE AGREEMENT ALTHOUGH PRIMELINK
HAS SUBSTANTIALLY DEVELOPED THE PROJECT AND HAS SPENT MORE OR LESS FORTY MILLION

PESOS, AND DESPITE APPELLEES FAILURE TO PRESENT SUFFICIENT EVIDENCE JUSTIFYING THE
SAID RESCISSION.
V
THE TRIAL COURT ERRED IN DECIDING THAT THE APPELLEES HAVE THE RIGHT TO TAKE OVER THE
SUBDIVISION AND TO APPROPRIATE FOR THEMSELVES ALL THE EXISTING IMPROVEMENTS
INTRODUCED THEREIN BY PRIMELINK, ALTHOUGH SAID RIGHT WAS NEITHER ALLEGED NOR
PRAYED FOR IN THE COMPLAINT, MUCH LESS PROVEN DURING THE EX PARTE HEARING, AND
EVEN WITHOUT ORDERING APPELLEES TO FIRST REIMBURSE PRIMELINK OF THE SUBSTANTIAL
DIFFERENCE BETWEEN THE MARKET VALUE OF APPELLEES RAW, UNDEVELOPED AND
UNPRODUCTIVE LAND (CONTRIBUTED TO THE PROJECT) AND THE SUM OF MORE OR LESS FORTY
MILLION PESOS WHICH PRIMELINK HAD SPENT FOR THE HORIZONTAL AND VERTICAL
DEVELOPMENT OF THE PROJECT, THEREBY ALLOWING APPELLEES TO UNJUSTLY ENRICH
THEMSELVES AT THE EXPENSE OF PRIMELINK.39
The appeal was docketed in the CA as CA-G.R. CV No. 69200.
On August 9, 2004, the appellate court rendered a decision affirming, with modification, the appealed decision.
The fallo of the decision reads:
WHEREFORE, in view of the foregoing, the assailed decision of the Regional Trial Court of Tagaytay City,
Branch 18, promulgated on April 17, 2000 in Civil Case No. TG-1776, is hereby AFFIRMED. Accordingly,
Transfer Certificate of Title No. T-10848 held for safekeeping by Chinabank pursuant to the Escrow Agreement
is ordered released for return to the plaintiffs-appellees and conformably with the affirmed decision, the
cancellation by the Register of Deeds of Tagaytay City of whatever annotation in TCT No. 10848 by virtue of
the Joint Venture Agreement, is now proper.
SO ORDERED.40
Citing the ruling of this Court in Aurbach v. Sanitary Wares Manufacturing Corporation, 41 the appellate court
ruled that, under Philippine law, a joint venture is a form of partnership and is to be governed by the laws of
partnership. The aggrieved parties filed a motion for reconsideration, 42 which the CA denied in its
Resolution43dated March 7, 2005.
Petitioners thus filed the instant Petition for Review on Certiorari, alleging that:
1) DID THE HONORABLE COURT OF APPEALS COMMIT A FATAL AND REVERSIBLE LEGAL
ERROR AND/OR GRAVE ABUSE OF DISCRETION IN ORDERING THE RETURN TO THE
RESPONDENTS OF THE PROPERTY WITH ALL IMPROVEMENTS THEREON, EVEN
WITHOUT ORDERING/REQUIRING THE RESPONDENTS TO FIRST PAY OR REIMBURSE
PRIMELINK OF ALL EXPENSES INCURRED IN DEVELOPING AND MARKETING THE
PROJECT, LESS THE ORIGINAL VALUE OF THE PROPERTY, AND THE SHARE DUE
RESPONDENTS FROM THE PROFITS (IF ANY) OF THE JOINT VENTURE PROJECT?
2) IS THE AFORESAID ORDER ILLEGAL AND CONFISCATORY, OPPRESSIVE AND
UNCONSCIONABLE, CONTRARY TO THE TENETS OF GOOD HUMAN RELATIONS AND
VIOLATIVE OF EXISTING LAWS AND JURISPRUDENCE ON JUDICIAL NOTICE, DEFAULT,
UNJUST ENRICHMENT AND RESCISSION OF CONTRACT WHICH REQUIRES MUTUAL
RESTITUTION, NOT UNILATERAL APPROPRIATION, OF PROPERTY BELONGING TO
ANOTHER?44
Petitioners maintain that the aforesaid portion of the decision which unconditionally awards to respondents "all
improvements" on the project without requiring them to pay the value thereof or to reimburse Primelink for all
expenses incurred therefore is inherently and essentially illegal and confiscatory, oppressive and
unconscionable, contrary to the tenets of good human relations, and will allow respondents to unjustly enrich
themselves at Primelinks expense. At the time respondents contributed the two parcels of land, consisting of
30,000 square meters to the joint venture project when the JVA was signed on March 10, 1994, the said

properties were worth not more than P500.00 per square meter, the "price tag" agreed upon the parties for the
purpose of the JVA. Moreover, before respondents rescinded the JVA sometime in October/November 1997,
the property had already been substantially developed as improvements had already been introduced thereon;
petitioners had likewise incurred administrative and marketing expenses, among others, amounting to more or
less P40,000,000.00.45
Petitioners point out that respondents did not pray in their complaint that they be declared the owners and
entitled to the possession of the improvements made by petitioner Primelink on the property; neither did they
adduce evidence to prove their entitlement to said improvements. It follows, petitioners argue, that
respondents were not entitled to the improvements although petitioner Primelink was declared in default.
They also aver that, under Article 1384 of the New Civil Code, rescission shall be only to the extent necessary
to cover the damages caused and that, under Article 1385 of the same Code, rescission creates the obligation
to return the things which were not object of the contract, together with their fruits, and the price with its
interest; consequently, it can be effected only when respondents can return whatever they may be obliged to
return. Respondents who sought the rescission of the JVA must place petitioner Primelink in the status quo.
They insist that respondents cannot rescind and, at the same time, retain the consideration, or part of the
consideration received under the JVA. They cannot have the benefits of rescission without assuming its
burden. All parties must be restored to their original positions as nearly as possible upon the rescission of a
contract. In the event that restoration to the status quo is impossible, rescission may be granted if the Court
can balance the equities and fashion an appropriate remedy that would be equitable to both parties and afford
complete relief.
Petitioners insist that being defaulted in the court a quo would in no way defeat their claim for reimbursement
because "[w]hat matters is that the improvements exist and they cannot be denied." 46 Moreover, they point out,
the ruling of this Court in Aurbach v. Sanitary Wares Manufacturing Corporation 47 cited by the CA is not in
point.
On the other hand, the CA ruled that although respondents therein (plaintiffs below) did not specifically pray for
their takeover of the property and for the possession of the improvements on the parcels of land, nevertheless,
respondents were entitled to said relief as a necessary consequence of the ruling of the trial court ordering the
rescission of the JVA. The appellate court cited the ruling of this Court in the Aurbach case and Article 1838 of
the New Civil Code, to wit:
As a general rule, the relation of the parties in joint ventures is governed by their agreement. When the
agreement is silent on any particular issue, the general principles of partnership may be resorted to. 48
Respondents, for their part, assert that Articles 1380 to 1389 of the New Civil Code deal with rescissible
contracts. What applies is Article 1191 of the New Civil Code, which reads:
ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should
not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of
damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should
become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons who have acquired the thing, in
accordance with articles 1385 and 1388 and the Mortgage Law.
They insist that petitioners are not entitled to rescission for the improvements because, as found by the RTC
and the CA, it was petitioner Primelink that enriched itself at the expense of respondents. Respondents
reiterate the ruling of the CA, and argue as follows:
PRIMELINK argued that the LAZATINs in their complaint did not allege, did not prove and did not pray that
they are and should be entitled to take over the development of the project, and that the improvements and

existing structures which were introduced by PRIMELINK after spending more or less Forty Million Pesos be
awarded to them. They merely asked in the complaint that the joint venture agreement be rescinded, and that
the parcels of land they contributed to the project be returned to them.
PRIMELINKs argument lacks merit. The order of the court for PRIMELINK to return possession of the real
estate property belonging to the LAZATINs including all improvements thereon was not a judgment that was
different in kind than what was prayed for by the LAZATINs. The order to return the property with all the
improvements thereon is just a necessary consequence to the order of rescission.
As a general rule, the relation of the parties in joint ventures is governed by their agreement. When the
agreement is silent on any particular issue, the general principles of partnership may be resorted to. In
Aurbach v. Sanitary Wares Manufacturing Corporation, the Supreme Court discussed the following points
regarding joint ventures and partnership:
The legal concept of a joint venture is of common law origin. It has no precise legal definition, but it has been
generally understood to mean an organization formed for some temporary purpose. (Gates v. Megargel, 266
Fed. 811 [1920]) It is, in fact, hardly distinguishable from the partnership, since elements are similar
community of interest in the business, sharing of profits and losses, and a mutual right of control. (Blackner v.
McDermott, 176 F.2d 498 [1949]; Carboneau v. Peterson, 95 P.2d 1043 [1939]; Buckley v. Chadwick, 45
Cal.2d 183, 288 P.2d 12, 289 P.2d 242 [1955]) The main distinction cited by most opinions in common law
jurisdictions is that the partnership contemplates a general business with some degree of continuity, while the
joint venture is formed for the execution of a single transaction, and is thus of a temporary nature. (Tuffs v.
Mann, 116 Cal.App. 170, 2 P.2d 500 [1931]; Harmon v. Martin, 395 III. 595, 71 N.E.2d 74 [1947]; Gates v.
Megargel, 266 Fed. 811 [1920]) This observation is not entirely accurate in this jurisdiction, since under the
Civil Code, a partnership may be particular or universal, and a particular partnership may have for its object a
specific undertaking. (Art. 1783, Civil Code). It would seem therefore that, under Philippine law, a joint venture
is a form of partnership and should thus be governed by the laws of partnership. The Supreme Court has,
however, recognized a distinction between these two business forms, and has held that although a corporation
cannot enter into a partnership contract, it may, however, engage in a joint venture with others. (At p. 12,
Tuazon v. Bolanos, 95 Phil. 906 [1954]; Campos and Lopez Campos Comments, Notes and Selected
Cases, Corporation Code 1981) (Emphasis Supplied)
The LAZATINs were able to establish fraud on the part of PRIMELINK which, in the words of the court a quo,
was a pattern of what appears to be a scheme or plot to reduce and eventually blot out the net incomes
generated from sales of housing units by the defendants. Under Article 1838 of the Civil Code, where the
partnership contract is rescinded on the ground of the fraud or misrepresentation of one of the parties
thereto, the party entitled to rescind is, without prejudice to any other right is entitled to a lien on, or right of
retention of, the surplus of the partnership property after satisfying the partnership liabilities to third persons for
any sum of money paid by him for the purchase of an interest in the partnership and for any capital or advance
contributed by him. In the instant case, the joint venture still has outstanding liabilities to third parties or the
buyers of the property.
It is not amiss to state that title to the land or TCT No. T-10848 which is now held by Chinabank for
safekeeping pursuant to the Escrow Agreement executed between Primelink Properties and Development
Corporation and Ma. Clara T. Lazatin-Magat should also be returned to the LAZATINs as a necessary
consequence of the order of rescission of contract. The reason for the existence of the Escrow Agreement has
ceased to exist when the joint venture agreement was rescinded. 49
Respondents stress that petitioners must bear any damages or losses they may have suffered. They likewise
stress that they did not enrich themselves at the expense of petitioners.
In reply, petitioners assert that it is unjust and inequitable for respondents to retain the improvements even if
their share in the P1,041,524.26 of the net income of the property and the sale of the land were to be
deducted from the value of the improvements, plus administrative and marketing expenses in the total amount
ofP40,000,000.00. Petitioners will still be entitled to an accounting from respondents. Respondents cannot
deny the existence and nature of said improvements as they are visible to the naked eye.
The threshold issues are the following: (1) whether respondents are entitled to the possession of the parcels of
land covered by the JVA and the improvements thereon introduced by petitioners as their contribution to the
JVA; (2) whether petitioners are entitled to reimbursement for the value of the improvements on the parcels of
land.

The petition has no merit.

On the first issue, we agree with petitioners that respondents did not specifically pray in their complaint below
that possession of the improvements on the parcels of land which they contributed to the JVA be transferred to
them. Respondents made a specific prayer in their complaint that, upon the rescission of the JVA, they be
placed in possession of the parcels of land subject of the agreement, and for other "reliefs and such other
remedies as are just and equitable in the premises." However, the trial court was not precluded from awarding
possession of the improvements on the parcels of land to respondents in its decision. Section 2(c), Rule 7 of
the Rules of Court provides that a pleading shall specify the relief sought but it may add as general prayer for
such further or other relief as may be deemed just and equitable. Even without the prayer for a specific
remedy, proper relief may be granted by the court if the facts alleged in the complaint and the evidence
introduced so warrant.50 The court shall grant relief warranted by the allegations and the proof even if no such
relief is prayed for.51 The prayer in the complaint for other reliefs equitable and just in the premises justifies the
grant of a relief not otherwise specifically prayed for.52
The trial court was not proscribed from placing respondents in possession of the parcels of land and the
improvements on the said parcels of land. It bears stressing that the parcels of land, as well as the
improvements made thereon, were contributed by the parties to the joint venture under the JVA, hence,
formed part of the assets of the joint venture. 53 The trial court declared that respondents were entitled to the
possession not only of the parcels of land but also of the improvements thereon as a consequence of its
finding that petitioners breached their agreement and defrauded respondents of the net income under the JVA.
On the second issue, we agree with the CA ruling that petitioner Primelink and respondents entered into a joint
venture as evidenced by their JVA which, under the Courts ruling in Aurbach, is a form of partnership, and as
such is to be governed by the laws on partnership.
When the RTC rescinded the JVA on complaint of respondents based on the evidence on record that
petitioners willfully and persistently committed a breach of the JVA, the court thereby dissolved/cancelled the
partnership.54With the rescission of the JVA on account of petitioners fraudulent acts, all authority of any
partner to act for the partnership is terminated except so far as may be necessary to wind up the partnership
affairs or to complete transactions begun but not yet finished. 55 On dissolution, the partnership is not
terminated but continues until the winding up of partnership affairs is completed. 56 Winding up means the
administration of the assets of the partnership for the purpose of terminating the business and discharging the
obligations of the partnership.
The transfer of the possession of the parcels of land and the improvements thereon to respondents was only
for a specific purpose: the winding up of partnership affairs, and the partition and distribution of the net
partnership assets as provided by law.57 After all, Article 1836 of the New Civil Code provides that unless
otherwise agreed by the parties in their JVA, respondents have the right to wind up the partnership affairs:
Art. 1836. Unless otherwise agreed, the partners who have not wrongfully dissolved the partnership or the
legal representative of the last surviving partner, not insolvent, has the right to wind up the partnership affairs,
provided, however, that any partner, his legal representative or his assignee, upon cause shown, may obtain
winding up by the court.
It must be stressed, too, that although respondents acquired possession of the lands and the improvements
thereon, the said lands and improvements remained partnership property, subject to the rights and obligations
of the parties, inter se, of the creditors and of third parties under Articles 1837 and 1838 of the New Civil Code,
and subject to the outcome of the settlement of the accounts between the parties as provided in Article 1839 of
the New Civil Code, absent any agreement of the parties in their JVA to the contrary.58 Until the partnership
accounts are determined, it cannot be ascertained how much any of the parties is entitled to, if at all.
It was thus premature for petitioner Primelink to be demanding that it be indemnified for the value of the
improvements on the parcels of land owned by the joint venture/partnership. Notably, the JVA of the parties
does not contain any provision designating any party to wind up the affairs of the partnership.
Thus, under Article 1837 of the New Civil Code, the rights of the parties when dissolution is caused in
contravention of the partnership agreement are as follows:

(1) Each partner who has not caused dissolution wrongfully shall have:
(a) All the rights specified in the first paragraph of this article, and
(b) The right, as against each partner who has caused the dissolution wrongfully, to
damages for breach of the agreement.
(2) The partners who have not caused the dissolution wrongfully, if they all desire to continue the
business in the same name either by themselves or jointly with others, may do so, during the
agreed term for the partnership and for that purpose may possess the partnership property,
provided they secure the payment by bond approved by the court, or pay to any partner who has
caused the dissolution wrongfully, the value of his interest in the partnership at the dissolution, less
any damages recoverable under the second paragraph, No. 1(b) of this article, and in like manner
indemnify him against all present or future partnership liabilities.
(3) A partner who has caused the dissolution wrongfully shall have:
(a) If the business is not continued under the provisions of the second paragraph, No.
2, all the rights of a partner under the first paragraph, subject to liability for damages in
the second paragraph, No. 1(b), of this article.
(b) If the business is continued under the second paragraph, No. 2, of this article, the
right as against his co-partners and all claiming through them in respect of their
interests in the partnership, to have the value of his interest in the partnership, less any
damage caused to his co-partners by the dissolution, ascertained and paid to him in
cash, or the payment secured by a bond approved by the court, and to be released
from all existing liabilities of the partnership; but in ascertaining the value of the
partners interest the value of the good-will of the business shall not be considered.
And under Article 1838 of the New Civil Code, the party entitled to rescind is, without prejudice to any other
right, entitled:
(1) To a lien on, or right of retention of, the surplus of the partnership property after satisfying the
partnership liabilities to third persons for any sum of money paid by him for the purchase of an
interest in the partnership and for any capital or advances contributed by him;
(2) To stand, after all liabilities to third persons have been satisfied, in the place of the creditors of
the partnership for any payments made by him in respect of the partnership liabilities; and
(3) To be indemnified by the person guilty of the fraud or making the representation against all
debts and liabilities of the partnership.
The accounts between the parties after dissolution have to be settled as provided in Article 1839 of the New
Civil Code:
Art. 1839. In settling accounts between the partners after dissolution, the following rules shall be observed,
subject to any agreement to the contrary:
(1) The assets of the partnership are:
(a) The partnership property,
(b) The contributions of the partners necessary for the payment of all the liabilities
specified in No. 2.

(2) The liabilities of the partnership shall rank in order of payment, as follows:
(a) Those owing to creditors other than partners,
(b) Those owing to partners other than for capital and profits,

line with the business authorized by its charter." (Wyoming-Indiana Oil Gas Co. vs. Weston, 80 A. L. R., 1043,
citing 2, Fletcher Cyc. E. 1082.) [Tuason vs. Bolaos, 95 Phil. 106(1954)]
G.R. No. 15574
September 17, 1919
SMITH, BELL & COMPANY (LTD.), petitioner,
vs.
JOAQUIN NATIVIDAD, Collector of Customs of the port of Cebu, respondent.

(c) Those owing to partners in respect of capital,

(d) Those owing to partners in respect of profits.

Ross and Lawrence for petitioner.

Attorney-General Paredes for respondent.

(3) The assets shall be applied in the order of their declaration in No. 1 of this article to the
satisfaction of the liabilities.

MALCOLM, J.:

(4) The partners shall contribute, as provided by article 1797, the amount necessary to satisfy the
liabilities.

A writ of mandamus is prayed for by Smith, Bell & Co. (Ltd.), against Joaquin Natividad, Collector of Customs
of the port of Cebu, Philippine Islands, to compel him to issue a certificate of Philippine registry to the
petitioner for its motor vessel Bato. The Attorney-General, acting as counsel for respondent, demurs to the
petition on the general ground that it does not state facts sufficient to constitute a cause of action. While the
facts are thus admitted, and while, moreover, the pertinent provisions of law are clear and understandable,
and interpretative American jurisprudence is found in abundance, yet the issue submitted is not lightly to be
resolved. The question, flatly presented, is, whether Act. No. 2761 of the Philippine Legislature is valid or,
more directly stated, whether the Government of the Philippine Islands, through its Legislature, can deny the
registry of vessels in its coastwise trade to corporations having alien stockholders.

(5) An assignee for the benefit of creditors or any person appointed by the court shall have the
right to enforce the contributions specified in the preceding number.
(6) Any partner or his legal representative shall have the right to enforce the contributions specified
in No. 4, to the extent of the amount which he has paid in excess of his share of the liability.
(7) The individual property of a deceased partner shall be liable for the contributions specified in
No. 4.
(8) When partnership property and the individual properties of the partners are in possession of a
court for distribution, partnership creditors shall have priority on partnership property and separate
creditors on individual property, saving the rights of lien or secured creditors.
(9) Where a partner has become insolvent or his estate is insolvent, the claims against his
separate property shall rank in the following order:
(a) Those owing to separate creditors;

FACTS.
Smith, Bell & Co., (Ltd.), is a corporation organized and existing under the laws of the Philippine Islands. A
majority of its stockholders are British subjects. It is the owner of a motor vessel known as the Bato built for it
in the Philippine Islands in 1916, of more than fifteen tons gross The Bato was brought to Cebu in the present
year for the purpose of transporting plaintiff's merchandise between ports in the Islands. Application was made
at Cebu, the home port of the vessel, to the Collector of Customs for a certificate of Philippine registry. The
Collector refused to issue the certificate, giving as his reason that all the stockholders of Smith, Bell & Co.,
Ltd., were not citizens either of the United States or of the Philippine Islands. The instant action is the result.
LAW.

(b) Those owing to partnership creditors;

(c) Those owing to partners by way of contribution.
IN LIGHT OF ALL THE FOREGOING, the petition is DENIED. The assailed Decision and Resolution of the
Court of Appeals in CA-G.R. CV No. 69200 are AFFIRMED insofar as they conform to this Decision of the
Court.
Costs against petitioners.
SO ORDERED.
Ruling:
ID.; CORPORATION AS PARTY MAY BE REPRESENTED BY ANOTHER PERSON, NATURAL OR
JUDICIAL.There is nothing against one corporation being represented by another person, natural or
juridical, in a suit in court, for the true rule is that "although a corporation has no power to enter into a
partnership, it may nevertheless enter into a joint venture with another where the nature of that venture is in

The Act of Congress of April 29, 1908, repealing the Shipping Act of April 30, 1906 but reenacting a portion of
section 3 of this Law, and still in force, provides in its section 1:
That until Congress shall have authorized the registry as vessels of the United States of vessels
owned in the Philippine Islands, the Government of the Philippine Islands is hereby authorized to
adopt, from time to time, and enforce regulations governing the transportation of merchandise and
passengers between ports or places in the Philippine Archipelago. (35 Stat. at L., 70; Section
3912, U. S. Comp Stat. [1916]; 7 Pub. Laws, 364.)
The Act of Congress of August 29, 1916, commonly known as the Jones Law, still in force, provides in section
3, (first paragraph, first sentence), 6, 7, 8, 10, and 31, as follows.
SEC. 3. That no law shall be enacted in said Islands which shall deprive any person of life, liberty,
or property without due process of law, or deny to any person therein the equal protection of the
laws. . . .

SEC. 6. That the laws now in force in the Philippines shall continue in force and effect, except as
altered, amended, or modified herein, until altered, amended, or repealed by the legislative
authority herein provided or by Act of Congress of the United States.
SEC. 7. That the legislative authority herein provided shall have power, when not inconsistent with
this Act, by due enactment to amend, alter modify, or repeal any law, civil or criminal, continued in
force by this Act as it may from time to time see fit
This power shall specifically extend with the limitation herein provided as to the tariff to all laws
relating to revenue provided as to the tariff to all laws relating to revenue and taxation in effect in
the Philippines.
SEC. 8. That general legislative power, except as otherwise herein provided, is hereby granted to
the Philippine Legislature, authorized by this Act.
SEC. 10. That while this Act provides that the Philippine government shall have the authority to
enact a tariff law the trade relations between the islands and the United States shall continue to be
governed exclusively by laws of the Congress of the United States: Provided, That tariff acts or
acts amendatory to the tariff of the Philippine Islands shall not become law until they shall receive
the approval of the President of the United States, nor shall any act of the Philippine Legislature
affecting immigration or the currency or coinage laws of the Philippines become a law until it has
been approved by the President of the United States: Provided further, That the President shall
approve or disapprove any act mentioned in the foregoing proviso within six months from and after
its enactment and submission for his approval, and if not disapproved within such time it shall
become a law the same as if it had been specifically approved.

SEC. 1176. Investigation into character of vessel. No application for a certificate of Philippine
register shall be approved until the collector of customs is satisfied from an inspection of the vessel
that it is engaged or destined to be engaged in legitimate trade and that it is of domestic ownership
as such ownership is defined in section eleven hundred and seventy-two of this Code.
The collector of customs may at any time inspect a vessel or examine its owner, master, crew, or
passengers in order to ascertain whether the vessel is engaged in legitimate trade and is entitled
to have or retain the certificate of Philippine register.
SEC. 1202. Limiting number of foreign officers and engineers on board vessels. No Philippine
vessel operating in the coastwise trade or on the high seas shall be permitted to have on board
more than one master or one mate and one engineer who are not citizens of the United States or
of the Philippine Islands, even if they hold licenses under section one thousand one hundred and
ninety-nine hereof. No other person who is not a citizen of the United States or of the Philippine
Islands shall be an officer or a member of the crew of such vessel. Any such vessel which fails to
comply with the terms of this section shall be required to pay an additional tonnage tax of fifty
centavos per net ton per month during the continuance of said failure.
ISSUES.
Predicated on these facts and provisions of law, the issues as above stated recur, namely, whether Act No
2761 of the Philippine Legislature is valid in whole or in part whether the Government of the Philippine
Islands, through its Legislature, can deny the registry of vessel in its coastwise trade to corporations having
alien stockholders .
OPINION.

SEC. 31. That all laws or parts of laws applicable to the Philippines not in conflict with any of the
provisions of this Act are hereby continued in force and effect." (39 Stat at L., 546.)
On February 23, 1918, the Philippine Legislature enacted Act No. 2761. The first section of this law amended
section 1172 of the Administrative Code to read as follows:
SEC. 1172. Certificate of Philippine register. Upon registration of a vessel of domestic
ownership, and of more than fifteen tons gross, a certificate of Philippine register shall be issued
for it. If the vessel is of domestic ownership and of fifteen tons gross or less, the taking of the
certificate of Philippine register shall be optional with the owner.
"Domestic ownership," as used in this section, means ownership vested in some one or more of
the following classes of persons: (a) Citizens or native inhabitants of the Philippine Islands; (b)
citizens of the United States residing in the Philippine Islands; (c) any corporation or company
composed wholly of citizens of the Philippine Islands or of the United States or of both, created
under the laws of the United States, or of any State thereof, or of thereof, or the managing agent or
master of the vessel resides in the Philippine Islands
Any vessel of more than fifteen gross tons which on February eighth, nineteen hundred and
eighteen, had a certificate of Philippine register under existing law, shall likewise be deemed a
vessel of domestic ownership so long as there shall not be any change in the ownership thereof
nor any transfer of stock of the companies or corporations owning such vessel to person not
included under the last preceding paragraph.
Sections 2 and 3 of Act No. 2761 amended sections 1176 and 1202 of the Administrative Code to read as
follows:

1. Considered from a positive standpoint, there can exist no measure of doubt as to the power of the
Philippine Legislature to enact Act No. 2761. The Act of Congress of April 29, 1908, with its specific delegation
of authority to the Government of the Philippine Islands to regulate the transportation of merchandise and
passengers between ports or places therein, the liberal construction given to the provisions of the Philippine
Bill, the Act of Congress of July 1, 1902, by the courts, and the grant by the Act of Congress of August 29,
1916, of general legislative power to the Philippine Legislature, are certainly superabundant authority for such
a law. While the Act of the local legislature may in a way be inconsistent with the Act of Congress regulating
the coasting trade of the Continental United States, yet the general rule that only such laws of the United
States have force in the Philippines as are expressly extended thereto, and the abnegation of power by
Congress in favor of the Philippine Islands would leave no starting point for convincing argument. As a matter
of fact, counsel for petitioner does not assail legislative action from this direction (See U. S. vs. Bull [1910], 15
Phil., 7; Sinnot vs. Davenport [1859] 22 How., 227.)
2. It is from the negative, prohibitory standpoint that counsel argues against the constitutionality of Act No.
2761. The first paragraph of the Philippine Bill of Rights of the Philippine Bill, repeated again in the first
paragraph of the Philippine Bill of Rights as set forth in the Jones Law, provides "That no law shall be enacted
in said Islands which shall deprive any person of life, liberty, or property without due process of law, or deny to
any person therein the equal protection of the laws." Counsel says that Act No. 2761 denies to Smith, Bell &
Co., Ltd., the equal protection of the laws because it, in effect, prohibits the corporation from owning vessels,
and because classification of corporations based on the citizenship of one or more of their stockholders is
capricious, and that Act No. 2761 deprives the corporation of its properly without due process of law because
by the passage of the law company was automatically deprived of every beneficial attribute of ownership in
the Bato and left with the naked title to a boat it could not use .
The guaranties extended by the Congress of the United States to the Philippine Islands have been used in the
same sense as like provisions found in the United States Constitution. While the "due process of law and
equal protection of the laws" clause of the Philippine Bill of Rights is couched in slightly different words than

the corresponding clause of the Fourteenth Amendment to the United States Constitution, the first should be
interpreted and given the same force and effect as the latter. (Kepner vs. U.S. [1904], 195 U. S., 100;
Sierra vs. Mortiga [1907], 204 U. S.,.470; U. S. vs. Bull [1910], 15 Phil., 7.) The meaning of the Fourteenth
Amendment has been announced in classic decisions of the United States Supreme Court. Even at the
expense of restating what is so well known, these basic principles must again be set down in order to serve as
the basis of this decision.
The guaranties of the Fourteenth Amendment and so of the first paragraph of the Philippine Bill of Rights, are
universal in their application to all person within the territorial jurisdiction, without regard to any differences of
race, color, or nationality. The word "person" includes aliens. (Yick Wo vs. Hopkins [1886], 118 U. S., 356;
Truaxvs. Raich [1915], 239 U. S., 33.) Private corporations, likewise, are "persons" within the scope of the
guaranties in so far as their property is concerned. (Santa Clara County vs. Southern Pac. R. R. Co. [1886],
118.U. S., 394; Pembina Mining Co. vs. Pennsylvania [1888],.125 U. S., 181 Covington & L. Turnpike Road
Co. vs. Sandford [1896], 164 U. S., 578.) Classification with the end in view of providing diversity of treatment
may be made among corporations, but must be based upon some reasonable ground and not be a mere
arbitrary selection (Gulf, Colorado & Santa Fe Railway Co. vs. Ellis [1897],.165 U. S., 150.) Examples of laws
held unconstitutional because of unlawful discrimination against aliens could be cited. Generally, these
decisions relate to statutes which had attempted arbitrarily to forbid aliens to engage in ordinary kinds of
business to earn their living. (Statevs. Montgomery [1900], 94 Maine, 192, peddling but see.
Commonwealth vs. Hana [1907], 195 Mass., 262; Templar vs. Board of Examiners of Barbers [1902], 131
Mich., 254, barbers; Yick Wo vs. Hopkins [1886], 118 U. S.,.356, discrimination against Chinese;
Truax vs. Raich [1915], 239 U. S., 33; In re Parrott [1880], 1 Fed , 481; Fraser vs. McConway & Torley Co.
[1897], 82 Fed , 257; Juniata Limestone Co. vs. Fagley [1898], 187 Penn., 193, all relating to the employment
of aliens by private corporations.)
A literal application of general principles to the facts before us would, of course, cause the inevitable deduction
that Act No. 2761 is unconstitutional by reason of its denial to a corporation, some of whole members are
foreigners, of the equal protection of the laws. Like all beneficient propositions, deeper research discloses
provisos. Examples of a denial of rights to aliens notwithstanding the provisions of the Fourteenth Amendment
could be cited. (Tragesser vs. Gray [1890], 73 Md., 250, licenses to sell spirituous liquors denied to persons
not citizens of the United States; Commonwealth vs. Hana [1907], 195 Mass , 262, excluding aliens from the
right to peddle; Patsone vs. Commonwealth of Pennsylvania [1914], 232 U. S. , 138, prohibiting the killing of
any wild bird or animal by any unnaturalized foreign-born resident; Ex parte Gilleti [1915], 70 Fla., 442,
discriminating in favor of citizens with reference to the taking for private use of the common property in fish
and oysters found in the public waters of the State; Heim vs. McCall [1915], 239 U. S.,.175, and
Crane vs. New York [1915], 239 U. S., 195, limiting employment on public works by, or for, the State or a
municipality to citizens of the United States.)
One of the exceptions to the general rule, most persistent and far reaching in influence is, that neither the
Fourteenth Amendment to the United States Constitution, broad and comprehensive as it is, nor any other
amendment, "was designed to interfere with the power of the State, sometimes termed its `police power,' to
prescribe regulations to promote the health, peace, morals, education, and good order of the people, and
legislate so as to increase the industries of the State, develop its resources and add to its wealth and
prosperity. From the very necessities of society, legislation of a special character, having these objects in view,
must often be had in certain districts." (Barbier vs. Connolly [1884], 113 U.S., 27; New Orleans Gas
Co. vs. Lousiana Light Co. [1885], 115 U.S., 650.) This is the same police power which the United States
Supreme Court say "extends to so dealing with the conditions which exist in the state as to bring out of them
the greatest welfare in of its people." (Bacon vs. Walker [1907], 204 U.S., 311.) For quite similar reasons, none
of the provision of the Philippine Organic Law could could have had the effect of denying to the Government of
the Philippine Islands, acting through its Legislature, the right to exercise that most essential, insistent, and
illimitable of powers, the sovereign police power, in the promotion of the general welfare and the public
interest. (U. S. vs. Toribio [1910], 15 Phil., 85; Churchill and Tait vs. Rafferty [1915], 32 Phil., 580;
Rubi vs. Provincial Board of Mindoro [1919], 39 Phil., 660.) Another notable exception permits of the regulation
or distribution of the public domain or the common property or resources of the people of the State, so that use
may be limited to its citizens. (Ex parte Gilleti [1915], 70 Fla., 442; McCready vs. Virginia [1876], 94 U. S., 391;
Patsone vs. Commonwealth of Pennsylvania [1914], 232U. S., 138.) Still another exception permits of the

limitation of employment in the construction of public works by, or for, the State or a municipality to citizens of
the United States or of the State. (Atkin vs. Kansas [1903],191 U. S., 207; Heim vs. McCall [1915], 239 U.S.,
175; Crane vs. New York [1915], 239 U. S., 195.) Even as to classification, it is admitted that a State may
classify with reference to the evil to be prevented; the question is a practical one, dependent upon experience.
(Patsone vs. Commonwealth of Pennsylvania [1914], 232 U. S., 138.)
To justify that portion of Act no. 2761 which permits corporations or companies to obtain a certificate of
Philippine registry only on condition that they be composed wholly of citizens of the Philippine Islands or of the
United States or both, as not infringing Philippine Organic Law, it must be done under some one of the
exceptions here mentioned This must be done, moreover, having particularly in mind what is so often of
controlling effect in this jurisdiction our local experience and our peculiar local conditions.
To recall a few facts in geography, within the confines of Philippine jurisdictional limits are found more than
three thousand islands. Literally, and absolutely, steamship lines are, for an Insular territory thus situated, the
arteries of commerce. If one be severed, the life-blood of the nation is lost. If on the other hand these arteries
are protected, then the security of the country and the promotion of the general welfare is sustained. Time and
again, with such conditions confronting it, has the executive branch of the Government of the Philippine
Islands, always later with the sanction of the judicial branch, taken a firm stand with reference to the presence
of undesirable foreigners. The Government has thus assumed to act for the all-sufficient and primitive reason
of the benefit and protection of its own citizens and of the self-preservation and integrity of its dominion. (In
re Patterson [1902], 1 Phil., 93; Forbes vs. Chuoco, Tiaco and Crossfield [1910], 16 Phil., 534;.228 U.S.,
549; In re McCulloch Dick [1918], 38 Phil., 41.) Boats owned by foreigners, particularly by such solid and
reputable firms as the instant claimant, might indeed traverse the waters of the Philippines for ages without
doing any particular harm. Again, some evilminded foreigner might very easily take advantage of such lavish
hospitality to chart Philippine waters, to obtain valuable information for unfriendly foreign powers, to stir up
insurrection, or to prejudice Filipino or American commerce. Moreover, under the Spanish portion of Philippine
law, the waters within the domestic jurisdiction are deemed part of the national domain, open to public use.
(Book II, Tit. IV, Ch. I, Civil Code; Spanish Law of Waters of August 3, 1866, arts 1, 2, 3.) Common carriers
which in the Philippines as in the United States and other countries are, as Lord Hale said, "affected with a
public interest," can only be permitted to use these public waters as a privilege and under such conditions as
to the representatives of the people may seem wise. (See De Villata vs. Stanley [1915], 32 Phil., 541.)
In Patsone vs. Commonwealth of Pennsylvania ([1913], 232 U.S., 138), a case herein before mentioned,
Justice Holmes delivering the opinion of the United States Supreme Court said:
This statute makes it unlawful for any unnaturalized foreign-born resident to kill any wild bird or
animal except in defense of person or property, and `to that end' makes it unlawful for such foreignborn person to own or be possessed of a shotgun or rifle; with a penalty of $25 and a forfeiture of
the gun or guns. The plaintiff in error was found guilty and was sentenced to pay the
abovementioned fine. The judgment was affirmed on successive appeals. (231 Pa., 46; 79 Atl.,
928.) He brings the case to this court on the ground that the statute is contrary to the 14th
Amendment and also is in contravention of the treaty between the United States and Italy, to which
latter country the plaintiff in error belongs .
Under the 14th Amendment the objection is twofold; unjustifiably depriving the alien of property,
and discrimination against such aliens as a class. But the former really depends upon the latter,
since it hardly can be disputed that if the lawful object, the protection of wild life
(Geer vs. Connecticut, 161 U.S., 519; 40 L. ed., 793; 16 Sup. Ct. Rep., 600), warrants the
discrimination, the, means adopted for making it effective also might be adopted. . . .
The discrimination undoubtedly presents a more difficult question. But we start with reference to
the evil to be prevented, and that if the class discriminated against is or reasonably might be
considered to define those from whom the evil mainly is to be feared, it properly may be picked
out. A lack of abstract symmetry does not matter. The question is a practical one, dependent upon
experience. . . .

The question therefore narrows itself to whether this court can say that the legislature of
Pennsylvania was not warranted in assuming as its premise for the law that resident unnaturalized
aliens were the peculiar source of the evil that it desired to prevent. (Barrett vs. Indiana,. 229 U.S.,
26, 29; 57 L. ed., 1050, 1052; 33 Sup. Ct. Rep., 692.)
Obviously the question, so stated, is one of local experience, on which this court ought to be very
slow to declare that the state legislature was wrong in its facts (Adams vs. Milwaukee, 228 U.S.,
572, 583; 57 L. ed., 971,.977; 33 Sup. Ct. Rep., 610.) If we might trust popular speech in some
states it was right; but it is enough that this court has no such knowledge of local conditions as to
be able to say that it was manifestly wrong. . . .
Judgment affirmed.
We are inclined to the view that while Smith, Bell & Co. Ltd., a corporation having alien stockholders, is entitled
to the protection afforded by the due-process of law and equal protection of the laws clause of the Philippine
Bill of Rights, nevertheless, Act No. 2761 of the Philippine Legislature, in denying to corporations such as
Smith, Bell &. Co. Ltd., the right to register vessels in the Philippines coastwise trade, does not belong to that
vicious species of class legislation which must always be condemned, but does fall within authorized
exceptions, notably, within the purview of the police power, and so does not offend against the constitutional
provision.
This opinion might well be brought to a close at this point. It occurs to us, however, that the legislative history
of the United States and the Philippine Islands, and, probably, the legislative history of other countries, if we
were to take the time to search it out, might disclose similar attempts at restriction on the right to enter the
coastwise trade, and might thus furnish valuable aid by which to ascertain and, if possible, effectuate
legislative intention.
3. The power to regulate commerce, expressly delegated to the Congress by the Constitution,
includes the power to nationalize ships built and owned in the United States by registries and
enrollments, and the recording of the muniments of title of American vessels. The Congress "may
encourage or it may entirely prohibit such commerce, and it may regulate in any way it may see fit
between these two extremes." (U.S.vs. Craig [1886], 28 Fed., 795; Gibbons vs. Ogden [1824], 9
Wheat., 1; The Passenger Cases [1849], 7 How., 283.)
Acting within the purview of such power, the first Congress of the United States had not been long convened
before it enacted on September 1, 1789, "An Act for Registering and Clearing Vessels, Regulating the
Coasting Trade, and for other purposes." Section 1 of this law provided that for any ship or vessel to obtain the
benefits of American registry, it must belong wholly to a citizen or citizens of the United States "and no other."
(1 Stat. at L., 55.) That Act was shortly after repealed, but the same idea was carried into the Acts of Congress
of December 31, 1792 and February 18, 1793. (1 Stat. at L., 287, 305.).Section 4 of the Act of 1792 provided
that in order to obtain the registry of any vessel, an oath shall be taken and subscribed by the owner, or by one
of the owners thereof, before the officer authorized to make such registry, declaring, "that there is no subject or
citizen of any foreign prince or state, directly or indirectly, by way of trust, confidence, or otherwise, interested
in such vessel, or in the profits or issues thereof." Section 32 of the Act of 1793 even went so far as to say
"that if any licensed ship or vessel shall be transferred to any person who is not at the time of such transfer a
citizen of and resident within the United States, ... every such vessel with her tackle, apparel, and furniture,
and the cargo found on board her, shall be forefeited." In case of alienation to a foreigner, Chief Justice
Marshall said that all the privileges of an American bottom were ipso facto forfeited. (U.S. vs. Willings and
Francis [1807], 4 Cranch, 48.) Even as late as 1873, the Attorney-General of the United States was of the
opinion that under the provisions of the Act of December 31, 1792, no vessel in which a foreigner is directly or
indirectly interested can lawfully be registered as a vessel of the United. States. (14 Op. Atty.-Gen. [U.S.],
340.)

These laws continued in force without contest, although possibly the Act of March 3, 1825, may have affected
them, until amended by the Act of May 28, 1896 (29 Stat. at L., 188) which extended the privileges of registry
from vessels wholly owned by a citizen or citizens of the United States to corporations created under the laws
of any of the states thereof. The law, as amended, made possible the deduction that a vessel belonging to a
domestic corporation was entitled to registry or enrollment even though some stock of the company be owned
by aliens. The right of ownership of stock in a corporation was thereafter distinct from the right to hold the
property by the corporation (Humphreys vs. McKissock [1890], 140 U.S., 304; Queen vs. Arnaud [1846], 9 Q.
B., 806; 29 Op. Atty.-Gen. [U.S.],188.)
On American occupation of the Philippines, the new government found a substantive law in operation in the
Islands with a civil law history which it wisely continued in force Article fifteen of the Spanish Code of
Commerce permitted any foreigner to engage in Philippine trade if he had legal capacity to do so under the
laws of his nation. When the Philippine Commission came to enact the Customs Administrative Act (No. 355)
in 1902, it returned to the old American policy of limiting the protection and flag of the United States to vessels
owned by citizens of the United States or by native inhabitants of the Philippine Islands (Sec. 117.) Two years
later, the same body reverted to the existing Congressional law by permitting certification to be issued to a
citizen of the United States or to a corporation or company created under the laws of the United States or of
any state thereof or of the Philippine Islands (Act No. 1235, sec. 3.) The two administration codes repeated the
same provisions with the necessary amplification of inclusion of citizens or native inhabitants of the Philippine
Islands (Adm. Code of 1916, sec. 1345; Adm. Code of 1917, sec. 1172). And now Act No. 2761 has returned
to the restrictive idea of the original Customs Administrative Act which in turn was merely a reflection of the
statutory language of the first American Congress.
Provisions such as those in Act No. 2761, which deny to foreigners the right to a certificate of Philippine
registry, are thus found not to be as radical as a first reading would make them appear.
Without any subterfuge, the apparent purpose of the Philippine Legislature is seen to be to enact an anti-alien
shipping act. The ultimate purpose of the Legislature is to encourage Philippine ship-building. This, without
doubt, has, likewise, been the intention of the United States Congress in passing navigation or tariff laws on
different occasions. The object of such a law, the United States Supreme Court once said, was to encourage
American trade, navigation, and ship-building by giving American ship-owners exclusive privileges. (Old
Dominion Steamship Co. vs. Virginia [1905], 198 U.S., 299; Kent's Commentaries, Vol. 3, p. 139.)
In the concurring opinion of Justice Johnson in Gibbons vs. Ogden ([1824], 9 Wheat., 1) is found the following:
Licensing acts, in fact, in legislation, are universally restraining acts; as, for example, acts licensing
gaming houses, retailers of spirituous liquors, etc. The act, in this instance, is distinctly of that
character, and forms part of an extensive system, the object of which is to encourage American
shipping, and place them on an equal footing with the shipping of other nations. Almost every
commercial nation reserves to its own subjects a monopoly of its coasting trade; and a
countervailing privilege in favor of American shipping is contemplated, in the whole legislation of
the United States on this subject. It is not to give the vessel an American character, that the license
is granted; that effect has been correctly attributed to the act of her enrollment. But it is to confer
on her American privileges, as contradistinguished from foreign; and to preserve the. Government
from fraud by foreigners, in surreptitiously intruding themselves into the American commercial
marine, as well as frauds upon the revenue in the trade coastwise, that this whole system is
projected.
The United States Congress in assuming its grave responsibility of legislating wisely for a new country did so
imbued with a spirit of Americanism. Domestic navigation and trade, it decreed, could only be carried on by
citizens of the United States. If the representatives of the American people acted in this patriotic manner to
advance the national policy, and if their action was accepted without protest in the courts, who can say that
they did not enact such beneficial laws under the all-pervading police power, with the prime motive of
safeguarding the country and of promoting its prosperity? Quite similarly, the Philippine Legislature made up
entirely of Filipinos, representing the mandate of the Filipino people and the guardian of their rights, acting

under practically autonomous powers, and imbued with a strong sense of Philippinism, has desired for these
Islands safety from foreign interlopers, the use of the common property exclusively by its citizens and the
citizens of the United States, and protection for the common good of the people. Who can say, therefore,
especially can a court, that with all the facts and circumstances affecting the Filipino people before it, the
Philippine Legislature has erred in the enactment of Act No. 2761?
Surely, the members of the judiciary are not expected to live apart from active life, in monastic seclusion
amidst dusty tomes and ancient records, but, as keen spectators of passing events and alive to the dictates of
the general the national welfare, can incline the scales of their decisions in favor of that solution which
will most effectively promote the public policy. All the presumption is in favor of the constitutionally of the law
and without good and strong reasons, courts should not attempt to nullify the action of the Legislature. "In
construing a statute enacted by the Philippine Commission (Legislature), we deem it our duty not to give it a
construction which would be repugnant to an Act of Congress, if the language of the statute is fairly
susceptible of another construction not in conflict with the higher law." (In re Guaria [1913], 24. Phil., 36;
U.S. vs. Ten Yu [1912], 24 Phil., 1.) That is the true construction which will best carry legislative intention into
effect.
With full consciousness of the importance of the question, we nevertheless are clearly of the opinion that the
limitation of domestic ownership for purposes of obtaining a certificate of Philippine registry in the coastwise
trade to citizens of the Philippine Islands, and to citizens of the United States, does not violate the provisions
of paragraph 1 of section 3 of the Act of Congress of August 29, 1916 No treaty right relied upon Act No. 2761
of the Philippine Legislature is held valid and constitutional .
The petition for a writ of mandamus is denied, with costs against the petitioner. So ordered.
Ruling:
FOURTEENTH AMENDMENT TO THE UNITED STATES CONSTITUTION; DUE PROCESS OF LAW AND
EQUAL PROTECTION OF THE LAWS; ALIENS.The guaranties of the Fourteenth Amendment and so of the
first paragraph of the Philippine Bill of Rights, are universal in their application to all persons within the
territorial jurisdiction, without regard to any differences of race, color, or nationality.
3.ID.; ID.; ID.; ID.; ID.The word "person" found in the Fourteenth Amendment and in the first sentence of the
first paragraph of the Philippine Bill of Rights includes aliens.
4.ID. ; ID. ; ID. ; ID. ; ID.Private corporations are "persons" within the scope of the guaranties in so far as
their property is concerned.
5.ID. ; ID. ; ID. ; ID. ; ID.Statutes which have attempted arbitrarily to forbid aliens to engage in any kind of
business to earn their living have been held unconstitutional, while other statutes denying certain rights to
aliens have been held constitutional. [Smith, Bell & Co. vs. Natividad., 40 Phil. 136(1919)]
While the plaintiff, a corporation having alien stockholders, is entitled to the protection afforded by the due
process of law and equal protection of the laws clause of the Philippine Bill of Rights, yet Act No. 2761, in
denying to corporations such as the plaintiff the right to register vessels in the Philippine coastwise trade, does
not belong to that vicious species of class legislation which must always be condemned, but falls within
authorized exceptions, notably, within the purview of the police power.
23.ID. ; ID.; ID. ; ID.Act No. 2761 does not violate the provisions of paragraph 1 of section 3 of the Act of
Congress of August 29, 1916, providing "that no law shall be enacted in said Islands which shall deprive any
person of life, liberty, or property without due process of law, or deny to any person therein the equal protection
of the laws."

24.ID. ; ID. ; ID. ; ID.Act No. 2761 is held to be valid and constitutional. [Smith, Bell & Co. vs. Natividad., 40
Phil. 136(1919)]
G.R. No. L-19550

June 19, 1967

HARRY S. STONEHILL, ROBERT P. BROOKS, JOHN J. BROOKS and KARL BECK, petitioners,
vs.
HON. JOSE W. DIOKNO, in his capacity as SECRETARY OF JUSTICE; JOSE LUKBAN, in his capacity
as Acting Director, National Bureau of Investigation; SPECIAL PROSECUTORS PEDRO D. CENZON,
EFREN I. PLANA and MANUEL VILLAREAL, JR. and ASST. FISCAL MANASES G. REYES; JUDGE
AMADO ROAN, Municipal Court of Manila; JUDGE ROMAN CANSINO, Municipal Court of Manila;
JUDGE HERMOGENES CALUAG, Court of First Instance of Rizal-Quezon City Branch, and JUDGE
DAMIAN JIMENEZ, Municipal Court of Quezon City, respondents.
Paredes, Poblador, Cruz and Nazareno and Meer, Meer and Meer and Juan T. David for petitioners.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Pacifico P. de Castro, Assistant
Solicitor General Frine C. Zaballero, Solicitor Camilo D. Quiason and Solicitor C. Padua for respondents.
CONCEPCION, C.J.:
Upon application of the officers of the government named on the margin 1 hereinafter referred to as
Respondents-Prosecutors several judges 2 hereinafter referred to as Respondents-Judges issued, on
different dates,3 a total of 42 search warrants against petitioners herein 4 and/or the corporations of which they
were officers,5 directed to the any peace officer, to search the persons above-named and/or the premises of
their offices, warehouses and/or residences, and to seize and take possession of the following personal
property to wit:
Books of accounts, financial records, vouchers, correspondence, receipts, ledgers, journals,
portfolios, credit journals, typewriters, and other documents and/or papers showing all business
transactions including disbursements receipts, balance sheets and profit and loss statements and
Bobbins (cigarette wrappers).
as "the subject of the offense; stolen or embezzled and proceeds or fruits of the offense," or "used or intended
to be used as the means of committing the offense," which is described in the applications adverted to above
as "violation of Central Bank Laws, Tariff and Customs Laws, Internal Revenue (Code) and the Revised Penal
Code."
Alleging that the aforementioned search warrants are null and void, as contravening the Constitution and the
Rules of Court because, inter alia: (1) they do not describe with particularity the documents, books and
things to be seized; (2) cash money, not mentioned in the warrants, were actually seized; (3) the warrants
were issued to fish evidence against the aforementioned petitioners in deportation cases filed against them;
(4) the searches and seizures were made in an illegal manner; and (5) the documents, papers and cash
money seized were not delivered to the courts that issued the warrants, to be disposed of in accordance with
law on March 20, 1962, said petitioners filed with the Supreme Court this original action for certiorari,
prohibition, mandamus and injunction, and prayed that, pending final disposition of the present case, a writ of
preliminary injunction be issued restraining Respondents-Prosecutors, their agents and /or representatives
from using the effects seized as aforementioned or any copies thereof, in the deportation cases already
adverted to, and that, in due course, thereafter, decision be rendered quashing the contested search warrants
and declaring the same null and void, and commanding the respondents, their agents or representatives to
return to petitioners herein, in accordance with Section 3, Rule 67, of the Rules of Court, the documents,
papers, things and cash moneys seized or confiscated under the search warrants in question.

