sary but this rule does not dispense with the requirement

that the taxpayer should actually receive, even beyond the

prescriptive period, the assessment notice. (Barcelon,
Roxas Securities, Inc. vs. Commissioner of Internal
Revenue, 498 SCRA 126 [2006])

··o0o··

G.R. No. 177549. June 18, 2009.*

ANTHONY S. YU, ROSITA G. YU and JASON G. YU,

petitioners, vs. JOSEPH S. YUKAYGUAN, NANCY L.
YUKAYGUAN, JERALD NERWIN L. YUKAYGUAN, and
JILL NESLIE L. YUKAYGUAN, [on their own behalf and
on behalf of] WINCHESTER INDUSTRIAL SUPPLY, INC.,
respondents.

Corporation Law; Derivative Suits; Words and Phrases; While

the general rule is that where a corporation is an injured party, its
power to sue is lodged with its board of directors or trustees, an
individual stockholder is permitted to institute a derivative suit on
behalf of the corporation wherein he holds stocks in order to protect
or vindicate corporate rights, whenever the officials of the
corporation refuse to sue, or are the ones to be sued, or hold the
control of the corporation; A derivative action is a suit by a
shareholder to enforce a corporate cause of action.·In one stroke,
with the use of sweeping language, which utterly lacked support,
the Court of Appeals converted the derivative suit between the
parties into liquidation proceedings. The general rule is that where
a corporation is an injured party, its power to sue is lodged with its
board of directors or trustees. Nonetheless, an individual
stockholder is permitted to institute a derivative suit on behalf of
the corporation wherein he holds stocks in order to protect or
vindicate corporate rights, whenever the officials of the corporation
refuse to sue, or are the ones to be sued, or hold the control of the
corporation. In such actions, the suing stockholder
_______________

* THIRD DIVISION.

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VOL. 589, JUNE 18, 2009 589

Yu vs. Yukayguan

is regarded as a nominal party, with the corporation as the real

party in interest. A derivative action is a suit by a shareholder to
enforce a corporate cause of action. The corporation is a necessary
party to the suit. And the relief which is granted is a judgment
against a third person in favor of the corporation. Similarly, if a
corporation has a defense to an action against it and is not
asserting it, a stockholder may intervene and defend on behalf of
the corporation. By virtue of Republic Act No. 8799, otherwise
known as the Securities Regulation Code, jurisdiction over intra-
corporate disputes, including derivative suits, is now vested in the
Regional Trial Courts designated by this Court pursuant to A.M.
No. 00-11-03-SC promulgated on 21 November 2000.

Same; Same; Dissolution of Corporations; Liquidation; Words

and Phrases; Following the voluntary or involuntary dissolution of a
corporation, liquidation is the process of settling the affairs of said
corporation, which consists of adjusting the debts and claims, that
is, of collecting all that is due the corporation, the settlement and
adjustment of claims against it and the payment of its just debts.·
Following the voluntary or involuntary dissolution of a corporation,
liquidation is the process of settling the affairs of said corporation,
which consists of adjusting the debts and claims, that is, of
collecting all that is due the corporation, the settlement and
adjustment of claims against it and the payment of its just debts.
More particularly, it entails the following: Winding up the affairs of
the corporation means the collection of all assets, the payment of all
its creditors, and the distribution of the remaining assets, if any
among the stockholders thereof in accordance with their contracts,
or if there be no special contract, on the basis of their respective
interests. The manner of liquidation or winding up may be provided
for in the corporate by-laws and this would prevail unless it is
inconsistent with law. It may be undertaken by the corporation
itself, through its Board of Directors; or by trustees to whom all
corporate assets are conveyed for liquidation; or by a receiver
appointed by the SEC upon its decree dissolving the corporation.
 Same; Same; Same; Same; A derivative suit is fundamentally
distinct and independent from liquidation proceedings·they are
neither part of each other nor the necessary consequence of the other.
·A derivative suit is fundamentally distinct and independent from
liquidation proceedings. They are neither part of each other nor