In their answer, respondents-prosecutors alleged, 6 (1) that the contested search warrants are valid and have
been issued in accordance with law; (2) that the defects of said warrants, if any, were cured by petitioners'
consent; and (3) that, in any event, the effects seized are admissible in evidence against herein petitioners,
regardless of the alleged illegality of the aforementioned searches and seizures.
On March 22, 1962, this Court issued the writ of preliminary injunction prayed for in the petition. However, by
resolution dated June 29, 1962, the writ was partially lifted or dissolved, insofar as the papers, documents and
things seized from the offices of the corporations above mentioned are concerned; but, the injunction was
maintained as regards the papers, documents and things found and seized in the residences of petitioners
herein.7
Thus, the documents, papers, and things seized under the alleged authority of the warrants in question may
be split into two (2) major groups, namely: (a) those found and seized in the offices of the aforementioned
corporations, and (b) those found and seized in the residences of petitioners herein.
As regards the first group, we hold that petitioners herein have no cause of action to assail the legality of the
contested warrants and of the seizures made in pursuance thereof, for the simple reason that said
corporations have their respective personalities, separate and distinct from the personality of herein
petitioners, regardless of the amount of shares of stock or of the interest of each of them in said corporations,
and whatever the offices they hold therein may be. 8 Indeed, it is well settled that the legality of a seizure can
be contested only by the party whose rights have been impaired thereby,9 and that the objection to an unlawful
search and seizure is purely personal and cannot be availed of by third parties. 10 Consequently, petitioners
herein may not validly object to the use in evidence against them of the documents, papers and things seized
from the offices and premises of the corporations adverted to above, since the right to object to the admission
of said papers in evidence belongsexclusively to the corporations, to whom the seized effects belong, and may
not be invoked by the corporate officers in proceedings against them in their individual capacity. 11 Indeed, it
has been held:
. . . that the Government's action in gaining possession of papers belonging to the corporation did
not relate to nor did it affect the personal defendants. If these papers were unlawfully seized and
thereby the constitutional rights of or any one were invaded, they were the rights of
the corporation and not the rights of the other defendants. Next, it is clear that a question of the
lawfulness of a seizure can be raised only by one whose rights have been invaded. Certainly, such
a seizure, if unlawful, could not affect the constitutional rights of defendants whose property had
not been seized or the privacy of whose homes had not been disturbed; nor could they claim for
themselves the benefits of the Fourth Amendment, when its violation, if any, was with reference to
the rights of another. Remus vs. United States (C.C.A.)291 F. 501, 511. It follows, therefore, that
the question of the admissibility of the evidence based on an alleged unlawful search and seizure
does not extend to the personal defendants but embraces only the corporation whose property
was taken. . . . (A Guckenheimer & Bros. Co. vs. United States, [1925] 3 F. 2d. 786, 789, Emphasis
supplied.)
With respect to the documents, papers and things seized in the residences of petitioners herein, the
aforementioned resolution of June 29, 1962, lifted the writ of preliminary injunction previously issued by this
Court,12 thereby, in effect, restraining herein Respondents-Prosecutors from using them in evidence against
petitioners herein.
In connection with said documents, papers and things, two (2) important questions need be settled, namely:
(1) whether the search warrants in question, and the searches and seizures made under the authority thereof,
are valid or not, and (2) if the answer to the preceding question is in the negative, whether said documents,
papers and things may be used in evidence against petitioners herein.1wph1.t

Petitioners maintain that the aforementioned search warrants are in the nature of general warrants and that
accordingly, the seizures effected upon the authority there of are null and void. In this connection, the
Constitution13 provides:
The right of the people to be secure in their persons, houses, papers, and effects against
unreasonable searches and seizures shall not be violated, and no warrants shall issue but upon
probable cause, to be determined by the judge after examination under oath or affirmation of the
complainant and the witnesses he may produce, and particularly describing the place to be
searched, and the persons or things to be seized.
Two points must be stressed in connection with this constitutional mandate, namely: (1) that no warrant shall
issue but upon probable cause, to be determined by the judge in the manner set forth in said provision; and (2)
that the warrant shall particularly describe the things to be seized.
None of these requirements has been complied with in the contested warrants. Indeed, the same were issued
upon applications stating that the natural and juridical person therein named had committed a "violation of
Central Ban Laws, Tariff and Customs Laws, Internal Revenue (Code) and Revised Penal Code." In other
words, nospecific offense had been alleged in said applications. The averments thereof with respect to the
offense committed were abstract. As a consequence, it was impossible for the judges who issued the warrants
to have found the existence of probable cause, for the same presupposes the introduction of competent proof
that the party against whom it is sought has performed particular acts, or committed specific omissions,
violating a given provision of our criminal laws. As a matter of fact, the applications involved in this case do not
allege any specific acts performed by herein petitioners. It would be the legal heresy, of the highest order, to
convict anybody of a "violation of Central Bank Laws, Tariff and Customs Laws, Internal Revenue (Code) and
Revised Penal Code," as alleged in the aforementioned applications without reference to any
determinate provision of said laws or
To uphold the validity of the warrants in question would be to wipe out completely one of the most fundamental
rights guaranteed in our Constitution, for it would place the sanctity of the domicile and the privacy of
communication and correspondence at the mercy of the whims caprice or passion of peace officers. This is
precisely the evil sought to be remedied by the constitutional provision above quoted to outlaw the so-called
general warrants. It is not difficult to imagine what would happen, in times of keen political strife, when the
party in power feels that the minority is likely to wrest it, even though by legal means.
Such is the seriousness of the irregularities committed in connection with the disputed search warrants, that
this Court deemed it fit to amend Section 3 of Rule 122 of the former Rules of Court 14 by providing in its
counterpart, under the Revised Rules of Court 15 that "a search warrant shall not issue but upon probable
cause in connection with one specific offense." Not satisfied with this qualification, the Court added thereto a
paragraph, directing that "no search warrant shall issue for more than one specific offense."
The grave violation of the Constitution made in the application for the contested search warrants was
compounded by the description therein made of the effects to be searched for and seized, to wit:
Books of accounts, financial records, vouchers, journals, correspondence, receipts, ledgers,
portfolios, credit journals, typewriters, and other documents and/or papers showing all business
transactions including disbursement receipts, balance sheets and related profit and loss
statements.
Thus, the warrants authorized the search for and seizure of records pertaining to all business transactions of
petitioners herein, regardless of whether the transactions were legal or illegal. The warrants sanctioned the
seizure of all records of the petitioners and the aforementioned corporations, whatever their nature, thus
openly contravening the explicit command of our Bill of Rights that the things to be seized
be particularly described as well as tending to defeat its major objective: the elimination
of general warrants.

Relying upon Moncado vs. People's Court (80 Phil. 1), Respondents-Prosecutors maintain that, even if the
searches and seizures under consideration were unconstitutional, the documents, papers and things thus
seized are admissible in evidence against petitioners herein. Upon mature deliberation, however, we are
unanimously of the opinion that the position taken in the Moncado case must be abandoned. Said position
was in line with the American common law rule, that the criminal should not be allowed to go free merely
"because the constable has blundered," 16 upon the theory that the constitutional prohibition against
unreasonable searches and seizures is protected by means other than the exclusion of evidence unlawfully
obtained, 17 such as the common-law action for damages against the searching officer, against the party who
procured the issuance of the search warrant and against those assisting in the execution of an illegal search,
their criminal punishment, resistance, without liability to an unlawful seizure, and such other legal remedies as
may be provided by other laws.
However, most common law jurisdictions have already given up this approach and eventually adopted the
exclusionary rule, realizing that this is the only practical means of enforcing the constitutional
injunction against unreasonable searches and seizures. In the language of Judge Learned Hand:
As we understand it, the reason for the exclusion of evidence competent as such, which has been
unlawfully acquired, is that exclusion is the only practical way of enforcing the constitutional
privilege. In earlier times the action of trespass against the offending official may have been
protection enough; but that is true no longer. Only in case the prosecution which itself controls the
seizing officials, knows that it cannot profit by their wrong will that wrong be repressed.18
In fact, over thirty (30) years before, the Federal Supreme Court had already declared:
If letters and private documents can thus be seized and held and used in evidence against a
citizen accused of an offense, the protection of the 4th Amendment, declaring his rights to be
secure against such searches and seizures, is of no value, and, so far as those thus placed are
concerned, might as well be stricken from the Constitution. The efforts of the courts and their
officials to bring the guilty to punishment, praiseworthy as they are, are not to be aided by the
sacrifice of those great principles established by years of endeavor and suffering which have
resulted in their embodiment in the fundamental law of the land.19
This view was, not only reiterated, but, also, broadened in subsequent decisions on the same Federal
Court. 20After reviewing previous decisions thereon, said Court held, in Mapp vs. Ohio (supra.):
. . . Today we once again examine the Wolf's constitutional documentation of the right of privacy
free from unreasonable state intrusion, and after its dozen years on our books, are led by it to
close the only courtroom door remaining open to evidence secured by official lawlessness in
flagrant abuse of that basic right, reserved to all persons as a specific guarantee against that very
same unlawful conduct. We hold that all evidence obtained by searches and seizures in violation of
the Constitution is, by that same authority, inadmissible in a State.
Since the Fourth Amendment's right of privacy has been declared enforceable against the States
through the Due Process Clause of the Fourteenth, it is enforceable against them by the same
sanction of exclusion as it used against the Federal Government. Were it otherwise, then just as
without the Weeks rule the assurance against unreasonable federal searches and seizures would
be "a form of words," valueless and underserving of mention in a perpetual charter of inestimable
human liberties, so too, without that rule the freedom from state invasions of privacy would be so
ephemeral and so neatly severed from its conceptual nexus with the freedom from all brutish
means of coercing evidence as not to permit this Court's high regard as a freedom "implicit in the
concept of ordered liberty." At the time that the Court held in Wolf that the amendment was
applicable to the States through the Due Process Clause, the cases of this Court as we have seen,
had steadfastly held that as to federal officers the Fourth Amendment included the exclusion of the
evidence seized in violation of its provisions. Even Wolf "stoutly adhered" to that proposition. The

right to when conceded operatively enforceable against the States, was not susceptible of
destruction by avulsion of the sanction upon which its protection and enjoyment had always been
deemed dependent under the Boyd, Weeks and Silverthorne Cases. Therefore, in extending the
substantive protections of due process to all constitutionally unreasonable searches state or
federal it was logically and constitutionally necessarily that the exclusion doctrine an
essential part of the right to privacy be also insisted upon as an essential ingredient of the right
newly recognized by the Wolf Case. In short, the admission of the new constitutional Right by Wolf
could not tolerate denial of its most important constitutional privilege, namely, the exclusion of the
evidence which an accused had been forced to give by reason of the unlawful seizure. To hold
otherwise is to grant the right but in reality to withhold its privilege and enjoyment. Only last year
the Court itself recognized that the purpose of the exclusionary rule to "is to deter to compel
respect for the constitutional guaranty in the only effectively available way by removing the
incentive to disregard it" . . . .
The ignoble shortcut to conviction left open to the State tends to destroy the entire system of
constitutional restraints on which the liberties of the people rest. Having once recognized that the
right to privacy embodied in the Fourth Amendment is enforceable against the States, and that the
right to be secure against rude invasions of privacy by state officers is, therefore constitutional in
origin, we can no longer permit that right to remain an empty promise. Because it is enforceable in
the same manner and to like effect as other basic rights secured by its Due Process Clause, we
can no longer permit it to be revocable at the whim of any police officer who, in the name of law
enforcement itself, chooses to suspend its enjoyment. Our decision, founded on reason and truth,
gives to the individual no more than that which the Constitution guarantees him to the police officer
no less than that to which honest law enforcement is entitled, and, to the courts, that judicial
integrity so necessary in the true administration of justice. (emphasis ours.)
Indeed, the non-exclusionary rule is contrary, not only to the letter, but also, to the spirit of the constitutional
injunction against unreasonable searches and seizures. To be sure, if the applicant for a search warrant has
competent evidence to establish probable cause of the commission of a given crime by the party against
whom the warrant is intended, then there is no reason why the applicant should not comply with the
requirements of the fundamental law. Upon the other hand, if he has no such competent evidence, then it
is not possible for the Judge to find that there is probable cause, and, hence, no justification for the issuance of
the warrant. The only possible explanation (not justification) for its issuance is the necessity of fishing evidence
of the commission of a crime. But, then, this fishing expedition is indicative of the absence of evidence to
establish a probable cause.
Moreover, the theory that the criminal prosecution of those who secure an illegal search warrant and/or make
unreasonable searches or seizures would suffice to protect the constitutional guarantee under consideration,
overlooks the fact that violations thereof are, in general, committed By agents of the party in power, for,
certainly, those belonging to the minority could not possibly abuse a power they do not have. Regardless of
the handicap under which the minority usually but, understandably finds itself in prosecuting agents of
the majority, one must not lose sight of the fact that the psychological and moral effect of the possibility 21 of
securing their conviction, is watered down by the pardoning power of the party for whose benefit the illegality
had been committed.
In their Motion for Reconsideration and Amendment of the Resolution of this Court dated June 29, 1962,
petitioners allege that Rooms Nos. 81 and 91 of Carmen Apartments, House No. 2008, Dewey Boulevard,
House No. 1436, Colorado Street, and Room No. 304 of the Army-Navy Club, should be included among the
premises considered in said Resolution as residences of herein petitioners, Harry S. Stonehill, Robert P.
Brook, John J. Brooks and Karl Beck, respectively, and that, furthermore, the records, papers and other effects
seized in the offices of the corporations above referred to include personal belongings of said petitioners and
other effects under their exclusive possession and control, for the exclusion of which they have a standing
under the latest rulings of the federal courts of federal courts of the United States. 22

We note, however, that petitioners' theory, regarding their alleged possession of and control over the
aforementioned records, papers and effects, and the alleged "personal" nature thereof, has Been
Advanced, notin their petition or amended petition herein, but in the Motion for Reconsideration and
Amendment of the Resolution of June 29, 1962. In other words, said theory would appear to be readjustment
of that followed in said petitions, to suit the approach intimated in the Resolution sought to be reconsidered
and amended. Then, too, some of the affidavits or copies of alleged affidavits attached to said motion for
reconsideration, or submitted in support thereof, contain either inconsistent allegations, or allegations
inconsistent with the theory now advanced by petitioners herein.

whom it is sought has performed particular acts or committed specific omissions in violation of a specific penal
provision. [Stonehill vs. Diokno, 20 SCRA 383(1967)]

Upon the other hand, we are not satisfied that the allegations of said petitions said motion for reconsideration,
and the contents of the aforementioned affidavits and other papers submitted in support of said motion, have
sufficiently established the facts or conditions contemplated in the cases relied upon by the petitioners; to
warrant application of the views therein expressed, should we agree thereto. At any rate, we do not deem it
necessary to express our opinion thereon, it being best to leave the matter open for determination in
appropriate cases in the future.

San Juan, Africa, Gonzales & San Agustin, for Petitioners.

We hold, therefore, that the doctrine adopted in the Moncado case must be, as it is hereby, abandoned; that
the warrants for the search of three (3) residences of herein petitioners, as specified in the Resolution of June
29, 1962, are null and void; that the searches and seizures therein made are illegal; that the writ of preliminary
injunction heretofore issued, in connection with the documents, papers and other effects thus seized in said
residences of herein petitioners is hereby made permanent; that the writs prayed for are granted, insofar as
the documents, papers and other effects so seized in the aforementioned residences are concerned; that the
aforementioned motion for Reconsideration and Amendment should be, as it is hereby, denied; and that the
petition herein is dismissed and the writs prayed for denied, as regards the documents, papers and other
effects seized in the twenty-nine (29) places, offices and other premises enumerated in the same Resolution,
without special pronouncement as to costs.
It is so ordered.
Ruling:
Constitutional Law; Search warrants; Corporations; Only party affected may contest legality of seizure effected
by search warrants.Officers of certain corporations, from which documents, papers and things were seized
by means of search warrants, have no cause of action to assail the legality of the seizures because said
corporations have personalities distinct and separate from those of said officers. The legality of a seizure can
be contested only by the party whose rights have been impaired thereby. The objection to an unlawful search
is purely personal and cannot be availed of by third parties.
Same; Evidence: When illegally seized evidence is admissible.Officers of certain corporations cannot validly
object to the use in evidence against them of the documents, papers and things seized from the offices and
premises of the corporations since the right to object to their admission in evidence belongs exclusively to the
corporations, to which the seized effects belong, and may not be invoked by the corporate officers in
proceedings against them in their individual capacity.
Same; Requisites for issuing search warrants.The Constitution provides that no warrant shall issue but upon
probable cause, to be determined by the judge, and that the warrant shall particularly describe the things to be
seized.
Same; General search warrants.Search warrants, issued upon applications stating that the natural and
juridical persons therein named had committed a violation of Central Bank laws, tariff and customs laws, Tax
Code and Revised Penal Code do not satisfy the constitutional requirements because no specific offense had
been alleged in said applications. It was impossible for the judges, who issued the warrants, to have found the
existence of probable cause, which presupposes the introduction of competent proof that the party against

[G.R. No. L-32409. February 27, 1971.]

BACHE & CO. (PHIL.), INC. and FREDERICK E. SEGGERMAN, Petitioners, v. HON. JUDGE VIVENCIO M.
RUIZ, MISAEL P. VERA, in his capacity as Commissioner of Internal Revenue, ARTURO LOGRONIO,
RODOLFO DE LEON, GAVINO VELASQUEZ, MIMIR DELLOSA, NICANOR ALCORDO, JOHN DOE, JOHN
DOE, JOHN DOE, and JOHN DOE, Respondents.

Solicitor General Felix Q. Antonio, Assistant Solicitor General Crispin V . Bautista, Solicitor Pedro A.
Ramirez and Special Attorney Jaime M. Maza for Respondents.

DECISION

VILLAMOR, J.:

This is an original action of certiorari, prohibition and mandamus, with prayer for a writ of preliminary
mandatory and prohibitory injunction. In their petition Bache & Co. (Phil.), Inc., a corporation duly organized
and existing under the laws of the Philippines, and its President, Frederick E. Seggerman, pray this Court to
declare null and void Search Warrant No. 2-M-70 issued by respondent Judge on February 25, 1970; to order
respondents to desist from enforcing the same and/or keeping the documents, papers and effects seized by
virtue thereof, as well as from enforcing the tax assessments on petitioner corporation alleged by petitioners to
have been made on the basis of the said documents, papers and effects, and to order the return of the latter to
petitioners. We gave due course to the petition but did not issue the writ of preliminary injunction prayed for
therein.
The pertinent facts of this case, as gathered from record, are as follows:chanrob1es virtual 1aw library
On February 24, 1970, respondent Misael P. Vera, Commissioner of Internal Revenue, wrote a letter
addressed to respondent Judge Vivencio M. Ruiz requesting the issuance of a search warrant against
petitioners for violation of Section 46(a) of the National Internal Revenue Code, in relation to all other pertinent
provisions thereof, particularly Sections 53, 72, 73, 208 and 209, and authorizing Revenue Examiner Rodolfo
de Leon, one of herein respondents, to make and file the application for search warrant which was attached to
the letter.
In the afternoon of the following day, February 25, 1970, respondent De Leon and his witness, respondent
Arturo Logronio, went to the Court of First Instance of Rizal. They brought with them the following papers:
respondent Veras aforesaid letter-request; an application for search warrant already filled up but still unsigned
by respondent De Leon; an affidavit of respondent Logronio subscribed before respondent De Leon; a
deposition in printed form of respondent Logronio already accomplished and signed by him but not yet
subscribed; and a search warrant already accomplished but still unsigned by respondent Judge.
At that time respondent Judge was hearing a certain case; so, by means of a note, he instructed his Deputy
Clerk of Court to take the depositions of respondents De Leon and Logronio. After the session had adjourned,
respondent Judge was informed that the depositions had already been taken. The stenographer, upon request
of respondent Judge, read to him her stenographic notes; and thereafter, respondent Judge asked respondent
Logronio to take the oath and warned him that if his deposition was found to be false and without legal basis,
he could be charged for perjury. Respondent Judge signed respondent de Leons application for search
warrant and respondent Logronios deposition, Search Warrant No. 2-M-70 was then sign by respondent
Judge and accordingly issued.
Three days later, or on February 28, 1970, which was a Saturday, the BIR agents served the search warrant
petitioners at the offices of petitioner corporation on Ayala Avenue, Makati, Rizal. Petitioners lawyers protested
the search on the ground that no formal complaint or transcript of testimony was attached to the warrant. The
agents nevertheless proceeded with their search which yielded six boxes of documents.
On March 3, 1970, petitioners filed a petition with the Court of First Instance of Rizal praying that the search
warrant be quashed, dissolved or recalled, that preliminary prohibitory and mandatory writs of injunction be

issued, that the search warrant be declared null and void, and that the respondents be ordered to pay
petitioners, jointly and severally, damages and attorneys fees. On March 18, 1970, the respondents, thru the
Solicitor General, filed an answer to the petition. After hearing, the court, presided over by respondent Judge,
issued on July 29, 1970, an order dismissing the petition for dissolution of the search warrant. In the
meantime, or on April 16, 1970, the Bureau of Internal Revenue made tax assessments on petitioner
corporation in the total sum of P2,594,729.97, partly, if not entirely, based on the documents thus seized.
Petitioners came to this Court.

constitution something of a fundamental character. Now, before a judge could issue a search warrant, he must
be under the obligation to examine personally under oath the complainant and if he has any witness, the
witnesses that he may produce . . ."cralaw virtua1aw library

The petition should be granted for the following reasons:chanrob1es virtual 1aw library

Personal examination by the judge of the complainant and his witnesses is necessary to enable him to
determine the existence or non-existence of a probable cause, pursuant to Art. III, Sec. 1, par. 3, of the
Constitution, and Sec. 3, Rule 126 of the Revised Rules of Court, both of which prohibit the issuance of
warrants except "upon probable cause." The determination of whether or not a probable cause exists calls for
the exercise of judgment after a judicial appraisal of facts and should not be allowed to be delegated in the
absence of any rule to the contrary.

1. Respondent Judge failed to personally examine the complainant and his witness.
The pertinent provisions of the Constitution of the Philippines and of the Revised Rules of Court
are:jgc:chanrobles.com.ph
"(3) The right of the people to be secure in their persons, houses, papers and effects against unreasonable
searches and seizures shall not be violated, and no warrants shall issue but upon probable cause, to be
determined by the judge after examination under oath or affirmation of the complainant and the witnesses he
may produce, and particularly describing the place to be searched, and the persons or things to be seized."
(Art. III, Sec. 1, Constitution.)
"SEC. 3. Requisites for issuing search warrant. A search warrant shall not issue but upon probable cause in
connection with one specific offense to be determined by the judge or justice of the peace after examination
under oath or affirmation of the complainant and the witnesses he may produce, and particularly describing the
place to be searched and the persons or things to be seized.
"No search warrant shall issue for more than one specific offense.
"SEC. 4. Examination of the applicant. The judge or justice of the peace must, before issuing the warrant,
personally examine on oath or affirmation the complainant and any witnesses he may produce and take their
depositions in writing, and attach them to the record, in addition to any affidavits presented to him." (Rule 126,
Revised Rules of Court.)
The examination of the complainant and the witnesses he may produce, required by Art. III, Sec. 1, par. 3, of
the Constitution, and by Secs. 3 and 4, Rule 126 of the Revised Rules of Court, should be conducted by the
judge himself and not by others. The phrase "which shall be determined by the judge after examination under
oath or affirmation of the complainant and the witnesses he may produce," appearing in the said constitutional
provision, was introduced by Delegate Francisco as an amendment to the draft submitted by the SubCommittee of Seven. The following discussion in the Constitutional Convention (Laurel, Proceedings of the
Philippine Constitutional Convention, Vol. III, pp. 755-757) is enlightening:jgc:chanrobles.com.ph

The implementing rule in the Revised Rules of Court, Sec. 4, Rule 126, is more emphatic and candid, for it
requires the judge, before issuing a search warrant, to "personally examine on oath or affirmation the
complainant and any witnesses he may produce . . ."cralaw virtua1aw library

In the case at bar, no personal examination at all was conducted by respondent Judge of the complainant
(respondent De Leon) and his witness (respondent Logronio). While it is true that the complainants application
for search warrant and the witness printed-form deposition were subscribed and sworn to before respondent
Judge, the latter did not ask either of the two any question the answer to which could possibly be the basis for
determining whether or not there was probable cause against herein petitioners. Indeed, the participants seem
to have attached so little significance to the matter that notes of the proceedings before respondent Judge
were not even taken. At this juncture it may be well to recall the salient facts. The transcript of stenographic
notes (pp. 61-76, April 1, 1970, Annex J-2 of the Petition) taken at the hearing of this case in the court below
shows that per instruction of respondent Judge, Mr. Eleodoro V. Gonzales, Special Deputy Clerk of Court, took
the depositions of the complainant and his witness, and that stenographic notes thereof were taken by Mrs.
Gaspar. At that time respondent Judge was at the sala hearing a case. After respondent Judge was through
with the hearing, Deputy Clerk Gonzales, stenographer Gaspar, complainant De Leon and witness Logronio
went to respondent Judges chamber and informed the Judge that they had finished the depositions.
Respondent Judge then requested the stenographer to read to him her stenographic notes. Special Deputy
Clerk Gonzales testified as follows:jgc:chanrobles.com.ph
"A And after finishing reading the stenographic notes, the Honorable Judge requested or instructed them,
requested Mr. Logronio to raise his hand and warned him if his deposition will be found to be false and without
legal basis, he can be charged criminally for perjury. The Honorable Court told Mr. Logronio whether he affirms
the facts contained in his deposition and the affidavit executed before Mr. Rodolfo de Leon.
"Q And thereafter?
"A And thereafter, he signed the deposition of Mr. Logronio.
"Q Who is this he?

"SR. ORENSE. Vamos a dejar compaero los piropos y vamos al grano.

"A The Honorable Judge.
En los casos de una necesidad de actuar inmediatamente para que no se frusten los fines de la justicia
mediante el registro inmediato y la incautacion del cuerpo del delito, no cree Su Seoria que causaria cierta
demora el procedimiento apuntado en su enmienda en tal forma que podria frustrar los fines de la justicia o si
Su Seoria encuentra un remedio para esto casos con el fin de compaginar los fines de la justicia con los
derechos del individuo en su persona, bienes etcetera, etcetera.

"Q The deposition or the affidavit?

"A The affidavit, Your Honor."cralaw virtua1aw library
Thereafter, respondent Judge signed the search warrant.

"SR. FRANCISCO. No puedo ver en la practica el caso hipottico que Su Seoria pregunta por la siguiente
razon: el que solicita un mandamiento de registro tiene que hacerlo por escrito y ese escrito no aparecer en la
Mesa del Juez sin que alguien vaya el juez a presentar ese escrito o peticion de sucuestro. Esa persona que
presenta el registro puede ser el mismo denunciante o alguna persona que solicita dicho mandamiento de
registro. Ahora toda la enmienda en esos casos consiste en que haya peticion de registro y el juez no se
atendra solamente a sea peticion sino que el juez examiner a ese denunciante y si tiene testigos tambin
examiner a los testigos.
"SR. ORENSE. No cree Su Seoria que el tomar le declaracion de ese denunciante por escrito siempre
requeriria algun tiempo?.
"SR. FRANCISCO. Seria cuestio de un par de horas, pero por otro lado minimizamos en todo lo posible las
vejaciones injustas con la expedicion arbitraria de los mandamientos de registro. Creo que entre dos males
debemos escoger. el menor.
x
x
x

The participation of respondent Judge in the proceedings which led to the issuance of Search Warrant No. 2M-70 was thus limited to listening to the stenographers readings of her notes, to a few words of warning
against the commission of perjury, and to administering the oath to the complainant and his witness. This
cannot be consider a personal examination. If there was an examination at all of the complainant and his
witness, it was the one conducted by the Deputy Clerk of Court. But, as stated, the Constitution and the rules
require a personal examination by the judge. It was precisely on account of the intention of the delegates to
the Constitutional Convention to make it a duty of the issuing judge to personally examine the complainant and
his witnesses that the question of how much time would be consumed by the judge in examining them came
up before the Convention, as can be seen from the record of the proceedings quoted above. The reading of
the stenographic notes to respondent Judge did not constitute sufficient compliance with the constitutional
mandate and the rule; for by that manner respondent Judge did not have the opportunity to observe the
demeanor of the complainant and his witness, and to propound initial and follow-up questions which the
judicial mind, on account of its training, was in the best position to conceive. These were important in arriving
at a sound inference on the all-important question of whether or not there was probable cause.
2. The search warrant was issued for more than one specific offense.

"MR. LAUREL. . . . The reason why we are in favor of this amendment is because we are incorporating in our

Search Warrant No. 2-M-70 was issued for" [v]iolation of Sec. 46(a) of the National Internal Revenue Code in
relation to all other pertinent provisions thereof particularly Secs. 53, 72, 73, 208 and 209." The question is:
Was the said search warrant issued "in connection with one specific offense," as required by Sec. 3, Rule
126?
To arrive at the correct answer it is essential to examine closely the provisions of the Tax Code referred to
above. Thus we find the following:chanrob1es virtual 1aw library
Sec. 46(a) requires the filing of income tax returns by corporations.
Sec. 53 requires the withholding of income taxes at source.
Sec. 72 imposes surcharges for failure to render income tax returns and for rendering false and fraudulent
returns.
Sec. 73 provides the penalty for failure to pay the income tax, to make a return or to supply the information
required under the Tax Code.
Sec. 208 penalizes" [a]ny person who distills, rectifies, repacks, compounds, or manufactures any article
subject to a specific tax, without having paid the privilege tax therefore, or who aids or abets in the conduct of
illicit distilling, rectifying, compounding, or illicit manufacture of any article subject to specific tax . . .," and
provides that in the case of a corporation, partnership, or association, the official and/or employee who caused
the violation shall be responsible.
Sec. 209 penalizes the failure to make a return of receipts, sales, business, or gross value of output removed,
or to pay the tax due thereon.
The search warrant in question was issued for at least four distinct offenses under the Tax Code. The first is
the violation of Sec. 46(a), Sec. 72 and Sec. 73 (the filing of income tax returns), which are interrelated. The
second is the violation of Sec. 53 (withholding of income taxes at source). The third is the violation of Sec. 208
(unlawful pursuit of business or occupation); and the fourth is the violation of Sec. 209 (failure to make a return
of receipts, sales, business or gross value of output actually removed or to pay the tax due thereon). Even in
their classification the six above-mentioned provisions are embraced in two different titles: Secs. 46(a), 53, 72
and 73 are under Title II (Income Tax); while Secs. 208 and 209 are under Title V (Privilege Tax on Business
and Occupation).
Respondents argue that Stonehill, Et. Al. v. Diokno, Et Al., L-19550, June 19, 1967 (20 SCRA 383), is not
applicable, because there the search warrants were issued for "violation of Central Bank Laws, Internal
Revenue (Code) and Revised Penal Code;" whereas, here Search Warrant No 2-M-70 was issued for violation
of only one code, i.e., the National Internal Revenue Code. The distinction more apparent than real, because it
was precisely on account of the Stonehill incident, which occurred sometime before the present Rules of Court
took effect on January 1, 1964, that this Court amended the former rule by inserting therein the phrase "in
connection with one specific offense," and adding the sentence "No search warrant shall issue for more than
one specific offense," in what is now Sec. 3, Rule 126. Thus we said in Stonehill:jgc:chanrobles.com.ph
"Such is the seriousness of the irregularities committed in connection with the disputed search warrants, that
this Court deemed it fit to amend Section 3 of Rule 122 of the former Rules of Court that a search warrant
shall not issue but upon probable cause in connection with one specific offense. Not satisfied with this
qualification, the Court added thereto a paragraph, directing that no search warrant shall issue for more than
one specific offense."
3. The search warrant does not particularly describe the things to be seized.
The documents, papers and effects sought to be seized are described in Search Warrant No. 2-M-70 in this
manner:jgc:chanrobles.com.ph
"Unregistered and private books of accounts (ledgers, journals, columnars, receipts and disbursements books,
customers ledgers); receipts for payments received; certificates of stocks and securities; contracts, promissory
notes and deeds of sale; telex and coded messages; business communications, accounting and business
records; checks and check stubs; records of bank deposits and withdrawals; and records of foreign
remittances, covering the years 1966 to 1970."cralaw virtua1aw library
The description does not meet the requirement in Art III, Sec. 1, of the Constitution, and of Sec. 3, Rule 126 of
the Revised Rules of Court, that the warrant should particularly describe the things to be seized.

"The grave violation of the Constitution made in the application for the contested search warrants was
compounded by the description therein made of the effects to be searched for and seized, to wit:chanrob1es
virtual 1aw library
Books of accounts, financial records, vouchers, journals, correspondence, receipts, ledgers, portfolios, credit
journals, typewriters, and other documents and/or paper showing all business transactions including
disbursement receipts, balance sheets and related profit and loss statements.
"Thus, the warrants authorized the search for and seizure of records pertaining to all business transactions of
petitioners herein, regardless of whether the transactions were legal or illegal. The warrants sanctioned the
seizure of all records of the petitioners and the aforementioned corporations, whatever their nature, thus
openly contravening the explicit command of our Bill of Rights that the things to be seized be particularly
described as well as tending to defeat its major objective: the elimination of general warrants."cralaw
virtua1aw library
While the term "all business transactions" does not appear in Search Warrant No. 2-M-70, the said warrant
nevertheless tends to defeat the major objective of the Bill of Rights, i.e., the elimination of general warrants,
for the language used therein is so all-embracing as to include all conceivable records of petitioner
corporation, which, if seized, could possibly render its business inoperative.
In Uy Kheytin, Et. Al. v. Villareal, etc., Et Al., 42 Phil. 886, 896, this Court had occasion to explain the purpose
of the requirement that the warrant should particularly describe the place to be searched and the things to be
seized, to wit:jgc:chanrobles.com.ph
". . . Both the Jones Law (sec. 3) and General Orders No. 58 (sec. 97) specifically require that a search
warrant should particularly describe the place to be searched and the things to be seized. The evident purpose
and intent of this requirement is to limit the things to be seized to those, and only those, particularly described
in the search warrant to leave the officers of the law with no discretion regarding what articles they shall
seize, to the end that unreasonable searches and seizures may not be made, that abuses may not be
committed. That this is the correct interpretation of this constitutional provision is borne out by American
authorities."cralaw virtua1aw library
The purpose as thus explained could, surely and effectively, be defeated under the search warrant issued in
this case.
A search warrant may be said to particularly describe the things to be seized when the description therein is as
specific as the circumstances will ordinarily allow (People v. Rubio; 57 Phil. 384); or when the description
expresses a conclusion of fact not of law by which the warrant officer may be guided in making the
search and seizure (idem., dissent of Abad Santos, J.,); or when the things described are limited to those
which bear direct relation to the offense for which the warrant is being issued (Sec. 2, Rule 126, Revised Rules
of Court). The herein search warrant does not conform to any of the foregoing tests. If the articles desired to
be seized have any direct relation to an offense committed, the applicant must necessarily have some
evidence, other than those articles, to prove the said offense; and the articles subject of search and seizure
should come in handy merely to strengthen such evidence. In this event, the description contained in the
herein disputed warrant should have mentioned, at least, the dates, amounts, persons, and other pertinent
data regarding the receipts of payments, certificates of stocks and securities, contracts, promissory notes,
deeds of sale, messages and communications, checks, bank deposits and withdrawals, records of foreign
remittances, among others, enumerated in the warrant.
Respondents contend that certiorari does not lie because petitioners failed to file a motion for reconsideration
of respondent Judges order of July 29, 1970. The contention is without merit. In the first place, when the
questions raised before this Court are the same as those which were squarely raised in and passed upon by
the court below, the filing of a motion for reconsideration in said court before certiorari can be instituted in this
Court is no longer a prerequisite. (Pajo, etc., Et. Al. v. Ago, Et Al., 108 Phil., 905). In the second place, the rule
requiring the filing of a motion for reconsideration before an application for a writ of certiorari can be
entertained was never intended to be applied without considering the circumstances. (Matutina v. Buslon, Et
Al., 109 Phil., 140.) In the case at bar time is of the essence in view of the tax assessments sought to be
enforced by respondent officers of the Bureau of Internal Revenue against petitioner corporation, On account
of which immediate and more direct action becomes necessary. (Matute v. Court of Appeals, Et Al., 26 SCRA
768.) Lastly, the rule does not apply where, as in this case, the deprivation of petitioners fundamental right to
due process taints the proceeding against them in the court below not only with irregularity but also with nullity.
(Matute v. Court of Appeals, Et Al., supra.)
It is next contended by respondents that a corporation is not entitled to protection against unreasonable search
and seizures. Again, we find no merit in the contention.

In Stonehill, this Court, speaking thru Mr. Chief Justice Roberto Concepcion, said:jgc:chanrobles.com.ph
"Although, for the reasons above stated, we are of the opinion that an officer of a corporation which is charged

with a violation of a statute of the state of its creation, or of an act of Congress passed in the exercise of its
constitutional powers, cannot refuse to produce the books and papers of such corporation, we do not wish to
be understood as holding that a corporation is not entitled to immunity, under the 4th Amendment, against
unreasonable searches and seizures. A corporation is, after all, but an association of individuals under an
assumed name and with a distinct legal entity. In organizing itself as a collective body it waives no
constitutional immunities appropriate to such body. Its property cannot be taken without compensation. It can
only be proceeded against by due process of law, and is protected, under the 14th Amendment, against
unlawful discrimination . . ." (Hale v. Henkel, 201 U.S. 43, 50 L. ed. 652.)
"In Linn v. United States, 163 C.C.A. 470, 251 Fed. 476, 480, it was thought that a different rule applied to a
corporation, the ground that it was not privileged from producing its books and papers. But the rights of a
corporation against unlawful search and seizure are to be protected even if the same result might have been
achieved in a lawful way." (Silverthorne Lumber Company, Et. Al. v. United States of America, 251 U.S. 385,
64 L. ed. 319.)
In Stonehill, Et. Al. v. Diokno, Et Al., supra, this Court impliedly recognized the right of a corporation to object
against unreasonable searches and seizures, thus:jgc:chanrobles.com.ph
"As regards the first group, we hold that petitioners herein have no cause of action to assail the legality of the
contested warrants and of the seizures made in pursuance thereof, for the simple reason that said
corporations have their respective personalities, separate and distinct from the personality of herein
petitioners, regardless of the amount of shares of stock or the interest of each of them in said corporations,
whatever, the offices they hold therein may be. Indeed, it is well settled that the legality of a seizure can be
contested only by the party whose rights have been impaired thereby, and that the objection to an unlawful
search and seizure is purely personal and cannot be availed of by third parties. Consequently, petitioners
herein may not validly object to the use in evidence against them of the documents, papers and things seized
from the offices and premises of the corporations adverted to above, since the right to object to the admission
of said papers in evidence belongs exclusively to the corporations, to whom the seized effects belong, and
may not be invoked by the corporate officers in proceedings against them in their individual
capacity . . ."cralaw virtua1aw library
In the Stonehill case only the officers of the various corporations in whose offices documents, papers and
effects were searched and seized were the petitioners. In the case at bar, the corporation to whom the seized
documents belong, and whose rights have thereby been impaired, is itself a petitioner. On that score,
petitioner corporation here stands on a different footing from the corporations in Stonehill.
The tax assessments referred to earlier in this opinion were, if not entirely as claimed by petitioners at
least partly as in effect admitted by respondents based on the documents seized by virtue of Search
Warrant No. 2-M-70. Furthermore, the fact that the assessments were made some one and one-half months
after the search and seizure on February 25, 1970, is a strong indication that the documents thus seized
served as basis for the assessments. Those assessments should therefore not be enforced.
PREMISES CONSIDERED, the petition is granted. Accordingly, Search Warrant No. 2-M-70 issued by
respondent Judge is declared null and void; respondents are permanently enjoined from enforcing the said
search warrant; the documents, papers and effects seized thereunder are ordered to be returned to
petitioners; and respondent officials the Bureau of Internal Revenue and their representatives are permanently
enjoined from enforcing the assessments mentioned in Annex "G" of the present petition, as well as other
assessments based on the documents, papers and effects seized under the search warrant herein nullified,
and from using the same against petitioners in any criminal or other proceeding. No pronouncement as to
costs.

RAUL R. DAZA, COMMISSIONER QUINTIN S. DOROMAL, CAPT. JORGE B. SIACUNCO, et

al., respondents.
Apostol, Bernas, Gumaru, Ona and Associates for petitioner.
Vicente G. Sison for intervenor A.T. Abesamis.

NARVASA, J.:
Challenged in this special civil action of certiorari and prohibition by a private corporation known as the Bataan
Shipyard and Engineering Co., Inc. are: (1) Executive Orders Numbered 1 and 2, promulgated by President
Corazon C. Aquino on February 28, 1986 and March 12, 1986, respectively, and (2) the sequestration,
takeover, and other orders issued, and acts done, in accordance with said executive orders by the Presidential
Commission on Good Government and/or its Commissioners and agents, affecting said corporation.
1. The Sequestration, Takeover, and Other Orders Complained of
a. The Basic Sequestration Order
The sequestration order which, in the view of the petitioner corporation, initiated all its misery was issued on
April 14, 1986 by Commissioner Mary Concepcion Bautista. It was addressed to three of the agents of the
Commission, hereafter simply referred to as PCGG. It reads as follows:
RE: SEQUESTRATION ORDER
By virtue of the powers vested in the Presidential Commission on Good Government,
by authority of the President of the Philippines, you are hereby directed to sequester
the following companies.
1. Bataan Shipyard and Engineering Co., Inc. (Engineering
Island Shipyard and Mariveles Shipyard)
2. Baseco Quarry
3. Philippine Jai-Alai Corporation
4. Fidelity Management Co., Inc.

Ruling:
Remedial law; Search and seizures; Right of corporation against unreasonable searches and seizures.A
corporation is entitled to immunity against unreasonable searches and seizures. A corporation is, after all, but
an association of individuals under an assumed name and with a distinct legal entity. In organizing itself as a
collective body it waives no constitutional immunities appropriate to such body. Its property cannot be taken
without compensation. It can only be proceeded against by due process of law, and is protected against
unlawful discrimination. [Bache & Co. (Phil.), Inc. vs. Ruiz, 37 SCRA 823(1971)]

5. Romson Realty, Inc.

G.R. No. 75885 May 27, 1987

8. Bay Transport

BATAAN SHIPYARD & ENGINEERING CO., INC. (BASECO), petitioner,

vs.
PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT, CHAIRMAN JOVITO SALONGA,
COMMISSIONER MARY CONCEPCION BAUTISTA, COMMISSIONER RAMON DIAZ, COMMISSIONER

9. And all affiliate companies of Alfredo "Bejo" Romualdez

6. Trident Management Co.

7. New Trident Management

You are hereby ordered:

1. To implement this sequestration order with a minimum disruption of these

companies' business activities.

9. Complete list of depository banks for all funds with the authorized signatories for
withdrawals thereof.

2. To ensure the continuity of these companies as going concerns, the care and
maintenance of these assets until such time that the Office of the President through the
Commission on Good Government should decide otherwise.

10. Schedule of company investments and placements.

The letter closed with the warning that if the documents were not submitted within five days, the officers would
be cited for "contempt in pursuance with Presidential Executive Order Nos. 1 and 2."

3. To report to the Commission on Good Government periodically.

c. Orders Re Engineer Island
Further, you are authorized to request for Military/Security Support from the
Military/Police authorities, and such other acts essential to the achievement of this
sequestration order. 1
b. Order for Production of Documents
On the strength of the above sequestration order, Mr. Jose M. Balde, acting for the PCGG, addressed a letter
dated April 18, 1986 to the President and other officers of petitioner firm, reiterating an earlier request for the
production of certain documents, to wit:

(1) Termination of Contract for Security Services

A third order assailed by petitioner corporation, hereafter referred to simply as BASECO, is that issued on April
21, 1986 by a Capt. Flordelino B. Zabala, a member of the task force assigned to carry out the basic
sequestration order. He sent a letter to BASECO's Vice-President for Finance, 3 terminating the contract for
security services within the Engineer Island compound between BASECO and "Anchor and FAIRWAYS" and
"other civilian security agencies," CAPCOM military personnel having already been assigned to the area,
(2) Change of Mode of Payment of Entry Charges

1. Stock Transfer Book

2. Legal documents, such as:
2.1. Articles of Incorporation
2.2. By-Laws
2.3. Minutes of the Annual Stockholders Meeting from 1973 to
1986
2.4. Minutes of the Regular and Special Meetings of the Board
of Directors from 1973 to 1986
2.5. Minutes of the Executive Committee Meetings from 1973 to
1986
2.6. Existing contracts with suppliers/contractors/others.
3. Yearly list of stockholders with their corresponding share/stockholdings from 1973 to
1986 duly certified by the Corporate Secretary.
4. Audited Financial Statements such as Balance Sheet, Profit & Loss and others from
1973 to December 31, 1985.

On July 15, 1986, the same Capt. Zabala issued a Memorandum addressed to "Truck Owners and
Contractors," particularly a "Mr. Buddy Ondivilla National Marine Corporation," advising of the amendment in
part of their contracts with BASECO in the sense that the stipulated charges for use of the BASECO road
network were made payable "upon entry and not anymore subject to monthly billing as was originally agreed
upon." 4
d. Aborted Contract for Improvement of Wharf at Engineer Island
On July 9, 1986, a PCGG fiscal agent, S. Berenguer, entered into a contract in behalf of BASECO with
Deltamarine Integrated Port Services, Inc., in virtue of which the latter undertook to introduce improvements
costing approximately P210,000.00 on the BASECO wharf at Engineer Island, allegedly then in poor condition,
avowedly to "optimize its utilization and in return maximize the revenue which would flow into the government
coffers," in consideration of Deltamarine's being granted "priority in using the improved portion of the wharf
ahead of anybody" and exemption "from the payment of any charges for the use of wharf including the area
where it may install its bagging equipments" "until the improvement remains in a condition suitable for port
operations." 5 It seems however that this contract was never consummated. Capt. Jorge B. Siacunco, "Head(PCGG) BASECO Management Team," advised Deltamarine by letter dated July 30, 1986 that "the new
management is not in a position to honor the said contract" and thus "whatever improvements * * (may be
introduced) shall be deemed unauthorized * * and shall be at * * (Deltamarine's) own risk." 6
e. Order for Operation of Sesiman Rock Quarry, Mariveles, Bataan
By Order dated June 20, 1986, Commissioner Mary Bautista first directed a PCGG agent, Mayor Melba O.
Buenaventura, "to plan and implement progress towards maximizing the continuous operation of the BASECO
Sesiman Rock Quarry * * by conventional methods;" but afterwards, Commissioner Bautista, in representation
of the PCGG, authorized another party, A.T. Abesamis, to operate the quarry, located at Mariveles, Bataan, an
agreement to this effect having been executed by them on September 17, 1986. 7

5. Monthly Financial Statements for the current year up to March 31, 1986.
f. Order to Dispose of Scrap, etc.
6. Consolidated Cash Position Reports from January to April 15, 1986.
7. Inventory listings of assets up dated up to March 31, 1986.

By another Order of Commissioner Bautista, this time dated June 26, 1986, Mayor Buenaventura was also
"authorized to clean and beautify the Company's compound," and in this connection, to dispose of or sell
"metal scraps" and other materials, equipment and machineries no longer usable, subject to specified
guidelines and safeguards including audit and verification. 8

8. Updated schedule of Accounts Receivable and Accounts Payable.

g. The TAKEOVER Order

By letter dated July 14, 1986, Commissioner Ramon A. Diaz decreed the provisional takeover by the PCGG of
BASECO, "the Philippine Dockyard Corporation and all their affiliated companies." 9 Diaz invoked the
provisions of Section 3 (c) of Executive Order No. 1, empowering the Commission
* * To provisionally takeover in the public interest or to prevent its disposal or
dissipation, business enterprises and properties taken over by the government of the
Marcos Administration or by entities or persons close to former President Marcos, until
the transactions leading to such acquisition by the latter can be disposed of by the
appropriate authorities.
A management team was designated to implement the order, headed by Capt. Siacunco, and was given the
following powers:
1. Conducts all aspects of operation of the subject companies;
2. Installs key officers, hires and terminates personnel as necessary;
3. Enters into contracts related to management and operation of the companies;
4. Ensures that the assets of the companies are not dissipated and used effectively
and efficiently; revenues are duly accounted for; and disburses funds only as may be
necessary;
5. Does actions including among others, seeking of military support as may be
necessary, that will ensure compliance to this order;
6. Holds itself fully accountable to the Presidential Commission on Good Government
on all aspects related to this take-over order.
h. Termination of Services of BASECO Officers
Thereafter, Capt. Siacunco, sent letters to Hilario M. Ruiz, Manuel S. Mendoza, Moises M. Valdez, Gilberto
Pasimanero, and Benito R. Cuesta I, advising of the termination of their services by the PCGG. 10
2. Petitioner's Plea and Postulates
It is the foregoing specific orders and acts of the PCGG and its members and agents which, to repeat,
petitioner BASECO would have this Court nullify. More particularly, BASECO prays that this Court1) declare unconstitutional and void Executive Orders Numbered 1 and 2;
2) annul the sequestration order dated April- 14, 1986, and all other orders subsequently issued and acts done
on the basis thereof, inclusive of the takeover order of July 14, 1986 and the termination of the services of the
BASECO executives. 11
a. Re Executive Orders No. 1 and 2, and the Sequestration and Takeover Orders
While BASECO concedes that "sequestration without resorting to judicial action, might be made within the
context of Executive Orders Nos. 1 and 2 before March 25, 1986 when the Freedom Constitution was
promulgated, under the principle that the law promulgated by the ruler under a revolutionary regime is the law
of the land, it ceased to be acceptable when the same ruler opted to promulgate the Freedom Constitution on
March 25, 1986 wherein under Section I of the same, Article IV (Bill of Rights) of the 1973 Constitution was
adopted providing, among others, that "No person shall be deprived of life, liberty and property without due
process of law." (Const., Art. I V, Sec. 1)." 12

It declares that its objection to the constitutionality of the Executive Orders "as well as the Sequestration Order
* * and Takeover Order * * issued purportedly under the authority of said Executive Orders, rests on four
fundamental considerations: First, no notice and hearing was accorded * * (it) before its properties and
business were taken over; Second, the PCGG is not a court, but a purely investigative agency and therefore
not competent to act as prosecutor and judge in the same cause; Third, there is nothing in the issuances
which envisions any proceeding, process or remedy by which petitioner may expeditiously challenge the
validity of the takeover after the same has been effected; and Fourthly, being directed against specified
persons, and in disregard of the constitutional presumption of innocence and general rules and procedures,
they constitute a Bill of Attainder." 13
b. Re Order to Produce Documents
It argues that the order to produce corporate records from 1973 to 1986, which it has apparently already
complied with, was issued without court authority and infringed its constitutional right against self-incrimination,
and unreasonable search and seizure. 14
c. Re PCGG's Exercise of Right of Ownership and Management
BASECO further contends that the PCGG had unduly interfered with its right of dominion and management of
its business affairs by
1) terminating its contract for security services with Fairways & Anchor, without the consent and against the
will of the contracting parties; and amending the mode of payment of entry fees stipulated in its Lease
Contract with National Stevedoring & Lighterage Corporation, these acts being in violation of the nonimpairment clause of the constitution; 15
2) allowing PCGG Agent Silverio Berenguer to enter into an "anomalous contract" with Deltamarine Integrated
Port Services, Inc., giving the latter free use of BASECO premises; 16
3) authorizing PCGG Agent, Mayor Melba Buenaventura, to manage and operate its rock quarry at Sesiman,
Mariveles; 17
4) authorizing the same mayor to sell or dispose of its metal scrap, equipment, machinery and other
materials; 18
5) authorizing the takeover of BASECO, Philippine Dockyard Corporation, and all their affiliated companies;
6) terminating the services of BASECO executives: President Hilario M. Ruiz; EVP Manuel S. Mendoza; GM
Moises M. Valdez; Finance Mgr. Gilberto Pasimanero; Legal Dept. Mgr. Benito R. Cuesta I; 19
7) planning to elect its own Board of Directors;

20

8) allowing willingly or unwillingly its personnel to take, steal, carry away from petitioner's premises at
Mariveles * * rolls of cable wires, worth P600,000.00 on May 11, 1986; 21
9) allowing "indiscriminate diggings" at Engineer Island to retrieve gold bars supposed to have been buried
therein. 22
3. Doubts, Misconceptions regarding Sequestration, Freeze and Takeover Orders
Many misconceptions and much doubt about the matter of sequestration, takeover and freeze orders have
been engendered by misapprehension, or incomplete comprehension if not indeed downright ignorance of the
law governing these remedies. It is needful that these misconceptions and doubts be dispelled so that
uninformed and useless debates about them may be avoided, and arguments tainted b sophistry or intellectual

dishonesty be quickly exposed and discarded. Towards this end, this opinion will essay an exposition of the
law on the matter. In the process many of the objections raised by BASECO will be dealt with.
4. The Governing Law
a. Proclamation No. 3
The impugned executive orders are avowedly meant to carry out the explicit command of the Provisional
Constitution, ordained by Proclamation No. 3, 23 that the President-in the exercise of legislative power which
she was authorized to continue to wield "(until a legislature is elected and convened under a new Constitution"
"shall give priority to measures to achieve the mandate of the people," among others to (r)ecover ill-gotten
properties amassed by the leaders and supporters of the previous regime and protect the interest of the
people through orders of sequestration or freezing of assets or accounts." 24
b. Executive Order No. 1
Executive Order No. 1 stresses the "urgent need to recover all ill-gotten wealth," and postulates that "vast
resources of the government have been amassed by former President Ferdinand E. Marcos, his immediate
family, relatives, and close associates both here and abroad." 25 Upon these premises, the Presidential
Commission on Good Government was created, 26 "charged with the task of assisting the President in regard
to (certain specified) matters," among which was precisely* * The recovery of all in-gotten wealth accumulated by former President Ferdinand E.
Marcos, his immediate family, relatives, subordinates and close associates, whether
located in the Philippines or abroad, including the takeover or sequestration of all
business enterprises and entities owned or controlled by them, during his
administration, directly or through nominees, by taking undue advantage of their public
office and/or using their powers, authority, influence, connections or relationship. 27
In relation to the takeover or sequestration that it was authorized to undertake in the fulfillment of its mission,
the PCGG was granted "power and authority" to do the following particular acts, to wit:
1. To sequester or place or cause to be placed under its control or possession any
building or office wherein any ill-gotten wealth or properties may be found, and any
records pertaining thereto, in order to prevent their destruction, concealment or
disappearance which would frustrate or hamper the investigation or otherwise prevent
the Commission from accomplishing its task.
2. To provisionally take over in the public interest or to prevent the disposal or
dissipation, business enterprises and properties taken over by the government of the
Marcos Administration or by entities or persons close to former President Marcos, until
the transactions leading to such acquisition by the latter can be disposed of by the
appropriate authorities.
3. To enjoin or restrain any actual or threatened commission of acts by any person or
entity that may render moot and academic, or frustrate or otherwise make ineffectual
the efforts of the Commission to carry out its task under this order. 28
So that it might ascertain the facts germane to its objectives, it was granted power to conduct investigations;
require submission of evidence by subpoenae ad testificandum and duces tecum; administer oaths; punish for
contempt. 29 It was given power also to promulgate such rules and regulations as may be necessary to carry
out the purposes of * * (its creation). 30
c. Executive Order No. 2
Executive Order No. 2 gives additional and more specific data and directions respecting "the recovery of illgotten properties amassed by the leaders and supporters of the previous regime." It declares that:

1) * * the Government of the Philippines is in possession of evidence showing that

there are assets and properties purportedly pertaining to former Ferdinand E. Marcos,
and/or his wife Mrs. Imelda Romualdez Marcos, their close relatives, subordinates,
business associates, dummies, agents or nominees which had been or were acquired
by them directly or indirectly, through or as a result of the improper or illegal use of
funds or properties owned by the government of the Philippines or any of its branches,
instrumentalities, enterprises, banks or financial institutions, or by taking undue
advantage of their office, authority, influence, connections or relationship, resulting in
their unjust enrichment and causing grave damage and prejudice to the Filipino people
and the Republic of the Philippines:" and
2) * * said assets and properties are in the form of bank accounts, deposits, trust
accounts, shares of stocks, buildings, shopping centers, condominiums, mansions,
residences, estates, and other kinds of real and personal properties in the Philippines
and in various countries of the world." 31
Upon these premises, the President1) froze "all assets and properties in the Philippines in which former President Marcos
and/or his wife, Mrs. Imelda Romualdez Marcos, their close relatives, subordinates,
business associates, dummies, agents, or nominees have any interest or participation;
2) prohibited former President Ferdinand Marcos and/or his wife * *, their close
relatives, subordinates, business associates, duties, agents, or nominees
from transferring, conveying, encumbering, concealing or dissipating said assets or
properties in the Philippines and abroad, pending the outcome of appropriate
proceedings in the Philippines to determine whether any such assets or properties
were acquired by them through or as a result of improper or illegal use of or the
conversion of funds belonging to the Government of the Philippines or any of its
branches, instrumentalities, enterprises, banks or financial institutions, or by taking
undue advantage of their official position, authority, relationship, connection or
influence to unjustly enrich themselves at the expense and to the grave damage and
prejudice of the Filipino people and the Republic of the Philippines;
3) prohibited "any person from transferring, conveying, encumbering or otherwise
depleting or concealing such assets and properties or from assisting or taking part in
their transfer, encumbrance, concealment or dissipation under pain of such penalties
as are prescribed by law;" and
4) required "all persons in the Philippines holding such assets or properties, whether
located in the Philippines or abroad, in their names as nominees, agents or trustees, to
make full disclosure of the same to the Commission on Good Government within thirty
(30) days from publication of * (the) Executive Order, * *. 32
d. Executive Order No. 14
A third executive order is relevant: Executive Order No. 14, 33 by which the PCGG is empowered, "with the
assistance of the Office of the Solicitor General and other government agencies, * * to file and prosecute all
cases investigated by it * * as may be warranted by its findings." 34 All such cases, whether civil or criminal, are
to be filed "with the Sandiganbayanwhich shall have exclusive and original jurisdiction thereof." 35 Executive
Order No. 14 also pertinently provides that civil suits for restitution, reparation of damages, or indemnification
for consequential damages, forfeiture proceedings provided for under Republic Act No. 1379, or any other civil
actions under the Civil Code or other existing laws, in connection with * * (said Executive Orders Numbered 1
and 2) may be filed separately from and proceed independently of any criminal proceedings and may be
proved by a preponderance of evidence;" and that, moreover, the "technical rules of procedure and evidence
shall not be strictly applied to* * (said)civil cases." 36
5. Contemplated Situations

The situations envisaged and sought to be governed are self-evident, these being:
1) that "(i)ll-gotten properties (were) amassed by the leaders and supporters of the
previous regime";37
a) more particularly, that ill-gotten wealth (was) accumulated by former President
Ferdinand E. Marcos, his immediate family, relatives, subordinates and close
associates, * * located in the Philippines or abroad, * * (and) business enterprises and
entities (came to be) owned or controlled by them, during * * (the Marcos)
administration, directly or through nominees, by taking undue advantage of their public
office and/or using their powers, authority, influence, Connections or relationship; 38

a. Need of Evidentiary Substantiation in Proper Suit

Consequently, the factual premises of the Executive Orders cannot simply be assumed. They will have to be
duly established by adequate proof in each case, in a proper judicial proceeding, so that the recovery of the illgotten wealth may be validly and properly adjudged and consummated; although there are some who maintain
that the fact-that an immense fortune, and "vast resources of the government have been amassed by former
President Ferdinand E. Marcos, his immediate family, relatives, and close associates both here and abroad,"
and they have resorted to all sorts of clever schemes and manipulations to disguise and hide their illicit
acquisitions-is within the realm of judicial notice, being of so extensive notoriety as to dispense with proof
thereof, Be this as it may, the requirement of evidentiary substantiation has been expressly acknowledged,
and the procedure to be followed explicitly laid down, in Executive Order No. 14.
b. Need of Provisional Measures to Collect and Conserve Assets Pending Suits

b) otherwise stated, that "there are assets and properties purportedly pertaining to
former President Ferdinand E. Marcos, and/or his wife Mrs. Imelda Romualdez
Marcos, their close relatives, subordinates, business associates, dummies, agents or
nominees which had been or were acquired by them directly or indirectly, through or as
a result of the improper or illegal use of funds or properties owned by the Government
of the Philippines or any of its branches, instrumentalities, enterprises, banks or
financial institutions, or by taking undue advantage of their office, authority, influence,
connections or relationship, resulting in their unjust enrichment and causing grave
damage and prejudice to the Filipino people and the Republic of the Philippines"; 39

Nor may it be gainsaid that pending the institution of the suits for the recovery of such "ill-gotten wealth" as the
evidence at hand may reveal, there is an obvious and imperative need for preliminary, provisional measures to
prevent the concealment, disappearance, destruction, dissipation, or loss of the assets and properties subject
of the suits, or to restrain or foil acts that may render moot and academic, or effectively hamper, delay, or
negate efforts to recover the same.

c) that "said assets and properties are in the form of bank accounts. deposits, trust.
accounts, shares of stocks, buildings, shopping centers, condominiums, mansions,
residences, estates, and other kinds of real and personal properties in the Philippines
and in various countries of the world;" 40 and

To answer this need, the law has prescribed three (3) provisional remedies. These are: (1) sequestration; (2)
freeze orders; and (3) provisional takeover.

2) that certain "business enterprises and properties (were) taken over by the
government of the Marcos Administration or by entities or persons close to former
President Marcos. 41
6. Government's Right and Duty to Recover All Ill-gotten Wealth
There can be no debate about the validity and eminent propriety of the Government's plan "to recover all illgotten wealth."
Neither can there be any debate about the proposition that assuming the above described factual premises of
the Executive Orders and Proclamation No. 3 to be true, to be demonstrable by competent evidence, the
recovery from Marcos, his family and his dominions of the assets and properties involved, is not only a right
but a duty on the part of Government.
But however plain and valid that right and duty may be, still a balance must be sought with the equally
compelling necessity that a proper respect be accorded and adequate protection assured, the fundamental
rights of private property and free enterprise which are deemed pillars of a free society such as ours, and to
which all members of that society may without exception lay claim.
* * Democracy, as a way of life enshrined in the Constitution, embraces as its
necessary components freedom of conscience, freedom of expression, and freedom in
the pursuit of happiness. Along with these freedoms are included economic freedom
and freedom of enterprise within reasonable bounds and under proper control. * *
Evincing much concern for the protection of property, the Constitution distinctly
recognizes the preferred position which real estate has occupied in law for
ages. Property is bound up with every aspect of social life in a democracy as
democracy is conceived in the Constitution. The Constitution realizes the indispensable
role which property, owned in reasonable quantities and used legitimately, plays in the
stimulation to economic effort and the formation and growth of a solid social middle
class that is said to be the bulwark of democracy and the backbone of every
progressive and happy country. 42

7. Provisional Remedies Prescribed by Law

Sequestration and freezing are remedies applicable generally to unearthed instances of "ill-gotten wealth." The
remedy of "provisional takeover" is peculiar to cases where "business enterprises and properties (were) taken
over by the government of the Marcos Administration or by entities or persons close to former President
Marcos."43
a. Sequestration
By the clear terms of the law, the power of the PCGG to sequester property claimed to be "ill-gotten" means to
place or cause to be placed under its possession or control said property, or any building or office wherein any
such property and any records pertaining thereto may be found, including "business enterprises and entities,"for the purpose of preventing the destruction, concealment or dissipation of, and otherwise conserving and
preserving, the same-until it can be determined, through appropriate judicial proceedings, whether the
property was in truth will- gotten," i.e., acquired through or as a result of improper or illegal use of or the
conversion of funds belonging to the Government or any of its branches, instrumentalities, enterprises, banks
or financial institutions, or by taking undue advantage of official position, authority relationship, connection or
influence, resulting in unjust enrichment of the ostensible owner and grave damage and prejudice to the
State. 44 And this, too, is the sense in which the term is commonly understood in other jurisdictions. 45
b. "Freeze Order"
A "freeze order" prohibits the person having possession or control of property alleged to constitute "ill-gotten
wealth" "from transferring, conveying, encumbering or otherwise depleting or concealing such property, or from
assisting or taking part in its transfer, encumbrance, concealment, or dissipation." 46 In other words, it
commands the possessor to hold the property and conserve it subject to the orders and disposition of the
authority decreeing such freezing. In this sense, it is akin to a garnishment by which the possessor or
ostensible owner of property is enjoined not to deliver, transfer, or otherwise dispose of any effects or credits in
his possession or control, and thus becomes in a sense an involuntary depositary thereof. 47
c. Provisional Takeover
In providing for the remedy of "provisional takeover," the law acknowledges the apparent distinction between
"ill gotten" "business enterprises and entities" (going concerns, businesses in actual operation), generally, as
to which the remedy of sequestration applies, it being necessarily inferred that the remedy entails no

interference, or the least possible interference with the actual management and operations thereof; and
"business enterprises which were taken over by the government government of the Marcos Administration or
by entities or persons close to him," in particular, as to which a "provisional takeover" is authorized, "in the
public interest or to prevent disposal or dissipation of the enterprises." 48 Such a "provisional takeover" imports
something more than sequestration or freezing, more than the placing of the business under physical
possession and control, albeit without or with the least possible interference with the management and
carrying on of the business itself. In a "provisional takeover," what is taken into custody is not only the physical
assets of the business enterprise or entity, but the business operation as well. It is in fine the assumption of
control not only over things, but over operations or on- going activities. But, to repeat, such a "provisional
takeover" is allowed only as regards "business enterprises * * taken over by the government of the Marcos
Administration or by entities or persons close to former President Marcos."
d. No Divestment of Title Over Property Seized
It may perhaps be well at this point to stress once again the provisional, contingent character of the remedies
just described. Indeed the law plainly qualifies the remedy of take-over by the adjective, "provisional." These
remedies may be resorted to only for a particular exigency: to prevent in the public interest the disappearance
or dissipation of property or business, and conserve it pending adjudgment in appropriate proceedings of the
primary issue of whether or not the acquisition of title or other right thereto by the apparent owner was
attended by some vitiating anomaly. None of the remedies is meant to deprive the owner or possessor of his
title or any right to the property sequestered, frozen or taken over and vest it in the sequestering agency, the
Government or other person. This can be done only for the causes and by the processes laid down by law.
That this is the sense in which the power to sequester, freeze or provisionally take over is to be understood
and exercised, the language of the executive orders in question leaves no doubt. Executive Order No. 1
declares that the sequestration of property the acquisition of which is suspect shall last "until the transactions
leading to such acquisition * * can be disposed of by the appropriate authorities." 49 Executive Order No. 2
declares that the assets or properties therein mentioned shall remain frozen "pending the outcome of
appropriate proceedings in the Philippines to determine whether any such assets or properties were acquired"
by illegal means. Executive Order No. 14 makes clear that judicial proceedings are essential for the resolution
of the basic issue of whether or not particular assets are "ill-gotten," and resultant recovery thereof by the
Government is warranted.
e. State of Seizure Not To Be Indefinitely Maintained; The Constitutional Command
There is thus no cause for the apprehension voiced by BASECO 50 that sequestration, freezing or provisional
takeover is designed to be an end in itself, that it is the device through which persons may be deprived of their
property branded as "ill-gotten," that it is intended to bring about a permanent, rather than a passing,
transitional state of affairs. That this is not so is quite explicitly declared by the governing rules.
Be this as it may, the 1987 Constitution should allay any lingering fears about the duration of these provisional
remedies. Section 26 of its Transitory Provisions, 51 lays down the relevant rule in plain terms, apart from
extending ratification or confirmation (although not really necessary) to the institution by presidential fiat of the
remedy of sequestration and freeze orders:
SEC. 26. The authority to issue sequestration or freeze orders under Proclamation No.
3 dated March 25, 1986 in relation to the recovery of ill-gotten wealth shag remain
operative for not more than eighteen months after the ratification of this Constitution.
However, in the national interest, as certified by the President, the Congress may
extend said period.
A sequestration or freeze order shall be issued only upon showing of a prima
facie case. The order and the list of the sequestered or frozen properties shall forthwith
be registered with the proper court. For orders issued before the ratification of this
Constitution, the corresponding judicial action or proceeding shall be filed within six
months from its ratification. For those issued after such ratification, the judicial action or
proceeding shall be commenced within six months from the issuance thereof.
The sequestration or freeze order is deemed automatically lifted if no judicial action or
proceeding is commenced as herein provided. 52

f. Kinship to Attachment Receivership

As thus described, sequestration, freezing and provisional takeover are akin to the provisional remedy of
preliminary attachment, or receivership. 53 By attachment, a sheriff seizes property of a defendant in a civil suit
so that it may stand as security for the satisfaction of any judgment that may be obtained, and not disposed of,
or dissipated, or lost intentionally or otherwise, pending the action. 54 By receivership, property, real or
personal, which is subject of litigation, is placed in the possession and control of a receiver appointed by the
Court, who shall conserve it pending final determination of the title or right of possession over it. 55 All these
remedies sequestration, freezing, provisional, takeover, attachment and receivership are provisional,
temporary, designed for-particular exigencies, attended by no character of permanency or finality, and always
subject to the control of the issuing court or agency.
g. Remedies, Non-Judicial
Parenthetically, that writs of sequestration or freeze or takeover orders are not issued by a court is of no
moment. The Solicitor General draws attention to the writ of distraint and levy which since 1936 the
Commissioner of Internal Revenue has been by law authorized to issue against property of a delinquent
taxpayer. 56 BASECO itself declares that it has not manifested "a rigid insistence on sequestration as a purely
judicial remedy * * (as it feels) that the law should not be ossified to a point that makes it insensitive to
change." What it insists on, what it pronounces to be its "unyielding position, is that any change in procedure,
or the institution of a new one, should conform to due process and the other prescriptions of the Bill of Rights
of the Constitution." 57 It is, to be sure, a proposition on which there can be no disagreement.
h. Orders May Issue Ex Parte
Like the remedy of preliminary attachment and receivership, as well as delivery of personal property
in replevinsuits, sequestration and provisional takeover writs may issue ex parte. 58 And as in preliminary
attachment, receivership, and delivery of personality, no objection of any significance may be raised to the ex
parte issuance of an order of sequestration, freezing or takeover, given its fundamental character of
temporariness or conditionality; and taking account specially of the constitutionally expressed "mandate of the
people to recover ill-gotten properties amassed by the leaders and supporters of the previous regime and
protect the interest of the people;" 59 as well as the obvious need to avoid alerting suspected possessors of "illgotten wealth" and thereby cause that disappearance or loss of property precisely sought to be prevented, and
the fact, just as self-evident, that "any transfer, disposition, concealment or disappearance of said assets and
properties would frustrate, obstruct or hamper the efforts of the Government" at the just recovery thereof. 60
8. Requisites for Validity
What is indispensable is that, again as in the case of attachment and receivership, there exist a prima facie
factual foundation, at least, for the sequestration, freeze or takeover order, and adequate and fair opportunity
to contest it and endeavor to cause its negation or nullification. 61
Both are assured under the executive orders in question and the rules and regulations promulgated by the
PCGG.
a. Prima Facie Evidence as Basis for Orders
Executive Order No. 14 enjoins that there be "due regard to the requirements of fairness and due
process." 62Executive Order No. 2 declares that with respect to claims on allegedly "ill-gotten" assets and
properties, "it is the position of the new democratic government that President Marcos * * (and other parties
affected) be afforded fair opportunity to contest these claims before appropriate Philippine
authorities." 63 Section 7 of the Commission's Rules and Regulations provides that sequestration or freeze
(and takeover) orders issue upon the authority of at least two commissioners, based on the affirmation or
complaint of an interested party, or motu proprio when the Commission has reasonable grounds to believe that
the issuance thereof is warranted. 64 A similar requirement is now found in Section 26, Art. XVIII of the 1987
Constitution, which requires that a "sequestration or freeze order shall be issued only upon showing of a prima
facie case."65

b. Opportunity to Contest
And Sections 5 and 6 of the same Rules and Regulations lay down the procedure by which a party may seek
to set aside a writ of sequestration or freeze order, viz:
SECTION 5. Who may contend.-The person against whom a writ of sequestration or
freeze or hold order is directed may request the lifting thereof in writing, either
personally or through counsel within five (5) days from receipt of the writ or order, or in
the case of a hold order, from date of knowledge thereof.

Upon these premises and reasoned conclusions, and upon the facts disclosed by the record, hereafter to be
discussed, the petition cannot succeed. The writs of certiorari and prohibition prayed for will not be issued.
The facts show that the corporation known as BASECO was owned or controlled by President Marcos "during
his administration, through nominees, by taking undue advantage of his public office and/or using his powers,
authority, or influence, " and that it was by and through the same means, that BASECO had taken over the
business and/or assets of the National Shipyard and Engineering Co., Inc., and other government-owned or
controlled entities.
12. Organization and Stock Distribution of BASECO

SECTION 6. Procedure for review of writ or order.-After due hearing or motu proprio for
good cause shown, the Commission may lift the writ or order unconditionally or subject
to such conditions as it may deem necessary, taking into consideration the evidence
and the circumstance of the case. The resolution of the commission may be appealed
by the party concerned to the Office of the President of the Philippines within fifteen
(15) days from receipt thereof.
Parenthetically, even if the requirement for a prima facie showing of "ill- gotten wealth" were not expressly
imposed by some rule or regulation as a condition to warrant the sequestration or freezing of property
contemplated in the executive orders in question, it would nevertheless be exigible in this jurisdiction in which
the Rule of Law prevails and official acts which are devoid of rational basis in fact or law, or are whimsical and
capricious, are condemned and struck down. 66
9. Constitutional Sanction of Remedies
If any doubt should still persist in the face of the foregoing considerations as to the validity and propriety of
sequestration, freeze and takeover orders, it should be dispelled by the fact that these particular remedies and
the authority of the PCGG to issue them have received constitutional approbation and sanction. As already
mentioned, the Provisional or "Freedom" Constitution recognizes the power and duty of the President to enact
"measures to achieve the mandate of the people to * * * (recover ill- gotten properties amassed by the leaders
and supporters of the previous regime and protect the interest of the people through orders of sequestration or
freezing of assets or accounts." And as also already adverted to, Section 26, Article XVIII of the 1987
Constitution67 treats of, and ratifies the "authority to issue sequestration or freeze orders under Proclamation
No. 3 dated March 25, 1986."
The institution of these provisional remedies is also premised upon the State's inherent police power,
regarded, as t lie power of promoting the public welfare by restraining and regulating the use of liberty and
property," 68 and as "the most essential, insistent and illimitable of powers * * in the promotion of general
welfare and the public interest," 69and said to be co-extensive with self-protection and * * not inaptly termed
(also) the'law of overruling necessity." " 70

BASECO describes itself in its petition as "a shiprepair and shipbuilding company * * incorporated as a
domestic private corporation * * (on Aug. 30, 1972) by a consortium of Filipino shipowners and shipping
executives. Its main office is at Engineer Island, Port Area, Manila, where its Engineer Island Shipyard is
housed, and its main shipyard is located at Mariveles Bataan." 73 Its Articles of Incorporation disclose that its
authorized capital stock is P60,000,000.00 divided into 60,000 shares, of which 12,000 shares with a value of
P12,000,000.00 have been subscribed, and on said subscription, the aggregate sum of P3,035,000.00 has
been paid by the incorporators. 74 The same articles Identify the incorporators, numbering fifteen (15), as
follows: (1) Jose A. Rojas, (2) Anthony P. Lee, (3) Eduardo T. Marcelo, (4) Jose P. Fernandez, (5) Generoso
Tanseco, (6) Emilio T. Yap, (7) Antonio M. Ezpeleta, (8) Zacarias Amante, (9) Severino de la Cruz, (10) Jose
Francisco, (11) Dioscoro Papa, (12) Octavio Posadas, (13) Manuel S. Mendoza, (14) Magiliw Torres, and (15)
Rodolfo Torres.
By 1986, however, of these fifteen (15) incorporators, six (6) had ceased to be stockholders, namely: (1)
Generoso Tanseco, (2) Antonio Ezpeleta, (3) Zacarias Amante, (4) Octavio Posadas, (5) Magiliw Torres, and
(6) Rodolfo Torres. As of this year, 1986, there were twenty (20) stockholders listed in BASECO's Stock and
Transfer Book. 75 Their names and the number of shares respectively held by them are as follows:

1. Jose A. Rojas

1,248 shares

2. Severino G. de la Cruz

1,248 shares

3. Emilio T. Yap

2,508 shares

4. Jose Fernandez

1,248 shares

5. Jose Francisco

128 shares

6. Manuel S. Mendoza

96 shares

7. Anthony P. Lee

1,248 shares

8. Hilario M. Ruiz

32 shares

9. Constante L. Farias

8 shares

10. PCGG not a "Judge"; General Functions

It should also by now be reasonably evident from what has thus far been said that the PCGG is not, and was
never intended to act as, a judge. Its general function is to conduct investigations in order to collect
evidenceestablishing instances of "ill-gotten wealth;" issue sequestration, and such orders as may be
warranted by the evidence thus collected and as may be necessary to preserve and conserve the assets of
which it takes custody and control and prevent their disappearance, loss or dissipation; and eventually file and
prosecute in the proper court of competent jurisdiction all cases investigated by it as may be warranted by its
findings. It does not try and decide, or hear and determine, or adjudicate with any character of finality or
compulsion, cases involving the essential issue of whether or not property should be forfeited and transferred
to the State because "ill-gotten" within the meaning of the Constitution and the executive orders. This function
is reserved to the designated court, in this case, the Sandiganbayan. 71 There can therefore be no serious
regard accorded to the accusation, leveled by BASECO, 72 that the PCGG plays the perfidious role of
prosecutor and judge at the same time.
11. Facts Preclude Grant of Relief to Petitioner

14. Subsequent Reduction of Price; Intervention of Marcos

10. Fidelity Management,
Inc.

65,882 shares

11. Trident Management

7,412 shares

12. United Phil. Lines

1,240 shares

Unaccountably, the price of P52,000,000.00 was reduced by more than one-half, to P24,311,550.00, about
eight (8) months later. A document to this effect was executed on October 9, 1973, entitled "Memorandum
Agreement," and was signed for NASSCO by Arturo Pacificador, as Presiding Officer of the Board of Directors,
and David R. Ines, as General Manager. 77 This agreement bore, at the top right corner of the first page, the
word "APPROVED" in the handwriting of President Marcos, followed by his usual full signature. The document
recited that a down payment of P5,862,310.00 had been made by BASECO, and the balance of
P19,449,240.00 was payable in equal semi-annual installments over nine (9) years after a grace period of two
(2) years, with interest at 7% per annum.
15. Acquisition of 300 Hectares from Export Processing Zone Authority

13. Renato M. Tanseco

8 shares

On October 1, 1974, BASECO acquired three hundred (300) hectares of land in Mariveles from the Export
Processing Zone Authority for the price of P10,047,940.00 of which, as set out in the document of sale,
P2,000.000.00 was paid upon its execution, and the balance stipulated to be payable in installments. 78

14. Fidel Ventura

8 shares

16. Acquisition of Other Assets of NASSCO; Intervention of Marcos

15. Metro Bay Drydock

136,370 shares

16. Manuel Jacela

1 share

17. Jonathan G. Lu

1 share

18. Jose J. Tanchanco

1 share

19. Dioscoro Papa

128 shares

Some nine months afterwards, or on July 15, 1975, to be precise, BASECO, again with the intervention of
President Marcos, acquired ownership of the rest of the assets of NASSCO which had not been included in
the first two (2) purchase documents. This was accomplished by a deed entitled "Contract of Purchase and
Sale," 79which, like the Memorandum of Agreement dated October 9, 1973 supra also bore at the upper righthand corner of its first page, the handwritten notation of President Marcos reading, "APPROVED, July 29,
1973," and underneath it, his usual full signature. Transferred to BASECO were NASSCO's "ownership and all
its titles, rights and interests over all equipment and facilities including structures, buildings, shops, quarters,
houses, plants and expendable or semi-expendable assets, located at the Engineer Island, known as the
Engineer Island Shops, including all the equipment of the Bataan National Shipyards (BNS) which were
excluded from the sale of NBS to BASECO but retained by BASECO and all other selected equipment and
machineries of NASSCO at J. Panganiban Smelting Plant." In the same deed, NASSCO committed itself to
cooperate with BASECO for the acquisition from the National Government or other appropriate Government
entity of Engineer Island. Consideration for the sale was set at P5,000,000.00; a down payment of
P1,000,000.00 appears to have been made, and the balance was stipulated to be paid at 7% interest per
annum in equal semi annual installments over a term of nine (9) years, to commence after a grace period of
two (2) years. Mr. Arturo Pacificador again signed for NASSCO, together with the general manager, Mr. David
R. Ines.
17. Loans Obtained

20. Edward T. Marcelo

4 shares

TOTAL

218,819 shares.

It further appears that on May 27, 1975 BASECO obtained a loan from the NDC, taken from "the last available
Japanese war damage fund of $19,000,000.00," to pay for "Japanese made heavy equipment (brand
new)." 80On September 3, 1975, it got another loan also from the NDC in the amount of
P30,000,000.00 (id.). And on January 28, 1976, it got still another loan, this time from the GSIS, in the sum of
P12,400,000.00. 81 The claim has been made that not a single centavo has been paid on these loans. 82

13 Acquisition of NASSCO by BASECO

18. Reports to President Marcos

Barely six months after its incorporation, BASECO acquired from National Shipyard & Steel Corporation, or
NASSCO, a government-owned or controlled corporation, the latter's shipyard at Mariveles, Bataan, known as
the Bataan National Shipyard (BNS), and except for NASSCO's Engineer Island Shops and certain
equipment of the BNS, consigned for future negotiation all its structures, buildings, shops, quarters, houses,
plants, equipment and facilities, in stock or in transit. This it did in virtue of a "Contract of Purchase and Sale
with Chattel Mortgage" executed on February 13, 1973. The price was P52,000,000.00. As partial payment
thereof, BASECO delivered to NASSCO a cash bond of P11,400,000.00, convertible into cash within twentyfour (24) hours from completion of the inventory undertaken pursuant to the contract. The balance of
P41,600,000.00, with interest at seven percent (7%) per annum, compounded semi-annually, was stipulated to
be paid in equal semi-annual installments over a term of nine (9) years, payment to commence after a grace
period of two (2) years from date of turnover of the shipyard to BASECO. 76

In September, 1977, two (2) reports were submitted to President Marcos regarding BASECO. The first was
contained in a letter dated September 5, 1977 of Hilario M. Ruiz, BASECO president. 83 The second was
embodied in a confidential memorandum dated September 16, 1977 of Capt. A.T. Romualdez. 84 They further
disclose the fine hand of Marcos in the affairs of BASECO, and that of a Romualdez, a relative by affinity.
a. BASECO President's Report
In his letter of September 5, 1977, BASECO President Ruiz reported to Marcos that there had been "no orders
or demands for ship construction" for some time and expressed the fear that if that state of affairs persisted,
BASECO would not be able to pay its debts to the Government, which at the time stood at the not
inconsiderable amount of P165,854,000.00. 85 He suggested that, to "save the situation," there be a "spin-

off (of their) shipbuilding activities which shall be handled exclusively by an entirely new corporation to be
created;" and towards this end, he informed Marcos that BASECO was

6. Contract dated July 16, 1975, between NASSCO and BASECO re-structure and
equipment at Engineer Island, Port Area Manila;

* * inviting NDC and LUSTEVECO to participate by converting the NDC shipbuilding

loan to BASECO amounting to P341.165M and assuming and converting a portion of
BASECO's shipbuilding loans from REPACOM amounting to P52.2M or a total of
P83.365M as NDC's equity contribution in the new corporation. LUSTEVECO will
participate by absorbing and converting a portion of the REPACOM loan of Bay
Shipyard and Drydock, Inc., amounting to P32.538M. 86

8. List of BASECO's fixed assets;

9. Loan Agreement dated September 3, 1975, BASECO's loan from NDC of
P30,000,000.00;

b. Romualdez' Report

10. BASECO-REPACOM Agreement dated May 27, 1975;

Capt. A.T. Romualdez' report to the President was submitted eleven (11) days later. It opened with the
following caption:

11. GSIS loan to BASECO dated January 28, 1976 of P12,400,000.00 for the housing
facilities for BASECO's rank-and-file employees. 90

MEMORANDUM:

Capt. Romualdez also recommended that BASECO's loans be restructured "until such period when BASECO
will have enough orders for ships in order for the company to meet loan obligations," and that

FOR : The President

SUBJECT: An Evaluation and Re-assessment of a Performance of a Mission

An LOI may be issued to government agencies using floating equipment, that a linkage
scheme be applied to a certain percent of BASECO's net profit as part of BASECO's
amortization payments tomake it justifiable for you, Sir. 91

FROM: Capt. A.T. Romualdez.

Like Ruiz, Romualdez wrote that BASECO faced great difficulties in meeting its loan obligations due chiefly to
the fact that "orders to build ships as expected * * did not materialize."
He advised that five stockholders had "waived and/or assigned their holdings inblank," these being: (1) Jose A.
Rojas, (2) Severino de la Cruz, (3) Rodolfo Torres, (4) Magiliw Torres, and (5) Anthony P. Lee. Pointing out that
"Mr. Magiliw Torres * * is already dead and Mr. Jose A. Rojas had a major heart attack," he made the following
quite revealing, and it may be added, quite cynical and indurate recommendation, to wit:
* * (that) their replacements (be effected) so we can register their names in the stock
book prior to the implementation of your instructions to pass a board resolution to
legalize the transfers under SEC regulations;

87

He also transmitted to Marcos, together with the report, the following documents:

88

1. Stock certificates indorsed and assigned in blank with assignments and waivers;

It is noteworthy that Capt. A.T. Romualdez does not appear to be a stockholder or officer of BASECO, yet he
has presented a report on BASECO to President Marcos, and his report demonstrates intimate familiarity with
the firm's affairs and problems.
19. Marcos' Response to Reports
President Marcos lost no time in acting on his subordinates' recommendations, particularly as regards the
"spin-off" and the "linkage scheme" relative to "BASECO's amortization payments."
a. Instructions re "Spin-Off"
Under date of September 28, 1977, he addressed a Memorandum to Secretary Geronimo Velasco of the
Philippine National Oil Company and Chairman Constante Farias of the National Development Company,
directing them "to participate in the formation of a new corporation resulting from the spin-off of the
shipbuilding component of BASECO along the following guidelines:

2. By getting their replacements, the families cannot question us later on; and
3. We will owe no further favors from them.

7. Contract dated October 1, 1974, between EPZA and BASECO re 300 hectares of
land at Mariveles, Bataan;

89

2. The articles of incorporation, the amended articles, and the by-laws of BASECO;
3. Deed of Sales, wherein NASSCO sold to BASECO four (4) parcels of land in
"Engineer Island", Port Area, Manila;

a. Equity participation of government shall be through LUSTEVECO and NDC in the

amount of P115,903,000 consisting of the following obligations of BASECO which are
hereby authorized to be converted to equity of the said new corporation, to wit:
1. NDC P83,865,000 (P31.165M loan & P52.2M Reparation)
2. LUSTEVECO P32,538,000 (Reparation)
b. Equity participation of government shall be in the form of non- voting shares.

4. Transfer Certificate of Title No. 124822 in the name of BASECO, covering "Engineer
Island";
5. Contract dated October 9, 1973, between NASSCO and BASECO re-structure and
equipment at Mariveles, Bataan;

For immediate compliance. 92

Mr. Marcos' guidelines were promptly complied with by his subordinates. Twenty-two (22) days after receiving
their president's memorandum, Messrs. Hilario M. Ruiz, Constante L. Farias and Geronimo Z. Velasco, in

representation of their respective corporations, executed a PRE-INCORPORATION AGREEMENT dated

October 20, 1977. 93 In it, they undertook to form a shipbuilding corporation to be known as "PHIL-ASIA
SHIPBUILDING CORPORATION," to bring to realization their president's instructions. It would seem that the
new corporation ultimately formed was actually named "Philippine Dockyard Corporation (PDC)." 94

1) the deeds of assignment of all 600 outstanding shares of Fidelity Management Inc.
which supposedly owns as aforesaid 65,882 shares of BASECO stock;
2) the deeds of assignment of 2,499,995 of the 2,500,000 outstanding shares of Metro
Bay Drydock Corporation which allegedly owns 136,370 shares of BASECO stock;

b. Letter of Instructions No. 670

Mr. Marcos did not forget Capt. Romualdez' recommendation for a letter of instructions. On February 14, 1978,
he issued Letter of Instructions No. 670 addressed to the Reparations Commission REPACOM the Philippine
National Oil Company (PNOC), the Luzon Stevedoring Company (LUSTEVECO), and the National
Development Company (NDC). What is commanded therein is summarized by the Solicitor General, with pithy
and not inaccurate observations as to the effects thereof (in italics), as follows:
* * 1) the shipbuilding equipment procured by BASECO through reparations be
transferred to NDC subject to reimbursement by NDC to BASECO (of) the amount of s
allegedly representing the handling and incidental expenses incurred by BASECO in
the installation of said equipment (so instead of NDC getting paid on its loan to
BASECO, it was made to pay BASECO instead the amount of P18.285M); 2) the
shipbuilding equipment procured from reparations through EPZA, now in the
possession of BASECO and BSDI (Bay Shipyard & Drydocking, Inc.) be transferred to
LUSTEVECO through PNOC; and 3) the shipbuilding equipment (thus) transferred be
invested by LUSTEVECO, acting through PNOC and NDC, as the government's equity
participation in a shipbuilding corporation to be established in partnership with the
private sector.
xxx xxx xxx
And so, through a simple letter of instruction and memorandum, BASECO's loan
obligation to NDC and REPACOM * * in the total amount of P83.365M and BSD's
REPACOM loan of P32.438M were wiped out and converted into non-voting preferred
shares. 95

3) the deeds of assignment of 800 outstanding shares of Trident Management Co.,

Inc. which allegedly owns 7,412 shares of BASECO stock, assigned in blank; 98 and
4) stock certificates corresponding to 207,725 out of the 218,819 outstanding shares of
BASECO stock; that is, all but 5 % all endorsed in blank. 99
While the petitioner's counsel was quick to dispute this asserted fact, assuring this Court that the BASECO
stockholders were still in possession of their respective stock certificates and had "never endorsed * * them in
blank or to anyone else," 100 that denial is exposed by his own prior and subsequent recorded statements as
a mere gesture of defiance rather than a verifiable factual declaration.
By resolution dated September 25, 1986, this Court granted BASECO's counsel a period of 10 days "to
SUBMIT,as undertaken by him, * * the certificates of stock issued to the stockholders of * * BASECO as of
April 23, 1986, as listed in Annex 'P' of the petition.' 101 Counsel thereafter moved for extension; and in his
motion dated October 2, 1986, he declared inter alia that "said certificates of stock are in the possession of
third parties, among whom being the respondents themselves * * and petitioner is still endeavoring to secure
copies thereof from them." 102 On the same day he filed another motion praying that he be allowed "to secure
copies of the Certificates of Stock in the name of Metro Bay Drydock, Inc., and of all other Certificates, of
Stock of petitioner's stockholders in possession of respondents." 103
In a Manifestation dated October 10, 1986,, 104 the Solicitor General not unreasonably argued that counsel's
aforestated motion to secure copies of the stock certificates "confirms the fact that stockholders of petitioner
corporation are not in possession of * * (their) certificates of stock," and the reason, according to him, was
"that 95% of said shares * * have been endorsed in blank and found in Malacaang after the former President
and his family fled the country." To this manifestation BASECO's counsel replied on November 5, 1986, as
already mentioned, Stubbornly insisting that the firm's stockholders had not really assigned their stock. 105

20. Evidence of Marcos'

Ownership of BASECO
It cannot therefore be gainsaid that, in the context of the proceedings at bar, the actuality of the control by
President Marcos of BASECO has been sufficiently shown.
Other evidence submitted to the Court by the Solicitor General proves that President Marcos not
only exercised control over BASECO, but also that he actually owns well nigh one hundred percent of its
outstanding stock.
It will be recalled that according to petitioner- itself, as of April 23, 1986, there were 218,819 shares of stock
outstanding, ostensibly owned by twenty (20) stockholders. 96 Four of these twenty are juridical persons:
(1) Metro Bay Drydock, recorded as holding 136,370 shares; (2) Fidelity Management, Inc., 65,882 shares;
(3) Trident Management,7,412 shares; and (4) United Phil. Lines, 1,240 shares. The first three corporations,
among themselves, own an aggregate of 209,664 shares of BASECO stock, or 95.82% of the outstanding
stock.
Now, the Solicitor General has drawn the Court's attention to the intriguing circumstance that found in
Malacanang shortly after the sudden flight of President Marcos, were certificates corresponding to more
thanninety-five percent (95%) of all the outstanding shares of stock of BASECO, endorsed in blank, together
with deeds of assignment of practically all the outstanding shares of stock of the three (3) corporations above
mentioned (which hold 95.82% of all BASECO stock), signed by the owners thereof although not notarized. 97
More specifically, found in Malacanang (and now in the custody of the PCGG) were:

In view of the parties' conflicting declarations, this Court resolved on November 27, 1986 among other things
"to require * * the petitioner * * to deposit upon proper receipt with Clerk of Court Juanito Ranjo the originals of
the stock certificates alleged to be in its possession or accessible to it, mentioned and described in Annex 'P'
of its petition, (and other pleadings) * * within ten (10) days from notice." 106 In a motion filed on December 5,
1986, 107 BASECO's counsel made the statement, quite surprising in the premises, that "it will negotiate with
the owners (of the BASECO stock in question) to allow petitioner to borrow from them, if available, the
certificates referred to" but that "it needs a more sufficient time therefor" (sic). BASECO's counsel however
eventually had to confess inability to produce the originals of the stock certificates, putting up the feeble
excuse that while he had "requested the stockholders to allow * * (him) to borrow said certificates, * * some of
* * (them) claimed that they had delivered the certificates to third parties by way of pledge and/or to secure
performance of obligations, while others allegedly have entrusted them to third parties in view of last national
emergency." 108 He has conveniently omitted, nor has he offered to give the details of the transactions
adverted to by him, or to explain why he had not impressed on the supposed stockholders the primordial
importance of convincing this Court of their present custody of the originals of the stock, or if he had done so,
why the stockholders are unwilling to agree to some sort of arrangement so that the originals of their
certificates might at the very least be exhibited to the Court. Under the circumstances, the Court can only
conclude that he could not get the originals from the stockholders for the simple reason that, as the Solicitor
General maintains, said stockholders in truth no longer have them in their possession, these having already
been assigned in blank to then President Marcos.
21. Facts Justify Issuance of Sequestration and Takeover Orders
In the light of the affirmative showing by the Government that, prima facie at least, the stockholders and
directors of BASECO as of April, 1986 109 were mere "dummies," nominees or alter egos of President
Marcos; at any rate, that they are no longer owners of any shares of stock in the corporation, the conclusion
cannot be avoided that said stockholders and directors have no basis and no standing whatever to cause the
filing and prosecution of the instant proceeding; and to grant relief to BASECO, as prayed for in the petition,

would in effect be to restore the assets, properties and business sequestered and taken over by the PCGG to
persons who are "dummies," nominees or alter egos of the former president.
From the standpoint of the PCGG, the facts herein stated at some length do indeed show that the private
corporation known as BASECO was "owned or controlled by former President Ferdinand E. Marcos * * during
his administration, * * through nominees, by taking advantage of * * (his) public office and/or using * * (his)
powers, authority, influence * *," and that NASSCO and other property of the government had been taken over
by BASECO; and the situation justified the sequestration as well as the provisional takeover of the corporation
in the public interest, in accordance with the terms of Executive Orders No. 1 and 2, pending the filing of the
requisite actions with the Sandiganbayan to cause divestment of title thereto from Marcos, and its adjudication
in favor of the Republic pursuant to Executive Order No. 14.
As already earlier stated, this Court agrees that this assessment of the facts is correct; accordingly, it sustains
the acts of sequestration and takeover by the PCGG as being in accord with the law, and, in view of what has
thus far been set out in this opinion, pronounces to be without merit the theory that said acts, and the
executive orders pursuant to which they were done, are fatally defective in not according to the parties
affected prior notice and hearing, or an adequate remedy to impugn, set aside or otherwise obtain relief
therefrom, or that the PCGG had acted as prosecutor and judge at the same time.
22. Executive Orders Not a Bill of Attainder
Neither will this Court sustain the theory that the executive orders in question are a bill of attainder. 110 "A bill
of attainder is a legislative act which inflicts punishment without judicial trial." 111 "Its essence is the
substitution of a legislative for a judicial determination of guilt." 112
In the first place, nothing in the executive orders can be reasonably construed as a determination or
declaration of guilt. On the contrary, the executive orders, inclusive of Executive Order No. 14, make it
perfectly clear that any judgment of guilt in the amassing or acquisition of "ill-gotten wealth" is to be handed
down by a judicial tribunal, in this case, the Sandiganbayan, upon complaint filed and prosecuted by the
PCGG. In the second place, no punishment is inflicted by the executive orders, as the merest glance at their
provisions will immediately make apparent. In no sense, therefore, may the executive orders be regarded as a
bill of attainder.
23. No Violation of Right against Self-Incrimination and Unreasonable Searches and Seizures
BASECO also contends that its right against self incrimination and unreasonable searches and seizures had
been transgressed by the Order of April 18, 1986 which required it "to produce corporate records from 1973 to
1986 under pain of contempt of the Commission if it fails to do so." The order was issued upon the authority of
Section 3 (e) of Executive Order No. 1, treating of the PCGG's power to "issue subpoenas requiring * * the
production of such books, papers, contracts, records, statements of accounts and other documents as may be
material to the investigation conducted by the Commission, " and paragraph (3), Executive Order No. 2
dealing with its power to "require all persons in the Philippines holding * * (alleged "ill-gotten") assets or
properties, whether located in the Philippines or abroad, in their names as nominees, agents or trustees, to
make full disclosure of the same * *." The contention lacks merit.
It is elementary that the right against self-incrimination has no application to juridical persons.
While an individual may lawfully refuse to answer incriminating questions unless
protected by an immunity 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 ofsuchprivileges * * 113
Relevant jurisprudence is also cited by the Solicitor General. 114
* * corporations are not entitled to all of the constitutional protections which private
individuals have. * * They are not at all within the privilege against selfincrimination, although this court more than once has said that the privilege runs very
closely with the 4th Amendment's Search and Seizure provisions. It is also settled that

an officer of the company cannot refuse to produce its records in its possession upon
the plea that they will either incriminate him or may incriminate it." (Oklahoma Press
Publishing Co. v. Walling, 327 U.S. 186; emphasis, the Solicitor General's).
* * The corporation is a creature of the state. It is presumed to be incorporated for the
benefit of the public. It received certain special privileges and franchises, and holds
them subject to the laws of the state and the limitations of its charter. Its powers are
limited by law. It can make no contract not authorized by its charter. Its rights to act as
a corporation are only preserved to it so long as it obeys the laws of its creation. There
is a reserve right in the legislature to investigate its contracts and find out whether it
has exceeded its powers. It would be a strange anomaly to hold that a state, having
chartered a corporation to make use of certain franchises, could not, in the exercise of
sovereignty, inquire how these franchises had been employed, and whether they had
been abused, and demand the production of the corporate books and papers for that
purpose. The defense amounts to this, that an officer of the corporation which is
charged with a criminal violation of the statute may plead the criminality of such
corporation as a refusal to produce its books. To state this proposition is to answer
it. While an individual may lawfully refuse to answer incriminating questions unless
protected by an immunity 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 privileges. (Wilson v. United States, 55 Law Ed., 771, 780 [emphasis,
the Solicitor General's])
At any rate, Executive Order No. 14-A, amending Section 4 of Executive Order No. 14 assures protection to
individuals required to produce evidence before the PCGG against any possible violation of his right against
self-incrimination. It gives them immunity from prosecution on the basis of testimony or information he is
compelled to present. As amended, said Section 4 now provides that
xxx xxx xxx
The witness may not refuse to comply with the order on the basis of his privilege
against self-incrimination; but no testimony or other information compelled under the
order (or any information directly or indirectly derived from such testimony, or other
information) may be used against the witness in any criminal case, except a
prosecution for perjury, giving a false statement, or otherwise failing to comply with the
order.
The constitutional safeguard against unreasonable searches and seizures finds no application to the case at
bar either. There has been no search undertaken by any agent or representative of the PCGG, and of course
no seizure on the occasion thereof.
24. Scope and Extent of Powers of the PCGG
One other question remains to be disposed of, that respecting the scope and extent of the powers that may be
wielded by the PCGG with regard to the properties or businesses placed under sequestration or provisionally
taken over. Obviously, it is not a question to which an answer can be easily given, much less one which will
suffice for every conceivable situation.
a. PCGG May Not Exercise Acts of Ownership
One thing is certain, and should be stated at the outset: the PCGG cannot exercise acts of dominion over
property sequestered, frozen or provisionally taken over. AS already earlier stressed with no little insistence,
the act of sequestration; freezing or provisional takeover of property does not import or bring about a
divestment of title over said property; does not make the PCGG the owner thereof. In relation to the property
sequestered, frozen or provisionally taken over, the PCGG is a conservator, not an owner. Therefore, it can
not perform acts of strict ownership; and this is specially true in the situations contemplated by the
sequestration rules where, unlike cases of receivership, for example, no court exercises effective supervision
or can upon due application and hearing, grant authority for the performance of acts of dominion.