590

590 SUPREME COURT REPORTS ANNOTATED

Yu vs. Yukayguan

the necessary consequence of the other. There is totally no

justification for the Court of Appeals to convert what was
supposedly a derivative suit instituted by respondents, on their own
behalf and on behalf of Winchester, Inc. against petitioners, to a
proceeding for the liquidation of Winchester, Inc.
Same; Same; A stockholderÊs right to institute a derivative suit
is not based on any express provision of the Corporation Code, or
even the Securities Regulation Code, but is impliedly recognized
when the said laws make corporate directors or officers liable for
damages suffered by the corporation and its stockholders for
violation of their fiduciary duties.·The Court has recognized that a
stockholderÊs right to institute a derivative suit is not based on any
express provision of the Corporation Code, or even the Securities
Regulation Code, but is impliedly recognized when the said laws
make corporate directors or officers liable for damages suffered by
the corporation and its stockholders for violation of their fiduciary
duties. Hence, a stockholder may sue for mismanagement, waste or
dissipation of corporate assets because of a special injury to him for
which he is otherwise without redress. In effect, the suit is an
action for specific performance of an obligation owed by the
corporation to the stockholders to assist its rights of action when
the corporation has been put in default by the wrongful refusal of
the directors or management to make suitable measures for its
protection. The basis of a stockholderÊs suit is always one in equity.
However, it cannot prosper without first complying with the legal
requisites for its institution.
Same; Same; Interim Rules of Procedure Governing Intra-
Corporate Controversies; Requisites for Filing of Derivative Suits.·
Section 1, Rule 8 of the Interim Rules of Procedure Governing
Intra-Corporate Controversies lays down the following
requirements which a stockholder must comply with in filing a
derivative suit: Sec. 1. Derivative action.·A stockholder or member
may bring an action in the name of a corporation or association, as
the case may be, provided, that: (1) He was a stockholder or
member at the time the acts or transactions subject of the action
occurred and at the time the action was filed; (2) He exerted all
reasonable efforts, and alleges the same with particularity in the
complaint, to exhaust all remedies available under the articles of
incorporation, by-laws, laws or rules governing the corporation or
partnership to obtain the relief he desires; (3) No appraisal rights
are available for the act or acts complained of; and (4) The suit is
not a nuisance or harassment suit.

591

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Yu vs. Yukayguan

Same; Same; The obvious intent behind the rule requiring the
stockholder filing a derivative suit to first exert all reasonable efforts
to exhaust all remedies available under the articles of incorporation,
by-laws, laws or rules governing the corporation or partnership to
obtain the relief he desires is to make the derivative suit the final
recourse of the stockholder, after all other remedies to obtain the
relief sought had failed.·The wordings of Section 1, Rule 8 of the
Interim Rules of Procedure Governing Intra-Corporate
Controversies are simple and do not leave room for statutory
construction. The second paragraph thereof requires that the
stockholder filing a derivative suit should have exerted all
reasonable efforts to exhaust all remedies available under the
articles of incorporation, by-laws, laws or rules governing the
corporation or partnership to obtain the relief he desires; and to
allege such fact with particularity in the complaint. The
obvious intent behind the rule is to make the derivative suit the
final recourse of the stockholder, after all other remedies to obtain
the relief sought had failed. The allegation of respondent Joseph in
his Affidavit of his repeated attempts to talk to petitioner Anthony
regarding their dispute hardly constitutes „all reasonable efforts to
exhaust all remedies available.‰ Respondents did not refer to or
mention at all any other remedy under the articles of incorporation
or by-laws of Winchester, Inc., available for dispute resolution
among stockholders, which respondents unsuccessfully availed
themselves of. And the Court is not prepared to conclude that the
articles of incorporation and by-laws of Winchester, Inc. absolutely
failed to provide for such remedies.
 Same; Same; The fact that Winchester, Inc. is a family
corporation does not in any way exempt a stockholder from
complying with the clear requirements and formalities of the rules
for filing a derivative suit·there is nothing in the pertinent laws or
rules supporting the distinction between, and the difference in the
requirements for, family corporations vis-à-vis other types of
corporations, in the institution by a stockholder of a derivative suit.
·Neither can this Court accept the reasons proffered by
respondents to excuse themselves from complying with the second
requirement under Section 1, Rule 8 of the Interim Rules of
Procedure Governing Intra-Corporate Controversies. They are
flimsy and insufficient, compared to the seriousness of respondentsÊ
accusations of fraud, misappropriation, and falsification of
corporate records against the petitioners. The fact that Winchester,
Inc. is a family corporation should not in any way

592

592 SUPREME COURT REPORTS ANNOTATED

Yu vs. Yukayguan

exempt respondents from complying with the clear requirements

and formalities of the rules for filing a derivative suit. There is
nothing in the pertinent laws or rules supporting the distinction
between, and the difference in the requirements for, family
corporations vis-à-vis other types of corporations, in the institution
by a stockholder of a derivative suit.
Same; Same; Pleadings and Practice; A partyÊs Supplemental
Affidavit and additional evidence are where they were only
appended to his Memorandum before the Regional Trial Court
(RTC)·parties should attach the affidavits of witnesses and other
documentary evidence to the appropriate pleading, which generally
should mean the complaint for the plaintiff and the answer for the
respondent.·As to respondentsÊ second ground in their Motion for
Reconsideration, the Court agrees with the ruling of the Court of
Appeals, in its 15 February 2006 Decision, that respondent JosephÊs
Supplemental Affidavit and additional evidence were inadmissible
since they were only appended by respondents to their
Memorandum before the RTC. Section 8, Rule 2 of the Interim
Rules of Procedure Governing Intra-Corporate Controversies is
crystal clear that: x x x According to the afore-quoted provision, the
parties should attach the affidavits of witnesses and other
documentary evidence to the appropriate pleading, which generally
should mean the complaint for the plaintiff and the answer for the
respondent. Affidavits and documentary evidence not so submitted
must already be attached to the respective pre-trial briefs of the
parties.
Same; Same; Same; Cases wherein the court can render
judgment prior to pre-trial, do not depart from or constitute an
exception to the requisite that affidavits of witnesses and
documentary evidence should be submitted, at the latest, with the
partiesÊ pre-trial briefs.·True, the parties in the present case
agreed to submit the case for judgment by the RTC, even before pre-
trial, in accordance with Section 4, Rule 4 of the Interim Rules of
Procedure Governing Intra-Corporate Controversies: Sec. 4.
Judgment before pre-trial.·If after submission of the pre-trial
briefs, the court determines that, upon consideration of the
pleadings, the affidavits and other evidence submitted by
the parties, a judgment may be rendered, the court may order the
parties to file simultaneously their respective memoranda
within a non-extendible period of twenty (20) days from receipt of
the order. Thereafter, the court shall render

593

VOL. 589, JUNE 18, 2009 593

Yu vs. Yukayguan

judgment, either full or otherwise, not later than ninety (90) days
from the expiration of the period to file the memoranda. Even then,
the afore-quoted provision still requires, before the court makes a
determination that it can render judgment before pre-trial, that the
parties had submitted their pre-trial briefs and the court took into
consideration the pleadings, affidavits and other evidence
submitted by the parties. Hence, cases wherein the court can render
judgment prior to pre-trial, do not depart from or constitute an
exception to the requisite that affidavits of witnesses and
documentary evidence should be submitted, at the latest, with the
partiesÊ pre-trial briefs. Taking further into account that under
Section 4, Rule 4 of the Interim Rules of Procedure Governing
Intra-Corporate Controversies parties are required to file their
memoranda simultaneously, the same would mean that a party
would no longer have any opportunity to dispute or rebut any new
affidavit or evidence attached by the other party to its
memorandum. To violate the above-quoted provision would, thus,
irrefragably run afoul the former partyÊs constitutional right to due
process.

PETITION for review on certiorari of the resolutions of the

Court of Appeals.
The facts are stated in the opinion of the Court.
Mario Y. Cavada for petitioners.
Francis M. Zosa for respondents.

CHICO-NAZARIO, J.:
Before Us is a Petition for Review on Certiorari1 under
Rule 45 of the Rules of Court, which seeks to reverse and
set aside the Resolutions dated 18 July 20062 and 19 April
20073 of the

_______________

1 Rollo, pp. 2-18.

2  Penned by Associate Justice Vicente L. Yap with Associate Justices
Arsenio J. Magpale and Apolinario D. Bruselas, Jr., concurring; Rollo, pp.
20-23.
3 Penned by Associate Justice Arsenio J. Magpale with Associate
Justices Agustin S. Dizon and Francisco P. Acosta, concurring; Rollo, pp.
25-26.

594

594 SUPREME COURT REPORTS ANNOTATED

Yu vs. Yukayguan

Court of Appeals in CA-G.R. SP No. 00185. Upon herein

respondentsÊ motion, the Court of Appeals rendered the
assailed Resolution dated 18 July 2006, reconsidering its
Decision4 dated 15 February 2006; and remanding the case
to the Regional Trial Court (RTC) of Cebu City, Branch 11,
for necessary proceedings, in effect, reversing the Decision5
dated 10 November 2004 of the RTC which dismissed
respondentsÊ Complaint in SRC Case No. 022-CEB. Herein
petitionersÊ Motion for Reconsideration of the Resolution
dated 18 July 2006 was denied by the appellate court in the
other assailed Resolution dated 19 April 2007.
Herein petitioners are members of the Yu Family,
particularly, the father, Anthony S. Yu (Anthony); the wife,
Rosita G. Yu (Rosita); and their son, Jason G. Yu (Jason).
Herein respondents composed the Yukayguan Family,
namely, the father, Joseph S. Yukayguan (Joseph); the wife,
Nancy L. Yukayguan (Nancy); and their children Jerald
Nerwin L. Yukayguan (Jerald) and Jill Neslie Yukayguan
(Jill).
Petitioner Anthony is the older half-brother of
respondent Joseph.
Petitioners and the respondents were all stockholders of
Winchester Industrial Supply, Inc. (Winchester, Inc.), a
domestic corporation engaged in the operation of a general
hardware and industrial supply and equipment business.
On 15 October 2002, respondents filed against
petitioners a verified Complaint for Accounting, Inspection
of Corporate Books and Damages through Embezzlement
and Falsification of Corporate Records and Accounts6
before the RTC of Cebu. The said Complaint was filed by
respondents, in their own behalf and as a derivative suit on
behalf of Winchester, Inc., and was docketed as SRC Case
No. 022-CEB. The factual

_______________

4 Rollo, pp. 32-43.

5 Penned by Judge Silvestre A. Maamo, Jr.; Rollo, pp. 27-30.
6 CA Rollo, pp. 39-45.

595

VOL. 589, JUNE 18, 2009 595

Yu vs. Yukayguan

background of the Complaint was stated in the attached

Affidavit executed by respondent Joseph.
According to respondents,7 Winchester, Inc. was
established and incorporated on 12 September 1977, with
petitioner Anthony as one of the incorporators, holding
1,000 shares of stock worth P100,000.00.8 Petitioner
Anthony paid for the said shares of stock with respondent
JosephÊs money, thus, making the former a mere trustee of
the shares for the latter. On 14 November 1984, petitioner
Anthony ceded 800 of his 1,000 shares of stock in
Winchester, Inc. to respondent Joseph, as well as Yu Kay
Guan,9 Siao So Lan, and John S. Yu.10 Petitioner Anthony
remained as trustee for respondent Joseph of the 200
shares of stock in Winchester, Inc., still in petitioner
AnthonyÊs name.
Respondents then alleged that on 30 June 1985,
Winchester, Inc. bought from its incorporators, excluding
petitioner Anthony, their accumulated 8,500 shares in the
corporation.11