Equally evident is that the resort to the provisional remedies in question should entail the least possible
interference with business operations or activities so that, in the event that the accusation of the business
enterprise being "ill gotten" be not proven, it may be returned to its rightful owner as far as possible in the
same condition as it was at the time of sequestration.
b. PCGG Has Only Powers of Administration
The PCGG may thus exercise only powers of administration over the property or business sequestered or
provisionally taken over, much like a court-appointed receiver, 115 such as to bring and defend actions in its
own name; receive rents; collect debts due; pay outstanding debts; and generally do such other acts and
things as may be necessary to fulfill its mission as conservator and administrator. In this context, it may in
addition enjoin or restrain any actual or threatened commission of acts by any person or entity that may render
moot and academic, or frustrate or otherwise make ineffectual its efforts to carry out its task; punish for direct
or indirect contempt in accordance with the Rules of Court; and seek and secure the assistance of any office,
agency or instrumentality of the government. 116 In the case of sequestered businesses generally (i.e., going
concerns, businesses in current operation), as in the case of sequestered objects, its essential role, as already
discussed, is that of conservator, caretaker, "watchdog" or overseer. It is not that of manager, or innovator,
much less an owner.
c. Powers over Business Enterprises Taken Over by Marcos or Entities or Persons
Close to him; Limitations Thereon
Now, in the special instance of a business enterprise shown by evidence to have been "taken over by the
government of the Marcos Administration or by entities or persons close to former President Marcos," 117 the
PCGG is given power and authority, as already adverted to, to "provisionally take (it) over in the public interest
or to prevent * * (its) disposal or dissipation;" and since the term is obviously employed in reference to going
concerns, or business enterprises in operation, something more than mere physical custody is connoted; the
PCGG may in this case exercise some measure of control in the operation, running, or management of the
business itself. But even in this special situation, the intrusion into management should be restricted to the
minimum degree necessary to accomplish the legislative will, which is "to prevent the disposal or dissipation"
of the business enterprise. There should be no hasty, indiscriminate, unreasoned replacement or substitution
of management officials or change of policies, particularly in respect of viable establishments. In fact, such a
replacement or substitution should be avoided if at all possible, and undertaken only when justified by
demonstrably tenable grounds and in line with the stated objectives of the PCGG. And it goes without saying
that where replacement of management officers may be called for, the greatest prudence, circumspection,
care and attention - should accompany that undertaking to the end that truly competent, experienced and
honest managers may be recruited. There should be no role to be played in this area by rank amateurs, no
matter how wen meaning. The road to hell, it has been said, is paved with good intentions. The business is not
to be experimented or played around with, not run into the ground, not driven to bankruptcy, not fleeced, not
ruined. Sight should never be lost sight of the ultimate objective of the whole exercise, which is to turn over the
business to the Republic, once judicially established to be "ill-gotten." Reason dictates that it is only under
these conditions and circumstances that the supervision, administration and control of business enterprises
provisionally taken over may legitimately be exercised.
d. Voting of Sequestered Stock; Conditions Therefor
So, too, it is within the parameters of these conditions and circumstances that the PCGG may properly
exercise the prerogative to vote sequestered stock of corporations, granted to it by the President of the
Philippines through a Memorandum dated June 26, 1986. That Memorandum authorizes the PCGG, "pending
the outcome of proceedings to determine the ownership of * * (sequestered) shares of stock," "to vote such
shares of stock as it may have sequestered in corporations at all stockholders' meetings called for the election
of directors, declaration of dividends, amendment of the Articles of Incorporation, etc." The Memorandum
should be construed in such a manner as to be consistent with, and not contradictory of the Executive Orders
earlier promulgated on the same matter. There should be no exercise of the right to vote simply because the
right exists, or because the stocks sequestered constitute the controlling or a substantial part of the corporate
voting power. The stock is not to be voted to replace directors, or revise the articles or by-laws, or otherwise
bring about substantial changes in policy, program or practice of the corporation except for demonstrably
weighty and defensible grounds, and always in the context of the stated purposes of sequestration or
provisional takeover, i.e., to prevent the dispersion or undue disposal of the corporate assets. Directors are not
to be voted out simply because the power to do so exists. Substitution of directors is not to be done without
reason or rhyme, should indeed be shunned if at an possible, and undertaken only when essential to prevent

disappearance or wastage of corporate property, and always under such circumstances as assure that the
replacements are truly possessed of competence, experience and probity.
In the case at bar, there was adequate justification to vote the incumbent directors out of office and elect
others in their stead because the evidence showed prima facie that the former were just tools of President
Marcos and were no longer owners of any stock in the firm, if they ever were at all. This is why, in its
Resolution of October 28, 1986; 118 this Court declared that
Petitioner has failed to make out a case of grave abuse or excess of jurisdiction in
respondents' calling and holding of a stockholders' meeting for the election of directors
as authorized by the Memorandum of the President * * (to the PCGG) dated June 26,
1986, particularly, where as in this case, the government can, through its designated
directors, properly exercise control and management over what appear to be properties
and assets owned and belonging to the government itself and over which the persons
who appear in this case on behalf of BASECO have failed to show any right or even
any shareholding in said corporation.
It must however be emphasized that the conduct of the PCGG nominees in the BASECO Board in the
management of the company's affairs should henceforth be guided and governed by the norms herein laid
down. They should never for a moment allow themselves to forget that they are conservators, not owners of
the business; they are fiduciaries, trustees, of whom the highest degree of diligence and rectitude is, in the
premises, required.
25. No Sufficient Showing of Other Irregularities
As to the other irregularities complained of by BASECO, i.e., the cancellation or revision, and the execution of
certain contracts, inclusive of the termination of the employment of some of its executives, 119 this Court
cannot, in the present state of the evidence on record, pass upon them. It is not necessary to do so. The
issues arising therefrom may and will be left for initial determination in the appropriate action. But the Court will
state that absent any showing of any important cause therefor, it will not normally substitute its judgment for
that of the PCGG in these individual transactions. It is clear however, that as things now stand, the petitioner
cannot be said to have established the correctness of its submission that the acts of the PCGG in question
were done without or in excess of its powers, or with grave abuse of discretion.
WHEREFORE, the petition is dismissed. The temporary restraining order issued on October 14, 1986 is lifted.
Ruling:
Right against self-incrimination has no application to juridical persons and the constitutional safeguard against
unreasonable searches and seizures finds no application to the case at bar either.BASECO also contends
that its right against self-incrimination and unreasonable searches and seizures had been transgressed by the
Order of April 18,1986 which required it "to produce corporate records from 1973 to 1986 under pain of
contempt of the Commission if it fails to do so." The order was issued upon the authority of Section 3 (e) of
Executive Order No. 1, treating of the PCGG's power to "issue subpoenas requiring * * the production of such
books, papers, contracts, records, statements of accounts and other documents as may be material to the
investigation conducted by the Commission," and paragraph (3), Executive Order No. 2 dealing with its power
to "(r)equire all persons in the Philippines holding * * (alleged "ill-gotten") assets or properties, whether located
in the Philippines or abroad, in their names as nominees, agents or trustees, to make full disclosure of the
same **." The contention lacks merit. It is elementary that the right against self-incrimination has no application
to juridical persons. "While an individual may lawfully refuse to answer incriminating questions unless
protected by an immunity 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 privileges. * *" At any rate,
Executive Order No. 14-A, amending Section 4 of Executive Order No. 14 assures protection to individuals
required to produce evidence before the PCGG against any possible violation of his right against selfincrimination. It gives them immunity from prosecution on the basis of testimony or information he is compelled
to present. As amended, said Section 4 now provides that"* * * * 'The witness may not refuse to comply with
the order on the basis of his privilege against self-incrimination; but no testimony or other information
compelled under the order (or any information directly or indirectly derived from such testimony, or other
information) may be used against the witness in any criminal case, except a prosecution for perjury, giving a
false statement, or otherwise failing to comply with the order." The constitutional safeguard against
unreasonable searches and seizures finds no application to the case at bar either. There has been no search
undertaken by any agent or representative of the PCGG, and of course no seizure on the occasion thereof.

G.R. No. L-22619

December 2, 1924

NATIONAL COAL COMPANY, plaintiff-appellee,

vs.
THE COLLECTOR OF INTERNAL REVENUE, defendant-appellant.
Attorney-General Villa-Real for appellant.
Perfecto J. Salas Rodriguez for appellee.

JOHNSON, J.:
This action was brought in the Court of First Instance of the City of Manila on the 17th day of July, 1923, for
the purpose of recovering the sum of P12,044.68, alleged to have been paid under protest by the plaintiff
company to the defendant, as specific tax on 24,089.3 tons of coal. Said company is a corporation created by
Act No. 2705 of the Philippine Legislature for the purpose of developing the coal industry in the Philippine
Islands and is actually engaged in coal mining on reserved lands belonging to the Government. It claimed
exemption from taxes under the provision of sections 14 and 15 of Act No. 2719, and prayed for a judgment
ordering the defendant to refund to the plaintiff said sum of P12,044.68, with legal interest from the date of the
presentation of the complaint, and costs against the defendant.
The defendant answered denying generally and specifically all the material allegations of the complaint,
except the legal existence and personality of the plaintiff. As a special defense, the defendant alleged (a) that
the sum of P12,044.68 was paid by the plaintiff without protests, and (b) that said sum was due and owing
from the plaintiff to the Government of the Philippine Islands under the provisions of section 1496 of the
Administrative Code and prayed that the complaint be dismissed, with costs against the plaintiff.
Upon the issue thus presented, the case was brought on for trial. After a consideration of the evidence
adduced by both parties, the Honorable Pedro Conception, judge, held that the words "lands owned by any
person, etc.," in section 15 of Act No. 2719 should be understood to mean "lands held in lease or usufruct," in
harmony with the other provision of said Act; that the coal lands possessed by the plaintiff, belonging to the
Government, fell within the provisions of section 15 of Act No. 2719; and that a tax of P0.04 per ton of 1,016
kilos on each ton of coal extracted therefrom, as provided in said section, was the only tax which should be
collected from the plaintiff; and sentenced the defendant to refund to the plaintiff the sum of P11,081.11 which
is the difference between the amount collected under section 1496 of the Administrative Code and the amount
which should have been collected under the provisions of said section 15 of Act No. 2719. From that sentence
the defendant appealed, and now makes the following assignments of error:
I. The court below erred in holding that section 15 of Act No. 2719 does not refer to coal lands owned by
persons and corporations.
II. The court below erred in holding that the plaintiff was not subject to the tax prescribed in section 1496 of the
Administrative Code.
The question confronting us in this appeal is whether the plaintiff is subject to the taxes under section 15 of Act
No. 2719, or to the specific taxes under section 1496 of the Administrative Code.
The plaintiff corporation was created on the 10th day of March, 1917, by Act No. 2705, for the purpose of
developing the coal industry in the Philippine Island, in harmony with the general plan of the Government to
encourage the development of the natural resources of the country, and to provided facilities therefor. By said
Act, the company was granted the general powers of a corporation "and such other powers as may be

necessary to enable it to prosecute the business of developing coal deposits in the Philippine Island and of
mining, extracting, transporting and selling the coal contained in said deposits." (Sec. 2, Act No. 2705.) By the
same law (Act No. 2705) the Government of the Philippine Islands is made the majority stockholder, evidently
in order to insure proper government supervision and control, and thus to place the Government in a position
to render all possible encouragement, assistance and help in the prosecution and furtherance of the
company's business.
On May 14, 1917, two months after the passage of Act No. 2705, creating the National Coal Company, the
Philippine Legislature passed Act No. 2719 "to provide for the leasing and development of coal lands in the
Philippine Islands." On October 18, 1917, upon petition of the National Coal Company, the Governor-General,
by Proclamation No. 39, withdrew "from settlement, entry, sale or other disposition, all coal-bearing public
lands within the Province of Zamboanga, Department of Mindanao and Sulu, and the Island of Polillo,
Province of Tayabas." Almost immediately after the issuance of said proclamation the National Coal Company
took possession of the coal lands within the said reservation, with an area of about 400 hectares, without any
further formality, contract or lease. Of the 30,000 shares of stock issued by the company, the Government of
the Philippine Islands is the owner of 29,809 shares, that is, of 99 1/3 per centum of the whole capital stock.
If we understand the theory of the plaintiff-appellee, it is, that it claims to be the owner of the land from which it
has mined the coal in question and is therefore subject to the provisions of section 15 of Act No. 2719 and not
to the provisions of the section 1496 of the Administrative Code. That contention of the plaintiff leads us to an
examination of the evidence upon the question of the ownership of the land from which the coal in question
was mined. Was the plaintiff the owner of the land from which the coal in question was mined? If the evidence
shows the affirmative, then the judgment should be affirmed. If the evidence shows that the land does not
belong to the plaintiff, then the judgment should be reversed, unless the plaintiff's rights fall under section 3 of
said Act.
The only witness presented by the plaintiff upon the question of the ownership of the land in question was Mr.
Dalmacio Costas, who stated that he was a member of the board of directors of the plaintiff corporation; that
the plaintiff corporation took possession of the land in question by virtue of the proclamation of the GovernorGeneral, known as Proclamation No. 39 of the year 1917; that no document had been issued in favor of the
plaintiff corporation; that said corporation had received no permission from the Secretary of Agriculture and
Natural Resources; that it took possession of said lands covering an area of about 400 hectares, from which
the coal in question was mined, solely, by virtue of said proclamation (Exhibit B, No. 39).
Said proclamation (Exhibit B) was issued by Francis Burton Harrison, then Governor-General, on the 18th day
of October, 1917, and provided: "Pursuant to the provision of section 71 of Act No. 926, I hereby withdraw from
settlement, entry, sale, or other disposition, all coal-bearing public lands within the Province of Zamboanga,
Department of Mindanao and Sulu, and the Island of Polillo, Province of Tayabas." It will be noted that said
proclamation only provided that all coal-bearing public lands within said province and island should be
withdrawn from settlement, entry, sale, or other disposition. There is nothing in said proclamation which
authorizes the plaintiff or any other person to enter upon said reversations and to mine coal, and no provision
of law has been called to our attention, by virtue of which the plaintiff was entitled to enter upon any of the
lands so reserved by said proclamation without first obtaining permission therefor.
The plaintiff is a private corporation. The mere fact that the Government happens to the majority stockholder
does not make it a public corporation. Act No. 2705, as amended by Act No. 2822, makes it subject to all of
the provisions of the Corporation Law, in so far as they are not inconsistent with said Act (No. 2705). No
provisions of Act No. 2705 are found to be inconsistent with the provisions of the Corporation Law. As a private
corporation, it has no greater rights, powers or privileges than any other corporation which might be organized
for the same purpose under the Corporation Law, and certainly it was not the intention of the Legislature to
give it a preference or right or privilege over other legitimate private corporations in the mining of coal. While it
is true that said proclamation No. 39 withdrew "from settlement, entry, sale, or other disposition of coal-bearing
public lands within the Province of Zamboanga . . . and the Island of Polillo," it made no provision for the
occupation and operation by the plaintiff, to the exclusion of other persons or corporations who might, under
proper permission, enter upon the operate coal mines.

On the 14th day of May, 1917, and before the issuance of said proclamation, the Legislature of the Philippine
Island in "an Act for the leasing and development of coal lands in the Philippine Islands" (Act No. 2719), made
liberal provision. Section 1 of said Act provides: "Coal-bearing lands of the public domain in the Philippine
Island shall not be disposed of in any manner except as provided in this Act," thereby giving a clear indication
that no "coal-bearing lands of the public domain" had been disposed of by virtue of said proclamation.
Neither is there any provision in Act No. 2705 creating the National Coal Company, nor in the amendments
thereof found in Act No. 2822, which authorizes the National Coal Company to enter upon any of the reserved
coal lands without first having obtained permission from the Secretary of Agriculture and Natural
Resources.lawphi1.net
The following propositions are fully sustained by the facts and the law:
(1) The National Coal Company is an ordinary private corporation organized under Act No. 2705, and has no
greater powers nor privileges than the ordinary private corporation, except those mentioned, perhaps, in
section 10 of Act No. 2719, and they do not change the situation here.
(2) It mined on public lands between the month of July, 1920, and the months of March, 1922, 24,089.3 tons of
coal.
(3) Upon demand of the Collector of Internal Revenue it paid a tax of P0.50 a ton, as taxes under the
provisions of article 1946 of the Administrative Code on the 15th day of December, 1922.
(4) It is admitted that it is neither the owner nor the lessee of the lands upon which said coal was mined.
(5) The proclamation of Francis Burton Harrison, Governor-General, of the 18th day of October, 1917, by
authority of section 1 of Act No. 926, withdrawing from settlement, entry, sale, or other dispositon all coalbearing public lands within the Province of Zamboanga and the Island of Polillo, was not a reservation for the
benefit of the National Coal Company, but for any person or corporation of the Philippine Islands or of the
United States.
(6) That the National Coal Company entered upon said land and mined said coal, so far as the record shows,
without any lease or other authority from either the Secretary of Agriculture and Natural Resources or any
person having the power to grant a leave or authority.
From all of the foregoing facts we find that the issue is well defined between the plaintiff and the defendant.
The plaintiff contends that it was liable only to pay the internal revenue and other fees and taxes provided for
under section 15 of Act No. 2719; while the defendant contends, under the facts of record, the plaintiff is
obliged to pay the internal revenue duty provided for in section 1496 of the Administrative Code. That being
the issue, an examination of the provisions of Act No. 2719 becomes necessary.
An examination of said Act (No. 2719) discloses the following facts important for consideration here:
First. All "coal-bearing lands of the public domain in the Philippine Islands shall not be disposed of in any
manner except as provided in this Act." Second. Provisions for leasing by the Secretary of Agriculture and
Natural Resources of "unreserved, unappropriated coal-bearing public lands," and the obligation to the
Government which shall be imposed by said Secretary upon the lessee.lawphi1.net
Third. The internal revenue duty and tax which must be paid upon coal-bearing lands owned by any person,
firm, association or corporation.

To repeat, it will be noted, first, that Act No. 2719 provides an internal revenue duty and tax upon unreserved,
unappropriated coal-bearing public lands which may be leased by the Secretary of Agriculture and Natural
Resources; and, second, that said Act (No. 2719) provides an internal revenue duty and tax imposed upon any
person, firm, association or corporation, who may be the owner of "coal-bearing lands." A reading of said Act
clearly shows that the tax imposed thereby is imposed upon two classes of persons only lessees and
owners.
The lower court had some trouble in determining what was the correct interpretation of section 15 of said Act,
by reason of what he believed to be some difference in the interpretation of the language used in Spanish and
English. While there is some ground for confusion in the use of the language in Spanish and English, we are
persuaded, considering all the provisions of said Act, that said section 15 has reference only to persons, firms,
associations or corporations which had already, prior to the existence of said Act, become the owners of coal
lands. Section 15 cannot certainty refer to "holders or lessees of coal lands' for the reason that practically all of
the other provisions of said Act has reference to lessees or holders. If section 15 means that the persons,
firms, associations, or corporation mentioned therein are holders or lessees of coal lands only, it is difficult to
understand why the internal revenue duty and tax in said section was made different from the obligations
mentioned in section 3 of said Act, imposed upon lessees or holders.
From all of the foregoing, it seems to be made plain that the plaintiff is neither a lessee nor an owner of coalbearing lands, and is, therefore, not subject to any other provisions of Act No. 2719. But, is the plaintiff subject
to the provisions of section 1496 of the Administrative Code?
Section 1496 of the Administrative Code provides that "on all coal and coke there shall be collected, per metric
ton, fifty centavos." Said section (1496) is a part of article, 6 which provides for specific taxes. Said article
provides for a specific internal revenue tax upon all things manufactured or produced in the Philippine Islands
for domestic sale or consumption, and upon things imported from the United States or foreign countries. It
having been demonstrated that the plaintiff has produced coal in the Philippine Islands and is not a lessee or
owner of the land from which the coal was produced, we are clearly of the opinion, and so hold, that it is
subject to pay the internal revenue tax under the provisions of section 1496 of the Administrative Code, and is
not subject to the payment of the internal revenue tax under section 15 of Act No. 2719, nor to any other
provisions of said Act.
Therefore, the judgment appealed from is hereby revoked, and the defendant is hereby relieved from all
responsibility under the complaint. And, without any finding as to costs, it is so ordered.
Ruling:
The National Coal Company is a private corporation. The fact that the Government happens to be a
stockholder therein does not make it a public corporation. It is subject to all the provisions of the Corporation
Law in so far as they are not inconsistent with Act No. 2705. As a private corporation, it has no greater rights,
powers, or privileges than any other corporation which might be organized for the same purpose under the
Corporation Law. It was not the intention of the legislature to give it a preference, or right, or privilege over
other legitimate private corporations in the mining of coal. The law made no provision for its occupation and
operation of coal-bearing lands, to the exclusion of other persons or corporations, under proper permission.
The National Coal Company being a private corporation, neither the lessee nor the owner of the lands upon
which it mined coal for the year in question, is subject to the payment of the internal revenue duty provided for
in section 1496 of the Administrative Code. [National Coal Co. vs. Collector of Internal Revenue, 46 Phil.
583(1924)]

PHILIPPINE SOCIETY FOR

THE PREVENTION OF
CRUELTY TO ANIMALS,

G.R. No. 169752

Petitioners,

Members:

- versus -

PUNO, C.J.
QUISUMBING,
YNARES-SANTIAGO,
SANDOVAL-GUTIERREZ,
CARPIO,
AUSTRIA-MARTINEZ,
CORONA,
CARPIO-MORALES,
AZCUNA,
TINGA,
CHICO-NAZARIO,
GARCIA,
VELASCO, JR.,
NACHURA, and
REYES, JJ.

COMMISSION ON AUDIT,
DIR. RODULFO J. ARIESGA
(in his official capacity as Director
of the Commission on Audit), MS.
MERLE M. VALENTIN and MS.
SUSAN GUARDIAN (in their official
capacities as Team Leader and Team
Member, respectively, of the audit
Team of the Commission on Audit),
Promulgated:
Respondents.
September 25, 2007
x-----------------------------------------------------------x
DECISION

At the time of the enactment of Act No. 1285, the original Corporation Law, Act No. 1459, was not yet in
existence. Act No. 1285 antedated both the Corporation Law and the constitution of the Securities and
Exchange Commission. Important to note is that the nature of the petitioner as a corporate entity is
distinguished from the sociedad anonimasunder the Spanish Code of Commerce.

For the purpose of enhancing its powers in promoting animal welfare and enforcing laws for the protection of
animals, the petitioner was initially imbued under its charter with the power to apprehend violators of animal
welfare laws. In addition, the petitioner was to share one-half (1/2) of the fines imposed and collected through
its efforts for violations of the laws related thereto. As originally worded, Sections 4 and 5 of Act No. 1285
provide:

SEC. 4. The said society is authorized to appoint not to exceed five agents
in the City of Manila, and not to exceed two in each of the provinces of the Philippine
Islands who shall have all the power and authority of a police officer to make arrests for
violation of the laws enacted for the prevention of cruelty to animals and the protection
of animals, and to serve any process in connection with the execution of such laws;
and in addition thereto, all the police force of the Philippine Islands, wherever
organized, shall, as occasion requires, assist said society, its members or agents, in
the enforcement of all such laws.

AUSTRIA-MARTINEZ, J.:

Before the Court is a special civil action for Certiorari and Prohibition under Rule 65 of the Rules of Court, in
relation to Section 2 of Rule 64, filed by the petitioner assailing Office Order No. 2005-021

[1]

SEC. 5. One-half of all the fines imposed and collected through the efforts
of said society, its members or its agents, for violations of the laws enacted for the
prevention of cruelty to animals and for their protection, shall belong to said society
and shall be used to promote its objects.

dated September

14, 2005 issued by the respondents which constituted the audit team, as well as its September 23, 2005

(emphasis supplied)

Letter[2] informing the petitioner that respondents audit team shall conduct an audit survey on the petitioner for
a detailed audit of its accounts, operations, and financial transactions. No temporary restraining order was
issued.

Subsequently, however, the power to make arrests as well as the privilege to retain a portion of the fines
collected for violation of animal-related laws were recalled by virtue of Commonwealth Act (C.A.) No. 148,
[4]

which reads, in its entirety, thus:

The petitioner was incorporated as a juridical entity over one hundred years ago by virtue of Act No. 1285,
enacted on January 19, 1905, by the Philippine Commission. The petitioner, at the time it was created, was

Be it enacted by the National Assembly of the Philippines:

composed of animal aficionados and animal propagandists. The objects of the petitioner, as stated in Section

Section 1. Section four of Act Numbered Twelve hundred and eighty-five as amended
by Act Numbered Thirty five hundred and forty-eight, is hereby further amended so as
to read as follows:

2 of its charter, shall be to enforce laws relating to cruelty inflicted upon animals or the protection of animals in
the Philippine Islands, and generally, to do and perform all things which may tend in any way to alleviate the
suffering of animals and promote their welfare.[3]

Sec. 4. The said society is authorized to appoint not to exceed

ten agents in the City of Manila, and not to exceed one in each
municipality of the Philippines who shall have the authority to
denounce to regular peace officers any violation of the laws
enacted for the prevention of cruelty to animals and the
protection of animals and to cooperate with said peace officers
in the prosecution of transgressors of such laws.

Sec. 2. The full amount of the fines collected for violation of the laws against cruelty to
animals and for the protection of animals, shall accrue to the general fund of the
Municipality where the offense was committed.
Sec. 3. This Act shall take effect upon its approval.

Petitioner explained thus:

Approved, November 8, 1936. (Emphasis supplied)

a.

Although the petitioner was created by special legislation, this necessarily came about
because in January 1905 there was as yet neither a Corporation Law or any other general

Immediately thereafter, then President Manuel L. Quezon issued Executive Order (E.O.) No. 63

law under which it may be organized and incorporated, nor a Securities and Exchange

dated November 12, 1936, portions of which provide:

Commission which would have passed upon its organization and incorporation.

Whereas, during the first regular session of the National Assembly, Commonwealth Act
Numbered One Hundred Forty Eight was enacted depriving the agents of the Society
for the Prevention of Cruelty to Animals of their power to arrest persons who have
violated the laws prohibiting cruelty to animals thereby correcting a serious defect in
one of the laws existing in our statute books.

b.

the petitioner of its power to make arrests, and that the petitioner lost its operational funding,

xxxx

underscore the fact that it exercises no governmental function. In fine, the government itself,

Whereas, the cruel treatment of animals is an offense against the State, penalized
under our statutes, which the Government is duty bound to enforce;
Now, therefore, I, Manuel L. Quezon, President of the Philippines, pursuant to the
authority conferred upon me by the Constitution, hereby decree, order, and direct the
Commissioner of Public Safety, the Provost Marshal General as head of the
Constabulary Division of the Philippine Army, every Mayor of a chartered city, and
every municipal president to detail and organize special members of the police force,
local, national, and the Constabulary to watch, capture, and prosecute
offenders against the laws enacted to prevent cruelty to animals. (Emphasis supplied)

That Executive Order No. 63, issued during the Commonwealth period, effectively deprived

by its overt acts, confirmed petitioners status as a private juridical entity.

The COA General Counsel issued a Memorandum [6] dated May 6, 2004, asserting that the petitioner was
subject to its audit authority. In a letter dated May 17, 2004,[7]respondent COA informed the petitioner of the
result of the evaluation, furnishing it with a copy of said Memorandum dated May 6, 2004 of the General
Counsel.

On December 1, 2003, an audit team from respondent Commission on Audit (COA) visited the office of the
petitioner to conduct an audit survey pursuant to COA Office Order No. 2003-051 dated November 18,
2003[5] addressed to the petitioner. The petitioner demurred on the ground that it was a private entity not under

Petitioner thereafter filed with the respondent COA a Request for Re-evaluation dated May 19, 2004,
[8]

insisting that it was a private domestic corporation.

the jurisdiction of COA, citing Section 2(1) of Article IX of the Constitution which specifies the general
jurisdiction of the COA, viz:

Section 1. General Jurisdiction. The Commission on Audit shall have the power,
authority, and duty to examine, audit, and settle all accounts pertaining to the revenue
and receipts of, and expenditures or uses of funds and property, owned or held in trust
by, or pertaining to the Government, or any of its subdivisions, agencies, or
instrumentalities, including government-owned and controlled corporations with original
charters, and on a post-audit basis: (a) constitutional bodies, commissions and officers
that have been granted fiscal autonomy under the Constitution; (b) autonomous state
colleges and universities; (c) other government-owned or controlled corporations and
their subsidiaries; and (d) such non-governmental entities receiving subsidy or equity,
directly or indirectly, from or through the government, which are required by law or the
granting institution to submit to such audit as a condition of subsidy or equity . However,
where the internal control system of the audited agencies is inadequate, the
Commission may adopt such measures, including temporary or special pre-audit, as
are necessary and appropriate to correct the deficiencies. It shall keep the general
accounts of the Government, and for such period as may be provided by law, preserve
the vouchers and other supporting papers pertaining thereto.(Emphasis supplied)

Acting on the said request, the General Counsel of respondent COA, in a Memorandum dated July 13, 2004,
[9]

affirmed her earlier opinion that the petitioner was a government entity that was subject to the audit

jurisdiction of respondent COA. In a letter dated September 14, 2004, the respondent COA informed the
petitioner of the result of the re-evaluation, maintaining its position that the petitioner was subject to its audit
jurisdiction, and requested an initial conference with the respondents.

In a Memorandum dated September 16, 2004, Director Delfin Aguilar reported to COA Assistant
Commissioner Juanito Espino, Corporate Government Sector, that the audit survey was not conducted due to
the refusal of the petitioner because the latter maintained that it was a private corporation.

processes as these functions were placed in the hands of the police force; seventh, no government appointee
Petitioner received on September 27, 2005 the subject COA Office Order 2005-021 dated September 14,

or representative sits on the board of trustees of the petitioner; eighth, a reading of the provisions of its charter

2005 and the COA Letter dated September 23, 2005.

(Act No. 1285) fails to show that any act or decision of the petitioner is subject to the approval of or control by
any government agency, except to the extent that it is governed by the law on private corporations in general;
and finally, ninth, the Committee on Animal Welfare, under the Animal Welfare Act of 1998, includes members

Hence, herein Petition on the following grounds:

from both the private and the public sectors.

A.

RESPONDENT COMMISSION ON AUDIT COMMITTED GRAVE ABUSE OF

DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WHEN IT
RULED THAT PETITIONER IS SUBJECT TO ITS AUDIT AUTHORITY.

The respondents contend that since the petitioner is a body politic created by virtue of a special legislation and

B.

endowed with a governmental purpose, then, indubitably, the COA may audit the financial activities of the

PETITIONER IS ENTITLED TO THE RELIEF SOUGHT, THERE BEING NO APPEAL,

NOR ANY PLAIN, SPEEDY AND ADEQUATE REMEDY IN THE ORDINARY COURSE
OF LAW AVAILABLE TO IT.[10]

latter. Respondents in effect divide their contentions into six strains: first, the test to determine whether an

The essential question before this Court is whether the petitioner qualifies as a government agency that may

virtue of a special charter, it is thus a government corporation subject to respondents auditing power; second,

be subject to audit by respondent COA.

the petitioner exercises sovereign powers, that is, it is tasked to enforce the laws for the protection and welfare

entity is a government corporation lies in the manner of its creation, and, since the petitioner was created by

of animals which ultimately redound to the public good and welfare, and, therefore, it is deemed to be a
Petitioner argues: first, even though it was created by special legislation in 1905 as there was no general law

government instrumentality as defined under the Administrative Code of 1987, the purpose of which is

then existing under which it may be organized or incorporated, it exercises no governmental functions

connected with the administration of government, as purportedly affirmed by American jurisprudence; third, by

because these have been revoked by C.A. No. 148 and E.O. No. 63; second, nowhere in its charter is it

virtue of Section 23,[11] Title II, Book III of the same Code, the Office of the President exercises supervision or

indicated that it is a public corporation, unlike, for instance, C.A. No. 111 which created the Boy Scouts of the

control over the petitioner; fourth, under the same Code, the requirement under its special charter for the

Philippines, defined its powers and purposes, and specifically stated that it was An Act to Create a Public

petitioner to render a report to the Civil Governor, whose functions have been inherited by the Office of the

Corporation in which, even as amended by Presidential Decree No. 460, the law still adverted to the Boy

President, clearly reflects the nature of the petitioner as a government instrumentality; fifth, despite the

Scouts of the Philippines as a public corporation, all of which are not obtaining in the charter of the

passage of the Corporation Code, the law creating the petitioner had not been abolished, nor had it been re-

petitioner; third, if it were a government body, there would have been no need for the State to grant it tax

incorporated under any general corporation law; and finally, sixth, Republic Act No. 8485, otherwise known as

exemptions under Republic Act No. 1178, and the fact that it was so exempted strengthens its position that it is

the Animal Welfare Act of 1998, designates the petitioner as a member of its Committee on Animal Welfare

a private institution; fourth, the employees of the petitioner are registered and covered by the Social Security

which is attached to the Department of Agriculture.

System at the latters initiative and not through the Government Service Insurance System, which should have
been the case had the employees been considered government employees; fifth, the petitioner does not

In view of the phrase One-half of all the fines imposed and collected through the efforts of said society, the

receive any form of financial assistance from the government, since C.A. No. 148, amending Section 5 of Act

Court, in a Resolution dated January 30, 2007, required the Office of the Solicitor General (OSG) and the

No. 1285, states that the full amount of the fines, collected for violation of the laws against cruelty to animals

parties to comment on: a) petitioner's authority to impose fines and the validity of the provisions of Act No.

and for the protection of animals, shall accrue to the general fund of the Municipality where the offense was

1285 and Commonwealth Act No. 148 considering that there are no standard measures provided for in

committed; sixth, C.A. No. 148 effectively deprived the petitioner of its powers to make arrests and serve

the aforecited laws as to the manner of implementation, the specific violations of the law, the person/s

[T]he test to determine whether a corporation is government owned or controlled, or

private in nature is simple. Is it created by its own charter for the exercise of a public
function, or by incorporation under the general corporation law? Those with special
charters are government corporations subject to its provisions, and its employees are
under the jurisdiction of the Civil Service Commission, and are compulsory members of
the Government Service Insurance System. xxx (Emphasis supplied)[13]

authorized to impose fine and in what amount; and, b) the effect of the 1935 and 1987 Constitutions on
whether petitioner continues to exist or should organize as a private corporation under the Corporation
Code, B.P. Blg. 68 as amended.

Petitioner and the OSG filed their respective Comments. Respondents filed a Manifestation stating that since
they were being represented by the OSG which filed its Comment, they opted to dispense with the filing of a

The petitioner is correct in stating that the charter test is predicated, at best, on the legal regime established by
the 1935 Constitution, Section 7, Article XIII, which states:

separate one and adopt for the purpose that of the OSG.

Sec. 7. The National Assembly shall not, except by general law, provide for the
formation, organization, or regulation of private corporations, unless such corporations
are owned or controlled by the Government or any subdivision or instrumentality
thereof.[14]

The petitioner avers that it does not have the authority to impose fines for violation of animal welfare laws; it
only enjoyed the privilege of sharing in the fines imposed and collected from its efforts in the enforcement of
The foregoing proscription has been carried over to the 1973 and the 1987 Constitutions. Section 16 of Article
animal welfare laws; such privilege, however, was subsequently abolished by C.A. No. 148; that it continues to
XII of the present Constitution provides:
exist as a private corporation since it was created by the Philippine Commission before the effectivity of the
Sec. 16. The 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.

Corporation law, Act No. 1459; and the 1935 and 1987 Constitutions.

The OSG submits that Act No. 1285 and its amendatory laws did not give petitioner the authority to impose
fines for violation of laws [12] relating to the prevention of cruelty to animals and the protection of animals; that
even prior to the amendment of Act No. 1285, petitioner was only entitled to share in the fines imposed; C.A.

Section 16 is essentially a re-enactment of Section 7 of Article XVI of the 1935 Constitution and Section 4 of
Article XIV of the 1973 Constitution.

No. 148 abolished that privilege to share in the fines collected; that petitioner is a public corporation and has
continued to exist since Act No. 1285; petitioner was not repealed by the 1935 and 1987 Constitutions which
contain transitory provisions maintaining all laws issued not inconsistent therewith until amended, modified or
repealed.

During the formulation of the 1935 Constitution, the Committee on Franchises recommended the foregoing
proscription to prevent the pressure of special interests upon the lawmaking body in the creation of
corporations or in the regulation of the same. To permit the lawmaking body by special law to provide for the
organization, formation, or regulation of private corporations would be in effect to offer to it the temptation in

The petition is impressed with merit.

many cases to favor certain groups, to the prejudice of others or to the prejudice of the interests of the country.
[15]

The arguments of the parties, interlaced as they are, can be disposed of in five points.
And since the underpinnings of the charter test had been introduced by the 1935 Constitution and not earlier, it
First, the Court agrees with the petitioner that the charter test cannot be applied.

follows that the test cannot apply to the petitioner, which was incorporated by virtue of Act No. 1285, enacted
on January 19, 1905. Settled is the rule that laws in general have no retroactive effect, unless the contrary is

Essentially, the charter test as it stands today provides:

provided.[16] All statutes are to be construed as having only a prospective operation, unless the purpose and

intention of the legislature to give them a retrospective effect is expressly declared or is necessarily implied

The textual foundation of the charter test, which placed a limitation on the power of the legislature, first

from the language used. In case of doubt, the doubt must be resolved against the retrospective effect.

appeared in the 1935 Constitution. However, the petitioner was incorporated in 1905 by virtue of Act No. 1258,

[17]

a law antedating the Corporation Law (Act No. 1459) by a year, and the 1935 Constitution, by thirty
There are a few exceptions. Statutes can be given retroactive effect in the following cases: (1) when the law

years. There being neither a general law on the formation and organization of private corporations nor a

itself so expressly provides; (2) in case of remedial statutes; (3) in case of curative statutes; (4) in case of laws

restriction on the legislature to create private corporations by direct legislation, the Philippine Commission at

interpreting others; and (5) in case of laws creating new rights.

that moment in history was well within its powers in 1905 to constitute the petitioner as a private juridical entity.

[18]

None of the exceptions is present in the

instant case.
Time and again the Court must caution even the most brilliant scholars of the law and all constitutional
The general principle of prospectivity of the law likewise applies to Act No. 1459, otherwise known as the

historians on the danger of imposing legal concepts of a later date on facts of an earlier date. [20]

Corporation Law, which had been enacted by virtue of the plenary powers of the Philippine Commission
on March 1, 1906, a little over a year after January 19, 1905, the time the petitioner emerged as a juridical

The amendments introduced by C.A. No. 148 made it clear that the petitioner was a private corporation and

entity. Even the Corporation Law respects the rights and powers of juridical entities organized beforehand, viz:

not an agency of the government. This was evident in Executive Order No. 63, issued by then President of the
Philippines Manuel L. Quezon, declaring that the revocation of the powers of the petitioner to appoint agents

SEC. 75. Any corporation or sociedad anonima formed, organized, and existing under
the laws of the Philippine Islands and lawfully transacting business in the Philippine
Islands on the date of the passage of this Act, shall be subject to the provisions hereof
so far as such provisions may be applicable and shall be entitled at its option either to
continue business as such corporation or to reform and organize under and by virtue of
the provisions of this Act, transferring all corporate interests to the new corporation
which, if a stock corporation, is authorized to issue its shares of stock at par to the
stockholders or members of the old corporation according to their interests. (Emphasis
supplied).

with powers of arrest corrected a serious defect in one of the laws existing in the statute books.

As a curative statute, and based on the doctrines so far discussed, C.A. No. 148 has to be given retroactive
effect, thereby freeing all doubt as to which class of corporations the petitioner belongs, that is, it is a quasipublic corporation, a kind of private domestic corporation, which the Court will further elaborate on under

As pointed out by the OSG, both the 1935 and 1987 Constitutions contain transitory provisions maintaining all

the fourth point.

laws issued not inconsistent therewith until amended, modified or repealed. [19]
In a legal regime where the charter test doctrine cannot be applied, the mere fact that a corporation has been

Second, a reading of petitioners charter shows that it is not subject to control or supervision by any agency of

created by virtue of a special law does not necessarily qualify it as a public corporation.

the State, unlike government-owned and -controlled corporations.No government representative sits on the
board of trustees of the petitioner. Like all private corporations, the successors of its members are determined

What then is the nature of the petitioner as a corporate entity? What legal regime governs its rights, powers,

voluntarily and solely by the petitioner in accordance with its by-laws, and may exercise those powers

and duties?

generally accorded to private corporations, such as the powers to hold property, to sue and be sued, to use a
common seal, and so forth. It may adopt by-laws for its internal operations: the petitioner shall be managed or

As stated, at the time the petitioner was formed, the applicable law was the Philippine Bill of 1902, and,
emphatically, as also stated above, no proscription similar to the charter test can be found therein.

operated by its officers in accordance with its by-laws in force. The pertinent provisions of the charter provide:

Section 1. Anna L. Ide, Kate S. Wright, John L. Chamberlain, William F.

Tucker, Mary S. Fergusson, Amasa S. Crossfield, Spencer Cosby, Sealy B. Rossiter,
Richard P. Strong, Jose Robles Lahesa, Josefina R. de Luzuriaga, and such other
persons as may be associated with them in conformity with this act, and their

successors, are hereby constituted and created a body politic and corporate at law,
under the name and style of The Philippines Society for the Prevention of Cruelty to
Animals.
As incorporated by this Act, said society shall have the power to add to its
organization such and as many members as it desires, to provide for and choose such
officers
as
it
may
deem
advisable,
and in such manner as it may
wish, and to remove members as it shall provide.
It shall have the right to sue and be sued, to use a common seal, to
receive legacies and donations, to conduct social enterprises for the purpose
of
obtaining funds, to levy dues upon itsmembers and provide for their collection to hold
real and personal estate such as may be necessary for the accomplishment of the
purposes of the society, and to adopt such by-laws for its government as may not be
inconsistent with law or this charter.
xxxx
Sec. 3. The said society shall be operated under the direction of its officers,
in accordance with its by-laws in force, and this charter.
xxxx
Sec. 6. The principal office of the society shall be kept in the city of Manila,
and the society shall have full power to locate and establish branch offices of the
society wherever it may deem advisable in the Philippine Islands, such branch offices
to be under the supervision and control of the principal office.

that render public service, supply public wants, [21] or pursue other eleemosynary objectives. While purposely
organized for the gain or benefit of its members, they are required by law to discharge functions for the public
benefit. Examples of these corporations are utility,[22] railroad, warehouse, telegraph, telephone, water supply
corporations and transportation companies. [23] It must be stressed that a quasi-public corporation is a species
of private corporations, but the qualifying factor is the type of service the former renders to the public: if it
performs a public service, then it becomes a quasi-public corporation. [24]

Authorities are of the view that the purpose alone of the corporation cannot be taken as a safe guide, for the
fact is that almost all corporations are nowadays created to promote the interest, good, or convenience of the
public. A bank, for example, is a private corporation; yet, it is created for a public benefit. Private schools and
universities are likewise private corporations; and yet, they are rendering public service. Private hospitals and
wards are charged with heavy social responsibilities. More so with all common carriers. On the other hand,
there may exist a public corporation even if it is endowed with gifts or donations from private individuals.

Third. The employees of the petitioner are registered and covered by the Social Security System at the latters
initiative, and not through the Government Service Insurance System, which should be the case if the
The true criterion, therefore, to determine whether a corporation is public or private is found in the totality of
employees are considered government employees. This is another indication of petitioners nature as a private
the relation of the corporation to the State. If the corporation is created by the State as the latters own agency
entity. Section 1 of Republic Act No. 1161, as amended by Republic Act No. 8282, otherwise known as the
or instrumentality to help it in carrying out its governmental functions, then that corporation is considered
Social Security Act of 1997, defines the employer:
Employer Any person, natural or juridical, domestic or foreign, who carries
on in the Philippines any trade, business, industry, undertaking or activity of any kind
and uses the services of another person who is under his orders as regards the
employment, except the Government and any of its political subdivisions, branches or
instrumentalities, including corporations owned or controlled by the Government:
Provided, That a self-employed person shall be both employee and employer at the
same time. (Emphasis supplied)

public; otherwise, it is private. Applying the above test, provinces, chartered cities, and barangays can best
exemplify public corporations. They are created by the State as its own device and agency for the
accomplishment of parts of its own public works.[25]

It is clear that the amendments introduced by C.A. No. 148 revoked the powers of the petitioner to arrest
Fourth. The respondents contend that the petitioner is a body politic because its primary purpose is to secure

offenders of animal welfare laws and the power to serve processes in connection therewith.

the protection and welfare of animals which, in turn, redounds to the public good.
Fifth. The respondents argue that since the charter of the petitioner requires the latter to render periodic
This argument, is, at best, specious. The fact that a certain juridical entity is impressed with public interest

reports to the Civil Governor, whose functions have been inherited by the President, the petitioner is,

does not, by that circumstance alone, make the entity a public corporation, inasmuch as a corporation may be

therefore, a government instrumentality.

private although its charter contains provisions of a public character, incorporated solely for the public
good. This class of corporations may be considered quasi-public corporations, which are private corporations

This contention is inconclusive. By virtue of the fiction that all corporations owe their very existence and
powers to the State, the reportorial requirement is applicable to all corporations of whatever nature, whether

they are public, quasi-public, or private corporationsas creatures of the State, there is a reserved right in the
legislature to investigate the activities of a corporation to determine whether it acted within its powers. In other
words, the reportorial requirement is the principal means by which the State may see to it that its creature
acted according to the powers and functions conferred upon it. These principles were extensively discussed
in Bataan Shipyard & Engineering Co., Inc. v. Presidential Commission on Good Government .[26] Here, the
Court, in holding that the subject corporation could not invoke the right against self-incrimination whenever the
State demanded the production of its corporate books and papers, extensively discussed the purpose of
reportorial requirements, viz:

x x x The corporation is a creature of the state. It is presumed to be incorporated for

the benefit of the public. It received certain special privileges and franchises, and holds
them subject to the laws of the state and the limitations of its charter. Its powers are
limited by law. It can make no contract not authorized by its charter. Its rights to act as
a corporation are only preserved to it so long as it obeys the laws of its creation. There
is a reserve[d] right in the legislature to investigate its contracts and find out whether it
has exceeded its powers. It would be a strange anomaly to hold that a state, having
chartered a corporation to make use of certain franchises, could not, in the exercise of
sovereignty, inquire how these franchises had been employed, and whether they had
been abused, and demand the production of the corporate books and papers for that
purpose. The defense amounts to this, that an officer of the corporation which is
charged with a criminal violation of the statute may plead the criminality of such
corporation as a refusal to produce its books. To state this proposition is to answer
it. While an individual may lawfully refuse to answer incriminating questions unless
protected by an immunity 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 privileges. (Wilson v. United States, 55 Law Ed., 771, 780.) [27]

WHEREFORE, the petition is GRANTED. Petitioner is DECLARED a private domestic corporation subject to
the jurisdiction of the Securities and Exchange Commission. The respondents are ENJOINED from

employees are considered government employees is another indication of petitioners nature as a private
entity.The employees of the petitioner are registered and covered by the Social Security System at the
latters initiative, and not through the Government Service Insurance System, which should be the case if the
employees are considered government employees. This is another indication of petitioners nature as a private
entity.
Same; Fact that a certain juridical entity is impressed with public interest does not, by that circumstance alone,
make the entity a public corporation, inasmuch as a corporation may be private though its charter contains
provisions of a public character incorporated solely for the public good.The respondents contend that the
petitioner is a body politic because its primary purpose is to secure the protection and welfare of animals
which, in turn, redounds to the public good. This argument, is, at best, specious. The fact that a certain
juridical entity is impressed with public interest does not, by that circumstance alone, make the entity a public
corporation, inasmuch as a corporation may be private although its charter contains provisions of a public
character, incorporated solely for the public good. This class of corporations may be considered quasi-public
corporations, which are private corporations that render public service, supply public wants, or pursue other
eleemosynary objectives. While purposely organized for the gain or benefit of its members, they are required
by law to discharge functions for the public benefit. Examples of these corporations are utility, railroad,
warehouse, telegraph, telephone, water supply corporations and transportation companies. It must be
stressed that a quasi-public corporation is a species of private corporations, but the qualifying factor is the type
of service the former renders to the public: if it performs a public service, then it becomes a quasi-public
corporation.
Same; The true criterion to determine whether a corporation is public or private is found in the totality of the
relation of the corporation to the State.The true criterion, therefore, to determine whether a corporation is
public or private is found in the totality of the relation of the corporation to the State. If the corporation is
created by the State as the latters own agency or instrumentality to help it in carrying out its governmental
functions, then that corporation is considered public; otherwise, it is private. Applying the above test,
provinces, chartered cities, and barangays can best exemplify public corporations. They are created by the
State as its own device and agency for the accomplishment of parts of its own public works. [Philippine
Society for the Prevention of Cruelty to Animals vs. Commission on Audit, 534 SCRA 112(2007)]
G.R. No. 147402

January 14, 2004

ENGR. 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.

investigating, examining and auditing the petitioner's fiscal and financial affairs.
Ruling:
Corporation Law; Amendments introduced by C.A. No. 148 made it clear that the petitioner was a private
corporation and not an agency of the government.The amendments introduced by C.A. No. 148 made it
clear that the petitioner was a private corporation and not an agency of the government. This was evident in
Executive Order No. 63, issued by then President of the Philippines Manuel L. Quezon, declaring that the
revocation of the powers of the petitioner to appoint agents with powers of arrest corrected a serious defect
in one of the laws existing in the statute books.
Same; A reading of petitioners charter shows that it is not subject to control or supervision by any agency of
the State, unlike government-owned and -controlled corporations.A reading of petitioners charter shows that
it is not subject to control or supervision by any agency of the State, unlike government-owned and -controlled
corporations. No government representative sits on the board of trustees of the petitioner. Like all private
corporations, the successors of its members are determined voluntarily and solely by the petitioner in
accordance with its by-laws, and may exercise those powers generally accorded to private corporations, such
as the powers to hold property, to sue and be sued, to use a common seal, and so forth. It may adopt by-laws
for its internal operations: the peti tioner shall be managed or operated by its officers in accordance with its
by-laws in force.
Same; Fact that employees of the petitioner are registered and covered by the Social Security System at the
latters initiative, and not through the Government Service Insurance System which should be the case if the

DECISION

CARPIO, J.:
The Case
This is a petition for certiorari1 to annul the Commission on Audits ("COA") Resolution dated 3 January 2000
and the Decision dated 30 January 2001 denying the Motion for Reconsideration. The COA denied petitioner
Ranulfo C. Felicianos request for COA to cease all audit services, and to stop charging auditing fees, to Leyte
Metropolitan Water District ("LMWD"). The COA also denied petitioners request for COA to refund all auditing
fees previously paid by LMWD.
Antecedent Facts

A Special Audit Team from COA Regional Office No. VIII audited the accounts of LMWD. Subsequently, LMWD
received a letter from COA dated 19 July 1999 requesting payment of auditing fees. As General Manager of
LMWD, petitioner sent a reply dated 12 October 1999 informing COAs Regional Director that the water district
could not pay the auditing fees. Petitioner cited as basis for his action Sections 6 and 20 of Presidential
Decree 198 ("PD 198")2, as well as Section 18 of Republic Act No. 6758 ("RA 6758"). The Regional Director
referred petitioners reply to the COA Chairman on 18 October 1999.
On 19 October 1999, petitioner wrote COA through the Regional Director asking for refund of all auditing fees
LMWD previously paid to COA.
On 16 March 2000, petitioner received COA Chairman Celso D. Gangans Resolution dated 3 January 2000
denying his requests. Petitioner filed a motion for reconsideration on 31 March 2000, which COA denied on 30
January 2001.
On 13 March 2001, petitioner filed this instant petition. Attached to the petition were resolutions of the Visayas
Association of Water Districts (VAWD) and the Philippine Association of Water Districts (PAWD) supporting the
petition.
The Ruling of the Commission on Audit
The COA ruled that this Court has already settled COAs audit jurisdiction over local water districts in Davao
City Water District v. Civil Service Commission and Commission on Audit,3 as follows:
The above-quoted provision [referring to Section 3(b) PD 198] definitely sets to naught petitioners
contention that they are private corporations. It is clear therefrom that the power to appoint the
members who will comprise the members of the Board of Directors belong to the local executives
of the local subdivision unit where such districts are located. In contrast, the members of the Board
of Directors or the trustees of a private corporation are elected from among members or
stockholders thereof. It would not be amiss at this point to emphasize that a private corporation is
created for the private purpose, benefit, aim and end of its members or stockholders. Necessarily,
said members or stockholders should be given a free hand to choose who will compose the
governing body of their corporation. But this is not the case here and this clearly indicates that
petitioners are not private corporations.
The COA also denied petitioners request for COA to stop charging auditing fees as well as petitioners request
for COA to refund all auditing fees already paid.
The Issues
Petitioner contends that COA committed grave abuse of discretion amounting to lack or excess of jurisdiction
by auditing LMWD and requiring it to pay auditing fees. Petitioner raises the following issues for resolution:
1. Whether a Local Water District ("LWD") created under PD 198, as amended, is a governmentowned or controlled corporation subject to the audit jurisdiction of COA;
2. Whether Section 20 of PD 198, as amended, prohibits COAs certified public accountants from
auditing local water districts; and
3. Whether Section 18 of RA 6758 prohibits the COA from charging government-owned and
controlled corporations auditing fees.
The Ruling of the Court
The petition lacks merit.