_______________

7  Id., at pp. 46-48.

8  The incorporators and their respective numbers of shares were as
follows:

Name No. of shares Amount

Eugene Yutankin 3,000 P 300,000.00
Hao Bun Yam 3,000 P 300,000.00
Co To 2,000 P 200,000.00
Vicenta Lo Chiong 1,000 P 100,000.00
Anthony S. Yu 1,000 P 100,000.00
10,000 P1,000,000.00
(Records, p. 14.)

9  Father of petitioner Anthony and respondent Joseph.

10 CA Rollo, p. 78.
11 In accordance with the recital of facts in the Complaint, if the 1,000
shares of Anthony Yu were to be subtracted from the total number of
shares issued by Winchester, Inc., the other incorporators would have a
total of 9,000 shares. However, according to the Deed of Sale dated 30
June 1985 (Records, p. 16), only 8,500 shares were sold to Winchester,
Inc. by the following shareholders:

596

596 SUPREME COURT REPORTS ANNOTATED

Yu vs. Yukayguan

Subsequently, on 7 November 1995, Winchester, Inc. sold

the same 8,500 shares to other persons, who included
respondents Nancy, Jerald, and Jill; and petitioners Rosita
and Jason.12
Respondents further averred that although respondent
Joseph appeared as the Secretary and Treasurer in the
corporate records of Winchester, Inc., petitioners actually
controlled and ran the said corporation as if it were their
own family business. Petitioner Rosita handled the money
market placements of the corporation to the exclusion of
respondent Joseph, the designated Treasurer of
Winchester, Inc. Petitioners were also misappropriating the
funds and properties of Winchester, Inc. by understating
the sales, charging their personal and family expenses to
the said corporation, and withdrawing stocks for their
personal use without paying for the same. Respondents
attached to the Complaint various receipts13 to prove the
personal and family expenses charged by petitioners to
Winchester, Inc.
Respondents, therefore, prayed that respondent Joseph
be declared the owner of the 200 shares of stock in
petitioner AnthonyÊs name. Respondents also prayed that
petitioners be ordered to: (1) deposit the corporate books
and records of Winchester, Inc. with the Branch Clerk of
Court of the RTC for respondentsÊ inspection; (2) render an
accounting of all the funds of Winchester, Inc. which
petitioners misappropriated; (3) reimburse the personal
and family expenses which petitioners charged to
Winchester, Inc., as well as the properties of the
corporation which petitioners withheld without pay-

_______________

Name No. of shares

Irinea Yutankin 3,000
Hao Bun Yam 3,000
Yu Kim Sing 1,500
Vicenta Lo Chiong 1,000
8,500

12 CA Rollo, pp. 56-57.

13 Annexes „E‰ to „Q‰; CA Rollo, pp. 60-77.

597

VOL. 589, JUNE 18, 2009 597

Yu vs. Yukayguan

ment; and (4) pay respondentsÊ attorneyÊs fees and

litigation expenses. In the meantime, respondents sought
the appointment of a Management Committee and the
freezing of all corporate funds by the trial court.
On 13 November 2002, petitioners filed an Answer with
Compulsory Counterclaim,14 attached to which was
petitioner AnthonyÊs Affidavit.15 Petitioners vehemently
denied the allegation that petitioner Anthony was a mere
trustee for respondent Joseph of the 1,000 shares of stock
in Winchester, Inc. in petitioner AnthonyÊs name. For the
incorporation of Winchester, Inc., petitioner Anthony
contributed P25,000.00 paid-up capital, representing 25%
of the total par value of the 1,000 shares he subscribed to,
the said amount being paid out of petitioner AnthonyÊs
personal savings and petitioners Anthony and RositaÊs
conjugal funds. Winchester, Inc. was being co-managed by
petitioners and respondents, and the attached receipts,
allegedly evidencing petitionersÊ use of corporate funds for
personal and family expenses, were in fact signed and
approved by respondent Joseph.
By way of special and affirmative defenses, petitioners
contended in their Answer with Compulsory Counterclaim
that respondents had no cause of action against them.
RespondentsÊ Complaint was purely intended for
harassment. It should be dismissed under Section 1(j), Rule
1616 of the Rules of Court for failure to comply with
conditions precedent before its filing. First, there was no
allegation in respondentsÊ Com-

_______________

14 CA Rollo, pp. 79-86.

15 Id., at pp. 87-91.
16 Rule 16, Section 1(j) of the Rules of Court provides:
Section 1. Grounds.·Within the time for but before filing the answer
to the complaint or pleading asserting a claim, a motion to dismiss may
be made on any of the following grounds:
xxxx
(j) That a condition precedent for filing the claim has not been
complied with.

598

598 SUPREME COURT REPORTS ANNOTATED

Yu vs. Yukayguan

plaint that earnest efforts were exerted to settle the

dispute between the parties. Second, since respondentsÊ
Complaint purportedly constituted a derivative suit, it
noticeably failed to allege that respondents exerted effort to
exhaust all available remedies in the Articles of
Incorporation and By-Laws of Winchester, Inc., as well as
in the Corporation Code. And third, given that respondentsÊ
Complaint was also for inspection of corporate books, it
lacked the allegation that respondents made a previous
demand upon petitioners to inspect the corporate books but
petitioners refused. Prayed for by petitioners, in addition to
the dismissal of respondentsÊ Complaint, was payment of
moral and exemplary damages, attorneyÊs fees, litigation
expenses, and cost of suit.
On 30 October 2002, the hearing on the application for
the appointment of a Management Committee was
commenced. Respondent Joseph submitted therein, as his
direct testimony, the same Affidavit that he executed,
which was attached to the respondentsÊ Complaint. On 4
November 2002, respondent Joseph was cross-examined by
the counsel for petitioners. Thereafter, the continuation of
the hearing was set for 29 November 2002, in order for
petitioners to adduce evidence in support of their
opposition to the application for the appointment of a
Management Committee.17
During the hearing on 29 November 2002, the parties
manifested before the RTC that there was an ongoing
mediation between them, and so the hearing on the
appointment of a Management Committee was reset to
another date.
In amicable settlement of their dispute, the petitioners
and respondents agreed to a division of the stocks in
trade,18 the real properties, and the other assets of
Winchester, Inc. In partial implementation of the afore-
mentioned amicable set-

_______________

17 Records, p. 52.
18 The Court understood this term to refer to the inventories of the
general hardware and industrial supply and equipment business.

599

VOL. 589, JUNE 18, 2009 599

Yu vs. Yukayguan

tlement, the stocks in trade and real properties in the

name of Winchester, Inc. were equally distributed among
petitioners and respondents. As a result, the stockholders
and members of the Board of Directors of Winchester, Inc.
passed, on 4 January 2003, a unanimous Resolution19
dissolving the corporation as of said date.
On 22 February 2004, respondents filed their pre-trial
brief.20
On 25 June 2004, petitioners filed a Manifestation21
informing the RTC of the existence of their amicable
settlement with respondents. Respondents, however, made
their own manifestation before the RTC that they were
repudiating said settlement, in view of the failure of the
parties thereto to divide the remaining assets of
Winchester, Inc. Consequently, respondents moved to have
SRC Case No. 022-CEB set for pre-trial.
On 23 August 2004, petitioners filed their pre-trial
brief.22
On 26 August 2004, instead of holding a formal pre-trial
conference and resuming the hearing on the application for
the appointment of a Management Committee, petitioners
and respondents agreed that the RTC may already render
a judgment based on the pleadings. In accordance with the
agreement of the parties, the RTC issued, on even date, an
Order23 which stated:

ORDER
„During the pre-trial conference held on August 26, 2004,
counsels of the parties manifested, agreed and suggested that a
judgment may be rendered by the Court in this case based on the
pleadings, affidavits, and other evidences on record, or to be
submitted by them, pursuant to the provision of Rule 4, Section 4 of
the Rule on Intra-

_______________

19 CA Rollo, p. 214.
20 Records, pp. 225-231.
21 Rollo, pp. 55-56.
22 Records, pp. 234-240.
23 Rollo, p. 62.

600

600 SUPREME COURT REPORTS ANNOTATED

Yu vs. Yukayguan

Corporate Controversies. The suggestion of counsels was approved

by the Court.
Accordingly, the Court hereby orders the counsels of the parties
to file simultaneously their respective memoranda within a non-
extendible period of twenty (20) days from notice hereof. Thereafter,
the instant case will be deemed submitted for resolution.
xxxx
Cebu City, August 26, 2004.
(signed)
SILVESTRE A. MAAMO, JR.
 Acting Presiding Judge

Petitioners and respondents duly filed their respective

Memoranda,24 discussing the arguments already set forth
in the pleadings they had previously submitted to the RTC.
Respondents, though, attached to their Memorandum a
Supplemental Affidavit25 of respondent Joseph, containing
assertions that refuted the allegations in petitioner
AnthonyÊs Affidavit, which was earlier submitted with
petitionersÊ Answer with Compulsory Counterclaim.
Respondents also appended to their Memorandum
additional documentary evidence,26 consisting of original
and duplicate cash invoices and cash disbursement receipts
issued by Winchester, Inc., to further substantiate their
claim that petitioners were understating sales and
charging their personal expenses to the corporate funds.
The RTC subsequently promulgated its Decision on 10
November 2004 dismissing SRC Case No. 022-CEB. The
dispositive portion of said Decision reads:

„WHEREFORE, in view of the foregoing premises and for lack

of merit, this Court hereby renders judgment in this case
DISMISSING the complaint filed by the [herein respondents].