The Constitution and existing laws4 mandate COA to audit all government agencies, including governmentowned and controlled corporations ("GOCCs") with original charters. An LWD is a GOCC with an original
charter. Section 2(1), Article IX-D of the Constitution provides for COAs audit jurisdiction, as follows:
SECTION 2. (1) The Commission on Audit shall have the power, authority and duty to examine,
audit, and settle all accounts pertaining to the revenue and receipts of, and expenditures or uses of
funds and property, owned or held in trust by, or pertaining to, the Government, or any of its
subdivisions, agencies, or instrumentalities, including government-owned and controlled
corporations with original charters, and on a post-audit basis: (a) constitutional bodies,
commissions and offices that have been granted fiscal autonomy under this Constitution; (b)
autonomous state colleges and universities; (c) other government-owned or controlled
corporations and their subsidiaries; and (d) such non-governmental entities receiving subsidy or
equity, directly or indirectly, from or through the government, which are required by law or the
granting institution to submit to such audit as a condition of subsidy or equity. However, where the
internal control system of the audited agencies is inadequate, the Commission may adopt such
measures, including temporary or special pre-audit, as are necessary and appropriate to correct
the deficiencies. It shall keep the general accounts of the Government and, for such period as may
be provided by law, preserve the vouchers and other supporting papers pertaining thereto.
(Emphasis supplied)
The COAs audit jurisdiction extends not only to government "agencies or instrumentalities," but also to
"government-owned and controlled corporations with original charters" as well as "other government-owned or
controlled corporations" without original charters.
Whether LWDs are Private or Government-Owned
and Controlled Corporations with Original Charters
Petitioner seeks to revive a well-settled issue. Petitioner asks for a re-examination of a doctrine backed by a
long line of cases culminating in Davao City Water District v. Civil Service Commission 5 and just recently
reiterated in De Jesus v. Commission on Audit.6 Petitioner maintains that LWDs are not government-owned
and controlled corporations with original charters. Petitioner even argues that LWDs are private corporations.
Petitioner asks the Court to consider certain interpretations of the applicable laws, which would give a "new
perspective to the issue of the true character of water districts." 7
Petitioner theorizes that what PD 198 created was the Local Waters Utilities Administration ("LWUA") and not
the LWDs. Petitioner claims that LWDs are created "pursuant to" and not created directly by PD 198. Thus,
petitioner concludes that PD 198 is not an "original charter" that would place LWDs within the audit jurisdiction
of COA as defined in Section 2(1), Article IX-D of the Constitution. Petitioner elaborates that PD 198 does not
create LWDs since it does not expressly direct the creation of such entities, but only provides for their
formation on an optional or voluntary basis. 8 Petitioner adds that the operative act that creates an LWD is the
approval of the Sanggunian Resolution as specified in PD 198.
Petitioners contention deserves scant consideration.
We begin by explaining the general framework under the fundamental law. The Constitution recognizes two
classes of corporations. The first refers to private corporations created under a general law. The second refers
to government-owned or controlled corporations created by special charters. Section 16, Article XII of the
Constitution provides:
Sec. 16. The 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.
The Constitution emphatically prohibits the creation of private corporations except by a general law applicable
to all citizens.9 The purpose of this constitutional provision is to ban private corporations created by special
charters, which historically gave certain individuals, families or groups special privileges denied to other
citizens.10

In short, Congress cannot enact a law creating a private corporation with a special charter. Such legislation
would be unconstitutional. Private corporations may exist only under a general law. If the corporation is
private, it must necessarily exist under a general law. Stated differently, only corporations created under a
general law can qualify as private corporations. Under existing laws, that general law is the Corporation
Code,11 except that the Cooperative Code governs the incorporation of cooperatives. 12
The Constitution authorizes Congress to create government-owned or controlled corporations through special
charters. Since private corporations cannot have special charters, it follows that Congress can create
corporations with special charters only if such corporations are government-owned or controlled.
Obviously, LWDs are not private corporations because they are not created under the Corporation Code.
LWDs are not registered with the Securities and Exchange Commission. Section 14 of the Corporation Code
states that "[A]ll corporations organized under this code shall file with the Securities and Exchange
Commission articles of incorporation x x x." LWDs have no articles of incorporation, no incorporators and no
stockholders or members. There are no stockholders or members to elect the board directors of LWDs as in
the case of all corporations registered with the Securities and Exchange Commission. The local mayor or the
provincial governor appoints the directors of LWDs for a fixed term of office. This Court has ruled that LWDs
are not created under the Corporation Code, thus:
From the foregoing pronouncement, it is clear that what has been excluded from the coverage of
the CSC are those corporations created pursuant to the Corporation Code. Significantly,
petitioners are not created under the said code, but on the contrary, they were created
pursuant to a special law and are governed primarily by its provision.13 (Emphasis supplied)
LWDs exist by virtue of PD 198, which constitutes their special charter. Since under the Constitution only
government-owned or controlled corporations may have special charters, LWDs can validly exist only if they
are government-owned or controlled. To claim that LWDs are private corporations with a special charter is to
admit that their existence is constitutionally infirm.
Unlike private corporations, which derive their legal existence and power from the Corporation Code, LWDs
derive their legal existence and power from PD 198. Sections 6 and 25 of PD 198 14 provide:
Section 6. Formation of District. This Act is the source of authorization and power to form
and maintain a district. For purposes of this Act, a district shall be considered as a quasipublic corporation performing public service and supplying public wants. As such, a
district shall exercise the powers, rights and privileges given to private corporations under
existing laws, in addition to the powers granted in, and subject to such restrictions
imposed, under this Act.
(a) The name of the local water district, which shall include the name of the city, municipality, or
province, or region thereof, served by said system, followed by the words "Water District".

(g) A statement acknowledging the powers, rights and obligations as set forth in Section 36 of this
Title.
Nothing in the resolution of formation shall state or infer that the local legislative body has the
power to dissolve, alter or affect the district beyond that specifically provided for in this Act.
If two or more cities, municipalities or provinces, or any combination thereof, desire to form a single
district, a similar resolution shall be adopted in each city, municipality and province.
xxx
Sec. 25. Authorization. The district may exercise all the powers which are expressly
granted by this Title or which are necessarily implied from or incidental to the powers and
purposes herein stated. For the purpose of carrying out the objectives of this Act, a district is
hereby granted the power of eminent domain, the exercise thereof shall, however, be subject to
review by the Administration. (Emphasis supplied)
Clearly, LWDs exist as corporations only by virtue of PD 198, which expressly confers on LWDs corporate
powers. Section 6 of PD 198 provides that LWDs "shall exercise the powers, rights and privileges given to
private corporations under existing laws." Without PD 198, LWDs would have no corporate powers. Thus, PD
198 constitutes the special enabling charter of LWDs. The ineluctable conclusion is that LWDs are
government-owned and controlled corporations with a special charter.
The phrase "government-owned and controlled corporations with original charters" means GOCCs created
under special laws and not under the general incorporation law. There is no difference between the term
"original charters" and "special charters." The Court clarified this in National Service Corporation v.
NLRC15 by citing the deliberations in the Constitutional Commission, as follows:
THE PRESIDING OFFICER (Mr. Trenas). The session is resumed.
Commissioner Romulo is recognized.
MR. ROMULO. Mr. Presiding Officer, I am amending my original proposed amendment to now
read as follows: "including government-owned or controlled corporations WITH ORIGINAL
CHARTERS." The purpose of this amendment is to indicate that government corporations such as
the GSIS and SSS, which have original charters, fall within the ambit of the civil service. However,
corporations which are subsidiaries of these chartered agencies such as the Philippine Airlines,
Manila Hotel and Hyatt are excluded from the coverage of the civil service.
THE PRESIDING OFFICER (Mr. Trenas). What does the Committee say?

(b) A description of the boundary of the district. In the case of a city or municipality, such boundary
may include all lands within the city or municipality. A district may include one or more
municipalities, cities or provinces, or portions thereof.
(c) A statement completely transferring any and all waterworks and/or sewerage facilities
managed, operated by or under the control of such city, municipality or province to such district
upon the filing of resolution forming the district.
(d) A statement identifying the purpose for which the district is formed, which shall include those
purposes outlined in Section 5 above.
(e) The names of the initial directors of the district with the date of expiration of term of office for
each.
(f) A statement that the district may only be dissolved on the grounds and under the conditions set
forth in Section 44 of this Title.

MR. FOZ. Just one question, Mr. Presiding Officer. By the term "original charters," what
exactly do we mean?
MR. ROMULO. We mean that they were created by law, by an act of Congress, or by special
law.
MR. FOZ. And not under the general corporation law.
MR. ROMULO. That is correct. Mr. Presiding Officer.
MR. FOZ. With that understanding and clarification, the Committee accepts the amendment.
MR. NATIVIDAD. Mr. Presiding Officer, so those created by the general corporation law are out.

MR. ROMULO. That is correct. (Emphasis supplied)

Again, in Davao City Water District v. Civil Service Commission,16 the Court reiterated the meaning of the
phrase "government-owned and controlled corporations with original charters" in this wise:
By "government-owned or controlled corporation with original charter," We mean
government owned or controlled corporation created by a special law and not under the
Corporation Code of the Philippines. Thus, in the case of Lumanta v. NLRC (G.R. No. 82819,
February 8, 1989, 170 SCRA 79, 82), We held:
"The Court, in National Service Corporation (NASECO) v. National Labor
Relations Commission, G.R. No. 69870, promulgated on 29 November 1988,
quoting extensively from the deliberations of the 1986 Constitutional
Commission in respect of the intent and meaning of the new phrase with
original charter, in effect held that government-owned and controlled
corporations with original charter refer to corporations chartered by special law
as distinguished from corporations organized under our general incorporation
statute the Corporation Code. In NASECO, the company involved had been
organized under the general incorporation statute and was a subsidiary of the National
Investment Development Corporation (NIDC) which in turn was a subsidiary of the
Philippine National Bank, a bank chartered by a special statute. Thus, governmentowned or controlled corporations like NASECO are effectively, excluded from the scope
of the Civil Service." (Emphasis supplied)
Petitioners contention that the Sangguniang Bayan resolution creates the LWDs assumes that the
Sangguniang Bayan has the power to create corporations. This is a patently baseless assumption. The Local
Government Code17 does not vest in the Sangguniang Bayan the power to create corporations. 18 What the
Local Government Code empowers the Sangguniang Bayan to do is to provide for the establishment of a
waterworks system "subject to existing laws." Thus, Section 447(5)(vii) of the Local Government Code
provides:
SECTION 447. Powers, Duties, Functions and Compensation. (a) The sangguniang bayan, as
the legislative body of the municipality, shall enact ordinances, approve resolutions and
appropriate funds for the general welfare of the municipality and its inhabitants pursuant to Section
16 of this Code and in the proper exercise of the corporate powers of the municipality as provided
for under Section 22 of this Code, and shall:
xxx
(vii) Subject to existing laws, provide for the establishment, operation, maintenance,
and repair of an efficient waterworks system to supply water for the inhabitants;
regulate the construction, maintenance, repair and use of hydrants, pumps, cisterns
and reservoirs; protect the purity and quantity of the water supply of the municipality
and, for this purpose, extend the coverage of appropriate ordinances over all territory
within the drainage area of said water supply and within one hundred (100) meters of
the reservoir, conduit, canal, aqueduct, pumping station, or watershed used in
connection with the water service; and regulate the consumption, use or wastage of
water;
x x x. (Emphasis supplied)
The Sangguniang Bayan may establish a waterworks system only in accordance with the provisions of PD
198. The Sangguniang Bayan has no power to create a corporate entity that will operate its waterworks
system. However, the Sangguniang Bayan may avail of existing enabling laws, like PD 198, to form and
incorporate a water district. Besides, even assuming for the sake of argument that the Sangguniang Bayan
has the power to create corporations, the LWDs would remain government-owned or controlled corporations
subject to COAs audit jurisdiction. The resolution of the Sangguniang Bayan would constitute an LWDs
special charter, making the LWD a government-owned and controlled corporation with an original charter. In
any event, the Court has already ruled in Baguio Water District v. Trajano19 that the Sangguniang Bayan
resolution is not the special charter of LWDs, thus:

While it is true that a resolution of a local sanggunian is still necessary for the final creation of a
district, this Court is of the opinion that said resolution cannot be considered as its charter, the
same being intended only to implement the provisions of said decree.
Petitioner further contends that a law must create directly and explicitly a GOCC in order that it may have an
original charter. In short, petitioner argues that one special law cannot serve as enabling law for several
GOCCs but only for one GOCC. Section 16, Article XII of the Constitution mandates that "Congress shall not,
except by general law,"20 provide for the creation of private corporations. Thus, the Constitution prohibits one
special law to create one private corporation, requiring instead a "general law" to create private corporations.
In contrast, the same Section 16 states that "Government-owned or controlled corporations may be created or
established by special charters." Thus, the Constitution permits Congress to create a GOCC with a special
charter. There is, however, no prohibition on Congress to create several GOCCs of the same class under one
special enabling charter.
The rationale behind the prohibition on private corporations having special charters does not apply to GOCCs.
There is no danger of creating special privileges to certain individuals, families or groups if there is one special
law creating each GOCC. Certainly, such danger will not exist whether one special law creates one GOCC, or
one special enabling law creates several GOCCs. Thus, Congress may create GOCCs either by special
charters specific to each GOCC, or by one special enabling charter applicable to a class of GOCCs, like PD
198 which applies only to LWDs.
Petitioner also contends that LWDs are private corporations because Section 6 of PD 198 21 declares that
LWDs "shall be considered quasi-public" in nature. Petitioners rationale is that only private corporations may
be deemed "quasi-public" and not public corporations. Put differently, petitioner rationalizes that a public
corporation cannot be deemed "quasi-public" because such corporation is already public. Petitioner concludes
that the term "quasi-public" can only apply to private corporations. Petitioners argument is inconsequential.
Petitioner forgets that the constitutional criterion on the exercise of COAs audit jurisdiction depends on the
governments ownership or control of a corporation. The nature of the corporation, whether it is private, quasipublic, or public is immaterial.
The Constitution vests in the COA audit jurisdiction over "government-owned and controlled corporations with
original charters," as well as "government-owned or controlled corporations" without original charters. GOCCs
with original charters are subject to COA pre-audit, while GOCCs without original charters are subject to COA
post-audit. GOCCs without original charters refer to corporations created under the Corporation Code but are
owned or controlled by the government. The nature or purpose of the corporation is not material in determining
COAs audit jurisdiction. Neither is the manner of creation of a corporation, whether under a general or special
law.
The determining factor of COAs audit jurisdiction is government ownership or control of the corporation.
InPhilippine Veterans Bank Employees Union-NUBE v. Philippine Veterans Bank,22 the Court even ruled
that the criterion of ownership and control is more important than the issue of original charter, thus:
This point is important because the Constitution provides in its Article IX-B, Section 2(1) that "the
Civil Service embraces all branches, subdivisions, instrumentalities, and agencies of the
Government, including government-owned or controlled corporations with original charters." As
the Bank is not owned or controlled by the Government although it does have an original
charter in the form of R.A. No. 3518,23 it clearly does not fall under the Civil Service and
should be regarded as an ordinary commercial corporation. Section 28 of the said law so
provides. The consequence is that the relations of the Bank with its employees should be
governed by the labor laws, under which in fact they have already been paid some of their claims.
(Emphasis supplied)
Certainly, the government owns and controls LWDs. The government organizes LWDs in accordance with a
specific law, PD 198. There is no private party involved as co-owner in the creation of an LWD. Just prior to the
creation of LWDs, the national or local government owns and controls all their assets. The government
controls LWDs because under PD 198 the municipal or city mayor, or the provincial governor, appoints all the
board directors of an LWD for a fixed term of six years.24 The board directors of LWDs are not co-owners of the
LWDs. LWDs have no private stockholders or members. The board directors and other personnel of LWDs are
government employees subject to civil service laws25 and anti-graft laws.26

While Section 8 of PD 198 states that "[N]o public official shall serve as director" of an LWD, it only means that
the appointees to the board of directors of LWDs shall come from the private sector. Once such private sector
representatives assume office as directors, they become public officials governed by the civil service law and
anti-graft laws. Otherwise, Section 8 of PD 198 would contravene Section 2(1), Article IX-B of the Constitution
declaring that the civil service includes "government-owned or controlled corporations with original charters."

MR. OPLE: I propose to add a new section on line 9, page 2 of the amended committee report
which reads: NO LAW SHALL BE PASSED EXEMPTING ANY ENTITY OF THE GOVERNMENT
OR ITS SUBSIDIARY IN ANY GUISE WHATEVER, OR ANY INVESTMENTS OF PUBLIC FUNDS,
FROM THE JURISDICTION OF THE COMMISSION ON AUDIT.
May I explain my reasons on record.

If LWDs are neither GOCCs with original charters nor GOCCs without original charters, then they would fall
under the term "agencies or instrumentalities" of the government and thus still subject to COAs audit
jurisdiction. However, the stark and undeniable fact is that the government owns LWDs. Section 45 27 of PD
198 recognizes government ownership of LWDs when Section 45 states that the board of directors may
dissolve an LWD only on the condition that "another public entity has acquired the assets of the district and
has assumed all obligations and liabilities attached thereto." The implication is clear that an LWD is a public
and not a private entity.
Petitioner does not allege that some entity other than the government owns or controls LWDs. Instead,
petitioner advances the theory that the "Water Districts owner is the District itself." 28 Assuming for the sake of
argument that an LWD is "self-owned,"29 as petitioner describes an LWD, the government in any event controls
all LWDs. First, government officials appoint all LWD directors to a fixed term of office. Second, any per
diem of LWD directors in excess of P50 is subject to the approval of the Local Water Utilities Administration,
and directors can receive no other compensation for their services to the LWD. 30 Third, the Local Water
Utilities Administration can require LWDs to merge or consolidate their facilities or operations. 31 This element
of government control subjects LWDs to COAs audit jurisdiction.
Petitioner argues that upon the enactment of PD 198, LWDs became private entities through the transfer of
ownership of water facilities from local government units to their respective water districts as mandated by PD
198. Petitioner is grasping at straws. Privatization involves the transfer of government assets to a private
entity. Petitioner concedes that the owner of the assets transferred under Section 6 (c) of PD 198 is no other
than the LWD itself.32 The transfer of assets mandated by PD 198 is a transfer of the water systems facilities
"managed, operated by or under the control of such city, municipality or province to such (water) district." 33 In
short, the transfer is from one government entity to another government entity. PD 198 is bereft of any
indication that the transfer is to privatize the operation and control of water systems.
Finally, petitioner claims that even on the assumption that the government owns and controls LWDs, Section
20 of PD 198 prevents COA from auditing LWDs. 34 Section 20 of PD 198 provides:
Sec. 20. System of Business Administration. The Board shall, as soon as practicable, prescribe
and define by resolution a system of business administration and accounting for the district, which
shall be patterned upon and conform to the standards established by the Administration. Auditing
shall be performed by a certified public accountant not in the government service. The
Administration may, however, conduct annual audits of the fiscal operations of the district to be
performed by an auditor retained by the Administration. Expenses incurred in connection therewith
shall be borne equally by the water district concerned and the Administration. 35 (Emphasis
supplied)

We know that a number of entities of the government took advantage of the absence of a
legislature in the past to obtain presidential decrees exempting themselves from the
jurisdiction of the Commission on Audit, one notable example of which is the Philippine
National Oil Company which is really an empty shell. It is a holding corporation by itself, and strictly
on its own account. Its funds were not very impressive in quantity but underneath that shell there
were billions of pesos in a multiplicity of companies. The PNOC the empty shell under a
presidential decree was covered by the jurisdiction of the Commission on Audit, but the billions of
pesos invested in different corporations underneath it were exempted from the coverage of the
Commission on Audit.
Another example is the United Coconut Planters Bank. The Commission on Audit has determined
that the coconut levy is a form of taxation; and that, therefore, these funds attributed to the shares
of 1,400,000 coconut farmers are, in effect, public funds. And that was, I think, the basis of the
PCGG in undertaking that last major sequestration of up to 94 percent of all the shares in the
United Coconut Planters Bank. The charter of the UCPB, through a presidential decree, exempted
it from the jurisdiction of the Commission on Audit, it being a private organization.
So these are the fetuses of future abuse that we are slaying right here with this additional section.
May I repeat the amendment, Madam President: NO LAW SHALL BE PASSED EXEMPTING ANY
ENTITY OF THE GOVERNMENT OR ITS SUBSIDIARY IN ANY GUISE WHATEVER, OR ANY
INVESTMENTS OF PUBLIC FUNDS, FROM THE JURISDICTION OF THE COMMISSION ON
AUDIT.
THE PRESIDENT: May we know the position of the Committee on the proposed amendment of
Commissioner Ople?
MR. JAMIR: If the honorable Commissioner will change the number of the section to 4, we will
accept the amendment.
MR. OPLE: Gladly, Madam President. Thank you.
MR. DE CASTRO: Madam President, point of inquiry on the new amendment.

Petitioner argues that PD 198 expressly prohibits COA auditors, or any government auditor for that matter,
from auditing LWDs. Petitioner asserts that this is the import of the second sentence of Section 20 of PD 198
when it states that "[A]uditing shall be performed by a certified public accountant not in the government
service."36

THE PRESIDENT: Commissioner de Castro is recognized.

PD 198 cannot prevail over the Constitution. No amount of clever legislation can exclude GOCCs like LWDs
from COAs audit jurisdiction. Section 3, Article IX-C of the Constitution outlaws any scheme or devise to
escape COAs audit jurisdiction, thus:

Is that not included in Section 2 (1) where it states: "(c) government-owned or controlled
corporations and their subsidiaries"? So that if these government-owned and controlled
corporations and their subsidiaries are subjected to the audit of the COA, any law exempting
certain government corporations or subsidiaries will be already unconstitutional.

Sec. 3. 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. (Emphasis supplied)
The framers of the Constitution added Section 3, Article IX-D of the Constitution precisely to annul provisions
of Presidential Decrees, like that of Section 20 of PD 198, that exempt GOCCs from COA audit. The following
exchange in the deliberations of the Constitutional Commission elucidates this intent of the framers:

MR. DE CASTRO: Thank you. May I just ask a few questions of Commissioner Ople.

So I believe, Madam President, that the proposed amendment is unnecessary.

MR. MONSOD: Madam President, since this has been accepted, we would like to reply to the
point raised by Commissioner de Castro.

THE PRESIDENT: Commissioner Monsod will please proceed.

MR. MONSOD: I think the Commissioner is trying to avoid the situation that happened in the past,
because the same provision was in the 1973 Constitution and yet somehow a law or a decree was
passed where certain institutions were exempted from audit. We are just reaffirming, emphasizing,
the role of the Commission on Audit so that this problem will never arise in the future. 37
There is an irreconcilable conflict between the second sentence of 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. We rule that the second sentence of Section 20 of PD 198 is unconstitutional since it
violates Sections 2(1) and 3, Article IX-D of the Constitution.
On the Legality of COAs
Practice of Charging Auditing Fees
Petitioner claims that the auditing fees COA charges LWDs for audit services violate the prohibition in Section
18 of RA 6758,38 which states:
Sec. 18. Additional Compensation of Commission on Audit Personnel and of other Agencies. In
order to preserve the independence and integrity of the Commission on Audit (COA), its officials
and employees are prohibited from receiving salaries, honoraria, bonuses, allowances or other
emoluments from any government entity, local government unit, government-owned or controlled
corporations, and government financial institutions, except those compensation paid directly by
COA out of its appropriations andcontributions.
Government entities, including government-owned or controlled corporations including financial
institutions and local government units are hereby prohibited from assessing or billing other
government entities, including government-owned or controlled corporations including financial
institutions or local government units for services rendered by its officials and employees as part of
their regular functions for purposes of paying additional compensation to said officials and
employees. (Emphasis supplied)
Claiming that Section 18 is "absolute and leaves no doubt," 39 petitioner asks COA to discontinue its practice of
charging auditing fees to LWDs since such practice allegedly violates the law.
Petitioners claim has no basis.
Section 18 of RA 6758 prohibits COA personnel from receiving any kind of compensation from any
government entity except "compensation paid directly by COA out of its appropriations and
contributions." Thus, RA 6758 itself recognizes an exception to the statutory ban on COA personnel receiving
compensation from GOCCs. In Tejada v. Domingo,40 the Court declared:
There can be no question that Section 18 of Republic Act No. 6758 is designed to strengthen
further the policy x x x to preserve the independence and integrity of the COA, by explicitly
PROHIBITING: (1) COA officials and employees from receiving salaries, honoraria, bonuses,
allowances or other emoluments from any government entity, local government unit, GOCCs and
government financial institutions, except such compensation paid directly by the COA out of
its appropriations and contributions, and (2) government entities, including GOCCs,
government financial institutions and local government units from assessing or billing other
government entities, GOCCs, government financial institutions or local government units for
services rendered by the latters officials and employees as part of their regular functions for
purposes of paying additional compensation to said officials and employees.
xxx
The first aspect of the strategy is directed to the COA itself, while the second aspect is addressed
directly against the GOCCs and government financial institutions. Under the first, COA personnel
assigned to auditing units of GOCCs or government financial institutions can receive only

such salaries, allowances or fringe benefits paid directly by the COA out of its
appropriations and contributions. The contributions referred to are the cost of audit
services earlier mentioned which cannot include the extra emoluments or benefits now
claimed by petitioners. The COA is further barred from assessing or billing GOCCs and
government financial institutions for services rendered by its personnel as part of their regular audit
functions for purposes of paying additional compensation to such personnel. x x x. (Emphasis
supplied)
In Tejada, the Court explained the meaning of the word "contributions" in Section 18 of RA 6758, which
allows COA to charge GOCCs the cost of its audit services:
x x x the contributions from the GOCCs are limited to the cost of audit services which are based on
the actual cost of the audit function in the corporation concerned plus a reasonable rate to cover
overhead expenses. The actual audit cost shall include personnel services, maintenance and other
operating expenses, depreciation on capital and equipment and out-of-pocket expenses. In respect
to the allowances and fringe benefits granted by the GOCCs to the COA personnel assigned to the
formers auditing units, the same shall be directly defrayed by COA from its own appropriations x x
x. 41
COA may charge GOCCs "actual audit cost" but GOCCs must pay the same directly to COA and not to COA
auditors. Petitioner has not alleged that COA charges LWDs auditing fees in excess of COAs "actual audit
cost." Neither has petitioner alleged that the auditing fees are paid by LWDs directly to individual COA
auditors. Thus, petitioners contention must fail.
WHEREFORE, the Resolution of the Commission on Audit dated 3 January 2000 and the Decision dated 30
January 2001 denying petitioners Motion for Reconsideration are AFFIRMED. The second sentence of
Section 20 of Presidential Decree No. 198 is declared VOID for being inconsistent with Sections 2 (1) and 3,
Article IX-D of the Constitution. No costs.
SO ORDERED.

ANTE V. LIBAN,

G.R. No. 175352

Petitioners Dante V. Liban, Reynaldo M. Bernardo, and Salvador M. Viari (petitioners) filed with this Court

EYNALDO M. BERNARDO,

d SALVADOR M. VIARI,

Present:

a Petition to Declare Richard J. Gordon as Having Forfeited His Seat in the Senate. Petitioners are officers of
the Board of Directors of the Quezon City Red Cross Chapter while respondent is Chairman of the Philippine

titioners,
PUNO, C.J.,

National Red Cross (PNRC) Board of Governors.

QUISUMBING,
YNARES-SANTIAGO,
CARPIO,

During respondents incumbency as a member of the Senate of the Philippines, [1] he was elected Chairman of
the PNRC during the 23 February 2006 meeting of the PNRC Board of Governors. Petitioners allege that by

CORONA,
CARPIO MORALES,

ersus -

CHICO-NAZARIO,

Senate as provided in Section 13, Article VI of the Constitution, which reads:

VELASCO, JR.,

SEC. 13. No Senator or Member of the House of Representatives may hold any other
office or employment in the Government, or any subdivision, agency, or instrumentality
thereof, including government-owned or controlled corporations or their subsidiaries,
during his term without forfeiting his seat. Neither shall he be appointed to any office
which may have been created or the emoluments thereof increased during the term for
which he was elected.
Petitioners cite Camporedondo v. NLRC,[2] which held that the PNRC is a government-owned or controlled
corporation. Petitioners claim that in accepting and holding the position of Chairman of the PNRC Board of
Governors, respondent has automatically forfeited his seat in the Senate, pursuant to Flores v. Drilon,[3] which
held that incumbent national legislators lose their elective posts upon their appointment to another government
office.

NACHURA,
LEONARDO-DE CASTRO,
BRION,
PERALTA, and
BERSAMIN, JJ.

In his Comment, respondent asserts that petitioners have no standing to file this petition which appears to be

CHARD J. GORDON,

espondent.

accepting the chairmanship of the PNRC Board of Governors, respondent has ceased to be a member of the

Promulgated:
July 15, 2009

an action for quo warranto, since the petition alleges that respondent committed an act which, by provision of
law, constitutes a ground for forfeiture of his public office. Petitioners do not claim to be entitled to the Senate

x--------------------------------------------------x
office of respondent. Under Section 5, Rule 66 of the Rules of Civil Procedure, only a person claiming to be
entitled to a public office usurped or unlawfully held by another may bring an action for quo warranto in his own
DECISION
name. If the petition is one for quo warranto, it is already barred by prescription since under Section 11, Rule
66 of the Rules of Civil Procedure, the action should be commenced within one year after the cause of the
CARPIO, J.:
public officers forfeiture of office. In this case, respondent has been working as a Red Cross volunteer for the
past 40 years. Respondent was already Chairman of the PNRC Board of Governors when he was elected
The Case
Senator in May 2004, having been elected Chairman in 2003 and re-elected in 2005.

This is a petition to declare Senator Richard J. Gordon (respondent) as having forfeited his seat in the Senate.

Respondent contends that even if the present petition is treated as a taxpayers suit, petitioners cannot be
allowed to raise a constitutional question in the absence of any claim that they suffered some actual damage

The Facts

or threatened injury as a result of the allegedly illegal act of respondent. Furthermore, taxpayers are allowed to
sue only when there is a claim of illegal disbursement of public funds, or that public money is being diverted to

any improper purpose, or where petitioners seek to restrain respondent from enforcing an invalid law that

We find the petition without merit.

results in wastage of public funds.

Petitioners Have No Standing to File this Petition
Respondent also maintains that if the petition is treated as one for declaratory relief, this Court would have no
jurisdiction since original jurisdiction for declaratory relief lies with the Regional Trial Court.

Respondent further insists that the PNRC is not a government-owned or controlled corporation and that the
prohibition under Section 13, Article VI of the Constitution does not apply in the present case since volunteer
service to the PNRC is neither an office nor an employment.

In their Reply, petitioners claim that their petition is neither an action for quo warranto nor an action for

A careful reading of the petition reveals that it is an action for quo warranto. Section 1, Rule 66 of the Rules of
Court provides:

Section 1. Action by Government against individuals. An action for the usurpation of

a public office, position or franchise may be commenced by a verified petition
brought in the name of the Republic of the Philippines against:
(a) A person who usurps, intrudes into, or unlawfully holds or exercises a public office,
position or franchise;
(b) A public officer who does or suffers an act which by provision of law, constitutes a ground for the
forfeiture of his office; or
(c) An association which acts as a corporation within the Philippines without being legally incorporated or
without lawful authority so to act. (Emphasis supplied)

declaratory relief. Petitioners maintain that the present petition is a taxpayers suit questioning the unlawful
disbursement of funds, considering that respondent has been drawing his salaries and other compensation as
a Senator even if he is no longer entitled to his office. Petitioners point out that this Court has jurisdiction over
this petition since it involves a legal or constitutional issue which is of transcendental importance.
The Issues

Petitioners raise the following issues:

1. Whether the Philippine National Red Cross (PNRC) is a government- owned or

controlled corporation;
2. Whether Section 13, Article VI of the Philippine Constitution applies to the case of
respondent who is Chairman of the PNRC and at the same time a Member of the
Senate;
3.

Whether respondent should be automatically removed as a Senator pursuant

to Section 13, Article VI of the Philippine Constitution; and

4.

Whether petitioners may legally institute this petition against respondent. [4]

Petitioners allege in their petition that:

4. Respondent became the Chairman of the PNRC when he was elected as such
during the First Regular Luncheon-Meeting of the Board of Governors of the PNRC
held on February 23, 2006, the minutes of which is hereto attached and made integral
part hereof as Annex A.
5. Respondent was elected as Chairman of the PNRC Board of Governors, during his
incumbency as a Member of the House of Senate of the Congress of the Philippines,
having been elected as such during the national elections last May 2004.
6. Since his election as Chairman of the PNRC Board of Governors, which position he duly accepted,
respondent has been exercising the powers and discharging the functions and duties of said office, despite the
fact that he is still a senator.
7. It is the respectful submission of the petitioner[s] that by accepting the chairmanship of the Board of
Governors of the PNRC, respondent has ceased to be a Member of the House of Senate as provided
in Section 13, Article VI of the Philippine Constitution, x x x
xxxx
10. It is respectfully submitted that in accepting the position of Chairman of the Board of Governors of
the PNRC on February 23, 2006, respondent has automatically forfeited his seat in the House of Senate
and, therefore, has long ceased to be a Senator, pursuant to the ruling of this Honorable Court in the case
of FLORES, ET AL. VS. DRILON AND GORDON, G.R. No. 104732, x x x
11. Despite the fact that he is no longer a senator, respondent continues to act as such and still performs the
powers, functions and duties of a senator, contrary to the constitution, law and jurisprudence.
12. Unless restrained, therefore, respondent will continue to falsely act and represent himself as a senator or
member of the House of Senate, collecting the salaries, emoluments and other compensations, benefits and
privileges appertaining and due only to the legitimate senators, to the damage, great and irreparable injury of
the Government and the Filipino people.[5] (Emphasis supplied)

The substantial issue boils down to whether the office of the PNRC Chairman is a government office or an
office in a government-owned or controlled corporation for purposes of the prohibition in Section 13, Article VI

Thus, petitioners are alleging that by accepting the position of Chairman of the PNRC Board of Governors,

of the Constitution.

respondent has automatically forfeited his seat in the Senate. In short, petitioners filed an action for usurpation
of public office against respondent, a public officer who allegedly committed an act which constitutes a ground
The Courts Ruling

for the forfeiture of his public office. Clearly, such an action is for quo warranto, specifically under Section 1(b),
Rule 66 of the Rules of Court.

Quo warranto is generally commenced by the Government as the proper party plaintiff. However, under
Section 5, Rule 66 of the Rules of Court, an individual may commence such an action if he claims to be
entitled to the public office allegedly usurped by another, in which case he can bring the action in his own
name. The person instituting quo warranto proceedings in his own behalf must claim and be able to show that
he is entitled to the office in dispute, otherwise the action may be dismissed at any stage. [6] In the present
case, petitioners do not claim to be entitled to the Senate office of respondent. Clearly, petitioners have no
standing to file the present petition.
Even if the Court disregards the infirmities of the petition and treats it as a taxpayers suit, the petition would
still fail on the merits.

PNRC is a Private Organization Performing Public Functions

On 22 March 1947, President Manuel A. Roxas signed Republic Act No. 95,[7] otherwise known as the PNRC
Charter. The PNRC is a non-profit, donor-funded, voluntary, humanitarian organization, whose mission is to
bring timely, effective, and compassionate humanitarian assistance for the most vulnerable without
consideration of nationality, race, religion, gender, social status, or political affiliation. [8] The PNRC provides six
major services: Blood Services, Disaster Management, Safety Services, Community Health and Nursing,
Social Services and Voluntary Service.[9]

The Republic of the Philippines, adhering to the Geneva Conventions, established the PNRC as a voluntary
organization for the purpose contemplated in the Geneva Convention of 27 July 1929. [10] The Whereas clauses
of the PNRC Charter read:

WHEREAS, there was developed at Geneva, Switzerland, on August 22, 1864, a

convention by which the nations of the world were invited to join together in
diminishing, so far lies within their power, the evils inherent in war;
WHEREAS, more than sixty nations of the world have ratified or adhered to the
subsequent revision of said convention, namely the Convention of Geneva of July 29
[sic], 1929 for the Amelioration of the Condition of the Wounded and Sick of Armies in
the Field (referred to in this Charter as the Geneva Red Cross Convention);
WHEREAS, the Geneva Red Cross Convention envisages the establishment in each country of a
voluntary organization to assist in caring for the wounded and sick of the armed forces and to
furnish supplies for that purpose;
WHEREAS, the Republic of the Philippines became an independent nation on
July 4, 1946 and proclaimed its adherence to the Geneva Red Cross Convention
on February 14, 1947, and by that action indicated its desire to participate with
the nations of the world in mitigating the suffering caused by war and to
establish in the Philippines a voluntary organization for that purpose as
contemplated by the Geneva Red Cross Convention;
WHEREAS, there existed in the Philippines since 1917 a Charter of the American
National Red Cross which must be terminated in view of the independence of the
Philippines; and
WHEREAS, the volunteer organizations established in the other countries which have
ratified or adhered to the Geneva Red Cross Convention assist in promoting the health
and welfare of their people in peace and in war, and through their mutual assistance
and cooperation directly and through their international organizations promote better
understanding and sympathy among the peoples of the world. (Emphasis supplied)

The PNRC is a member National Society of the International Red Cross and Red Crescent Movement
(Movement), which is composed of the International Committee of the Red Cross (ICRC), the International
Federation of Red Cross and Red Crescent Societies (International Federation), and the National Red Cross

and Red Crescent Societies (National Societies). The Movement is united and guided by its seven
Fundamental Principles:

1. HUMANITY The International Red Cross and Red Crescent Movement, born of a
desire to bring assistance without discrimination to the wounded on the battlefield,
endeavors, in its international and national capacity, to prevent and alleviate
human suffering wherever it may be found. Its purpose is to protect life and health
and to ensure respect for the human being. It promotes mutual understanding,
friendship, cooperation and lasting peace amongst all peoples.
2. IMPARTIALITY It makes no discrimination as to nationality, race, religious beliefs, class or political opinions.
It endeavors to relieve the suffering of individuals, being guided solely by their needs, and to give priority to the
most urgent cases of distress.
3. NEUTRALITY In order to continue to enjoy the confidence of all, the Movement
may not take sides in hostilities or engage at any time in controversies of a
political, racial, religious or ideological nature.
4. INDEPENDENCE The Movement is independent. The National Societies, while
auxiliaries in the humanitarian services of their governments and subject to
the laws of their respective countries, must always maintain their autonomy
so that they may be able at all times to act in accordance with the principles
of the Movement.
5. VOLUNTARY SERVICE It is a voluntary relief movement not prompted in any
manner by desire for gain.
6. UNITY There can be only one Red Cross or one Red Crescent Society in any one country. It must be open
to all. It must carry on its humanitarian work throughout its territory.
7. UNIVERSALITY The International Red Cross and Red Crescent Movement, in which all Societies have
equal status and share equal responsibilities and duties in helping each other, is worldwide. (Emphasis
supplied)

The Fundamental Principles provide a universal standard of reference for all members of the Movement. The
PNRC, as a member National Society of the Movement, has the duty to uphold the Fundamental Principles
and ideals of the Movement. In order to be recognized as a National Society, the PNRC has to
be autonomous and must operate in conformity with the Fundamental Principles of the Movement. [11]
The reason for this autonomy is fundamental. To be accepted by warring belligerents as neutral workers
during international or internal armed conflicts, the PNRC volunteers must not be seen as belonging to any
side of the armed conflict. In the Philippines where there is a communist insurgency and a Muslim separatist
rebellion, the PNRC cannot be seen as government-owned or controlled, and neither can the PNRC
volunteers be identified as government personnel or as instruments of government policy. Otherwise, the
insurgents or separatists will treat PNRC volunteers as enemies when the volunteers tend to the wounded in
the battlefield or the displaced civilians in conflict areas.

Thus, the PNRC must not only be, but must also be seen to be, autonomous, neutral and independent in order
to conduct its activities in accordance with the Fundamental Principles. The PNRC must not appear to be an
instrument or agency that implements government policy; otherwise, it cannot merit the trust of all and cannot

effectively carry out its mission as a National Red Cross Society. [12] It is imperative that the PNRC must be

whom are private sector members of the PNRC. The PNRC Chairman is not appointed by the President or by

autonomous, neutral, and independent in relation to the State.

any subordinate government official.

To ensure and maintain its autonomy, neutrality, and independence, the PNRC cannot be owned or controlled
by the government. Indeed, the Philippine government does not own the PNRC. The PNRC does not have
government assets and does not receive any appropriation from the Philippine Congress. [13] The PNRC is

Under Section 16, Article VII of the Constitution, [14] the President appoints all officials and employees in the
Executive branch whose appointments are vested in the President by the Constitution or by law. The President
also appoints those whose appointments are not otherwise provided by law. Under this Section 16, the law
may also authorize the heads of departments, agencies, commissions, or boards to appoint officers lower in
rank than such heads of departments, agencies, commissions or boards. [15] In Rufino v. Endriga,[16] the Court
explained appointments under Section 16 in this wise:

financed primarily by contributions from private individuals and private entities obtained through solicitation
Under Section 16, Article VII of the 1987 Constitution, the President appoints three
groups of officers. The first group refers to the heads of the Executive departments,
ambassadors, other public ministers and consuls, officers of the armed forces from the
rank of colonel or naval captain, and other officers whose appointments are vested in
the President by the Constitution. The second group refers to those whom the
President may be authorized by law to appoint. The third group refers to all other
officers of the Government whose appointments are not otherwise provided by law.

campaigns organized by its Board of Governors, as provided under Section 11 of the PNRC Charter:

SECTION 11. As a national voluntary organization, the Philippine National Red Cross
shall be financed primarily by contributions obtained through solicitation
campaigns throughout the year which shall be organized by the Board of
Governors and conducted by the Chapters in their respective jurisdictions. These
fund raising campaigns shall be conducted independently of other fund drives by other
organizations. (Emphasis supplied)

Under the same Section 16, there is a fourth group of lower-ranked officers whose appointments Congress
may by law vest in the heads of departments, agencies, commissions, or boards. x x x
xxx

members of the PNRC Board of Governors are appointed by the President of the Philippines. Thus,

In a department in the Executive branch, the head is the Secretary. The law may not authorize the
Undersecretary, acting as such Undersecretary, to appoint lower-ranked officers in the Executive department.
In an agency, the power is vested in the head of the agency for it would be preposterous to vest it in the
agency itself. In a commission, the head is the chairperson of the commission. In a board, the head is also the
chairperson of the board. In the last three situations, the law may not also authorize officers other than the
heads of the agency, commission, or board to appoint lower-ranked officers.

twenty-four members, or four-fifths (4/5), of the PNRC Board of Governors are not appointed by the

xxx

President. Section 6 of the PNRC Charter, as amended, provides:

The Constitution authorizes Congress to vest the power to appoint lower-ranked officers specifically in the
heads of the specified offices, and in no other person. The word heads refers to the chairpersons of the
commissions or boards and not to their members, for several reasons.

The government does not control the PNRC. Under the PNRC Charter, as amended, only six of the thirty

SECTION 6. The governing powers and authority shall be vested in a Board of

Governors composed of thirty members, six of whom shall be appointed by the
President of the Philippines, eighteen shall be elected by chapter delegates in biennial
conventions and the remaining six shall be selected by the twenty-four members of the
Board already chosen. x x x.

The President does not appoint the Chairman of the PNRC. Neither does the head of any department, agency,
commission or board appoint the PNRC Chairman. Thus, the PNRC Chairman is not an official or employee of

Thus, of the twenty-four members of the PNRC Board, eighteen are elected by the chapter delegates of the
PNRC, and six are elected by the twenty-four members already chosena select group where the private sector
members have three-fourths majority. Clearly, an overwhelming majority of four-fifths of the PNRC Board
are elected or chosen by the private sector members of the PNRC.

the Executive branch since his appointment does not fall under Section 16, Article VII of the
Constitution. Certainly, the PNRC Chairman is not an official or employee of the Judiciary or Legislature. This
leads us to the obvious conclusion that the PNRC Chairman is not an official or employee of the Philippine
Government. Not being a government official or employee, the PNRC Chairman, as such, does not hold
a government office or employment.

The PNRC Board of Governors, which exercises all corporate powers of the PNRC, elects the PNRC
Chairman and all other officers of the PNRC. The incumbent Chairman of PNRC, respondent Senator Gordon,
was elected, as all PNRC Chairmen are elected, by a private sector-controlled PNRC Board four-fifths of

Under Section 17, Article VII of the Constitution, [17] the President exercises control over all government offices
in the Executive branch. If an office is legally not under the control of the President, then such office is
not part of the Executive branch. In Rufino v. Endriga,[18] the Court explained the Presidents power of control
over all government offices as follows:

contributing P35, P100, P300, P500 or P1,000 for the year.[20] Even foreigners, whether residents or not, can
Every government office, entity, or agency must fall under the Executive, Legislative, or
Judicial branches, or must belong to one of the independent constitutional bodies, or
must be a quasi-judicial body or local government unit. Otherwise, such government
office, entity, or agency has no legal and constitutional basis for its existence.

be members of the PNRC. Section 5 of the PNRC Charter, as amended by Presidential Decree No. 1264,
[21]

The CCP does not fall under the Legislative or Judicial branches of government. The CCP is also not one of
the independent constitutional bodies. Neither is the CCP a quasi-judicial body nor a local government unit.
Thus, the CCP must fall under the Executive branch. Under the Revised Administrative Code of 1987, any
agency not placed by law or order creating them under any specific department falls under the Office of the
President.
Since the President exercises control over all the executive departments, bureaus, and offices, the President
necessarily exercises control over the CCP which is an office in the Executive branch. In mandating that the
President shall have control of all executive . . . offices, Section 17, Article VII of the 1987 Constitution does
not exempt any executive office one performing executive functions outside of the independent constitutional
bodies from the Presidents power of control. There is no dispute that the CCP performs executive, and not
legislative, judicial, or quasi-judicial functions.
The Presidents power of control applies to the acts or decisions of all officers in the Executive branch.
This is true whether such officers are appointed by the President or by heads of departments,
agencies, commissions, or boards. The power of control means the power to revise or reverse the acts
or decisions of a subordinate officer involving the exercise of discretion.
In short, the President sits at the apex of the Executive branch, and exercises control of all the executive
departments, bureaus, and offices. There can be no instance under the Constitution where an officer of the
Executive branch is outside the control of the President. The Executive branch is unitary since there is only
one President vested with executive power exercising control over the entire Executive branch.Any office in
the Executive branch that is not under the control of the President is a lost command whose existence is
without any legal or constitutional basis. (Emphasis supplied)

reads:

SEC. 5. Membership in the Philippine National Red Cross shall be open to the entire
population in the Philippines regardless of citizenship. Any contribution to the Philippine
National Red Cross Annual Fund Campaign shall entitle the contributor to membership
for one year and said contribution shall be deductible in full for taxation purposes.

Thus, the PNRC is a privately owned, privately funded, and privately run charitable organization. The PNRC is
not a government-owned or controlled corporation.

Petitioners anchor their petition on the 1999 case of Camporedondo v. NLRC,[22] which ruled that the PNRC is
a government-owned or controlled corporation. In ruling that the PNRC is a government-owned or controlled
corporation, the simple test used was whether the corporation was created by its own special charter for the
exercise of a public function or by incorporation under the general corporation law. Since the PNRC was
created under a special charter, the Court then ruled that it is a government corporation. However,
the Camporedondo ruling failed to consider the definition of a government-owned or controlled corporation as
provided under Section 2(13) of the Introductory Provisions of the Administrative Code of 1987:

An overwhelming four-fifths majority of the PNRC Board are private sector individuals elected to the PNRC
Board by the private sector members of the PNRC. The PNRC Board exercises all corporate powers of the
PNRC. The PNRC is controlled by private sector individuals. Decisions or actions of the PNRC Board are not
reviewable by the President. The President cannot reverse or modify the decisions or actions of the
PNRC Board. Neither can the President reverse or modify the decisions or actions of the PNRC
Chairman. It is the PNRC Board that can review, reverse or modify the decisions or actions of the PNRC
Chairman. This proves again that the office of the PNRC Chairman is a private office, not a government office.
Although the State is often represented in the governing bodies of a National Society, this can be justified by
the need for proper coordination with the public authorities, and the government representatives may take part
in decision-making within a National Society. However, the freely-elected representatives of a National
Societys active members must remain in a large majority in a National Societys governing bodies. [19]

SEC. 2. General Terms Defined. x x x

(13) Government-owned or controlled corporation refers to any agency organized
as a stock or non-stock corporation, vested with functions relating to public
needs whether governmental or proprietary in nature, and owned by the
Government directly or through its instrumentalities either wholly, or where
applicable as in the case of stock corporations, to the extent of at least fifty-one
(51) percent of its capital stock: Provided, That government-owned or controlled
corporations may be further categorized by the Department of the Budget, the Civil
Service Commission, and the Commission on Audit for purposes of the exercise and
discharge of their respective powers, functions and responsibilities with respect to such
corporations.(Boldfacing and underscoring supplied)

The PNRC is not government-owned but privately owned. The vast majority of the thousands of PNRC

A government-owned or controlled corporation must be owned by the government, and in the case of a stock

members are private individuals, including students. Under the PNRC Charter, those who contribute to the

corporation, at least a majority of its capital stock must be owned by the government. In the case of a non-

annual fund campaign of the PNRC are entitled to membership in the PNRC for one year. Thus, any one

stock corporation, by analogy at least a majority of the members must be government officials holding such

between

and

65

years

of

age

can

be

PNRC

member

for

one

year

upon

membership by appointment or designation by the government. Under this criterion, and as discussed earlier,
the government does not own or control PNRC.
The PNRC Charter is Violative of the Constitutional Proscription against the Creation of Private
Corporations by Special Law

The 1935 Constitution, as amended, was in force when the PNRC was created by special charter on 22 March
1947. Section 7, Article XIV of the 1935 Constitution, as amended,reads:
SEC. 7. The Congress shall not, except by general law, provide for the
formation, organization, or regulation of private corporations, unless such corporations
are owned or controlled by the Government or any subdivision or instrumentality
thereof.