_______________

24 CA Rollo, pp. 177-202, 94-106.

25 Id., at pp. 107-110.
26 Id., at pp. 111-128.

601

VOL. 589, JUNE 18, 2009 601

Yu vs. Yukayguan

The Court also hereby dismisses the [herein petitionersÊ]

counterclaim because it has not been indubitably shown that the
filing by the [respondents] of the latterÊs complaint was done in bad
faith and with malice.‰27

The RTC declared that respondents failed to show that

they had complied with the essential requisites for filing a
derivative suit as set forth in Rule 8 of the Interim Rules of
Procedure Governing Intra-Corporate Controversies:
(1) He was a stockholder or member at the time the acts or transactions
subject of the action occurred and at the time the action was filed;
(2) He exerted all reasonable efforts, and alleges the same with
particularity in the complaint, to exhaust all remedies available
under the articles of incorporation, by-laws, laws or rules governing
the corporation or partnership to obtain the relief he desires;
(3) No appraisal rights are available for the act or acts complained of;
and
(4) The suit is not a nuisance or harassment suit.

As to respondentsÊ prayer for the inspection of corporate

books and records, the RTC adjudged that they had
likewise failed to comply with the requisites entitling them
to the same. Section 2, Rule 7 of the Interim Rules of
Procedure Governing Intra-Corporate Controversies
requires that the complaint for inspection of corporate
books or records must state that:

(1) The case is for the enforcement of plaintiff's right of inspection of

corporate orders or records and/or to be furnished with financial
statements under Sections 74 and 75 of the Corporation Code of the
Philippines;

_______________

27 Rollo, p. 30.

602

602 SUPREME COURT REPORTS ANNOTATED

Yu vs. Yukayguan

(2) A demand for inspection and copying of books and records and/or to be
furnished with financial statements made by the plaintiff upon
defendant;
(3) The refusal of defendant to grant the demands of the plaintiff and the
reasons given for such refusals, if any; and
(4) The reasons why the refusal of defendant to grant the demands of the
plaintiff is unjustified and illegal, stating the law and jurisprudence
in support thereof.

The RTC further noted that respondent Joseph was the

corporate secretary of Winchester, Inc. and, as such, he was
supposed to be the custodian of the corporate books and
records; therefore, a court order for respondentsÊ inspection
of the same was no longer necessary. The RTC similarly
denied respondentsÊ demand for accounting as it was clear
that Winchester, Inc. had been engaging the services of an
audit firm. Respondent Joseph himself described the audit
firm as competent and independent, and believed that the
audited financial statements the said audit firm prepared
were true, faithful, and correct.
Finding the claims of the parties for damages against
each other to be unsubstantiated, the RTC thereby
dismissed the same.
Respondents challenged the foregoing RTC Decision
before the Court of Appeals via a Petition for Review under
Rule 43 of the Rules of Court, docketed as CA-G.R. SP No.
00185.
On 15 February 2006, the Court of Appeals rendered its
Decision, affirming the 10 December 2004 Decision of the
RTC. Said the appellate court:

„After a careful and judicious scrutiny of the extant records of

the case, together with the applicable laws and jurisprudence, WE
see no reason or justification for granting the present appeal.
xxxx
x x x [T]his Court sees that the instant petition would still fail
taking into consideration all the pleadings and evidence of the
parties

603

VOL. 589, JUNE 18, 2009 603

Yu vs. Yukayguan

except the supplemental affidavit of [herein respondent] Joseph and

its corresponding annexes appended in [respondentsÊ] memorandum
before the Court a quo. The Court a quo have (sic) outrightly
dismissed the complaint for its failure to comply with the
mandatory provisions of the Interim Rules of Procedure for Intra-
Corporate Controversies particularly Rule 2, Section 4(3), Rule 8,
Section [1(2)] and Rule 7, Section 2 thereof, which reads as follows:
RULE 2
COMMENCEMENT OF ACTION AND PLEADINGS
Sec. 4. Complaint.·The complaint shall state or contain:
xxxx
(3) the law, rule, or regulation relied upon, violated, or sought to
be enforced;
xxxx
 RULE 8
DERIVATIVE SUITS
Sec. 1. Derivative action.·x x x
xxxx
(2) He exerted all reasonable efforts, and alleges the same with
particularity in the complaint, to exhaust all remedies available
under the articles of incorporation, by-laws, laws or rules governing
the corporation or partnership to obtain the relief he desires.
xxxx
RULE 7
INSPECTION OF CORPORATE BOOKS AND RECORDS
Sec. 2. Complaint.·In addition to the requirements in section 4,
Rule 2 of these Rules, the complaint must state the following:
(1) The case is set (sic) for the enforcement of plaintiff Ês
right of inspection of corporate orders or records and/or to be
furnished with financial statements under Section 74 and 75
of the Corporation Code of the Philippines;

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604 SUPREME COURT REPORTS ANNOTATED