The subsequent 1973 and 1987 Constitutions contain similar provisions prohibiting Congress from creating
private corporations except by general law. Section 1 of the PNRC Charter, as amended, creates the
PNRC as a body corporate and politic, thus:
SECTION 1. There is hereby created in the Republic of the Philippines a body
corporate and politic to be the voluntary organization officially designated to
assist the Republic of the Philippines in discharging the obligations set forth in
the Geneva Conventions and to perform such other duties as are inherent upon a
National Red Cross Society. The national headquarters of this Corporation shall be
located in Metropolitan Manila. (Emphasis supplied)

The Constitution authorizes Congress to create government-owned or controlled

corporations through special charters. Since private corporations cannot have special
charters, it follows that Congress can create corporations with special charters only if
such corporations are government-owned or controlled.[24] (Emphasis supplied)

In Feliciano, the Court held that the Local Water Districts are government-owned or controlled corporations
since they exist by virtue of Presidential Decree No. 198, which constitutes their special charter. The seed
capital assets of the Local Water Districts, such as waterworks and sewerage facilities, were public property
which were managed, operated by or under the control of the city, municipality or province before the assets
were transferred to the Local Water Districts. The Local Water Districts also receive subsidies and loans from
the Local Water Utilities Administration (LWUA). In fact, under the 2009 General Appropriations Act, [25] the
LWUA has a budget amounting toP400,000,000 for its subsidy requirements. [26] There is no private capital
invested in the Local Water Districts. The capital assets and operating funds of the Local Water Districts all
come from the government, either through transfer of assets, loans, subsidies or the income from such assets
or funds.
The government also controls the Local Water Districts because the municipal or city mayor, or the provincial
governor, appoints all the board directors of the Local Water Districts. Furthermore, the board directors and
other personnel of the Local Water Districts are government employees subject to civil service laws and antigraft laws. Clearly, the Local Water Districts are considered government-owned or controlled corporations not
only because of their creation by special charter but also because the government in fact owns and
controls the Local Water Districts.
Just like the Local Water Districts, the PNRC was created through a special charter. However, unlike
the Local Water Districts, the elements of government ownership and control are clearly lacking in the
PNRC. Thus, although the PNRC is created by a special charter, it cannot be considered a government-owned
or controlled corporation in the absence of the essential elements of ownership and control by the
government. In creating the PNRC as a corporate entity, Congress was in fact creating a private corporation.
However, the constitutional prohibition against the creation of private corporations by special charters provides
no exception even for non-profit or charitable corporations. Consequently, the PNRC Charter, insofar as it
creates the PNRC as a private corporation and grants it corporate powers, [27] is void for being
unconstitutional. Thus, Sections 1,[28] 2,[29] 3,[30] 4(a),[31] 5,[32] 6,[33] 7,[34] 8,[35] 9,[36] 10,[37] 11,[38] 12,[39] and 13[40] of
the PNRC Charter, as amended, are void.

In Feliciano v. Commission on Audit,[23] the Court explained the constitutional provision prohibiting Congress
from creating private corporations in this wise:
We begin by explaining the general framework under the fundamental law. The
Constitution recognizes two classes of corporations. The first refers to private
corporations created under a general law. The second refers to government-owned or
controlled corporations created by special charters. Section 16, Article XII of the
Constitution provides:
Sec. 16. The 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.
The Constitution emphatically prohibits the creation of private corporations except by
general law applicable to all citizens. The purpose of this constitutional provision is to
ban private corporations created by special charters, which historically gave certain
individuals, families or groups special privileges denied to other citizens.
In short, Congress cannot enact a law creating a private corporation with a
special charter. Such legislation would be unconstitutional. Private corporations
may exist only under a general law. If the corporation is private, it must
necessarily exist under a general law. Stated differently, only corporations created
under a general law can qualify as private corporations. Under existing laws, the
general law is the Corporation Code, except that the Cooperative Code governs the
incorporation of cooperatives.

The other provisions[41] of the PNRC Charter remain valid as they can be considered as a recognition by the
State that the unincorporated PNRC is the local National Society of the International Red Cross and Red
Crescent Movement, and thus entitled to the benefits, exemptions and privileges set forth in the PNRC
Charter. The other provisions of the PNRC Charter implement the Philippine Governments treaty obligations
under Article 4(5) of the Statutes of the International Red Cross and Red Crescent Movement, which provides
that to be recognized as a National Society, the Society must be duly recognized by the legal government of
its country on the basis of the Geneva Conventions and of the national legislation as a voluntary aid society,
auxiliary to the public authorities in the humanitarian field.

In sum, we hold that the office of the PNRC Chairman is not a government office or an office in a governmentowned or controlled corporation for purposes of the prohibition in Section 13, Article VI of the 1987
Constitution. However, since the PNRC Charter is void insofar as it creates the PNRC as a private corporation,

the PNRC should incorporate under the Corporation Code and register with the Securities and Exchange
Commission if it wants to be a private corporation.

DANTE V. LIBAN, REYNALDO M. BERNARDO and SALVADOR

M. VIARI,

G. R. No. 175352

Petitioners,
Present:

WHEREFORE, we declare that the office of the Chairman of the Philippine National Red Cross is not a
government office or an office in a government-owned or controlled corporation for purposes of the prohibition

CORONA, C.J.,

in Section 13, Article VI of the 1987 Constitution. We also declare that Sections 1, 2, 3, 4(a), 5, 6, 7, 8, 9, 10,

CARPIO,

11, 12, and 13 of the Charter of the Philippine National Red Cross, or Republic Act No. 95, as amended by
Presidential Decree Nos. 1264 and 1643, are VOID because they create the PNRC as a private corporation or

CARPIO MORALES,

grant it corporate powers.

VELASCO, JR.,

SO ORDERED.

NACHURA,

Ruling:
Same; Same; Same; Philippine National Red Cross (PNRC) is not government-owned but privately owned.
The PNRC is not government-owned but privately owned. The vast majority of the thousands of PNRC
members are private individuals, including students. Under the PNRC Charter, those who contribute to the
annual fund campaign of the PNRC are entitled to membership in the PNRC for one year. Thus, any one
between 6 and 65 years of age can be a PNRC member for one year upon contributing P35, P100, P300,
P500 or P1,000 for the year. Even foreigners, whether residents or not, can be members of the PNRC. [Liban
vs. Gordon, 593 SCRA 68(2009)]

- versus -

LEONARDO-DE CASTRO,
BRION,
PERALTA,
BERSAMIN,
DEL CASTILLO,
ABAD,
VILLARAMA, JR.,

RICHARD J. GORDON,

PEREZ,

Respondent.

MENDOZA, and
SERENO, JJ.

PHILIPPINE NATIONAL RED CROSS,

Promulgated:
Intervenor.

January 18, 2011

x--------------------------------------------------x

RESOLUTION
some other ground, i.e., lack of standing of petitioners, there was no need for it to delve into the validity of R.A.
LEONARDO-DE CASTRO, J.:

No. 95, and the rest of the judgment should be deemed obiter.

This resolves the Motion for Clarification and/or for Reconsideration [1] filed on August 10, 2009 by
respondent Richard J. Gordon (respondent) of the Decisionpromulgated by this Court on July 15, 2009 (the
Decision),

the Motion

for

Partial

Reconsideration[2] filed

on August

27,

2009 by movant-

In its Motion for Partial Reconsideration, PNRC prays that the Court sustain the constitutionality
of its Charter on the following grounds:

A.

THE ASSAILED DECISION DECLARING UNCONSTITUTIONAL

REPUBLIC ACT NO. 95 AS AMENDED DEPRIVED INTERVENOR PNRC
OF ITS CONSTITUTIONAL RIGHT TO DUE PROCESS.

intervenor Philippine National Red Cross (PNRC), and the latters Manifestation and Motion to Admit
Attached Position Paper[3] filed on December 23, 2009.

In the Decision,[4] the Court held that respondent did not forfeit his seat in the Senate when he

1.

INTERVENOR PNRC WAS NEVER A PARTY TO THE INSTANT

CONTROVERSY.

2.

THE CONSTITUTIONALITY OF REPUBLIC ACT NO. 95, AS AMENDED

WAS NEVER AN ISSUE IN THIS CASE.

accepted the chairmanship of the PNRC Board of Governors, as the office of the PNRC Chairman is not a
B.

THE CURRENT CHARTER OF PNRC IS PRESIDENTIAL DECREE NO. 1264

AND NOT REPUBLIC ACT NO. 95. PRESIDENTIAL DECREE NO. 1264 WAS
NOT A CREATION OF CONGRESS.

C.

PNRCS STRUCTURE IS SUI GENERIS; IT IS A CLASS OF ITS OWN. WHILE IT

IS PERFORMING HUMANITARIAN FUNCTIONS AS AN AUXILIARY TO
GOVERNMENT, IT IS A NEUTRAL ENTITY SEPARATE AND INDEPENDENT
OF GOVERNMENT CONTROL, YET IT DOES NOT QUALIFY AS STRICTLY
PRIVATE IN CHARACTER.

government office or an office in a government-owned or controlled corporation for purposes of the prohibition
in Section 13, Article VI of the 1987 Constitution. [5] The Decision, however, further declared void the PNRC
Charter insofar as it creates the PNRC as a private corporation and consequently ruled that the PNRC should
incorporate under the Corporation Code and register with the Securities and Exchange Commission if it wants
to be a private corporation.[6] The dispositive portion of the Decision reads as follows:

WHEREFORE, we declare that the office of the Chairman of the Philippine

National Red Cross is not a government office or an office in a government-owned or
controlled corporation for purposes of the prohibition in Section 13, Article VI of the
1987 Constitution. We also declare that Sections 1, 2, 3, 4(a), 5, 6, 7, 8, 9, 10, 11, 12,
and 13 of the Charter of the Philippine National Red Cross, or Republic Act No. 95, as
amended by Presidential Decree Nos. 1264 and 1643, are VOID because they create
the PNRC as a private corporation or grant it corporate powers. [7]

In his Comment and Manifestation[10] filed on November 9, 2009, respondent manifests: (1) that
he agrees with the position taken by the PNRC in its Motion for Partial Reconsideration dated August 27,
2009; and (2) as of the writing of said Comment and Manifestation, there was pending before the Congress of
the Philippines a proposed bill entitled An Act Recognizing the PNRC as an Independent, Autonomous, Non-

In his Motion for Clarification and/or for Reconsideration, respondent raises the following grounds: (1) as

Governmental Organization Auxiliary to the Authorities of the Republic of the Philippines in the Humanitarian

the issue of constitutionality of Republic Act (R.A.) No. 95 was not raised by the parties, the Court went beyond

Field, to be Known as The Philippine Red Cross. [11]

the case in deciding such issue; and (2) as the Court decided that Petitioners did not have standing to file the
instant Petition, the pronouncement of the Court on the validity of R.A. No. 95 should be considered obiter.[8]

After a thorough study of the arguments and points raised by the respondent as well as those of movantintervenor in their respective motions, we have reconsidered our pronouncements in our Decision dated July

Respondent argues that the validity of R.A. No. 95 was a non-issue; therefore, it was unnecessary
[9]

for the Court to decide on that question. Respondent cites Laurel v. Garcia, wherein the Court said that it will
not pass upon a constitutional question although properly presented by the record if the case can be disposed
of on some other ground and goes on to claim that since this Court, in the Decision, disposed of the petition on

15, 2009 with regard to the nature of the PNRC and the constitutionality of some provisions of the PNRC
Charter, R.A. No. 95, as amended.

As correctly pointed out in respondents Motion, the issue of constitutionality of R.A. No. 95 was not raised by

Similar provisions are found in Article XIV, Section 4 of the 1973 Constitution and Article XII, Section 16 of the

the parties, and was not among the issues defined in the body of the Decision; thus, it was not the very lis

1987 Constitution. The latter reads:

mota of the case. We have reiterated the rule as to when the Court will consider the issue of constitutionality
in Alvarez v. PICOP Resources, Inc.,[12] thus:

This Court will not touch the issue of unconstitutionality unless it is the very lis
mota. It is a well-established rule that a court should not pass upon a
constitutional question and decide a law to be unconstitutional or invalid, unless
such question is raised by the parties and that when it is raised, if the record also
presents some other ground upon which the court may [rest] its judgment, that course
will be adopted and the constitutional question will be left for consideration until such
question will be unavoidable.[13]

Under the rule quoted above, therefore, this Court should not have declared void certain sections of R.A. No.
95, as amended by Presidential Decree (P.D.) Nos. 1264 and 1643, the PNRC Charter. Instead, the Court
should have exercised judicial restraint on this matter, especially since there was some other ground upon
which the Court could have based its judgment. Furthermore, the PNRC, the entity most adversely affected by
this declaration of unconstitutionality, which was not even originally a party to this case, was being compelled,
as a consequence of the Decision, to suddenly reorganize and incorporate under the Corporation Code, after

SECTION 16. The 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.

Since its enactment, the PNRC Charter was amended several times, particularly on June 11, 1953, August 16,
1971, December 15, 1977, and October 1, 1979, by virtue of R.A. No. 855, R.A. No. 6373, P.D. No. 1264, and
P.D. No. 1643, respectively. The passage of several laws relating to the PNRCs corporate existence
notwithstanding the effectivity of the constitutional proscription on the creation of private corporations by law, is
a recognition that the PNRC is not strictly in the nature of a private corporation contemplated by the aforesaid
constitutional ban.

more than sixty (60) years of existence in this country.

A closer look at the nature of the PNRC would show that there is none like it not just in terms of

Its existence as a chartered corporation remained unchallenged on ground of unconstitutionality

notwithstanding that R.A. No. 95 was enacted on March 22, 1947 during the effectivity of the 1935

structure, but also in terms of history, public service and official status accorded to it by the State and the
international community. There is merit in PNRCs contention that its structure is sui generis.

Constitution, which provided for a proscription against the creation of private corporations by special law, to
wit:
The PNRC succeeded the chapter of the American Red Cross which was in existence in the
SEC. 7. The Congress shall not, except by general law, provide for the
formation, organization, or regulation of private corporations, unless such corporations
are owned and controlled by the Government or any subdivision or instrumentality
thereof. (Art. XIV, 1935 Constitution.)

Philippines since 1917. It was created by an Act of Congress after the Republic of the Philippines became an
independent nation on July 6, 1946 and proclaimed on February 14, 1947 its adherence to the Convention of
Geneva of July 29, 1929 for the Amelioration of the Condition of the Wounded and Sick of Armies in the Field
(the Geneva Red Cross Convention). By that action the Philippines indicated its desire to participate with the

nations of the world in mitigating the suffering caused by war and to establish in the Philippines a voluntary

assistance and cooperation directly and through their international organizations

promote better understanding and sympathy among the people of the world;

organization for that purpose and like other volunteer organizations established in other countries which have
ratified the Geneva Conventions, to promote the health and welfare of the people in peace and in war. [14]

The provisions of R.A. No. 95, as amended by R.A. Nos. 855 and 6373, and further amended by
P.D. Nos. 1264 and 1643, show the historical background and legal basis of the creation of the PNRC by

NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the

Philippines, by virtue of the powers vested in me by the Constitution as Commander-inChief of all the Armed Forces of the Philippines and pursuant to Proclamation No. 1081
dated September 21, 1972, and General Order No. 1 dated September 22, 1972, do
hereby decree and order that Republic Act No. 95, Charter of the Philippine National
Red Cross (PNRC) as amended by Republic Acts No. 855 and 6373, be further
amended as follows:

legislative fiat, as a voluntary organization impressed with public interest. Pertinently R.A. No. 95, as amended
by P.D. 1264, provides:

WHEREAS, during the meeting in Geneva, Switzerland, on 22 August

1894, the nations of the world unanimously agreed to diminish within their power the
evils inherent in war;

WHEREAS, more than one hundred forty nations of the world have ratified
or adhered to the Geneva Conventions of August 12, 1949 for the Amelioration of the
Condition of the Wounded and Sick of Armed Forces in the Field and at Sea, The
Prisoners of War, and The Civilian Population in Time of War referred to in this Charter
as the Geneva Conventions;

Section 1. There is hereby created in the Republic of the Philippines a

body corporate and politic to be the voluntary organization officially designated
to assist the Republic of the Philippines in discharging the obligations set forth
in the Geneva Conventions and to perform such other duties as are inherent
upon a national Red Cross Society. The national headquarters of this
Corporation shall be located in Metropolitan Manila. (Emphasis supplied.)

The significant public service rendered by the PNRC can be gleaned from Section 3 of its Charter,
which provides:

WHEREAS, the Republic of the Philippines became an independent

nation on July 4, 1946, and proclaimed on February 14, 1947 its adherence to the
Geneva Conventions of 1929, and by the action, indicated its desire to participate
with the nations of the world in mitigating the suffering caused by war and to
establish in the Philippines a voluntary organization for that purpose as
contemplated by the Geneva Conventions;

WHEREAS, there existed in the Philippines since 1917 a chapter of the

American National Red Cross which was terminated in view of the independence of the
Philippines; and

WHEREAS, the volunteer organizations established in other countries

which have ratified or adhered to the Geneva Conventions assist in promoting the
health and welfare of their people in peace and in war, and through their mutual

Section 3. That the purposes of this Corporation shall be as follows:

(a) To provide volunteer aid to the sick and wounded of armed forces in
time of war, in accordance with the spirit of and under the conditions prescribed by the
Geneva Conventions to which the Republic of the Philippines proclaimed its
adherence;

(b) For the purposes mentioned in the preceding sub-section, to perform all
duties devolving upon the Corporation as a result of the adherence of the Republic of
the Philippines to the said Convention;

(c) To act in matters of voluntary relief and in accordance with the

authorities of the armed forces as a medium of communication between people of the
Republic of the Philippines and their Armed Forces, in time of peace and in time of war,
and to act in such matters between similar national societies of other governments and
the Governments and people and the Armed Forces of the Republic of the Philippines;

The PNRC works closely with the ICRC and has been involved in humanitarian activities in the
Philippines since 1982. Among others, these activities in the country include:

(d) To establish and maintain a system of national and international relief in

time of peace and in time of war and apply the same in meeting and emergency needs
caused by typhoons, flood, fires, earthquakes, and other natural disasters and to
devise and carry on measures for minimizing the suffering caused by such disasters;

1.

Giving protection and assistance to civilians displaced or otherwise affected by armed clashes
between the government and armed opposition groups, primarily in Mindanao;

(e) To devise and promote such other services in time of peace and in time
of war as may be found desirable in improving the health, safety and welfare of the
Filipino people;

2.

Working to minimize the effects of armed hostilities and violence on the population;

3.

Visiting detainees; and

4.

Promoting awareness of international humanitarian law in the public and private sectors. [16]

(f) To devise such means as to make every citizen and/or resident of the
Philippines a member of the Red Cross.

National Societies such as the PNRC act as auxiliaries to the public authorities of their own
countries in the humanitarian field and provide a range of services including disaster relief and health and
The PNRC is one of the National Red Cross and Red Crescent Societies, which, together with the
social programmes.
International Committee of the Red Cross (ICRC) and the IFRC and RCS, make up the International Red
Cross and Red Crescent Movement (the Movement). They constitute a worldwide humanitarian movement,
whose mission is:
The International Federation of Red Cross (IFRC) and Red Crescent Societies (RCS) Position
Paper,

[17]

[T]o prevent and alleviate human suffering wherever it may be found, to protect life and
health and ensure respect for the human being, in particular in times of armed conflict
and other emergencies, to work for the prevention of disease and for the promotion of
health and social welfare, to encourage voluntary service and a constant readiness to
give help by the members of the Movement, and a universal sense of solidarity towards
all those in need of its protection and assistance. [15]

submitted by the PNRC, is instructive with regard to the elements of the specific nature of the

National Societies such as the PNRC, to wit:

National Societies, such as the Philippine National Red Cross and its sister
Red Cross and Red Crescent Societies, have certain specificities deriving from the
1949 Geneva Convention and the Statutes of the International Red Cross and Red
Crescent Movement (the Movement). They are also guided by the seven Fundamental
Principles of the Red Cross and Red Crescent Movement: Humanity, Impartiality,
Neutrality, Independence, Voluntary Service, Unity and Universality.

A National Society partakes of a sui generis character. It is a protected

component of the Red Cross movement under Articles 24 and 26 of the First Geneva
Convention, especially in times of armed conflict. These provisions require that the staff
of a National Society shall be respected and protected in all circumstances. Such
protection is not ordinarily afforded by an international treaty to ordinary private entities
or even non-governmental organisations (NGOs). This sui generis character is also
emphasized by the Fourth Geneva Convention which holds that an Occupying Power
cannot require any change in the personnel or structure of a National Society. National
societies are therefore organizations that are directly regulated by international
humanitarian law, in contrast to other ordinary private entities, including NGOs.

It is in recognition of this sui generis character of the PNRC that R.A. No. 95 has remained valid and effective
from the time of its enactment in March 22, 1947 under the 1935 Constitution and during the effectivity of the
1973 Constitution and the 1987 Constitution.

xxxx
The PNRC Charter and its amendatory laws have not been questioned or challenged on
constitutional grounds, not even in this case before the Court now.
In addition, National Societies are not only officially recognized by their
public authorities as voluntary aid societies, auxiliary to the public authorities in the
humanitarian field, but also benefit from recognition at the International level. This is
considered to be an element distinguishing National Societies from other organisations
(mainly NGOs) and other forms of humanitarian response.
In the Decision, the Court, citing Feliciano v. Commission on Audit,[19] explained that the purpose of the
constitutional provision prohibiting Congress from creating private corporations was to prevent the granting of
x x x. No other organisation belongs to a world-wide Movement in which all
Societies have equal status and share equal responsibilities and duties in helping each
other. This is considered to be the essence of the Fundamental Principle of
Universality.

special privileges to certain individuals, families, or groups, which were denied to other groups. Based on the
above discussion, it can be seen that the PNRC Charter does not come within the spirit of this constitutional
provision, as it does not grant special privileges to a particular individual, family, or group, but creates an entity
that strives to serve the common good.

Furthermore, the National Societies are considered to be auxiliaries to the

public authorities in the humanitarian field. x x x.

The auxiliary status of [a] Red Cross Society means that it is at one and
the same time a private institution and a public service organization because the
very nature of its work implies cooperation with the authorities, a link with the
State. In carrying out their major functions, Red Cross Societies give their
humanitarian support to official bodies, in general having larger resources than the
Societies, working towards comparable ends in a given sector.

Furthermore, a strict and mechanical interpretation of Article XII, Section 16 of the 1987 Constitution will hinder
the State in adopting measures that will serve the public good or national interest. It should be noted that a
special law, R.A. No. 9520, the Philippine Cooperative Code of 2008, and not the general corporation code,
vests corporate power and capacities upon cooperatives which are private corporations, in order to implement
the States avowed policy.

x x x No other organization has a duty to be its governments

humanitarian partner while remaining independent. [18] (Emphases ours.)
In the Decision of July 15, 2009, the Court recognized the public service rendered by the PNRC as
the governments partner in the observance of its international commitments, to wit:

characteristic of National Societies that they are not inspired by the desire for financial gain but by individual
The PNRC is a non-profit, donor-funded, voluntary, humanitarian organization, whose
mission is to bring timely, effective, and compassionate humanitarian assistance for the
most vulnerable without consideration of nationality, race, religion, gender, social
status, or political affiliation. The PNRC provides six major services: Blood Services,
Disaster Management, Safety Services, Community Health and Nursing, Social
Services and Voluntary Service.

The Republic of the Philippines, adhering to the Geneva Conventions,

established the PNRC as a voluntary organization for the purpose contemplated in the
Geneva Convention of 27 July 1929. x x x.[20] (Citations omitted.)

commitment and devotion to a humanitarian purpose freely chosen or accepted as part of the service that
National Societies through its volunteers and/or members render to the Community.[23]

The PNRC, as a National Society of the International Red Cross and Red Crescent Movement,
can neither be classified as an instrumentality of the State, so as not to lose its character of neutrality as well
as its independence, nor strictly as a private corporation since it is regulated by international humanitarian law
and is treated as an auxiliary of the State.[24]

So must this Court recognize too the countrys adherence to the Geneva Convention and
respect the unique status of the PNRC in consonance with its treaty obligations. The Geneva
Convention has the force and effect of law.[21] Under the Constitution, the Philippines adopts the generally
accepted principles of international law as part of the law of the land. [22] This constitutional provision must be
reconciled and harmonized with Article XII, Section 16 of the Constitution, instead of using the latter to negate

Based on the above, the sui generis status of the PNRC is now sufficiently established. Although it
is neither a subdivision, agency, or instrumentality of the government, nor a government-owned or -controlled
corporation or a subsidiary thereof, as succinctly explained in the Decision of July 15, 2009, so much so that

the former.

respondent, under the Decision, was correctly allowed to hold his position as Chairman thereof concurrently
while he served as a Senator, such a conclusion does not ipso facto imply that the PNRC is a private
corporation within the contemplation of the provision of the Constitution, that must be organized under the
By requiring the PNRC to organize under the Corporation Code just like any other private
corporation, the Decision of July 15, 2009 lost sight of the PNRCs special status under international

Corporation Code. As correctly mentioned by Justice Roberto A. Abad, the sui generis character of PNRC
requires us to approach controversies involving the PNRC on a case-to-case basis.

humanitarian law and as an auxiliary of the State, designated to assist it in discharging its obligations under
the Geneva Conventions. Although the PNRC is called to be independent under its Fundamental Principles, it
interprets such independence as inclusive of its duty to be the governments humanitarian partner. To be
recognized in the International Committee, the PNRC must have an autonomous status, and carry out its
humanitarian mission in a neutral and impartial manner.

In sum, the PNRC enjoys a special status as an important ally and auxiliary of the government in
the humanitarian field in accordance with its commitments under international law. This Court cannot all of a
sudden refuse to recognize its existence, especially since the issue of the constitutionality of the PNRC
Charter was never raised by the parties. It bears emphasizing that the PNRC has responded to almost all
national disasters since 1947, and is widely known to provide a substantial portion of the countrys blood

However, in accordance with the Fundamental Principle of Voluntary Service of National Societies

requirements. Its humanitarian work is unparalleled. The Court should not shake its existence to the core in an

of the Movement, the PNRC must be distinguished from private and profit-making entities. It is the main

untimely and drastic manner that would not only have negative consequences to those who depend on it in

times of disaster and armed hostilities but also have adverse effects on the image of the Philippines in the
international community. The sections of the PNRC Charter that were declared void must therefore stay.

WHEREFORE, premises considered, respondent Richard J. Gordons Motion for Clarification

and/or

for

Reconsideration and

Reconsideration of the Decision in G.R.

movant-intervenor
No.

175352 dated

PNRCs Motion
July

15,

2009

for

Partial

are GRANTED. The

constitutionality of R.A. No. 95, as amended, the charter of the Philippine National Red Cross, was not raised
by the parties as an issue and should not have been passed upon by this Court. The structure of the PNRC
is sui generis being neither strictly private nor public in nature. R.A. No. 95 remains valid and constitutional in
its entirety. The dispositive portion of the Decision should therefore be MODIFIEDby deleting the second
sentence, to now read as follows:

Same; Same; The Philippine National Red Cross (PNRC) has responded to almost all national disasters since
1947, and is widely known to provide a substantial portion of the countrys blood requirements.It bears
emphasizing that the PNRC has responded to almost all national disasters since 1947, and is widely known to
provide a substantial portion of the countrys blood requirements. Its humanitarian work is unparalleled. The
Court should not shake its existence to the core in an untimely and drastic manner that would not only have
negative consequences to those who depend on it in times of disaster and armed hostilities but also have
adverse effects on the image of the Philippines in the international community. The sections of the PNRC
Charter that were declared void must therefore stay.
CARPIO, J., Dissenting Opinion:
Corporation Law; Philippine National Red Cross; Constitutional Law; View that the creation of the Philippine
National Red Cross (PNRC) through a special charter is violative of the constitutional proscription against the
creation of private corporations by special law.Since the PNRC is a private corporation, the creation of the
PNRC through a special charter is violative of the constitutional proscription against the creation of private
corporations by special law. The creation of the PNRC by special charter on 22 March 1947 through RA 95
contravenes Section 7, Article XIV of the 1935 Constitution, as amended, which reads: SEC. 7. The Congress
shall not, except by general law, provide for the formation, organization, or regulation of private corporations,
unless such corporations are owned or controlled by the Government or any subdivision or instrumentality
thereof. [Liban vs. Gordon, 639 SCRA 709(2011)]
[G.R. No. L-6776. May 21, 1955.]
THE REGISTER OF DEEDS OF RIZAL, Petitioner-Appellee, v. UNG SIU SI TEMPLE, RespondentAppellant.
Alejo F. Candido for Appellant.
Solicitor General Querube C. Makalintal and Solicitor Felix V. Makasiar for Appellee.

SYLLABUS
WHEREFORE, we declare that the office of the Chairman of the Philippine
National Red Cross is not a government office or an office in a government-owned or
controlled corporation for purposes of the prohibition in Section 13, Article VI of the
1987 Constitution.

SO ORDERED.

Ruling:
Corporation Law; Philippine National Red Cross; A closer look at the nature of the Philippine National Red
Cross (PNRC) would show that there is none like it not just in terms of structure, but also in terms of history,
public service and official status.The passage of several laws relating to the PNRCs corporate existence
notwithstanding the effectivity of the constitutional proscription on the creation of private corporations by law, is
a recognition that the PNRC is not strictly in the nature of a private corporation contemplated by the aforesaid
constitutional ban. A closer look at the nature of the PNRC would show that there is none like it not just in
terms of structure, but also in terms of history, public service and official status accorded to it by the State and
the international community. There is merit in PNRCs contention that its structure is sui generis.
Same; Same; The sui generis character of Philippine National Red Cross (PNRC) requires us to approach
controversies involving the PNRC on a case-to-case basis.Although it is neither a subdivision, agency, or
instrumentality of the government, nor a government-owned or controlled corporation or a subsidiary thereof,
as succinctly explained in the Decision of July 15, 2009, so much so that respondent, under the Decision, was
correctly allowed to hold his position as Chairman thereof concurrently while he served as a Senator, such a
conclusion does not ipso facto imply that the PNRC is a private corporation within the contemplation of the
provision of the Constitution, that must be organized under the Corporation Code. As correctly mentioned by
Justice Roberto A. Abad, the sui generis character of PNRC requires us to approach controversies involving
the PNRC on a case-to-case basis.

1. CONSTITUTIONAL LAW RIGHT TO ACQUIRE LANDS LIMITED TO FILIPINO CITIZENS; ACT 271
REPEALED BY SECTION 5, ARTICLE XIII, OF THE CONSTITUTION. The provisions of Act No. 271 of the
old Philippine Commission which allow all religious associations, of whatever sort or denomination, whether
incorporated in the Philippines or in the name of other country, to hold land in the Philippines for religious
purposes, must be deemed repealed by the absolute term of section 5, Article XIII, of the Constitution, which
limit the acquisition of land in the Philippines to its citizens, or to corporations or associations at least sixty per
centum of the capital stock of which is owned by such citizens, adopted after the enactment of said Act No.
271.
2. ID.; ID.; ID.; DEEP OF DONATION EXECUTED BY A FILIPINO CITIZEN IN FAVOR OF A FOREIGN
RELIGIOUS ORGANIZATION CAN BE REGISTERED. In view of the provisions of sections 1 and 5 of
Article XIII of the Constitution and the decision of the Supreme Court in the case of Krivenko v. The Register of
Deeds of Manila, 44 Off. Gaz., 1211, a deed of donation of a parcel of land executed by a Filipino citizen in
favor of a religious organization whose founder, trustees and administrator are non-Filipinos, can not be
admitted for registration.
3. ID.; ID.; ID.; ID.; REFUSAL OF REGISTER OF DEEDS TO REGISTER DEED OF DONATION IS NOT
VIOLATIVE OF FREEDOM OF RELIGION CLAUSE. The refusal of the Register of Deeds to register said
deed of donation is not violative of the freedom of religion clause of Constitution (section 1 [7], Article III), since
land tenure is by no means indispensable to the free exercise and enjoyment of religious profession or
worship; or that one may not worship the Deity according to the dictates of his own conscience unless upon
land held in free simple.

DECISION

REYES, J.B.L., J.:

The Register of Deeds for the province of Rizal refused to accept for record a deed of donation executed in
due form on January 22, 1953, by Jesus Dy, a Filipino citizen, conveying a parcel of residential land, in
Caloocan, Rizal, known as lot No. 2, block 48-D, PSD-4212, G.L.R.O. Record No. 11267, in favor of the
unregistered religious organization "Ung Siu Si Temple", operating through three trustees all of Chinese
nationality. The donation was duly accepted by Yu Juan, of Chinese nationality, founder and deaconess of the
Temple, acting in representation and in behalf of the latter and its trustees.
The refusal of the Registrar was elevated en Consulta to the IVth Branch of the Court of First Instance of
Manila. On March 14, 1953, the Court upheld the action of the Rizal Register of Deeds,
saying:jgc:chanrobles.com.ph
"The question raised by the Register of Deeds in the above transcribed consulta is whether a deed of donation
of a parcel of land executed in favor of a religious organization whose founder, trustees and administrator are
Chinese citizens should be registered or not.
It appearing from the record of the Consulta that UNG SIU SI TEMPLE is a religious organization whose
deaconess, founder, trustees and administrator are all Chinese citizens, this Court is of the opinion and so
hold that in view of the provisions of the sections 1 and 5 of Article XIII of the Constitution of the Philippines
limiting the acquisition of land in the Philippines to its citizens, or to corporations or associations at least sixty
per centum of the capital stock of which is owned by such citizens adopted after the enactment of said Act No.
271, and the decision of the Supreme Court in the case of Krivenko v. the Register of Deeds of Manila, the
deed of donation in question should not be admitted for registration." (Printed Rec. App. pp. 17-18).
Not satisfied with the ruling of the Court of First Instance, counsel for the donee Uy Siu Si Temple has
appealed to this Court, claiming: (1) that the acquisition of the land in question, for religious purposes, is
authorized and permitted by Act No. 271 of the old Philippine Commission, providing as
follows:jgc:chanrobles.com.ph
"SECTION 1. It shall be lawful for all religious associations, of whatever sort or denomination, whether
incorporated in the Philippine Islands or in the name of other country, or not incorporated at all, to hold land in
the Philippine Islands upon which to build churches, parsonages, or educational or charitable institutions.

Ruling:
CONSTITUTIONAL LAW; RlGHT TO ACQUIRE LANDS LlMITED TO FlLIPINO CITIZENS; ACT 271
REPEALED BY SECTION 5, ARTICLE XIII, OF THE CONSTITUTION.The provisions of Act No. 271 of the
old Philippine Commission which allow all religious associations, of whatever sort or denomination, whether
incorporated in the Philippines or in the name of other country, to hold land in the Philippines for religious
purposes, must be deemed repealed by the absolute terms of section 5, Article XIII, of the Constitution, which
limit the acquisition of land in the Philippines to its citizens, or to corporations or associations at least sixty per
centum of the capital stock of which is owned by such citizens, adopted after the enactment of said Act No.
271.
2.ID. ; ID. ; ID. ; DEED OF DONATION EXECUTED BY A FILIPINO CITIZEN IN FAVOR OF A FOREIGN
RELIGIOUS ORGANIZATION CAN NOT BE REGISTERED.In view of the provisions of sections 1 and 5 of
Article XIII of the Constitution and the decision of the Supreme Court in the case of Krivenko vs. The Register
of Deeds of Manila, 44 Off. Gaz., 1211, a deed of donation of a parcel of land executed by a Filipino citizen in
favor of a religious orga nization whose founder, trustees and administrator are nonFilipinos, can not be
admitted for registration.
3.ID.; ID.; ID.; ID.; REFUSAL OF REGISTER OF DEEDS TO REGISTER DEED OF DONATION IS NOT
VlOLATIVE OF FREEDOM OF RELIGION CLAUSE.The refusal of the Register of Deeds to register said
deed of donation is not violative of the freedom of religion clause of the Constitution (section 1 [7], Article III),
since land tenure is by no means indispensable to the free exercise and enjoyment of religious profession or
worship; or that one may not worship the Deity according to the dictates of his own conscience unless upon
land held in fee simple. [Register of Deeds vs. Ung Siu Si Temple, 97 Phil. 58(1955)]
G.R. No. L-6055
June 12, 1953
THE PEOPLE OF THE PHILIPPINES, plaintiff-appellee,
vs.
WILLIAM H. QUASHA, defendant-appellant.

"SEC. 2. Such religious institutions, if not incorporated, shall hold the land in the name of three Trustees for
the use of such associations; . . ." (Printed Rec. App. p. 5.)

Jose P. Laurel for appellant and William H. Quasha in his own behalf.
Office of the Solicitor General Juan R. Liwag and Assistant Solicitor General Francisco Carreon for appellee.

and (2) that the refusal of the Register of Deeds violates the freedom of religion clause of our Constitution [Art.
III, Sec. 1(7)].

REYES, J.:

We are of the opinion that the Court below has correctly held that in view of the absolute terms of section 5,
Title XIII, of the Constitution, the provisions of Act No. 271 of the old Philippine Commission must be deemed
repealed since the Constitution was enacted, in so far as incompatible therewith. In providing that,
"Save in cases of hereditary succession, no private agricultural land shall be transferred or assigned except to
individuals, corporations or associations qualified to acquire or hold lands of the public domain in the
Philippines",
the Constitution makes no exception in favor of religious associations. Neither is there any such saving found
in sections 1 and 2 of Article XIII, restricting the acquisition of public agricultural lands and other natural
resources to "corporations or associations at least sixty per centum of the capital of which is owned by such
citizens" (of the Philippines).
The fact that the appellant religious organization has no capital stock does not suffice to escape the
Constitutional inhibition, since it is admitted that its members are of foreign nationality. The purpose of the sixty
per centum requirement is obviously to ensure that corporations or associations allowed to acquire agricultural
land or to exploit natural resources shall be controlled by Filipinos, and the spirit of the Constitution demands
that in the absence of capital stock, the controlling membership should be composed of Filipino citizens.
To permit religious associations controlled by non-Filipinos to acquire agricultural lands would be to drive the
opening wedge to revive alien religious land holdings in this country. We can not ignore the historical fact that
complaints against land holdings of that kind were among the factors that sparked the revolution of 1896.
As to the complaint that the disqualification under article XIII is violative of the freedom of religion guaranteed
by Article III of the Constitution, we are by no means convinced (nor has it been shown) that land tenure is
indispensable to the free exercise and enjoyment of religious profession or worship; or that one may not
worship the Deity according to the dictates of his own conscience unless upon land held in fee simple. The
resolution appealed from is affirmed, with costs against Appellant.

William H. Quasha, a member of the Philippine bar, was charged in the Court of First Instance of Manila with
the crime of falsification of a public and commercial document in that, having been entrusted with the
preparation and registration of the article of incorporation of the Pacific Airways Corporation, a domestic
corporation organized for the purpose of engaging in business as a common carrier, he caused it to appear in
said article of incorporation that one Arsenio Baylon, a Filipino citizen, had subscribed to and was the owner of
60.005 per cent of the subscribed capital stock of the corporation when in reality, as the accused well knew,
such was not the case, the truth being that the owner of the portion of the capital stock subscribed to by
Baylon and the money paid thereon were American citizen whose name did not appear in the article of
incorporation, and that the purpose for making this false statement was to circumvent the constitutional
mandate that no corporation shall be authorize to operate as a public utility in the Philippines unless 60 per
cent of its capital stock is owned by Filipinos.
Found guilty after trial and sentenced to a term of imprisonment and a fine, the accused has appealed to this
Court.
The essential facts are not in dispute. On November 4,1946, the Pacific Airways Corporation registered its
articles of incorporation with the Securities and Exchanged Commission. The article were prepared and the
registration was effected by the accused, who was in fact the organizer of the corporation. The article stated
that the primary purpose of the corporation was to carry on the business of a common carrier by air, land or
water; that its capital stock was P1,000,000, represented by 9,000 preferred and 100,000 common shares,
each preferred share being of the par value of p100 and entitled to 1/3 vote and each common share, of the
par value of P1 and entitled to one vote; that the amount capital stock actually subscribed was P200,000, and
the names of the subscribers were Arsenio Baylon, Eruin E. Shannahan, Albert W. Onstott, James O'Bannon,

Denzel J. Cavin, and William H. Quasha, the first being a Filipino and the other five all Americans; that
Baylon's subscription was for 1,145 preferred shares, of the total value of P114,500, and for 6,500 common
shares, of the total par value of P6,500, while the aggregate subscriptions of the American subscribers were
for 200 preferred shares, of the total par value of P20,000, and 59,000 common shares, of the total par value
of P59,000; and that Baylon and the American subscribers had already paid 25 per cent of their respective
subscriptions. Ostensibly the owner of, or subscriber to, 60.005 per cent of the subscribed capital stock of the
corporation, Baylon nevertheless did not have the controlling vote because of the difference in voting power
between the preferred shares and the common shares. Still, with the capital structure as it was, the article of
incorporation were accepted for registration and a certificate of incorporation was issued by the Securities and
Exchange Commission.
There is no question that Baylon actually subscribed to 60.005 per cent of the subscribed capital stock of the
corporation. But it is admitted that the money paid on his subscription did not belong to him but to the
Americans subscribers to the corporate stock. In explanation, the accused testified, without contradiction, that
in the process of organization Baylon was made a trustee for the American incorporators, and that the reason
for making Baylon such trustee was as follows:
Q. According to this article of incorporation Arsenio Baylon subscribed to 1,135 preferred shares
with a total value of P1,135. Do you know how that came to be?
A. Yes.
The people who were desirous of forming the corporation, whose names are listed on page 7 of this certified
copy came to my house, Messrs. Shannahan, Onstott, O'Bannon, Caven, Perry and Anastasakas one
evening. There was considerable difficulty to get them all together at one time because they were pilots. They
had difficulty in deciding what their respective share holdings would be. Onstott had invested a certain amount
of money in airplane surplus property and they had obtained a considerable amount of money on those planes
and as I recall they were desirous of getting a corporation formed right away. And they wanted to have their
respective shares holdings resolved at a latter date. They stated that they could get together that they feel that
they had no time to settle their respective share holdings. We discussed the matter and finally it was decided
that the best way to handle the things was not to put the shares in the name of anyone of the interested parties
and to have someone act as trustee for their respective shares holdings. So we looked around for a trustee.
And he said "There are a lot of people whom I trust." He said, "Is there someone around whom we could get
right away?" I said, "There is Arsenio. He was my boy during the liberation and he cared for me when i was
sick and i said i consider him my friend." I said. They all knew Arsenio. He is a very kind man and that was
what was done. That is how it came about.
Defendant is accused under article 172 paragraph 1, in connection with article 171, paragraph 4, of the
Revised Penal Code, which read:
ART. 171. Falsification by public officer, employee, or notary or ecclesiastic minister. The
penalty ofprision mayor and a fine not to exceed 5,000 pesos shall be imposed upon any public
officer, employee, or notary who, taking advantage of his official position, shall falsify a document
by committing any of the following acts:
xxx

xxx

xxx

xxx

xxx

1. Any private individual who shall commit any of the falsifications enumerated in the next
preceding article in any public or official document or letter of exchange or any other kind of
commercial document.
Commenting on the above provision, Justice Albert, in his well-known work on the Revised Penal Code ( new
edition, pp. 407-408), observes, on the authority of U.S. vs. Reyes, (1 Phil., 341), that the perversion of truth in
the narration of facts must be made with the wrongful intent of injuring a third person; and on the authority
of U.S. vs. Lopez (15 Phil., 515), the same author further maintains that even if such wrongful intent is proven,
still the untruthful statement will not constitute the crime of falsification if there is no legal obligation on the part
of the narrator to disclose the truth. Wrongful intent to injure a third person and obligation on the part of the
narrator to disclose the truth are thus essential to a conviction for a crime of falsification under the above
article of the Revised Penal Code.
Now, as we see it, the falsification imputed in the accused in the present case consists in not disclosing in the
articles of incorporation that Baylon was a mere trustee ( or dummy as the prosecution chooses to call him) of
his American co-incorporators, thus giving the impression that Baylon was the owner of the shares subscribed
to by him which, as above stated, amount to 60.005 per cent of the sub-scribed capital stock. This, in the
opinion of the trial court, is a malicious perversion of the truth made with the wrongful intent circumventing
section 8, Article XIV of the Constitution, which provides that " no franchise, certificate, or any other form of
authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to
corporation or other entities organized under the law of the Philippines, sixty per centum of the capital of which
is owned by citizens of the Philippines . . . ." Plausible though it may appear at first glance, this opinion loses
validity once it is noted that it is predicated on the erroneous assumption that the constitutional provision just
quoted was meant to prohibit the mere formation of a public utility corporation without 60 per cent of its capital
being owned by the Filipinos, a mistaken belief which has induced the lower court to that the accused was
under obligation to disclose the whole truth about the nationality of the subscribed capital stock of the
corporation by revealing that Baylon was a mere trustee or dummy of his American co-incorporators, and that
in not making such disclosure defendant's intention was to circumvent the Constitution to the detriment of the
public interests. Contrary to the lower court's assumption, the Constitution does not prohibit the mere
formation of a public utility corporation without the required formation of Filipino capital. 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 proportion of Filipino capital. This is obvious from the context, for
the constitutional provision in question qualifies the terms " franchise", "certificate", or "any other form of
authorization" with the phrase "for the operation of a public utility," thereby making it clear that the franchise
meant is not the "primary franchise" that invest a body of men with corporate existence but the "secondary
franchise" or the privilege to operate as a public utility after the corporation has already come into being.
If the Constitution does not prohibit the mere formation of a public utility corporation with the alien capital, then
how can the accused be charged with having wrongfully intended to circumvent that fundamental law by not
revealing in the articles of incorporation that Baylon was a mere trustee of his American co-incorporation and
that for that reason the subscribed capital stock of the corporation was wholly American? For the mere
formation of the corporation such revelation was not essential, and the Corporation Law does not require it.
Defendant was, therefore, under no obligation to make it. In the absence of such obligation and of the allege
wrongful intent, defendant cannot be legally convicted of the crime with which he is charged.

xxx

4. Making untruthful statements in a narration of facts.

ART. 172. Falsification by private individuals and use of falsified documents. The penalty
of prision correccional in its medium and maximum period and a fine of not more than 5,000 pesos
shall be imposed upon:

It is urged, however, that the formation of the corporation with 60 per cent of its subscribed capital stock
appearing in the name of Baylon was an indispensable preparatory step to the subversion of the constitutional
prohibition and the laws implementing the policy expressed therein. This view is not correct. For a corporation
to be entitled to operate a public utility it is not necessary that it be organized with 60 per cent of its capital
owned by Filipinos from the start. A corporation formed with capital that is entirely alien may subsequently
change the nationality of its capital through transfer of shares to Filipino citizens. conversely, a corporation
originally formed with Filipino capital may subsequently change the national status of said capital through
transfer of shares to foreigners. What need is there then for a corporation that intends to operate a public utility

to have, at the time of its formation, 60 per cent of its capital owned by Filipinos alone? That condition may
anytime be attained thru the necessary transfer of stocks. The moment for determining whether a corporation
is entitled to operate as a public utility is when it applies for a franchise, certificate, or any other form of
authorization for that purpose. And that can be done after the corporation has already come into being and not
while it is still being formed. And at that moment, the corporation must show that it has complied not only with
the requirement of the Constitution as to the nationality of its capital, but also with the requirements of the Civil
Aviation Law if it is a common carrier by air, the Revised Administrative Code if it is a common carrier by water,
and the Public Service Law if it is a common carrier by land or other kind of public service.

FILIPINAS COMPAIA DE SEGUROS, petitioner,

vs.
CHRISTERN, HUENEFELD and CO., INC., respondent.
Ramirez and Ortigas for petitioner.
Ewald Huenefeld for respondent.
PARAS, C.J.:

Equally untenable is the suggestion that defendant should at least be held guilty of an "impossible crime"
under article 59 of the Revised Penal Code. It not being possible to suppose that defendant had intended to
commit a crime for the simple reason that the alleged constitutional prohibition which he is charged for having
tried to circumvent does not exist, conviction under that article is out of the question.
The foregoing consideration can not but lead to the conclusion that the defendant can not be held guilty of the
crime charged. The majority of the court, however, are also of the opinion that, even supposing that the act
imputed to the defendant constituted falsification at the time it was perpetrated, still with the approval of the
Party Amendment to the Constitution in March, 1947, which placed Americans on the same footing as Filipino
citizens with respect to the right to operate public utilities in the Philippines, thus doing away with the
prohibition in section 8, Article XIV of the Constitution in so far as American citizens are concerned, the said
act has ceased to be an offense within the meaning of the law, so that defendant can no longer be held
criminally liable therefor.
In view of the foregoing, the judgment appealed from is reversed and the defendant William H. Quasha
acquitted, with costs de oficio.
Ruling:
Constitutional Law; Corporations; Public Utilities; Mere Formation of Public Utility Corporation without the
Requisite Filipino Capital Not Prohibition.-The Constitution does not prohibit the mere formation of a public
utility corporation without the required proportion of Filipino capital. 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 proportion of Filipino capital (sec. 8, Art. XIV of the Constitution). [People vs. Quasha,
93 Phil., 333(1953)]
Duty of Revealing the Ownership of the Capital of a Corporation.If the Constitution does not prohibit the
mere formation of a public utility corporation with alien capital, then how could the accused be charged with
having wrongfully intended to circumvent that fundamental law by not disclosing in the articles of incorporation
that one of the incorporators, a Filipino, was a mere trustee of his American co-incorporators and that for that
reason the subscribed capital stock of the corporation was wholly American? For the mere formation of the
corporation such disclosure was not essential, and the Corporation Law does not require it. The accused was,
therefore, under no obligation to make it. In the absence of such obligation and of the alleged wrongful intent
on the part of the accused, he cannot legally be convicted of the crime of falsification for having allegedly
perverted the truth in a narration of facts.
3.Falsification; False Narration for not revealing a Certain Fact, not Punishable if There is no Legal Obligation
to Disclose the Truth.It is essential to the commission of this crime that the perversion of truth in a narration
of facts must be made with the wrongful intent of injuring a third person and even if such wrongful intent is
proven, still the untruthful statement will not constitute criminal falsification if there is no legal obligation on the
part of the narrator to disclose the truth. (U. S. vs. Reyes, 1 Phil., 341; U. S. vs. Lopez, 15 Phil., 515.) Wrongful
intent to injure a third person and obligation on the part of the narrator to disclose the truth are thus essential
to , conviction for the crime of falsification under articles 171 (4) and 172 (1) of the Revised Penal Code.
[People vs. Quasha, 93 Phil., 333(1953)]
G.R. No. L-2294
May 25, 1951

On October 1, 1941, the respondent corporation, Christern Huenefeld, & Co., Inc., after payment of
corresponding premium, obtained from the petitioner ,Filipinas Cia. de Seguros, fire policy No. 29333 in the
sum of P1000,000, covering merchandise contained in a building located at No. 711 Roman Street, Binondo
Manila. On February 27, 1942, or during the Japanese military occupation, the building and insured
merchandise were burned. In due time the respondent submitted to the petitioner its claim under the policy.
The salvage goods were sold at public auction and, after deducting their value, the total loss suffered by the
respondent was fixed at P92,650. The petitioner refused to pay the claim on the ground that the policy in favor
of the respondent had ceased to be in force on the date the United States declared war against Germany, the
respondent Corporation (though organized under and by virtue of the laws of the Philippines) being controlled
by the German subjects and the petitioner being a company under American jurisdiction when said policy was
issued on October 1, 1941. The petitioner, however, in pursuance of the order of the Director of Bureau of
Financing, Philippine Executive Commission, dated April 9, 1943, paid to the respondent the sum of P92,650
on April 19, 1943.
The present action was filed on August 6, 1946, in the Court of First Instance of Manila for the purpose of
recovering from the respondent the sum of P92,650 above mentioned. The theory of the petitioner is that the
insured merchandise were burned up after the policy issued in 1941 in favor of the respondent corporation has
ceased to be effective because of the outbreak of the war between the United States and Germany on
December 10, 1941, and that the payment made by the petitioner to the respondent corporation during the
Japanese military occupation was under pressure. After trial, the Court of First Instance of Manila dismissed
the action without pronouncement as to costs. Upon appeal to the Court of Appeals, the judgment of the Court
of First Instance of Manila was affirmed, with costs. The case is now before us on appeal by certiorari from the
decision of the Court of Appeals.
The Court of Appeals overruled the contention of the petitioner that the respondent corporation became an
enemy when the United States declared war against Germany, relying on English and American cases which
held that a corporation is a citizen of the country or state by and under the laws of which it was created or
organized. It rejected the theory that nationality of private corporation is determine by the character or
citizenship of its controlling stockholders.
There is no question that majority of the stockholders of the respondent corporation were German subjects.
This being so, we have to rule that said respondent became an enemy corporation upon the outbreak of the
war between the United States and Germany. The English and American cases relied upon by the Court of
Appeals have lost their force in view of the latest decision of the Supreme Court of the United States in
Clark vs. Uebersee Finanz Korporation, decided on December 8, 1947, 92 Law. Ed. Advance Opinions, No. 4,
pp. 148-153, in which the controls test has been adopted. In "Enemy Corporation" by Martin Domke, a paper
presented to the Second International Conference of the Legal Profession held at the Hague (Netherlands) in
August. 1948 the following enlightening passages appear:
Since World War I, the determination of enemy nationality of corporations has been discussion in
many countries, belligerent and neutral. A corporation was subject to enemy legislation when it was
controlled by enemies, namely managed under the influence of individuals or corporations,
themselves considered as enemies. It was the English courts which first the Daimler case applied
this new concept of "piercing the corporate veil," which was adopted by the peace of Treaties of
1919 and the Mixed Arbitral established after the First World War.