Yu vs. Yukayguan

(2)  A demand for inspection and copying of books [and/or]

to be furnished with financial statements made by the
plaintiffs upon defendant;
(3) The refusal of the defendant to grant the demands of
the plaintiff and the reasons given for such refusal, if any;
and
(4)  The reasons why the refusal of defendant to grant the
demands of the plaintiff is unjustified and illegal, stating the
law and jurisprudence in support thereof.
xxxx
A perusal of the extant record shows that [herein respondents]
have not complied with the above quoted provisions. [Respondents]
should be mindful that in filing their complaint which, as admitted
by them, is a derivative suit, should have first exhausted all
available remedies under its (sic) Articles of Incorporation, or its by-
laws, or any laws or rules governing the corporation. The
contention of [respondent Joseph] that he had indeed made
several talks to (sic) his brother [herein petitioner Anthony]
to settle their differences is not tantamount to exhaustion of
remedies. What the law requires is to bring the grievance to
the Board of Directors or Stockholders for the latter to take
the opportunity to settle whatever problem in its regular
meeting or special meeting called for that purpose which
[respondents] failed to do. x x x The requirements laid down by
the Interim Rules of Procedure for Intra-Corporate Controversies
are mandatory which cannot be dispensed with by any stockholder
of a corporation before filing a derivative suit.‰28 (Emphasis ours.)

The Court of Appeals likewise sustained the refusal by

the RTC to consider respondent JosephÊs Supplemental
Affidavit and other additional evidence, which respondents
belatedly submitted with their Memorandum to the said
trial court. The appellate court ratiocinated that:

„With regard to the claim of [herein respondents] that the

supplemental affidavit of [respondent] Joseph and its annexes
appended to their memorandum should have been taken into
consideration by the Court a quo to support the reliefs prayed [for]
in their complaint.

_______________

28 Id., at pp. 37-39.

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Yu vs. Yukayguan

(sic) This Court rules that said supplemental affidavit and its
annexes is (sic) inadmissible.
A second hard look of (sic) the extant records show that during
the pre-trial conference conducted on August 26, 2004, the parties
through their respective counsels had come up with an agreement
that the lower court would render judgment based on the pleadings
and evidence submitted. This agreement is in accordance with Rule
4, Sec. 4 of the Interim Rules of Procedure for Intra-Corporate
Controversies which explicitly states:
SECTION 4. Judgment before pre-trial.·If, after submission
of the pre-trial briefs, the court determines that, upon
consideration of the pleadings, the affidavits and other
evidence submitted by the parties, a judgment may be
rendered, the court may order the parties to file
simultaneously their respective memoranda within a non-
extendible period of twenty (20) days from receipt of the
order. Thereafter, the court shall render judgment, either full
or otherwise, not later than ninety (90) days from the
 expiration of the period to file the memoranda.
xxxx
Clearly, the supplemental affidavit and its appended documents
which were submitted only upon the filing of the memorandum for
the [respondents] were not submitted in the pre-trial briefs for the
stipulation of the parties during the pre-trial, hence, it cannot be
accepted pursuant to Rule 2, Sec. 8 of the same rules which reads as
follows:
SEC. 8. Affidavits, documentary and other evidence.·
Affidavits shall be based on personal knowledge, shall set
forth such facts as would be admissible in evidence, and shall
show affirmatively that the affiant is competent to testify on
the matters stated therein. The affidavits shall be in question
and answer form, and shall comply with the rules on
admissibility of evidence.
Affidavits of witnesses as well as documentary and other
evidence shall be attached to the appropriate pleading;
Provided, however, that affidavits, documentary and other
evidence not so submitted may be attached to the pre-trial
brief required under these Rules. Affidavits and other
evidence

606

606 SUPREME COURT REPORTS ANNOTATED

Yu vs. Yukayguan

not so submitted shall not be admitted in evidence,

except in the following cases:
(1) Testimony of unwilling, hostile, or adverse party
witnesses. A witness is presumed prima facie hostile if he
fails or refuses to execute an affidavit after a written request
therefor;
(2) If the failure to submit the evidence is for meritorious and
compelling reasons; and
(3) Newly discovered evidence.
In case of (2) and (3) above, the affidavit and evidence must
be submitted not later than five (5) days prior to its
introduction in evidence.
There is no showing in the case at bench that the supplemental
affidavit and its annexes falls (sic) within one of the exceptions of
the above quoted proviso, hence, inadmissible.
It must be noted that in the case at bench, like any other civil
cases, „the party making an allegation in a civil case has the burden
of proving it by preponderance of evidence.‰ Differently stated, upon
the plaintiff in [a] civil case, the burden of proof never parts. That
is, appellants must adduce evidence that has greater weight or is
more convincing that (sic) which is offered to oppose it. In the case
at bar, no one should be blamed for the dismissal of the complaint
but the [respondents] themselves for their lackadaisical attitude in
setting forth and appending their defences belatedly. To admit them
would be a denial of due process for the opposite party which this
Court cannot allow.‰29

Ultimately, the Court of Appeals decreed:

„WHEREFORE, judgment is hereby rendered DISMISSING

the instant petition and the assailed Decision of the Regional Trial
Court (RTC), 7th Judicial Region, Branch II, Cebu City, dated
November 10, 2004, in SRC Case No. 022-CEB is AFFIRMED in
toto. Cost against the [herein respondents].‰30