The United States of America did not adopt the control test during the First World War. Courts
refused to recognized the concept whereby American-registered corporations could be considered
as enemies and thus subject to domestic legislation and administrative measures regarding enemy
property.
World War II revived the problem again. It was known that German and other enemy interests were
cloaked by domestic corporation structure. It was not only by legal ownership of shares that a
material influence could be exercised on the management of the corporation but also by long term
loans and other factual situations. For that reason, legislation on enemy property enacted in
various countries during World War II adopted by statutory provisions to the control test and
determined, to various degrees, the incidents of control. Court decisions were rendered on the
basis of such newly enacted statutory provisions in determining enemy character of domestic
corporation.
The United States did not, in the amendments of the Trading with the Enemy Act during the last
war, include as did other legislations the applications of the control test and again, as in World War
I, courts refused to apply this concept whereby the enemy character of an American or neutralregistered corporation is determined by the enemy nationality of the controlling stockholders.
Measures of blocking foreign funds, the so called freezing regulations, and other administrative
practice in the treatment of foreign-owned property in the United States allowed to large degree the
determination of enemy interest in domestic corporations and thus the application of the control
test. Court decisions sanctioned such administrative practice enacted under the First War Powers
Act of 1941, and more recently, on December 8, 1947, the Supreme Court of the United States
definitely approved of the control theory. In Clark vs. Uebersee Finanz Korporation, A. G., dealing
with a Swiss corporation allegedly controlled by German interest, the Court: "The property of all
foreign interest was placed within the reach of the vesting power (of the Alien Property Custodian)
not to appropriate friendly or neutral assets but to reach enemy interest which masqueraded under
those innocent fronts. . . . The power of seizure and vesting was extended to all property of any
foreign country or national so that no innocent appearing device could become a Trojan horse."
It becomes unnecessary, therefore, to dwell at length on the authorities cited in support of the appealed
decision. However, we may add that, in Haw Pia vs. China Banking Corporation, * 45 Off Gaz., (Supp. 9) 299,
we already held that China Banking Corporation came within the meaning of the word "enemy" as used in the
Trading with the Enemy Acts of civilized countries not only because it was incorporated under the laws of an
enemy country but because it was controlled by enemies.
The Philippine Insurance Law (Act No. 2427, as amended,) in section 8, provides that "anyone except a public
enemy may be insured." It stands to reason that an insurance policy ceases to be allowable as soon as an
insured becomes a public enemy.

Effect of war, generally. All intercourse between citizens of belligerent powers which is
inconsistent with a state of war is prohibited by the law of nations. Such prohibition includes all
negotiations, commerce, or trading with the enemy; all acts which will increase, or tend to increase,
its income or resources; all acts of voluntary submission to it; or receiving its protection; also all
acts concerning the transmission of money or goods; and all contracts relating thereto are thereby
nullified. It further prohibits insurance upon trade with or by the enemy, upon the life or lives of
aliens engaged in service with the enemy; this for the reason that the subjects of one country
cannot be permitted to lend their assistance to protect by insurance the commerce or property of
belligerent, alien subjects, or to do anything detrimental too their country's interest. The purpose of
war is to cripple the power and exhaust the resources of the enemy, and it is inconsistent that one
country should destroy its enemy's property and repay in insurance the value of what has been so
destroyed, or that it should in such manner increase the resources of the enemy, or render it aid,
and the commencement of war determines, for like reasons, all trading intercourse with the enemy,
which prior thereto may have been lawful. All individuals therefore, who compose the belligerent
powers, exist, as to each other, in a state of utter exclusion, and are public enemies. (6 Couch,
Cyc. of Ins. Law, pp. 5352-5353.)
In the case of an ordinary fire policy, which grants insurance only from year, or for some other
specified term it is plain that when the parties become alien enemies, the contractual tie is broken
and the contractual rights of the parties, so far as not vested. lost. (Vance, the Law on Insurance,
Sec. 44, p. 112.)
The respondent having become an enemy corporation on December 10, 1941, the insurance policy issued in
its favor on October 1, 1941, by the petitioner (a Philippine corporation) had ceased to be valid and enforcible,
and since the insured goods were burned after December 10, 1941, and during the war, the respondent was
not entitled to any indemnity under said policy from the petitioner. However, elementary rules of justice (in the
absence of specific provision in the Insurance Law) require that the premium paid by the respondent for the
period covered by its policy from December 11, 1941, should be returned by the petitioner.
The Court of Appeals, in deciding the case, stated that the main issue hinges on the question of whether the
policy in question became null and void upon the declaration of war between the United States and Germany
on December 10, 1941, and its judgment in favor of the respondent corporation was predicated on its
conclusion that the policy did not cease to be in force. The Court of Appeals necessarily assumed that, even if
the payment by the petitioner to the respondent was involuntary, its action is not tenable in view of the ruling
on the validity of the policy. As a matter of fact, the Court of Appeals held that "any intimidation resorted to by
the appellee was not unjust but the exercise of its lawful right to claim for and received the payment of the
insurance policy," and that the ruling of the Bureau of Financing to the effect that "the appellee was entitled to
payment from the appellant was, well founded." Factually, there can be no doubt that the Director of the
Bureau of Financing, in ordering the petitioner to pay the claim of the respondent, merely obeyed the
instruction of the Japanese Military Administration, as may be seen from the following: "In view of the findings
and conclusion of this office contained in its decision on Administrative Case dated February 9, 1943 copy of
which was sent to your office and the concurrence therein of the Financial Department of the Japanese Military
Administration, and following the instruction of said authority, you are hereby ordered to pay the claim of
Messrs. Christern, Huenefeld & Co., Inc. The payment of said claim, however, should be made by means of
crossed check." (Emphasis supplied.)
It results that the petitioner is entitled to recover what paid to the respondent under the circumstances on this
case. However, the petitioner will be entitled to recover only the equivalent, in actual Philippines currency of
P92,650 paid on April 19, 1943, in accordance with the rate fixed in the Ballantyne scale.
Wherefore, the appealed decision is hereby reversed and the respondent corporation is ordered to pay to the
petitioner the sum of P77,208.33, Philippine currency, less the amount of the premium, in Philippine currency,
that should be returned by the petitioner for the unexpired term of the policy in question, beginning December
11, 1941. Without costs. So ordered.

G.R. No. L-8451

December 20, 1957

THE ROMAN CATHOLIC APOSTOLIC ADMINISTRATOR OF DAVAO, INC., petitioner,

vs.
THE LAND REGISTRATION COMMISSION and THE REGISTER OF DEEDS OF DAVAO
CITY, respondents.
Teodoro Padilla, for petitioner.
Office of the Solicitor General Ambrosio Padilla, Assistant Solicitor General Jose G. Bautista and Troadio T.
Quianzon, Jr., for respondents.

After the motion to reconsider said resolution was denied, an action for mandamus was instituted with this
Court by said corporation sole, alleging that under the Corporation Law as well as the settled jurisprudence on
the matter, the deed of sale executed by Mateo L. Rodis in favor of petitioner is actually a deed of sale in favor
of the Catholic Church which is qualified to acquire private agricultural lands for the establishment and
maintenance of places of worship, and prayed that judgment be rendered reserving and setting aside the
resolution of the Land Registration Commissioner in question. In its resolution of November 15, 1954, this
Court gave due course to this petition providing that the procedure prescribed for appeals from the Public
Service Commission of the Securities and Exchange Commissions (Rule 43), be followed.
Section 5 of Article XIII of the Philippine Constitution reads as follows:
SEC. 5. Save in cases of hereditary succession, no private agricultural land shall be transferred or
assigned except to individuals, corporations, or associations qualified to acquire or hold lands of
the public domain in the Philippines.

FELIX, J.:
Section 1 of the same Article also provides the following:
This is a petition for mandamus filed by the Roman Catholic Apostolic Administrator of Davao seeking the
reversal of a resolution by the Land Registration Commissioner in L.R.C. Consulta No. 14. The facts of the
case are as follows:
On October 4, 1954, Mateo L. Rodis, a Filipino citizen and resident of the City of Davao, executed a deed of
sale of a parcel of land located in the same city covered by Transfer Certificate No. 2263, in favor of the
Roman Catholic Apostolic Administrator of Davao Inc., s corporation sole organized and existing in
accordance with Philippine Laws, with Msgr. Clovis Thibault, a Canadian citizen, as actual incumbent. When
the deed of sale was presented to Register of Deeds of Davao for registration, the latter.
having in mind a previous resolution of the Fourth Branch of the Court of First Instance of Manila
wherein the Carmelite Nuns of Davao were made to prepare an affidavit to the effect that 60 per
cent of the members of their corporation were Filipino citizens when they sought to register in favor
of their congregation of deed of donation of a parcel of land
required said corporation sole to submit a similar affidavit declaring that 60 per cent of the members thereof
were Filipino citizens.
The vendee in the letter dated June 28, 1954, expressed willingness to submit an affidavit, both not in the
same tenor as that made the Progress of the Carmelite Nuns because the two cases were not similar, for
whereas the congregation of the Carmelite Nuns had five incorporators, the corporation sole has only one; that
according to their articles of incorporation, the organization of the Carmelite Nuns became the owner of
properties donated to it, whereas the case at bar, the totality of the Catholic population of Davao would
become the owner of the property bought to be registered.
As the Register of Deeds entertained some doubts as to the registerability if the document, the matter was
referred to the Land Registration Commissioner en consulta for resolution in accordance with section 4 of
Republic Act No. 1151. Proper hearing on the matter was conducted by the Commissioner and after the
petitioner corporation had filed its memorandum, a resolution was rendered on September 21, 1954, holding
that in view of the provisions of Section 1 and 5 of Article XIII of the Philippine Constitution, the vendee was
not qualified to acquire private lands in the Philippines in the absence of proof that at least 60 per centum of
the capital, property, or assets of the Roman Catholic Apostolic Administrator of Davao, Inc., was actually
owned or controlled by Filipino citizens, there being no question that the present incumbent of the corporation
sole was a Canadian citizen. It was also the opinion of the Land Registration Commissioner that section 159 of
the corporation Law relied upon by the vendee was rendered operative by the aforementioned provisions of
the Constitution with respect to real estate, unless the precise condition set therein that at least 60 per cent
of its capital is owned by Filipino citizens be present, and, therefore, ordered the Registered Deeds of
Davao to deny registration of the deed of sale in the absence of proof of compliance with such condition.

SECTION 1. All agricultural, timber, and mineral lands of the public domain, water, minerals, coal, petroleum,
and other mineral oils, all forces of potential energy, and other natural resources of the Philippines belong to
the State, and their disposition, exploitation, development, or utilization shall be limited to cititzens of the
Philippines, or to corporations or associations at least sixty per centum of the capital of which is owned by
such citizens, SUBJECT TO ANY EXISTING RIGHT, grant, lease, or concession AT THE TIME OF THE
INAUGURATION OF THE GOVERNMENT ESTABLISHED UNDER CONSTITUTION. Natural resources, with
the exception of public agricultural land, shall not be alienated, and no license, concession, or leases for the
exploitation, development, or utilization of any of the natural resources shall be granted for a period exceeding
twenty-five years, renewable for another twenty-five years, except as to water rights for irrigation, water supply,
fisheries, or industrial uses other than the development of water power, in which cases other than the
development and limit of the grant.
In virtue of the foregoing mandates of the Constitution, who are considered "qualified" to acquire and hold
agricultural lands in the Philippines? What is the effect of these constitutional prohibition of the right of a
religious corporation recognized by our Corporation Law and registered as a corporation sole, to possess,
acquire and register real estates in its name when the Head, Manager, Administrator or actual incumbent is an
alien?
Petitioner consistently maintained that a corporation sole, irrespective of the citizenship of its incumbent, is not
prohibited or disqualified to acquire and hold real properties. The Corporation Law and the Canon Law are
explicit in their provisions that a corporation sole or "ordinary" is not the owner of the of the properties that he
may acquire but merely the administrator thereof. The Canon Law also specified that church temporalities are
owned by the Catholic Church as a "moral person" or by the diocess as minor "moral persons" with the
ordinary or bishop as administrator.
And elaborating on the composition of the Catholic Church in the Philippines, petitioner explained that as a
religious society or organization, it is made up of 2 elements or divisions the clergy or religious members
and the faithful or lay members. The 1948 figures of the Bureau of Census showed that there were 277,551
Catholics in Davao and aliens residing therein numbered 3,465. Ever granting that all these foreigners are
Catholics, petitioner contends that Filipino citizens form more than 80 per cent of the entire Catholics
population of that area. As to its clergy and religious composition, counsel for petitioner presented the Catholic
Directory of the Philippines for 1954 (Annex A) which revealed that as of that year, Filipino clergy and women
novices comprise already 60.5 per cent of the group. It was, therefore, allowed that the constitutional
requirement was fully met and satisfied.
Respondents, on the other hand, averred that although it might be true that petitioner is not the owner of the
land purchased, yet he has control over the same, with full power to administer, take possession of, alienate,

transfer, encumber, sell or dispose of any or all lands and their improvements registered in the name of the
corporation sole and can collect, receive, demand or sue for all money or values of any kind that may be kind
that may become due or owing to said corporation, and vested with authority to enter into agreements with any
persons, concerns or entities in connection with said real properties, or in other words, actually exercising all
rights of ownership over the properties. It was their stand that the theory that properties registered in the name
of the corporation sole are held in true for the benefit of the Catholic population of a place, as of Davao in the
case at bar should be sustained because a conglomeration of persons cannot just be pointed out as the cestui
que trust or recipient of the benefits from the property allegedly administered in their behalf. Neither can it be
said that the mass of people referred to as such beneficiary exercise ant right of ownership over the same.
This set-up, respondents argued, falls short of a trust. The respondents instead tried to prove that in reality, the
beneficiary of ecclesiastical properties are not members or faithful of the church but someone else, by quoting
a portion a portion of the ought of fidelity subscribed by a bishop upon his elevation to the episcopacy wherein
he promises to render to the Pontificial Father or his successors an account of his pastoral office and of all
things appertaining to the state of this church.
Respondents likewise advanced the opinion that in construing the constitutional provision calling for 60 per
cent of Filipino citizenship, the criterion of the properties or assets thereof.
In solving the problem thus submitted to our consideration, We can say the following: A corporation sole is a
special form of corporation usually associated with the clergy. Conceived and introduced into the common law
by sheer necessity, this legal creation which was referred to as "that unhappy freak of English law" was
designed to facilitate the exercise of the functions of ownership carried on by the clerics for and on behalf of
the church which was regarded as the property owner (See I Couvier's Law Dictionary, p. 682-683).
A corporation sole consists of one person only, and his successors (who will always be one at a time), in some
particular station, who are incorporated by law in order to give them some legal capacities and advantages,
particularly that of perpetuity, which in their natural persons they could not have had. In this sense, the king is
a sole corporation; so is a bishop, or dens, distinct from their several chapters (Reid vs. Barry, 93 Fla. 849, 112
So. 846).
The provisions of our Corporation law on religious corporations are illuminating and sustain the stand of
petitioner. Section 154 thereof provides:
SEC. 154. For the administration of the temporalities of any religious denomination, society or
church and the management of the estates and the properties thereof, it shall be lawful for the
bishop, chief priest, or presiding either of any such religious denomination, society or church to
become a corporation sole, unless inconsistent wit the rules, regulations or discipline of his
religious denomination, society or church or forbidden by competent authority thereof.
See also the pertinent provisions of the succeeding sections of the same Corporation Law copied hereunder:
SEC. 155. In order to become a corporation sole the bishop, chief priest, or presiding elder of any
religious denomination, society or church must file with the Securities and Exchange
Commissioner articles of incorporation setting forth the following facts:

(As amended by Commonwealth Act No. 287).

SEC. 157. From and after the filing with the Securities and Exchange Commissioner of the said
articles of incorporation, which verified by affidavit or affirmation as aforesaid and accompanied by
the copy of the commission, certificate of election, or letters of appointment of the bishop, chief
priest, or presiding elder, duly certified as prescribed in the section immediately preceding such the
bishop, chief priest, or presiding elder, as the case may be, shall become a corporation sole
and all temporalities, estates, and properties the religious denomination, society, or church
therefore administered or managed by him as such bishop, chief priest, or presiding elder, shall be
held in trust by him as a corporation sole, for the use, purpose, behalf, and sole benefit of his
religious denomination, society, or church, including hospitals, schools, colleges, orphan, asylums,
parsonages, and cemeteries thereof. For the filing of such articles of incorporation, the Securities
and Exchange Commissioner shall collect twenty-five pesos. (As amended by Commonwealth Act.
No. 287); and.
SEC. 163. The right to administer all temporalities and all property held or owned by a religious
order or society, or by the diocese, synod, or district organization of any religious denomination or
church shall, on its incorporation, pass to the corporation and shall be held in trust for the use,
purpose behalf, and benefit of the religious society, or order so incorporated or of the church of
which the diocese, or district organization is an organized and constituent part.
The Cannon Law contains similar provisions regarding the duties of the corporation sole or ordinary as
administrator of the church properties, as follows:
Al Ordinario local pertenence vigilar diligentemente sobre la administracion de todos los bienes
eclesiasticos que se hallan en su territorio y no estuvieren sustraidos de su jurisdiccion, salvs las
prescriciones legitimas que le concedan mas aamplios derechos.
Teniendo en cuenta los derechos y las legitimas costumbres y circunstancias, procuraran los
Ordinarios regular todo lo concerniente a la administracion de los bienes eclesciasticos, dando las
oportunas instucciones particularles dentro del narco del derecho comun. (Title XXVIII, Codigo de
Derecho Canonico, Lib. III, Canon 1519).1
That leaves no room for doubt that the bishops or archbishops, as the case may be, as corporation's sole are
merely administrators of the church properties that come to their possession, in which they hold in trust for the
church. It can also be said that while it is true that church properties could be administered by a natural
persons, problems regarding succession to said properties can not be avoided to rise upon his death. Through
this legal fiction, however, church properties acquired by the incumbent of a corporation sole pass, by
operation of law, upon his death not his personal heirs but to his successor in office. It could be seen,
therefore, that a corporation sole is created not only to administer the temporalities of the church or religious
society where he belongs but also to hold and transmit the same to his successor in said office. If the
ownership or title to the properties do not pass to the administrators, who are the owners of church
properties?.
Bouscaren and Elis, S.J., authorities on cannon law, on their treatise comment:

xxx xxx xxx.

(3) That as such bishop, chief priest, or presiding elder he is charged with the administration of the
temporalities and the management of the estates and properties of his religious denomination,
society, or church within its territorial jurisdiction, describing it;
xxx xxx xxx.

In matters regarding property belonging to the Universal Church and to the Apostolic See, the
Supreme Pontiff exercises his office of supreme administrator through the Roman Curia; in matters
regarding other church property, through the administrators of the individual moral persons in the
Church according to that norms, laid down in the Code of Cannon Law. This does not mean,
however, that the Roman Pontiff is the owner of all the church property; but merely that he is the
supreme guardian (Bouscaren and Ellis, Cannon Law, A Text and Commentary, p. 764).

and this Court, citing Campes y Pulido, Legislacion y Jurisprudencia Canonica, ruled in the case of Trinidad
vs. Roman Catholic Archbishop of Manila, 63 Phil. 881, that:
The second question to be decided is in whom the ownership of the properties constituting the
endowment of the ecclesiastical or collative chaplaincies is vested.
Canonists entertain different opinions as to the persons in whom the ownership of the
ecclesiastical properties is vested, with respect to which we shall, for our purpose, confine
ourselves to stating with Donoso that, while many doctors cited by Fagnano believe that it resides
in the Roman Pontiff as Head of the Universal Church, it is more probable that ownership, strictly
speaking, does not reside in the latter, and, consequently, ecclesiastical properties are owned by
the churches, institutions and canonically established private corporations to which said properties
have been donated.
Considering that nowhere can We find any provision conferring ownership of church properties on the Pope
although he appears to be the supreme administrator or guardian of his flock, nor on the corporation sole or
heads of dioceses as they are admittedly mere administrators of said properties, ownership of these
temporalities logically fall and develop upon the church, diocese or congregation acquiring the same. Although
this question of ownership of ecclesiastical properties has off and on been mentioned in several decisions of
the Court yet in no instance was the subject of citizenship of this religious society been passed upon.
We are not unaware of the opinion expressed by the late Justice Perfecto in his dissent in the case of
Agustines vs. Court of First Instance of Bulacan, 80 Phil. 565, to the effect that "the Roman Catholic
Archbishop of Manila is only a branch of a universal church by the Pope, with permanent residence in Rome,
Italy". There is no question that the Roman Catholic Church existing in the Philippines is a tributary and part of
the international religious organization, for the word "Roman" clearly expresses its unity with and recognizes
the authority of the Pope in Rome. However, lest We become hasty in drawing conclusions, We have to
analyze and take note of the nature of the government established in the Vatican City, of which it was said:
GOVERNMENT. In the Roman Catholic Church supreme authority and jurisdiction over clergy and
laity alike as held by the pope who (since the Middle Ages) is elected by the cardinals assembled
in conclave, and holds office until his death or legitimate abdication. . . While the pope is obviously
independent of the laws made, and the officials appointed, by himself or his predecessors, he
usually exercises his administrative authority according to the code of canon law and through the
congregations, tribunals and offices of the Curia Romana. In their respective territories (called
generally dioceses) and over their respective subjects, the patriarchs, metropolitans or
archbishops and bishops exercise a jurisdiction which is called ordinary (as attached by law to an
office given to a person. . . (Collier's Encyclopedia, Vol. 17, p. 93).
While it is true and We have to concede that in the profession of their faith, the Roman Pontiff is the supreme
head; that in the religious matters, in the exercise of their belief, the Catholic congregation of the faithful
throughout the world seeks the guidance and direction of their Spiritual Father in the Vatican, yet it cannot be
said that there is a merger of personalities resultant therein. Neither can it be said that the political and civil
rights of the faithful, inherent or acquired under the laws of their country, are affected by that relationship with
the Pope. The fact that the Roman Catholic Church in almost every country springs from that society that saw
its beginning in Europe and the fact that the clergy of this faith derive their authorities and receive orders from
the Holy See do not give or bestow the citizenship of the Pope upon these branches. Citizenship is a political
right which cannot be acquired by a sort of "radiation". We have to realize that although there is a fraternity
among all the catholic countries and the dioceses therein all over the globe, the universality that the word
"catholic" implies, merely characterize their faith, a uniformity in the practice and the interpretation of their
dogma and in the exercise of their belief, but certainly they are separate and independent from one another in
jurisdiction, governed by different laws under which they are incorporated, and entirely independent on the
others in the management and ownership of their temporalities. To allow theory that the Roman Catholic
Churches all over the world follow the citizenship of their Supreme Head, the Pontifical Father, would lead to
the absurdity of finding the citizens of a country who embrace the Catholic faith and become members of that

religious society, likewise citizens of the Vatican or of Italy. And this is more so if We consider that the Pope
himself may be an Italian or national of any other country of the world. The same thing be said with regard to
the nationality or citizenship of the corporation sole created under the laws of the Philippines, which is not
altered by the change of citizenship of the incumbent bishops or head of said corporation sole.
We must therefore, declare that although a branch of the Universal Roman Catholic Apostolic Church, every
Roman Catholic Church in different countries, if it exercises its mission and is lawfully incorporated in
accordance with the laws of the country where it is located, is considered an entity or person with all the rights
and privileges granted to such artificial being under the laws of that country, separate and distinct from the
personality of the Roman Pontiff or the Holy See, without prejudice to its religious relations with the latter
which are governed by the Canon Law or their rules and regulations.
We certainly are conscious of the fact that whatever conclusion We may draw on this matter will have a far
reaching influence, nor can We overlook the pages of history that arouse indignation and criticisms against
church landholdings. This nurtured feeling that snowbailed into a strong nationalistic sentiment manifested
itself when the provisions on natural to be embodied in the Philippine Constitution were framed, but all that has
been said on this regard referred more particularly to landholdings of religious corporations known as "Friar
Estates" which have already bee acquired by our government, and not to properties held by corporations sole
which, We repeat, are properties held in trust for the benefit of the faithful residing within its territorial
jurisdiction. Though that same feeling probably precipitated and influenced to a large extent the doctrine laid
down in the celebrated Krivenco decision, We have to take this matter in the light of legal provisions and
jurisprudence actually obtaining, irrespective of sentiments.
The question now left for our determination is whether the Universal Roman Catholic Apostolic Church in the
Philippines, or better still, the corporation sole named the Roman Catholic Apostolic Administrator of Davao,
Inc., is qualified to acquire private agricultural lands in the Philippines pursuant to the provisions of Article XIII
of the Constitution.
We see from sections 1 and 5 of said Article quoted before, that only persons or corporations qualified to
acquire hold lands of the public domain in the Philippines may acquire or be assigned and hold private
agricultural lands. Consequently, the decisive factor in the present controversy hinges on the proposition or
whether or not the petitioner in this case can acquire agricultural lands of the public domain.
From the data secured from the Securities and Exchange Commission, We find that the Roman Catholic
Bishop of Zamboanga was incorporated (as a corporation sole) in September, 1912, principally to administer
its temporalities and manage its properties. Probably due to the ravages of the last war, its articles of
incorporation were reconstructed in the Securities and Exchange Commission on April 8, 1948. At first, this
corporation sole administered all the temporalities of the church existing or located in the island of Mindanao.
Later on, however, new dioceses were formed and new corporations sole were created to correspond with the
territorial jurisdiction of the new dioceses, one of them being petitioner herein, the Roman Catholic Apostolic
Administrator of Davao, Inc., which was registered with the Securities and Exchange Commission on
September 12, 1950, and succeeded in the administrative for all the "temporalities" of the Roman Catholic
Church existing in Davao.
According to our Corporation Law, Public Act No. 1549, approved April 1, 1906, a corporation sole.
is organized and composed of a single individual, the head of any religious society or church, for
the ADMINISTRATION of the temporalities of such society or church. By "temporalities" is meant
estate and properties not used exclusively for religious worship. The successor in office of such
religious head or chief priest incorporated as a corporation sole shall become the corporation sole
on ascension to office, and shall be permitted to transact business as such on filing with the
Securities and Exchange Commission a copy of his commission, certificate of election or letter of
appointment duly certified by any notary public or clerk of court of record (Guevara's The Philippine
Corporation Law, p. 223).

The Corporation Law also contains the following provisions:

SECTION 159. Any corporation sole may purchase and hold real estate and personal; property for
its church, charitable, benevolent, or educational purposes, and may receive bequests or gifts of
such purposes. Such corporation may mortgage or sell real property held by it upon obtaining an
order for that purpose from the Court of First Instance of the province in which the property is
situated; but before making the order proof must be made to the satisfaction of the Court that
notice of the application for leave to mortgage or sell has been given by publication or otherwise in
such manner and for such time as said Court or the Judge thereof may have directed, and that it is
to the interest of the corporation that leave to mortgage or sell must be made by petition, duly
verified by the bishop, chief priest, or presiding elder acting as corporation sole, and may be
opposed by any member of the religious denomination, society or church represented by the
corporation sole: Provided, however, That in cases where the rules, regulations, and discipline of
the religious denomination, society or church concerned represented by such corporation sole
regulate the methods of acquiring, holding, selling and mortgaging real estate and personal
property, such rules, regulations, and discipline shall control and the intervention of the Courts
shall not be necessary.
It can, therefore, be noticed that the power of a corporation sole to purchase real property, like the power
exercised in the case at bar, it is not restricted although the power to sell or mortgage sometimes is,
depending upon the rules, regulations, and discipline of the church concerned represented by said corporation
sole. If corporations sole can purchase and sell real estate for its church, charitable, benevolent, or
educational purposes, can they register said real properties? As provided by law, lands held in trust for specific
purposes me be subject of registration (section 69, Act 496), and the capacity of a corporation sole, like
petitioner herein, to register lands belonging to it is acknowledged, and title thereto may be issued in its name
(Bishop of Nueva Segovia vs. Insular Government, 26 Phil. 300-1913). Indeed it is absurd that while the
corporations sole that might be in need of acquiring lands for the erection of temples where the faithful can
pray, or schools and cemeteries which they are expressly authorized by law to acquire in connection with the
propagation of the Roman Catholic Apostolic faith or in furtherance of their freedom of religion they could not
register said properties in their name. As professor Javier J. Nepomuceno very well says "Man in his search
for the immortal and imponderable, has, even before the dawn of recorded history, erected temples to the
Unknown God, and there is no doubt that he will continue to do so for all time to come, as long as he
continues 'imploring the aid of Divine Providence'" (Nepomuceno's Corporation Sole, VI Ateneo Law Journal,
No. 1, p. 41, September, 1956). Under the circumstances of this case, We might safely state that even before
the establishment of the Philippine Commonwealth and of the Republic of the Philippines every corporation
sole then organized and registered had by express provision of law the necessary power and qualification to
purchase in its name private lands located in the territory in which it exercised its functions or ministry and for
which it was created, independently of the nationality of its incumbent unique and single member and head,
the bishop of the dioceses. It can be also maintained without fear of being gainsaid that the Roman Catholic
Apostolic Church in the Philippines has no nationality and that the framers of the Constitution, as will be
hereunder explained, did not have in mind the religious corporations sole when they provided that 60 per
centum of the capital thereof be owned by Filipino citizens.
There could be no controversy as to the fact that a duly registered corporation sole is an artificial being having
the right of succession and the power, attributes, and properties expressly authorized by law or incident to its
existence (section 1, Corporation Law). In outlining the general powers of a corporation. Public Act. No. 1459
provides among others:
SEC. 13. Every corporation has the power:
(5) To purchase, hold, convey, sell, lease, lot, mortgage, encumber, and otherwise deal with such
real and personal property as the purpose for which the corporation was formed may permit, and
the transaction of the lawful business of the corporation may reasonably and necessarily require,
unless otherwise prescribed in this Act: . . .

In implementation of the same and specially made applicable to a form of corporation recognized by the same
law, Section 159 aforequoted expressly allowed the corporation sole to purchase and hold real as well as
personal properties necessary for the promotion of the objects for which said corporation sole is created.
Respondent Land Registration Commissioner, however, maintained that since the Philippine Constitution is a
later enactment than public Act No. 1459, the provisions of Section 159 in amplification of Section 13 thereof,
as regard real properties, should be considered repealed by the former.
There is a reason to believe that when the specific provision of the Constitution invoked by respondent
Commissioner was under consideration, the framers of the same did not have in mind or overlooked this
particular form of corporation. It is undeniable that the naturalization and conservation of our national
resources was one of the dominating objectives of the Convention and in drafting the present Article XII of the
Constitution, the delegates were goaded by the desire (1) to insure their conservation for Filipino posterity; (2)
to serve as an instrument of national defense, helping prevent the extension into the country of foreign control
through peaceful economic penetration; and (3) to prevent making the Philippines a source of international
conflicts with the consequent danger to its internal security and independence (See The Framing of the
Philippine Constitution by Professor Jose M. Aruego, a Delegate to the Constitutional Convention, Vol. II. P.
592-604). In the same book Delegate Aruego, explaining the reason behind the first consideration, wrote:
At the time of the framing of Philippine Constitution, Filipino capital had been to be rather shy.
Filipinos hesitated s a general rule to invest a considerable sum of their capital for the
development, exploitation and utilization of the natural resources of the country. They had not as
yet been so used to corporate as the peoples of the west. This general apathy, the delegates knew,
would mean the retardation of the development of the natural resources, unless foreign capital
would be encouraged to come and help in that development. They knew that the naturalization of
the natural resources would certainly not encourage theINVESTMENT OF FOREIGN CAPITAL
into them. But there was a general feeling in the Convention that it was better to have such a
development retarded or even postpone together until such time when the Filipinos would be ready
and willing to undertake it rather than permit the natural resources to be placed under the
ownership or control of foreigners in order that they might be immediately be developed, with the
Filipinos of the future serving not as owners but utmost as tenants or workers under foreign
masters. By all means, the delegates believed, the natural resources should be conserved for
Filipino posterity.
It could be distilled from the foregoing that the farmers of the Constitution intended said provisions as barrier
for foreigners or corporations financed by such foreigners to acquire, exploit and develop our natural
resources, saving these undeveloped wealth for our people to clear and enrich when they are already
prepared and capable of doing so. But that is not the case of corporations sole in the Philippines, for, We
repeat, they are mere administrators of the "temporalities" or properties titled in their name and for the benefit
of the members of their respective religion composed of an overwhelming majority of Filipinos. No mention nor
allusion whatsoever is made in the Constitution as to the prohibition against or the liability of the Roman
Catholic Church in the Philippines to acquire and hold agricultural lands. Although there were some
discussions on landholdings, they were mostly confined in the inclusion of the provision allowing the
Government to break big landed estates to put an end to absentee landlordism.
But let us suppose, for the sake of argument, that the above referred to inhibitory clause of Section 1 of Article
XIII of the constitution does have bearing on the petitioner's case; even so the clause requiring that at least 60
per centum of the capital of the corporation be owned by Filipinos is subordinated to the petitioner's aforesaid
right already existing at the time of the inauguration of the Commonwealth and the Republic of the Philippines.
In the language of Mr. Justice Jose P. Laurel (a delegate to the Constitutional Convention), in his concurring
opinion of the case of Gold Creek mining Corporation, petitioner vs. Eulogio Rodriguez, Secretary of
Agriculture and Commerce, and Quirico Abadilla, Director of the Bureau of Mines, respondent, 66 Phil. 259:
The saving clause in the section involved of the Constitution was originally embodied in the report
submitted by the Committee on Naturalization and Preservation of Land and Other Natural
Resources to the Constitutional Convention on September 17, 1954. It was later inserted in the

first draft of the Constitution as section 13 of Article XIII thereof, and finally incorporated as we find
it now. Slight have been the changes undergone by the proviso from the time when it comes out of
the committee until it was finally adopted. When first submitted and as inserted to the first draft of
the Constitution it reads: 'subject to any right, grant, lease, or concession existing in respect
thereto on the date of the adoption of the Constitution'. As finally adopted, the proviso reads:
'subject to any existing right, grant, lease, or concession at the time of the inauguration of the
Government established under this Constitution'. This recognition is not mere graciousness but
springs form the just character of the government established. The framers of the Constitution
were not obscured by the rhetoric of democracy or swayed to hostility by an intense spirit of
nationalism. They well knew that conservation of our natural resources did not mean destruction or
annihilation of acquired property rights. Withal, they erected a government neither episodic nor
stationary but well-nigh conservative in the protection of property rights. This notwithstanding
nationalistic and socialistic traits discoverable upon even a sudden dip into a variety of the
provisions embodied in the instrument.
The writer of this decision wishes to state at this juncture that during the deliberation of this case he submitted
to the consideration of the Court the question that may be termed the "vested right saving clause" contained in
Section 1, Article XII of the Constitution, but some of the members of this Court either did not agree with the
theory of the writer, or were not ready to take a definite stand on the particular point I am now to discuss
deferring our ruling on such debatable question for a better occasion, inasmuch as the determination thereof is
not absolutely necessary for the solution of the problem involved in this case. In his desire to face the issues
squarely, the writer will endeavor, at least as a disgression, to explain and develop his theory, not as a
lucubration of the Court, but of his own, for he deems it better and convenient to go over the cycle of reasons
that are linked to one another and that step by step lead Us to conclude as We do in the dispositive part of this
decision.
It will be noticed that Section 1 of Article XIII of the Constitution provides, among other things, that "all
agricultural lands of the public domain and their disposition shall be limited to citizens of the Philippines or
to corporations at least 60 per centum of the capital of which is owned by such citizens, SUBJECT TO ANY
EXISTING RIGHT AT THE TIME OF THE INAUGURATION OF THE GOVERNMENT ESTABLISHED UNDER
THIS CONSTITUTION."
As recounted by Mr. Justice Laurel in the aforementioned case of Gold Creek Mining Corporation vs.
Rodriguez et al., 66 Phil. 259, "this recognition (in the clause already quoted), is not mere graciousness but
springs from the just character of the government established. The farmers of the Constitution were not
obscured by the rhetoric of democracy or swayed to hostility by an intense spirit of nationalism. They well
knew that conservation of our natural resources did not mean destruction or annihilation of ACQUIRED
PROPERTY RIGHTS".
But respondents' counsel may argue that the preexisting right of acquisition of public or private lands by a
corporation which does not fulfill this 60 per cent requisite, refers to purchases of the Constitution and not to
later transactions. This argument would imply that even assuming that petitioner had at the time of the
enactment of the Constitution the right to purchase real property or right could not be exercised after the
effectivity of our Constitution, because said power or right of corporations sole, like the herein petitioner,
conferred in virtue of the aforequoted provisions of the Corporation Law, could no longer be exercised in view
of the requisite therein prescribed that at least 60 per centum of the capital of the corporation had to be
Filipino. It has been shown before that: (1) the corporation sole, unlike the ordinary corporations which are
formed by no less than 5 incorporators, is composed of only one persons, usually the head or bishop of the
diocese, a unit which is not subject to expansion for the purpose of determining any percentage whatsoever;
(2) the corporation sole is only the administrator and not the owner of the temporalities located in the territory
comprised by said corporation sole; (3) such temporalities are administered for and on behalf of the faithful
residing in the diocese or territory of the corporation sole; and (4) the latter, as such, has no nationality and the
citizenship of the incumbent Ordinary has nothing to do with the operation, management or administration of
the corporation sole, nor effects the citizenship of the faithful connected with their respective dioceses or
corporation sole.

In view of these peculiarities of the corporation sole, it would seem obvious that when the specific provision of
the Constitution invoked by respondent Commissioner (section 1, Art. XIII), was under consideration, the
framers of the same did not have in mind or overlooked this particular form of corporation. If this were so, as
the facts and circumstances already indicated tend to prove it to be so, then the inescapable conclusion would
be that this requirement of at least 60 per cent of Filipino capital was never intended to apply to corporations
sole, and the existence or not a vested right becomes unquestionably immaterial.
But let us assumed that the questioned proviso is material. yet We might say that a reading of said Section 1
will show that it does not refer to any actual acquisition of land up to the right, qualification or power to
acquire and hold private real property. The population of the Philippines, Catholic to a high percentage, is ever
increasing. In the practice of religion of their faithful the corporation sole may be in need of more temples
where to pray, more schools where the children of the congregation could be taught in the principles of their
religion, more hospitals where their sick could be treated, more hallow or consecrated grounds or cemeteries
where Catholics could be buried, many more than those actually existing at the time of the enactment of our
Constitution. This being the case, could it be logically maintained that because the corporation sole which, by
express provision of law, has the power to hold and acquire real estate and personal property of its churches,
charitable benevolent, or educational purposes (section 159, Corporation Law) it has to stop its growth and
restrain its necessities just because the corporation sole is a non-stock corporation composed of only one
person who in his unity does not admit of any percentage, especially when that person is not the owner but
merely an administrator of the temporalities of the corporation sole? The writer leaves the answer to whoever
may read and consider this portion of the decision.
Anyway, as stated before, this question is not a decisive factor in disposing the case, for even if We were to
disregard such saving clause of the Constitution, which reads: subject to any existing right, grant, etc., at the
same time of the inauguration of the Government established under this Constitution, yet We would have,
under the evidence on record, sufficient grounds to uphold petitioner's contention on this matter.
In this case of the Register of Deeds of Rizal vs. Ung Sui Si Temple, 2 G.R. No. L-6776, promulgated May 21,
1955, wherein this question was considered from a different angle, this Court through Mr. Justice J.B.L. Reyes,
said:
The fact that the appellant religious organization has no capital stock does not suffice to escape
the Constitutional inhibition, since it is admitted that its members are of foreign nationality. The
purpose of the sixty per centum requirement is obviously to ensure that corporation or associations
allowed to acquire agricultural land or to exploit natural resources shall be controlled by Filipinos;
and the spirit of the Constitution demands that in the absence of capital stock, the controlling
membership should be composed of Filipino citizens.
In that case respondent-appellant Ung Siu Si Temple was not a corporation sole but a corporation aggregate,
i.e., an unregistered organization operating through 3 trustees, all of Chinese nationality, and that is why this
Court laid down the doctrine just quoted. With regard to petitioner, which likewise is a non-stock corporation,
the case is different, because it is a registered corporation sole, evidently of no nationality and registered
mainly to administer the temporalities and manage the properties belonging to the faithful of said church
residing in Davao. But even if we were to go over the record to inquire into the composing membership to
determine whether the citizenship requirement is satisfied or not, we would find undeniable proof that the
members of the Roman Catholic Apostolic faith within the territory of Davao are predominantly Filipino citizens.
As indicated before, petitioner has presented evidence to establish that the clergy and lay members of this
religion fully covers the percentage of Filipino citizens required by the Constitution. These facts are not
controverted by respondents and our conclusion in this point is sensibly obvious.
Dissenting OpinionDiscussed. After having developed our theory in the case and arrived at the findings
and conclusions already expressed in this decision. We now deem it proper to analyze and delve into the
basic foundation on which the dissenting opinion stands up. Being aware of the transcendental and farreaching effects that Our ruling on the matter might have, this case was thoroughly considered from all points
of view, the Court sparing no effort to solve the delicate problems involved herein.

At the deliberations had to attain this end, two ways were open to a prompt dispatch of the case: (1) the
reversal of the doctrine We laid down in the celebrated Krivenko case by excluding urban lots and properties
from the group of the term "private agricultural lands" use in this section 5, Article XIII of the Constitution; and
(2) by driving Our reasons to a point that might indirectly cause the appointment of Filipino bishops or Ordinary
to head the corporations sole created to administer the temporalities of the Roman Catholic Church in the
Philippines. With regard to the first way, a great majority of the members of this Court were not yet prepared
nor agreeable to follow that course, for reasons that are obvious. As to the second way, it seems to be
misleading because the nationality of the head of a diocese constituted as a corporation sole has no material
bearing on the functions of the latter, which are limited to the administration of the temporalities of the Roman
Catholic Apostolic Church in the Philippines.

The Court in construing a statute, will assume that the legislature acted with full knowledge of the
prior legislation on the subject and its construction by the courts. (Johns vs. Town of Sheridan, 89
N. E. 899, 44 Ind. App. 620.).

Upon going over the grounds on which the dissenting opinion is based, it may be noticed that its author
lingered on the outskirts of the issues, thus throwing the main points in controversy out of focus. Of course We
fully agree, as stated by Professor Aruego, that the framers of our Constitution had at heart to insure the
conservation of the natural resources of Our motherland of Filipino posterity; to serve them as an instrument of
national defense, helping prevent the extension into the country of foreign control through peaceful economic
penetration; and to prevent making the Philippines a source of international conflicts with the consequent
danger to its internal security and independence. But all these precautions adopted by the Delegates to Our
Constitutional Assembly could have not been intended for or directed against cases like the one at bar. The
emphasis and wonderings on the statement that once the capacity of a corporation sole to acquire private
agricultural lands is admitted there will be no limit to the areas that it may hold and that this will pave the way
for the "revival or revitalization of religious landholdings that proved so troublesome in our past", cannot even
furnish the "penumbra" of a threat to the future of the Filipino people. In the first place, the right of Filipino
citizens, including those of foreign extraction, and Philippine corporations, to acquire private lands is not
subject to any restriction or limit as to quantity or area, and We certainly do not see any wrong in that. The
right of Filipino citizens and corporations to acquire public agricultural lands is already limited by law. In the
second place, corporations sole cannot be considered as aliens because they have no nationality at all.
Corporations sole are, under the law, mere administrators of the temporalities of the Roman Catholic Church
in the Philippines. In the third place, every corporation, be it aggregate or sole, is only entitled to purchase,
convey, sell, lease, let, mortgage, encumber and otherwise deal with real properties when it is pursuant to or in
consonance with the purposes for which the corporation was formed, and when the transactions of the lawful
business of the corporation reasonably and necessarily require such dealing section 13-(5) of the
Corporation Law, Public Act No. 1459 and considering these provisions in conjunction with Section 159 of
the same law which provides that a corporation sole may only "purchase and hold real estate and personal
properties for its church, charitable, benevolent or educational purposes", the above mentioned fear of
revitalization of religious landholdings in the Philippines is absolutely dispelled. The fact that the law
thus expressly authorizes the corporations sole to receive bequests or gifts of real properties (which were the
main source that the friars had to acquire their big haciendas during the Spanish regime), is a clear indication
that the requisite that bequests or gifts of real estate be for charitable, benevolent, or educational purposes,
was, in the opinion of the legislators, considered sufficient and adequate protection against the revitalization of
religious landholdings.

It is not to be presumed that a provision was inserted in a constitution or statute without reason, or
that a result was intended inconsistent with the judgment of men of common sense guided by
reason" (Mitchell vs. Lawden, 123 N.E. 566, 288 Ill. 326.) See City of Decatur vs. German, 142 N.
E. 252, 310 Ill. 591, and may other authorities that can be cited in support hereof.

Finally, and as previously stated, We have reason to believe that when the Delegates to the Constitutional
Convention drafted and approved Article XIII of the Constitution they do not have in mind the corporation sole.
We come to this finding because the Constitutional Assembly, composed as it was by a great number of
eminent lawyers and jurists, was like any other legislative body empowered to enact either the Constitution of
the country or any public statute, presumed to know the conditions existing as to particular subject matter
when it enacted a statute (Board of Commerce of Orange Country vs. Bain, 92 S.E. 176; N. C. 377).
Immemorial customs are presumed to have been always in the mind of the Legislature in enacting
legislation. (In re Kruger's Estate, 121 A. 109; 277 P. 326).
The Legislative is presumed to have a knowledge of the state of the law on the subjects upon
which it legislates. (Clover Valley Land and Stock Co. vs. Lamb et al., 187, p. 723,726.)

The Legislature is presumed to have been familiar with the subject with which it was dealing . . . .
(Landers vs. Commonwealth, 101 S. E. 778, 781.).
The Legislature is presumed to know principles of statutory construction. (People vs. Lowell, 230
N. W. 202, 250 Mich. 349, followed in P. vs. Woodworth, 230 N.W. 211, 250 Mich. 436.).

Consequently, the Constitutional Assembly must have known:

1. That a corporation sole is organized by and composed of a single individual, the head of any
religious society or church operating within the zone, area or jurisdiction covered by said
corporation sole (Article 155, Public Act No. 1459);
2. That a corporation sole is a non-stock corporation;
3. That the Ordinary ( the corporation sole proper) does not own the temporalities which he merely
administers;
4. That under the law the nationality of said Ordinary or of any administrator has absolutely no
bearing on the nationality of the person desiring to acquire real property in the Philippines by
purchase or other lawful means other than by hereditary succession, who according to the
Constitution must be a Filipino (sections 1 and 5, Article XIII).
5. That section 159 of the Corporation Law expressly authorized the corporation sole to purchase
and holdreal estate for its church, charitable, benevolent or educational purposes, and to receive
bequests or giftsfor such purposes;
6. That in approving our Magna Carta the Delegates to the Constitutional Convention, almost all of
whom were Roman Catholics, could not have intended to curtail the propagation of the Roman
Catholic faith or the expansion of the activities of their church, knowing pretty well that with the
growth of our population more places of worship, more schools where our youth could be taught
and trained; more hallow grounds where to bury our dead would be needed in the course of time.
Long before the enactment of our Constitution the law authorized the corporations sole even to receive
bequests or gifts of real estates and this Court could not, without any clear and specific provision of the
Constitution, declare that any real property donated, let as say this year, could no longer be registered in the
name of the corporation sole to which it was conveyed. That would be an absurdity that should not receive our
sanction on the pretext that corporations sole which have no nationality and are non-stock corporations
composed of only one person in the capacity of administrator, have to establish first that at least sixty per
centum of their capital belong to Filipino citizens. The new Civil Code even provides:
ART. 10. In case of doubt in the interpretation or application of laws, it is presumed that the
lawmaking body intended right and justice to prevail.

Moreover, under the laws of the Philippines, the administrator of the properties of a Filipino can acquire, in the
name of the latter, private lands without any limitation whatsoever, and that is so because the properties thus
acquired are not for and would not belong to the administrator but to the Filipino whom he represents. But the
dissenting Justice inquires: If the Ordinary is only the administrator, for whom does he administer? And who
can alter or overrule his acts? We will forthwith proceed to answer these questions. The corporations sole by
reason of their peculiar constitution and form of operation have no designed owner of its temporalities,
although by the terms of the law it can be safely implied that the Ordinary holds them in trust for the benefit of
the Roman Catholic faithful to their respective locality or diocese. Borrowing the very words of the law, We
may say that the temporalities of every corporation sole are held in trust for the use, purpose, behalf and
benefit of the religious society, or order so incorporated or of the church to which the diocese, synod, or district
organization is an organized and constituent part (section 163 of the Corporation Law).
In connection with the powers of the Ordinary over the temporalities of the corporation sole, let us see now
what is the meaning and scope of the word "control". According to the Merriam-Webster's New International
Dictionary, 2nd ed., p. 580, on of the acceptations of the word "control" is:
4. To exercise restraining or directing influence over; to dominate; regulate; hence, to hold from
action; to curb; subject; also, Obs. to overpower.
SYN: restrain, rule, govern, guide, direct; check, subdue.
It is true that under section 159 of the Corporation Law, the intervention of the courts is not necessary,
tomortgage or sell real property held by the corporation sole where the rules, regulations and discipline of the
religious denomination, society or church concerned presented by such corporation sole regulates the
methods of acquiring, holding, selling and mortgaging real estate, and that the Roman Catholic faithful residing
in the jurisdiction of the corporation sole has no say either in the manner of acquiring or of selling real property.
It may be also admitted that the faithful of the diocese cannot govern or overrule the acts of the Ordinary, but
all this does not mean that the latter can administer the temporalities of the corporation sole without check or
restraint. We must not forget that when a corporation sole is incorporated under Philippine laws, the head and
only member thereof subjects himself to the jurisdiction of the Philippine courts of justice and these tribunals
can thus entertain grievances arising out of or with respect to the temporalities of the church which came into
the possession of the corporation sole as administrator. It may be alleged that the courts cannot intervene as
to the matters of doctrine or teachings of the Roman Catholic Church. That is correct, but the courts may step
in, at the instance of the faithful for whom the temporalities are being held in trust, to check undue exercise by
the corporation sole of its power as administrator to insure that they are used for the purpose or purposes for
which the corporation sole was created.
American authorities have these to say:
It has been held that the courts have jurisdiction over an action brought by persons claiming to be
members of a church, who allege a wrongful and fraudulent diversion of the church property to
uses foreign to the purposes of the church, since no ecclesiastical question is involved and equity
will protect from wrongful diversion of the property (Hendryx vs. Peoples United Church, 42 Wash.
336, 4 L.R.A. n.s. 1154).
The courts of the State have no general jurisdiction and control over the officers of such
corporations in respect to the performance of their official duties; but as in respect to the property
which they hold for the corporation, they stand in position of TRUSTEES and the courts may
exercise the same supervision as in other cases of trust (Ramsey vs. Hicks, 174 Ind. 428, 91 N.E.
344, 92 N.E. 164, 30 L.R.A. n.s. 665; Hendryx vs. Peoples United Church, supra.).
Courts of the state do not interfere with the administration of church rules or discipline unless civil
rights become involved and which must be protected (Morris St., Baptist Church vs. Dart, 67 S.C.
338, 45 S.E. 753, and others). (All cited in Vol. II, Cooley's Constitutional Limitations, p. 960-964.).

If the Constitutional Assembly was aware of all the facts above enumerated and of the provisions of law
relative to existing conditions as to management and operation of corporations sole in the Philippines, and if,
on the other hand, almost all of the Delegates thereto embraced the Roman Catholic faith, can it be imagined
even for an instant that when Article XIII of the Constitution was approved the framers thereof intended to
prevent or curtail from then on the acquisition sole, either by purchase or donation, of real properties that they
might need for the propagation of the faith and for there religious and Christian activities such as the moral
education of the youth, the care, attention and treatment of the sick and the burial of the dead of the Roman
Catholic faithful residing in the jurisdiction of the respective corporations sole? The mere indulgence in said
thought would impress upon Us a feeling of apprehension and absurdity. And that is precisely the leit motiv
that permeates the whole fabric of the dissenting opinion.
It seems from the foregoing that the main problem We are confronted with in this appeal, hinges around the
necessity of a proper and adequate interpretation of sections 1 and 5 of Article XIII of the Constitution. Let Us
then be guided by the principles of statutory construction laid down by the authorities on the matter:
The most important single factor in determining the intention of the people from whom the
constitution emanated is the language in which it is expressed. The words employed are to be
taken in their natural sense, except that legal or technical terms are to be given their technical
meaning. The imperfections of language as a vehicle for conveying meanings result in ambiguities
that must be resolved by result to extraneous aids for discovering the intent of the framers. Among
the more important of these are a consideration of the history of the times when the provision was
adopted and of the purposes aimed at in its adoption. The debates of constitutional convention,
contemporaneous construction, and practical construction by the legislative and executive
departments, especially if long continued, may be resorted to resolve, but not to create,
ambiguities. . . . Consideration of the consequences flowing from alternative constructions of
doubtful provisions constitutes an important interpretative device. . . . The purposes of many of the
broadly phrased constitutional limitations were the promotion of policies that do not lend
themselves to definite and specific formulation. The courts have had to define those policies and
have often drawn on natural law and natural rights theories in doing so. The interpretation of
constitutions tends to respond to changing conceptions of political and social values. The extent to
which these extraneous aids affect the judicial construction of constitutions cannot be formulated in
precise rules, but their influence cannot be ignored in describing the essentials of the process
(Rottschaeffer on Constitutional Law, 1939 ed., p. 18-19).
There are times that when even the literal expression of legislation may be inconsistent with the
general objectives of policy behind it, and on the basis of equity or spirit of the statute the courts
rationalize a restricted meaning of the latter. A restricted interpretation is usually applied where the
effect of literal interpretation will make for injustice and absurdity or, in the words of one court, the
language must be so unreasonable 'as to shock general common sense'. (Vol. 3, Sutherland on
Statutory Construction, 3rd ed., 150.).
A constitution is not intended to be a limitation on the development of a country nor an obstruction
to its progress and foreign relations (Moscow Fire Ins. Co. of Moscow, Russia vs. Bank of New
York and Trust Co., 294 N. Y. S.648; 56 N.E. 2d. 745, 293 N.Y. 749).
Although the meaning or principles of a constitution remain fixed and unchanged from the time of
its adoption, a constitution must be construed as if intended to stand for a great length of time, and
it is progressive and not static. Accordingly, it should not receive too narrow or literal an
interpretation but rather the meaning given it should be applied in such manner as to meet new or
changed conditions as they arise (U.S. vs. Lassic, 313 U.S. 299, 85 L. Ed., 1368).
Effect should be given to the purpose indicated by a fair interpretation of the language used and
that construction which effectuates, rather than that which destroys a plain intent or purpose of a
constitutional provision, is not only favored but will be adopted (State ex rel. Randolph Country vs.
Walden, 206 S.W. 2d 979).

It is quite generally held that in arriving at the intent and purpose the construction should be broad
or liberal or equitable, as the better method of ascertaining that intent, rather than technical (Great
Southern Life Ins. Co. vs. City of Austin, 243 S.W. 778).
All these authorities uphold our conviction that the framers of the Constitution had not in mind the corporations
sole, nor intended to apply them the provisions of section 1 and 5 of said Article XIII when they passed and
approved the same. And if it were so as We think it is, herein petitioner, the Roman Catholic Apostolic
Administrator of Davao, Inc., could not be deprived of the right to acquire by purchase or donation real
properties for charitable, benevolent and educational purposes, nor of the right to register the same in its
name with the Register of Deeds of Davao, an indispensable requisite prescribed by the Land Registration Act
for lands covered by the Torrens system.
We leave as the last theme for discussion the much debated question above referred to as "the vested right
saving clause" contained in section 1, Article XIII of the Constitution. The dissenting Justice hurls upon the
personal opinion expressed on the matter by the writer of the decision the most pointed darts of his severe
criticism. We think, however, that this strong dissent should have been spared, because as clearly indicated
before, some members of this Court either did not agree with the theory of the writer or were not ready to take
a definite stand on that particular point, so that there being no majority opinion thereon there was no need of
any dissension therefrom. But as the criticism has been made the writer deems it necessary to say a few
words of explanation.
The writer fully agrees with the dissenting Justice that ordinarily "a capacity to acquire (property) in futuro, is
not in itself a vested or existing property right that the Constitution protects from impairment. For a property
right to be vested (or acquired) there must be a transition from the potential or contingent to the actual, and the
proprietary interest must have attached to a thing; it must have become 'fixed and established'" (Balboa vs.
Farrales, 51 Phil. 498). But the case at bar has to be considered as an exception to the rule because among
the rights granted by section 159 of the Corporation Law was the right to receive bequests or gifts of real
properties for charitable, benevolent and educational purposes. And this right to receive such bequests or gifts
(which implies donations in futuro), is not a mere potentiality that could be impaired without any specific
provision in the Constitution to that effect, especially when the impairment would disturbingly affect the
propagation of the religious faith of the immense majority of the Filipino people and the curtailment of the
activities of their Church. That is why the writer gave us a basis of his contention what Professor Aruego said
in his book "The Framing of the Philippine Constitution" and the enlightening opinion of Mr. Justice Jose P.
Laurel, another Delegate to the Constitutional Convention, in his concurring opinion in the case of Goldcreek
Mining Co. vs. Eulogio Rodriguez et al., 66 Phil. 259. Anyway the majority of the Court did not deem
necessary to pass upon said "vested right saving clause" for the final determination of this case.

REPUBLIC OF THE PHILIPPINES, represented by the Director of Lands, petitioner-appellant,

vs.
JUDGE CANDIDO P. VILLANUEVA, of the Court of First Instance of Bulacan, Malolos Branch VII, and
IGLESIA NI CRISTO, as a corporation sole, represented by ERAO G. MANALO, as Executive
Minister,respondents-appellees.

AQUINO, J.:
Like L-49623, Manila Electric Company vs. Judge Castro-Bartolome, this case involves the prohibition in
section 11, Article XIV of the Constitution that "no private corporation or association may hold alienable lands
of the public domain except by lease not to exceed one thousand hectares in area".
Lots Nos. 568 and 569, located at Barrio Dampol, Plaridel, Bulacan, with an area of 313 square meters and an
assessed value of P1,350 were acquired by the Iglesia Ni Cristo on January 9, 1953 from Andres Perez in
exchange for a lot with an area of 247 square meters owned by the said church (Exh. D).
The said lots were already possessed by Perez in 1933. They are not included in any military reservation.
They are inside an area which was certified as alienable or disposable by the Bureau of Forestry in 1927. The
lots are planted to santol and mango trees and banana plants. A chapel exists on the said land. The land had
been declared for realty tax purposes. Realty taxes had been paid therefor (Exh. N).
On September 13, 1977, the Iglesia Ni Cristo, a corporation sole, duly existing under Philippine laws, filed with
the Court of First Instance of Bulacan an application for the registration of the two lots. It alleged that it and its
predecessors-in-interest had possessed the land for more than thirty years. It invoked section 48(b) of the
Public Land Law, which provides:
Chapter VIII.Judicial confirmation of imperfect or incomplete titles.
xxx xxx xxx
SEC. 48. The following-described citizens of the Philippines, occupying lands of the
public domain or claiming to own any such lands or an interest therein, but whose titles
have not been perfected or completed, may apply to the Court of First Instance of the
province where the land is located for confirmation of their claims and the issuance of a
certificate of title therefore, under the Land Register Act, to wit:

JUDGMENT
Wherefore, the resolution of the respondent Land Registration Commission of September 21, 1954, holding
that in view of the provisions of sections 1 and 5 of Article XIII of the Philippine Constitution the vendee
(petitioner) is not qualified to acquire lands in the Philippines in the absence of proof that at least 60 per
centum of the capital, properties or assets of the Roman Catholic Apostolic Administrator of Davao, Inc. is
actually owned or controlled by Filipino citizens, and denying the registration of the deed of sale in the
absence of proof of compliance with such requisite, is hereby reversed. Consequently, the respondent
Register of Deeds of the City of Davao is ordered to register the deed of sale executed by Mateo L. Rodis in
favor of the Roman Catholic Apostolic Administrator of Davao, Inc., which is the subject of the present
litigation. No pronouncement is made as to costs. It is so ordered.
G.R. No. L-55289 June 29, 1982

xxx xxx xxx

(b) Those who by themselves or through their predecessors-in-interest have been in
open, continuous, exclusive, and notorious possession and occupation of agricultural
lands of the public domain, under a bona fide claim of acquisition of ownership, for at
least thirty years immediately preceding the filing of the application for confirmation of
title except when prevented by war or force majeure. These shall be conclusively
presumed to have performed all the conditions essential to a Government grant and
shall be entitled to a certificate of title under the provisions of this chapter." (As
amended by Republic Act No. 1942, approved on June 22, 1957.)
The Republic of the Philippines, through the Direct/r of Lands, opposed the application on the grounds that
applicant, as a private corporation, is disqualified to hold alienable lands of the public domain, that the land
applied for is public land not susceptible of private appropriation and that the applicant and its predecessors-

in-interest have not been in the open, continuous, exclusive and notorious possession of the land since June
12, 1945.
After hearing, the trial court ordered the registration of the two lots, as described in Plan Ap-04-001344 (Exh.
E), in the name of the Iglesia Ni Cristo, a corporation sole, represented by Executive Minister Erao G.
Manalo, with office at the corner of Central and Don Mariano Marcos Avenues, Quezon City, From that
decision, the Republic of the Philippines appealed to this Court under Republic Act No. 5440. The appeal
should be sustained.
As correctly contended by the Solicitor General, the Iglesia Ni Cristo, as a corporation sole or a juridical
person, is disqualified to acquire or hold alienable lands of the public domain, like the two lots in question,
because of the constitutional prohibition already mentioned and because the said church is not entitled to avail
itself of the benefits of section 48(b) which applies only to Filipino citizens or natural persons. A corporation
sole (an "unhappy freak of English law") has no nationality (Roman Catholic Apostolic Adm. of Davao, Inc. vs.
Land Registration Commission, 102 Phil. 596. See Register of Deeds vs. Ung Siu Si Temple, 97 Phil. 58 and
sec. 49 of the Public Land Law).
The contention in the comments of the Iglesia Ni Cristo (its lawyer did not file any brief) that the two lots are
private lands, following the rule laid down in Susi vs. Razon and Director of Lands, 48 Phil. 424, is not correct.
What was considered private land in the Susi case was a parcel of land possessed by a Filipino citizen since
time immemorial, as in Cario vs. Insular Government, 212 U.S. 449, 53 L. ed. 594, 41 Phil. 935 and 7 Phil.
132. The lots sought to be registered in this case do not fall within that category. They are still public lands. A
land registration proceeding under section 48(b) "presupposes that the land is public" (Mindanao vs. Director
of Lands, L-19535, July 10, 1967, 20 SCRA 641, 644).
As held in Oh Cho vs. Director of Lands, 75 Phil. 890, "all lands that were not acquired from the Government,
either by purchase or by grant, belong to the public domain. An exception to the rule would be any land that
should have been in the possession of an occupant and of his predecessors-in-interest since time immemorial,
for such possession would justify the presumption that the land had never been part of the public domain or
that it had been a private property even before the Spanish conquest. "
In Uy Un vs. Perez, 71 Phil. 508, it was noted that the right of an occupant of public agricultural land to obtain
a confirmation of his title under section 48(b) of the Public Land Law is a "derecho dominical incoativo"and that
before the issuance of the certificate of title the occupant is not in the juridical sense the true owner of the land
since it still pertains to the State.
The lower court's judgment is reversed and set aside. The application for registration of the Iglesia Ni Cristo is
dismissed with costs against said applicant.
SO ORDERED.
Ruling:
Corporations; Land Registration; Constitutional Law; A religious corporation sole, which has no nationality, like
the Iglesia ni Cnsto cannot acquire lands beyond the limits prescribed by the Constitution.As correctly
contended by the Solicitor General, the Iglesia Ni Cristo, as a corporation sole or a juridical person, is
disqualified to acquire or hold alienable lands of the public domain, like the two lots in question, because of the
constitutional prohibition already mentioned and because the said church is not entitled to avail itself of the
benefits of section 48(b) which applies only to Filipino citizens or natural persons. A corporation sole (an
unhappy freak of English law) has no nationality (Roman Catholic Apostolic Adm. of Dayao, Inc. vs. Land
Registration Commission, 102 Phil. 596. See Register of Deeds vs. Ung Siu Si Temple, 97 Phil. 58 and sec, 49
of the Public Land Law).
Same; Same; Same; Same.The contention in the comments, of the Iglesia Ni Cristo (its lawyer did not file
any brief) that the two lots are private lands, following the rule laid down in Susi vs. Razon and Director of
Lands, 48 Phil. 424, is not correct. What was considered private land in the Susi case was a parcel of land

possessed by a Filipino citizen since time immemorial as in Cario vs. Insular Government, 212 U.S. 449, 53
L. ed 594, 41 Phil. 935 and 7 Phil. 132. The lots sought to be registered in this case do not fall within that
category. They are still public lands. A land registration proceeding under section 48(b) presupposes that the
land is public (Mindanao vs. Director of Lands, L-19535, July 10, 1967, 20 SCRA 641, 644).
Land Registration; A petition for confirmation of title presupposes that the land pertains to the State.In Uy Un
vs. Perez, 71 Phil. 508, it was noted that the right of an occupant of public agricultural land to obtain a
confirmation of his title under section 48(b) of the Public Land Law is a derecho dominical incoativo and that
before the issuance of the certificate of title the occupant is not in the juridical sense the true owner of the land
since it still pertains to the State.
G.R. No. L-12719

May 31, 1962

THE COLLECTOR OF INTERNAL REVENUE, petitioner,

vs.
THE CLUB FILIPINO, INC. DE CEBU, respondent.
Office of the Solicitor General for petitioner.
V. Jaime and L. E. Petilla for respondent.
PAREDES, J.:
This is a petition to review the decision of the Court of Tax Appeals, reversing the decision of the Collector of
Internal Revenue, assessing against and demanding from the "Club Filipino, Inc. de Cebu", the sum of
P12,068.84 as fixed and percentage taxes, surcharge and compromise penalty, allegedly due from it as a
keeper of bar and restaurant.
As found by the Court of Tax Appeals, the "Club Filipino, Inc. de Cebu," (Club, for short), is a civic corporation
organized under the laws of the Philippines with an original authorized capital stock of P22,000.00, which was
subsequently increased to P200,000.00, among others, to it "proporcionar, operar, y mantener un campo de
golf, tenis, gimnesio (gymnasiums), juego de bolos (bowling alleys), mesas de billar y pool, y toda clase de
juegos no prohibidos por leyes generales y ordenanzas generales; y desarollar y cultivar deportes de toda
clase y denominacion cualquiera para el recreo y entrenamiento saludable de sus miembros y accionistas"
(sec. 2, Escritura de Incorporacion del Club Filipino, Inc. Exh. A). Neither in the articles or by-laws is there a
provision relative to dividends and their distribution, although it is covenanted that upon its dissolution, the
Club's remaining assets, after paying debts, shall be donated to a charitable Philippine Institution in Cebu (Art.
27, Estatutos del Club, Exh. A-a.).
The Club owns and operates a club house, a bowling alley, a golf course (on a lot leased from the
government), and a bar-restaurant where it sells wines and liquors, soft drinks, meals and short orders to its
members and their guests. The bar-restaurant was a necessary incident to the operation of the club and its
golf-course. The club is operated mainly with funds derived from membership fees and dues. Whatever profits
it had, were used to defray its overhead expenses and to improve its golf-course. In 1951. as a result of a
capital surplus, arising from the re-valuation of its real properties, the value or price of which increased, the
Club declared stock dividends; but no actual cash dividends were distributed to the stockholders. In 1952, a
BIR agent discovered that the Club has never paid percentage tax on the gross receipts of its bar and
restaurant, although it secured B-4, B-9(a) and B-7 licenses. In a letter dated December 22, 1852, the
Collector of Internal Revenue assessed against and demanded from the Club, the following sums:
As percentage tax on its gross receipts
during the tax years 1946 to 1951
Surcharge therein
As fixed tax for the years 1946 to 1952
Compromise penalty

The Club wrote the Collector, requesting for the cancellation of the assessment. The request having been
denied, the Club filed the instant petition for review.

P9,599.07
2,399.77
70.00
500.00

The dominant issues involved in this case are twofold:

1. Whether the respondent Club is liable for the payment of the sum of 12,068.84, as fixed and percentage
taxes and surcharges prescribed in sections 182, 183 and 191 of the Tax Code, under which the assessment
was made, in connection with the operation of its bar and restaurant, during the periods mentioned above; and
2. Whether it is liable for the payment of the sum of P500.00 as compromise penalty.
Section 182, of the Tax Code states, "Unless otherwise provided, every person engaging in a business on
which the percentage tax is imposed shall pay in full a fixed annual tax of ten pesos for each calendar year or
fraction thereof in which such person shall engage in said business." Section 183 provides in general that "the
percentage taxes on business shall be payable at the end of each calendar quarter in the amount lawfully due
on the business transacted during each quarter; etc." And section 191, same Tax Code, provides "Percentage
tax . . . Keepers of restaurants, refreshment parlors and other eating places shall pay a tax three per centum,
and keepers of bar and cafes where wines or liquors are served five per centum of their gross receipts . . .". It
has been held that the liability for fixed and percentage taxes, as provided by these sections, does not ipso
factoattach by mere reason of the operation of a bar and restaurant. For the liability to attach, the operator
thereof must be engaged in the business as a barkeeper and restaurateur. The plain and ordinary meaning
of business is restricted to activities or affairs where profit is the purpose or livelihood is the motive, and the
term business when used without qualification, should be construed in its plain and ordinary meaning,
restricted to activities for profitor livelihood (The Coll. of Int. Rev. v. Manila Lodge No. 761 of the BPOE [Manila
Elks Club] & Court of Tax Appeals, G.R. No. L-11176, June 29, 1959, giving full definitions of the word
"business"; Coll. of Int. Rev. v. Sweeney, et al. [International Club of Iloilo, Inc.], G.R. No. L-12178, Aug. 21,
1959, the facts of which are similar to the ones at bar; Manila Polo Club v. B. L. Meer, etc., No. L-10854, Jan.
27, 1960).
Having found as a fact that the Club was organized to develop and cultivate sports of all class and
denomination, for the healthful recreation and entertainment of its stockholders and members; that upon its
dissolution, its remaining assets, after paying debts, shall be donated to a charitable Philippine Institution in
Cebu; that it is operated mainly with funds derived from membership fees and dues; that the Club's bar and
restaurant catered only to its members and their guests; that there was in fact no cash dividend distribution to
its stockholders and that whatever was derived on retail from its bar and restaurant was used to defray its
overall overhead expenses and to improve its golf-course (cost-plus-expenses-basis), it stands to reason that
the Club is not engaged in the business of an operator of bar and restaurant (same authorities, cited above).
It is conceded that the Club derived profit from the operation of its bar and restaurant, but such fact does not
necessarily convert it into a profit-making enterprise. The bar and restaurant are necessary adjuncts of the
Club to foster its purposes and the profits derived therefrom are necessarily incidental to the primary object of
developing and cultivating sports for the healthful recreation and entertainment of the stockholders and
members. That a Club makes some profit, does not make it a profit-making Club. As has been remarked a
club should always strive, whenever possible, to have surplus (Jesus Sacred Heart College v. Collector of Int.
Rev., G.R. No. L-6807, May 24, 1954; Collector of Int. Rev. v. Sinco Educational Corp., G.R. No. L-9276, Oct.
23, 1956).1wph1.t
It is claimed that unlike the two cases just cited (supra), which are non-stock, the appellee Club is a stock
corporation. This is unmeritorious. The facts that the capital stock of the respondent Club is divided into
shares, does not detract from the finding of the trial court that it is not engaged in the business of operator of
bar and restaurant. What is determinative of whether or not the Club is engaged in such business is its object
or purpose, as stated in its articles and by-laws. It is a familiar rule that the actual purpose is not controlled by
the corporate form or by the commercial aspect of the business prosecuted, but may be shown by extrinsic
evidence, including the by-laws and the method of operation. From the extrinsic evidence adduced, the Tax
Court concluded that the Club is not engaged in the business as a barkeeper and restaurateur.
Moreover, for a stock corporation to exist, two requisites must be complied with, to wit: (1) a capital stock
divided into shares and (2) an authority to distribute to the holders of such shares, dividends or allotments of
the surplus profits on the basis of the shares held (sec. 3, Act No. 1459). In the case at bar, nowhere in its
articles of incorporation or by-laws could be found an authority for the distribution of its dividends or surplus
profits. Strictly speaking, it cannot, therefore, be considered a stock corporation, within the contemplation of
the corporation law.

A tax is a burden, and, as such, it should not be deemed imposed upon fraternal, civic, non-profit, nonstock
organizations, unless the intent to the contrary is manifest and patent" (Collector v. BPOE Elks Club, et
al., supra), which is not the case in the present appeal.
Having arrived at the conclusion that respondent Club is not engaged in the business as an operator of a bar
and restaurant, and therefore, not liable for fixed and percentage taxes, it follows that it is not liable for any
penalty, much less of a compromise penalty.
WHEREFORE, the decision appealed from is affirmed without costs.
Ruling:
Taxation; Percentage Tax; Bar and Restaurant; When operator not engaged in business.The liability for fixed
and percentage taxes as provided by Sections 182, 183 and 191 of the Tax Code does not ipso facto attach by
mere reason of the operation of a bar and restaurant. For the liability to attach, the operator thereof must be
engaged in the business as a barkeeper and restaurateur.
Same; Words and Phrases; "Business", meaning of.The plain and ordinary meaning of business is restricted
to activities or affairs where profit is the purpose or livelihood is the motive, and the term business when used
without qualification, should be construed in its plain and ordinary meaning, restricted to activities for profit or
livelihood.
Same; Club Filipino, Inc. de Cebu; Not engaged in bar and restaurant.The Club Filipino, Inc. de Cebu was
organized to develop and cultivate sports of all class and denomination, for the healthful recreation and
entertainment of its stockholders and members; that upon its dissolution, its remaining assets, after paying
debts shall be donated to a charitable Philippine Institution in Cebu; that it is operated mainly with funds
derived from membership fees and dues; that the Club's bar and restaurant catered only to its members and
their guests; that there was in fact no cash dividend distribution to its stockholders and that whatever was
derived on retail from its bar and restaurant was used to defray its overall overhead expenses and to improve
its golf course (cost-plus-expenses-basis), it stands to reason that the Club is not engaged in the business of
an operator of bar and restaurant. [Collector of Internal Revenue vs. Club Filipino, Inc. de Cebu, 5 SCRA
321(1962)]
G.R. No. 91889 August 27, 1993
MANUEL R. DULAY ENTERPRISES, INC., VIRGILIO E. DULAY AND NEPOMUCENO
REDOVAN, petitioners,
vs.
THE HONORABLE COURT OF APPEALS, EDGARDO D. PABALAN, MANUEL A. TORRES, JR., MARIA
THERESA V. VELOSO AND CASTRENSE C. VELOSO, respondents.
Virgilio E. Dulay for petitioners.
Torres, Tobias, Azura & Jocson for private respondents.

NOCON, J.:
This is a petition for review on certiorari to annul and set aside the decision 1 of the Court of Appeals affirming
the decision 2 of the Regional Trial Court of Pasay, Branch 114 Civil Cases Nos. 8198-P, and 2880-P, the
dispositive portion of which reads, as follows:
Wherefore, in view of all the foregoing considerations, in this Court hereby renders
judgment, as follows:
In Civil Case No. 2880-P, the petition filed by Manuel R. Dulay Enterprises, Inc. and
Virgilio E. Dulay for annulment or declaration of nullity of the decision of the
Metropolitan Trial Court, Branch 46, Pasay City, in its Civil Case No. 38-81 entitled

"Edgardo D. Pabalan, et al., vs. Spouses Florentino Manalastas, et al.," is dismissed

for lack of merits;
In Civil Case No. 8278-P, the complaint filed by Manuel R. Dulay Enterprises, Inc. for
cancellation of title of Manuel A. Torres, Jr. (TCT No. 24799 of the Register of Deeds of
Pasay City) and reconveyance, is dismissed for lack or merit, and,
In Civil Case No. 8198-P, defendants Manuel R. Dulay Enterprises, Inc. and Virgilio E.
Dulay are ordered to surrender and deliver possession of the parcel of land, together
with all the improvements thereon, described in Transfer Certificate of Title No. 24799
of the Register of Deeds of Pasay City, in favor of therein plaintiffs Manuel A. Torres, Jr.
as owner and Edgardo D. Pabalan as real estate administrator of said Manuel A.
Torres, Jr.; to account for and return to said plaintiffs the rentals from dwelling unit No.
8-A of the apartment building (Dulay Apartment) from June 1980 up to the present, to
indemnify plaintiffs, jointly and severally, expenses of litigation in the amount of
P4,000.00 and attorney's fees in the sum of P6,000.00, for all the three (3) cases. Codefendant Nepomuceno Redovan is ordered to pay the current and subsequent rentals
on the premises leased by him to plaintiffs.
The counterclaim of defendants Virgilio E. Dulay and Manuel R. Dulay Enterprises, Inc.
and N. Redovan, dismissed for lack of merit. With costs against the three (3)
aforenamed defendants. 3

Upon the failure of private respondent Maria Veloso to pay private respondent Torres, the subject property was
sold on April 5, 1978 to private respondent Torres as the highest bidder in an extrajudicial foreclosure sale as
evidenced by the Certificate of Sheriff's Sale 11 issued on April 20, 1978.
On July 20, 1978, private respondent Maria Veloso executed a Deed of Absolute Assignment of the Right to
Redeem 12 in favor of Manuel Dulay assigning her right to repurchase the subject property from private
respondent Torres as a result of the extra sale held on April 25, 1978.
As neither private respondent Maria Veloso nor her assignee Manuel Dulay was able to redeem the subject
property within the one year statutory period for redemption, private respondent Torres filed an Affidavit of
Consolidation of Ownership 13 with the Registry of Deeds of Pasay City and TCT No. 24799 14 was
subsequently issued to private respondent Manuel Torres on April 23, 1979.
On October 1, 1979, private respondent Torres filed a petition for the issuance of a writ of possession against
private respondents spouses Veloso and Manuel Dulay in LRC Case No. 1742-P. However, when petitioner
Virgilio Dulay was never authorized by the petitioner corporation to sell or mortgage the subject property, the
trial court ordered private respondent Torres to implead petitioner corporation as an indispensable party but
the latter moved for the dismissal of his petition which was granted in an Order dated April 8, 1980.
On June 20, 1980, private respondent Torres and Edgardo Pabalan, real estate administrator of Torres, filed
an action against petitioner corporation, Virgilio Dulay and Nepomuceno Redovan, a tenant of Dulay
Apartment Unit No. 8-A for the recovery of possession, sum of money and damages with preliminary injunction
in Civil Case, No. 8198-P with the then Court of First Instance of Rizal.

The facts as found by the trial court are as follows:

Petitioner Manuel R. Dulay Enterprises, Inc, a domestic corporation with the following as members of its Board
of Directors: Manuel R. Dulay with 19,960 shares and designated as president, treasurer and general
manager, Atty. Virgilio E. Dulay with 10 shares and designated as vice-president; Linda E. Dulay with 10
shares; Celia Dulay-Mendoza with 10 shares; and Atty. Plaridel C. Jose with 10 shares and designated as
secretary, owned a property covered by TCT No. 17880 4 and known as Dulay Apartment consisting of sixteen
(16) apartment units on a six hundred eighty-nine (689) square meters lot, more or less, located at Seventh
Street (now Buendia Extension) and F.B. Harrison Street, Pasay City.
Petitioner corporation through its president, Manuel Dulay, obtained various loans for the construction of its
hotel project, Dulay Continental Hotel (now Frederick Hotel). It even had to borrow money from petitioner
Virgilio Dulay to be able to continue the hotel project. As a result of said loan, petitioner Virgilio Dulay occupied
one of the unit apartments of the subject property since property since 1973 while at the same time managing
the Dulay Apartment at his shareholdings in the corporation was subsequently increased by his father. 5
On December 23, 1976, Manuel Dulay by virtue of Board Resolution
No 18 6 of petitioner corporation sold the subject property to private respondents spouses Maria Theresa and
Castrense Veloso in the amount of P300,000.00 as evidenced by the Deed of Absolute Sale. 7 Thereafter, TCT
No. 17880 was cancelled and TCT No. 23225 was issued to private respondent Maria Theresa
Veloso. 8 Subsequently, Manuel Dulay and private respondents spouses Veloso executed a Memorandum to
the Deed of Absolute Sale of December 23, 1976 9 dated December 9, 1977 giving Manuel Dulay within (2)
years or until December 9, 1979 to repurchase the subject property for P200,000.00 which was, however, not
annotated either in TCT No. 17880 or TCT No. 23225.
On December 24, 1976, private respondent Maria Veloso, without the knowledge of Manuel Dulay, mortgaged
the subject property to private respondent Manuel A. Torres for a loan of P250,000.00 which was duly
annotated as Entry No. 68139 in TCT No. 23225. 10

On July 21, 1980, petitioner corporation filed an action against private respondents spouses Veloso and Torres
for the cancellation of the Certificate of Sheriff's Sale and TCT No. 24799 in Civil Case No. 8278-P with the
then Court of First Instance of Rizal.
On January 29, 1981, private respondents Pabalan and Torres filed an action against spouses Florentino and
Elvira Manalastas, a tenant of Dulay Apartment Unit No. 7-B, with petitioner corporation as intervenor for
ejectment in Civil Case No. 38-81 with the Metropolitan Trial Court of Pasay City which rendered a decision on
April 25, 1985, dispositive portion of which reads, as follows:
Wherefore, judgment is hereby rendered in favor of the plaintiff (herein private
respondents) and against the defendants:
1. Ordering the defendants and all persons claiming possession under them to vacate
the premises.
2. Ordering the defendants to pay the rents in the sum of P500.000 a month from May,
1979 until they shall have vacated the premises with interest at the legal rate;
3. Ordering the defendants to pay attorney's fees in the sum of P2,000.00 and
P1,000.00 as other expenses of litigation and for them to pay the costs of the suit. 15
Thereafter or on May 17, 1985, petitioner corporation and Virgilio Dulay filed an action against the presiding
judge of the Metropolitan Trial Court of Pasay City, private respondents Pabalan and Torres for the annulment
of said decision with the Regional Trial Court of Pasay in Civil Case No. 2880-P.
Thereafter, the three (3) cases were jointly tried and the trial court rendered a decision in favor of private
respondents.

Not satisfied with said decision, petitioners appealed to the Court of Appeals which rendered a decision on
October 23, 1989, the dispositive portion of which reads, as follows:
PREMISES CONSIDERED, the decision being appealed should be as it is hereby
AFFIRMED in full.16
On November 8, 1989, petitioners filed a Motion for Reconsideration which was denied on January 26, 1990.
Hence, this petition.
During the pendency of this petition, private respondent Torres died on April 3, 1991 as shown in his death
certificate 17 and named Torres-Pabalan Realty & Development Corporation as his heir in his holographic
will 18 dated October 31, 1986.
Petitioners contend that the respondent court had acted with grave abuse of discretion when it applied the
doctrine of piercing the veil of corporate entity in the instant case considering that the sale of the subject
property between private respondents spouses Veloso and Manuel Dulay has no binding effect on petitioner
corporation as Board Resolution No. 18 which authorized the sale of the subject property was resolved without
the approval of all the members of the board of directors and said Board Resolution was prepared by a person
not designated by the corporation to be its secretary.
We do not agree.
Section 101 of the Corporation Code of the Philippines provides:
Sec. 101. When board meeting is unnecessary or improperly held. Unless the by-laws
provide otherwise, any action by the directors of a close corporation without a meeting
shall nevertheless be deemed valid if:
1. Before or after such action is taken, written consent thereto is signed by all the
directors, or
2. All the stockholders have actual or implied knowledge of the action and make no
prompt objection thereto in writing; or
3. The directors are accustomed to take informal action with the express or implied
acquiese of all the stockholders, or
4. All the directors have express or implied knowledge of the action in question and
none of them makes prompt objection thereto in writing.
If a directors' meeting is held without call or notice, an action taken therein within the
corporate powers is deemed ratified by a director who failed to attend, unless he
promptly files his written objection with the secretary of the corporation after having
knowledge thereof.

In the instant case, petitioner corporation is classified as a close corporation and consequently a board
resolution authorizing the sale or mortgage of the subject property is not necessary to bind the corporation for
the action of its president. At any rate, corporate action taken at a board meeting without proper call or notice
in a close corporation is deemed ratified by the absent director unless the latter promptly files his written
objection with the secretary of the corporation after having knowledge of the meeting which, in his case,
petitioner Virgilio Dulay failed to do.
It is relevant to note that although a corporation is an entity which has a personality distinct and separate from
its individual stockholders or members, 19 the veil of corporate fiction may be pierced when it is used to defeat
public convenience justify wrong, protect fraud or defend crime. 20 The privilege of being treated as an entity
distinct and separate from its stockholder or members is therefore confined to its legitimate uses and is subject
to certain limitations to prevent the commission of fraud or other illegal or unfair act. When the corporation is
used merely as an alter ego or business conduit of a person, the law will regard the corporation as the act of
that person. 21 The Supreme Court had repeatedly disregarded the separate personality of the corporation
where the corporate entity was used to annul a valid contract executed by one of its members.
Petitioners' claim that the sale of the subject property by its president, Manuel Dulay, to private respondents
spouses Veloso is null and void as the alleged Board Resolution No. 18 was passed without the knowledge
and consent of the other members of the board of directors cannot be sustained. As correctly pointed out by
the respondent Court of Appeals:
Appellant Virgilio E. Dulay's protestations of complete innocence to the effect that he
never participated nor was even aware of any meeting or resolution authorizing the
mortgage or sale of the subject premises (see par. 8, affidavit of Virgilio E. Dulay, dated
May 31, 1984, p. 14, Exh. "21") is difficult to believe. On the contrary, he is very much
privy to the transactions involved. To begin with, he is a incorporator and one of the
board of directors designated at the time of the organization of Manuel R. Dulay
Enterprise, Inc. In ordinary parlance, the said entity is loosely referred to as a "family
corporation". The nomenclature, if imprecise, however, fairly reflects the cohesiveness
of a group and the parochial instincts of the individual members of such an aggrupation
of which Manuel R. Dulay Enterprises, Inc. is typical: four-fifths of its incorporators
being close relatives namely, three (3) children and their father whose name identifies
their corporation (Articles of Incorporation of Manuel R. Dulay Enterprises, Inc. Exh.
"31-A"). 22
Besides, the fact that petitioner Virgilio Dulay on June 24, 1975 executed an affidavit 23 that he was a signatory
witness to the execution of the post-dated Deed of Absolute Sale of the subject property in favor of private
respondent Torres indicates that he was aware of the transaction executed between his father and private
respondents and had, therefore, adequate knowledge about the sale of the subject property to private
respondents.
Consequently, petitioner corporation is liable for the act of Manuel Dulay and the sale of the subject property to
private respondents by Manuel Dulay is valid and binding. As stated by the trial court:
. . . the sale between Manuel R. Dulay Enterprises, Inc. and the spouses Maria
Theresa V. Veloso and Castrense C. Veloso, was a corporate act of the former and not
a personal transaction of Manuel R. Dulay. This is so because Manuel R. Dulay was
not only president and treasurer but also the general manager of the corporation. The
corporation was a closed family corporation and the only non-relative in the board of
directors was Atty. Plaridel C. Jose who appeared on paper as the secretary. There is
no denying the fact, however, that Maria Socorro R. Dulay at times acted as secretary. .
. ., the Court can not lose sight of the fact that the Manuel R. Dulay Enterprises, Inc. is
a closed family corporation where the incorporators and directors belong to one single
family. It cannot be concealed that Manuel R. Dulay as president, treasurer and general

manager almost had absolute control over the business and affairs of the
corporation. 24
Moreover, the appellate courts will not disturb the findings of the trial judge unless he has plainly overlooked
certain facts of substance and value that, if considered, might affect the result of the case, 25 which is not
present in the instant case.
Petitioners' contention that private respondent Torres never acquired ownership over the subject property
since the latter was never in actual possession of the subject property nor was the property ever delivered to
him is also without merit.
Paragraph 1, Article 1498 of the New Civil Code provides:
When the sale is made through a public instrument, the execution thereof shall be
equivalent to the delivery of the thing which is the object of the contract, if from the
deed the contrary do not appear or cannot clearly be inferred.
Under the aforementioned article, the mere execution of the deed of sale in a public document is equivalent to
the delivery of the property. Likewise, this Court had held that:
It is settled that the buyer in a foreclosure sale becomes the absolute owner of the
property purchased if it is not redeemed during the period of one year after the
registration of the sale. As such, he is entitled to the possession of the said property
and can demand it at any time following the consolidation of ownership in his name
and the issuance to him of a new transfer certificate of title. The buyer can in fact
demand possession of the land even during the redemption period except that he has
to post a bond in accordance with Section 7 of Act No. 3133 as amended. No such
bond is required after the redemption period if the property is not redeemed.
Possession of the land then becomes an absolute right of the purchaser as confirmed
owner. 26
Therefore, prior physical delivery or possession is not legally required since the execution of the Deed of Sale
in deemed equivalent to delivery.
Finally, we hold that the respondent appellate court did not err in denying petitioner's motion for
reconsideration despite the fact that private respondents failed to submit their comment to said motion as
required by the respondent appellate court from resolving petitioners' motion for reconsideration without the
comment of the private respondent which was required merely to aid the court in the disposition of the motion.
The courts are as much interested as the parties in the early disposition of cases before them. To require
otherwise would unnecessarily clog the courts' dockets.
WHEREFORE, the petition is DENIED and the decision appealed from is hereby AFFIRMED.
SO ORDERED.
Ruling:
Corporation Law; Petitioner corporation is classified as a close corporation and consequently a board
resolution authorizing the sale or mortgage of the subject property is not necessary to bind the Corporation for
the action of its President.In the instant case, petitioner corporation is classified as a close corporation and
consequently a board resolution authorizing the sale or mortgage of the subject property is not necessary to
bind the corporation for the action of its president. At any rate, a corporate action taken at a board meeting
without proper call or notice in a close corporation is deemed ratified by the absent director unless the latter

promptly files his written objection with the secretary of the corporation after having knowledge of the meeting
which, in this case, petitioner Virgilio Dulay failed to do.
Same; Piercing the veil of corporate fiction; When the corporation is used merely as an alter ego or business
conduit of a person, the law will regard the corporation as the act of that person.It is relevant to note that
although a corporation is an entity which has a personality distinct and separate from its individual
stockholders or members, the veil of corporate fiction may be pierced when it is used to defeat public
convenience, justify wrong, protect fraud or defend crime. The privilege of being treated as an entity distinct
and separate from its stockholders or members is therefore confined to its legitimate uses and is subject to
certain limitations to prevent the commission of fraud or other illegal or unfair act. When the corporation is
used merely as an alter ego or business conduit of a person, the law will regard the corporation as the act of
that person. The Supreme Court had repeatedly disregarded the separate personality of the corporation where
the corporate entity was used to annul a valid contract executed by one of its members. [Manuel R. Dulay
Enterprises, Inc. vs. Court of Appeals, 225 SCRA 678(1993)]
G.R. No. L-4900
August 31, 1953
FINANCING CORPORATION OF THE PHILIPPINES and J. AMADO ARANETA, petitioners,
vs.
HON. JOSE TEODORO, Judge of the Court of First Instance of Negros Occidental, Branch II, and
ENCARNACION LIZARES VDA. DE PANLILIO, respondents.
Vicente Hilado for petitioners.
Antonio Barredo for respondents.
MONTEMAYOR, J.:
In civil case No. 1924 of the Court of First Instance of Negros Occidental, Asuncion Lopez Vda. de Lizares,
Encarnacion Lizares Vda. de Panlilio and Efigenia Vda. de Paredes, in their own behalf and in behalf of the
other minority stockholders of the Financing Corporation of the Philippines, filed a complaint against the said
corporation and J. Amado Araneta, its president and general manager, claiming among other things alleged
gross mismanagement and fraudulent conduct of the corporate affairs of the defendant corporation by J.
Amado Araneta, and asking that the corporation be dissolved; that J. Amado Araneta be declared personally
accountable for the amounts of the unauthorized and fraudulent disbursements and disposition of assets
made by him, and that he be required to account for said assets, and that pending trial and disposition of the
case on its merits a receiver be appointed to take possession of the books, records and assets of the
defendant corporation preparatory to its dissolution and liquidation and distribution of the assets. Over the
strong objection of the defendants, the trial court presided by respondent Judge Jose Teodoro, granted the
petition for the appointment of a receiver and designated Mr. Alfredo Yulo as such receiver with a bond of
P50,000. Failing to secure a reconsideration of the order appointing a receiver, the defendants in said case,
Financing Corporation of the Philippines and J. Amado Araneta, as petitioners, have filed the present petition
for certiorari with preliminary injunction to revoke and set aside the order. Acting upon that part of the petition
asking for a writ of preliminary injunction, a majority of the court granted the same upon the filing of a bond by
the petitioners in the sum of P50,000.
The main contention of the petitioners in opposing the appointment of a receiver in this case is that said
appointment is merely an auxiliary remedy; that the principal remedy sought by the respondents in the action
in Negros Occidental was the dissolution of the Financing Corporation of the Philippines; that according to the
law a suit for the dissolution of a corporation can be brought and maintained only by the State through its legal
counsel, and that respondents, much less the minority stockholders of said corporation, have no right or
personality to maintain the action for dissolution, and that inasmuch as said action cannot be maintained
legally by the respondents, then the auxiliary remedy for the appointment of a receiver has no basis.
True it is that the general rule is that the minority stockholders of a corporation cannot sue and demand its
dissolution. However, there are cases that hold that even minority stockholders may ask for dissolution, this,
under the theory that such minority members, if unable to obtain redress and protection of their rights within
the corporation, must not and should not be left without redress and remedy. This was what probably

prompted this Court to state in the case of Hall, et al. vs. Judge Piccio,* G.R. No. L-2598 (47 Off. Gaz. No. 12
Supp., p. 200) that even the existence of a de jure corporation may be terminated in a private suit for its
dissolution by the stockholders without the intervention of the State. It was therein further held that although
there might be some room for argument on the right of minority stockholders to ask for dissolution,-that
question does not affect the court's jurisdiction over the case, and that the remedy by the party dissatisfied
was to appeal from the decision of the trial court. We repeat that although as a rule, minority stockholders of a
corporation may not ask for its dissolution in a private suit, and that such action should be brought by the
Government through its legal officer in a quo warranto case, at their instance and request, there might be
exceptional cases wherein the intervention of the State, for one reason or another, cannot be obtained, as
when the State is not interested because the complaint is strictly a matter between the stockholders and does
not involve, in the opinion of the legal officer of the Government, any of the acts or omissions warranting quo
warranto proceedings, in which minority stockholders are entitled to have such dissolution. When such action
or private suit is brought by them, the trial court had jurisdiction and may or may not grant the prayer,
depending upon the facts and circumstances attending it. The trial court's decision is of course subject to
review by the appellate tribunal. Having such jurisdiction, the appointment of a receiver pendente lite is left to
the sound discretion of the trial court. As was said in the case of Angeles vs. Santos (64 Phil., 697), the action
having been properly brought and the trial court having entertained the same, it was within the power of said
court upon proper showing to appoint a receiverpendente lite for the corporation; that although the
appointment of a receiver upon application of the minority stockholders is a power to be exercised with great
caution, nevertheless, it should be exercised necessary in order not to entirely ignore and disregard the rights
of said minority stockholders, especially when said minority stockholders are unable to obtain redress and
protection of their rights within the corporation itself.
In that civil case No. 1924 of Negros Occidental court, allegations of mismanagement and misconduct by its
President and Manager were made, specially in connection with the petition for the appointment of a receiver.
in order to have an idea of the seriousness of said allegations, we reproduce a pertinent portion of the order of
respondent Judge Teodoro dated June 23, 1951, subject of these certiorari proceedings:
Considering plaintiffs' complaint and verified motion for appointment of a receiver together, as they
have been treated jointly in the opposition of the defendants, the grounds of the prayer for
receivership may be briefly stated to be: (1) imminent danger of insolvency; (2) fraud and
mismanagement, such as, particularly, (a) wrongful and unauthorized diversion from corporate
purposes and use for personal benefit of defendant Araneta, for the benefit of the corporations
under his control and of which he is majority stockholder and/or for the benefit of his relatives,
personal friends and the political organization to which he is affiliated of approximately over one
and a half million pesos of the funds of the defendant corporation in the form of uncollected
allowances and loans, either without or with uncollected interest, and either unsecured or
insufficiently secured, and sometimes with a securities appearing in favor of defendant Araneta as
if the funds advanced or loaned were his own; (b) unauthorized and profitless pledging of
securities owned by defendant corporation to secure obligations amounting to P588,645.34 of
another corporation controlled by defendant Araneta; (c) unauthorized and profitless using of the
name of the defendant corporation in the shipping of sugar belonging to other corporations
controlled by defendant Araneta to the benefit of said corporations in the amount of at least
P104,343.36; (d) refusal by defendant Araneta to endorse to the defendant corporation shares of

stock and other securities belonging to it but which are still in his name; (e) negligent failure to
endorse other shares of stock belonging to defendant corporation but still in the names of the
respective vendors; and (f) illegal and unauthorized transfer and deposit in the United States of
America of 6,426,281 shares of the Atok-Big Wedge Mining Company; (3) violations of the
corporation law and the by-laws of the corporation such as (a) refusal to allow minority
stockholders to examine the books and records of the corporation; (b) failure to call and hold
stockholders' and directors' meetings; (c) virtual disregard and ignoring of the board of directors by
defendant Araneta who has been and is conducting the affairs of the corporation under his
absolute control and for his personal benefit and for the benefit of the corporations controlled by
him, to the prejudice and in disregard of the rights of the plaintiffs and other minority stockholders;
and (d) irregularity in the keeping and (e) errors and omissions in the books and failure of the same
to reflect the real and actual transactions of the defendant corporations; (4) failure to achieve the
fundamental purpose of the corporation; (5) if administration, possession and control of the affairs,
books, etc. of defendant corporation are left in the hands of the defendant Araneta and the present
corporate officials, under his power and influence, the remaining assets of the corporation are in
danger of being further dissipated, wasted or lost and of becoming ultimately unavailable for
distribution among its stockholders; and (6) the best means to protect and preserve the assets of
defendant corporation is the appointment of a receiver.
In conclusion, we hold that the trial court through respondent Judge Teodoro had jurisdiction and properly
entertained the original case; that he also had jurisdiction to appoint a receiver pendente lite, and considering
the allegations made in connection with the petition for the appointment of a receiver, he neither exceeded his
jurisdiction nor abused his discretion in appointing a receiver. The petition for certiorari is hereby denied, with
costs. The writ of preliminary injunction heretofore issued is hereby ordered dissolved.
Ruling;
Corporations ; Involuntarily Dissolution ; Petition Therefore by Minonrity Stockholders.Although as a rule
minority stock- holders of a corporation may not ask for its dissolution in a private suit and such action should
be brought by the Govern- ment through its legal officer in a quo warranto case at their instance and request,
there might be exceptional cases wherein the intervention of the State, for one reason or another, cannot be
obtained, as when the State, is not interested because the complaint is strictly a matter between the
stockholders and does not involve, in the opinion of the legal officer of the Government, any of the acts or
omissions warranting quo warranto proceedings in which minority stockholders are entitled to have such
dissolution. When such action or private suit is brought by them, the trial court has jurisdiction and may or may
not grant the prayer, depending upon the facts and circumstances attending it. (Hall et al. vs. Judge Piccio, 47
Off. Gaz., supp. 12, p. 200.)
2.Id.; Id; Receiver for Corporation "Pendente Lite".Action having been properly brought and the trial court
having entertained the same, it is within the power of said court upon proper showing to appoint a receiver
pendente lite for the corporation. Although the appointment of a receiver upon application of the minority
stockholders is a power to be exercised with great caution, nevertheless it should be exercised when
necessary in order not to entirely ignore and disregard the rights of said minority stockholders, especially when
said minority stockholders are unable to obtain redress and protection of their rights within the corporation
itself. (Angeles vs. Santos, 64 Phil., 697.) [Financing Corporation of the Phil. and Araneta vs. Teodoro, etc. and
Vda. de Paalilio, 93 Phil., 678(1953)]