_______________

29 Id., at pp. 39-42.

30 Id., at p. 43.

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Yu vs. Yukayguan

Unperturbed, respondents filed before the Court of

Appeals, on 23 February 2006, a Motion for
Reconsideration and Motion to Set for Oral Arguments the
Motion for Reconsideration,31 invoking the following
grounds:

(1) The [herein respondents] have sufficiently exhausted all remedies

before filing the present action; and
(2) [The] Honorable Court erred in holding that the supplemental
affidavit and its annexes is (sic) inadmissible because the rules and
the lower court expressly allowed the submission of the same in its
order dated August 26, 2004 x x x.‰32

In a Resolution33 dated 8 March 2006, the Court of

Appeals granted respondentsÊ Motion to Set for Oral
Arguments the Motion for Reconsideration.
On 4 April 2006, the Court of Appeals issued a
Resolution34 setting forth the events that transpired during
the oral arguments, which took place on 30 March 2006.
Counsels for the parties manifested before the appellate
court that they were submitting respondentsÊ Motion for
Reconsideration for resolution. Justice Magpale, however,
still called on the parties to talk about the possible
settlement of the case considering their familial
relationship. Independent of the resolution of respondentsÊ
Motion for Reconsideration, the parties were agreeable to
pursue a settlement for the dissolution of the corporation,
which they had actually already started.
In a Resolution35 dated 11 April 2006, the Court of
Appeals ordered the parties to submit, within 10 days from
notice, their intended amicable settlement, since the same
would undeniably affect the resolution of respondentsÊ
pending Mo-

_______________

31 Id., at pp. 57-61.

32 Id., at p. 57.
33 CA Rollo, pp. 434-435.
34 Rollo, pp. 65-66.
35 Id., at pp. 67-68.

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608 SUPREME COURT REPORTS ANNOTATED

Yu vs. Yukayguan

tion for Reconsideration. If the said period should lapse

without the parties submitting an amicable settlement,
then they were directed by the appellate court to file within
10 days thereafter their position papers instead.
On 5 May 2006, respondents submitted to the Court of
Appeals their Position Paper,36 stating that the parties did
not reach an amicable settlement. Respondents informed
the appellate court that prior to the filing with the
Securities and Exchange Commission (SEC) of a petition
for dissolution of Winchester, Inc., the parties already
divided the stocks in trade and the real assets of the
corporation among themselves. Respondents posited,
though, that the afore-mentioned distribution of the assets
of Winchester, Inc. among the parties was null and void, as
it violated the last paragraph of Section 122 of the
Corporation Code, which provides that, „[e]xcept by a
decrease of capital stock and as otherwise allowed by the
Corporation Code, no corporation shall distribute any of its
assets or property except upon lawful dissolution and after
payment of all its debts and liabilities.‰ At the same time,
however, respondents brought to the attention of the Court
of Appeals that the parties did eventually file with the SEC
a petition for dissolution of Winchester, Inc., which the SEC
approved.37
Respondents no longer discussed in their Position Paper
the grounds they previously invoked in their Motion for
Reconsideration of the Court of Appeals Decision dated 15
February 2006, affirming in toto the RTC Decision dated 10
November 2004. They instead argued that the RTC
Decision in question was null and void as it did not clearly
state the facts and the law on which it was based.
Respondents sought the remand of the case to the RTC for
further proceedings on their derivative suit and completion
of the dissolution of Win-

_______________

36 CA Rollo, pp. 486-494.

37 The certificate of dissolution of respondent Winchester, Inc. was
not, however, made part of the records of the case before the Court of
Appeals or this Court.

609

VOL. 589, JUNE 18, 2009 609

Yu vs. Yukayguan

chester, Inc., including the legalization of the prior partial

distribution among the parties of the assets of said
corporation.
Petitioners filed their Position Paper38 on 23 May 2006,
wherein they accused respondents of attempting to
incorporate extraneous matters into the latterÊs Motion for
Reconsideration. Petitioners pointed out that the issue
before the Court of Appeals was not the dissolution and
division of assets of Winchester, Inc., thus, a remand of the
case to the RTC was not necessary.
On 18 July 2006, the Court of Appeals rendered the
assailed Resolution, granting respondentsÊ Motion for
Reconsideration. The Court of Appeals reasoned in this
wise:
 „After a second look and appreciation of the facts of the case, vis-
à-vis the issues raised by the [herein respondentsÊ] motion for
reconsideration and in view of the formal dissolution of the
corporation which leaves unresolved up to the present the
settlement of the properties and assets which are now in danger of
dissipation due to the unending litigation, this Court finds the need
to remand the instant case to the lower court (commercial court) as
the proper forum for the adjudication, disposition, conveyance and
distribution of said properties and assets between and amongst its
stockholders as final settlement pursuant to Sec. 122 of the
Corporation Code after payment of all its debts and liabilities as
provided for under the same proviso. This is in accord with the
pronouncement of the Supreme Court in the case of Clemente, et
al. vs. Court of Appeals, et al. where the high court ruled and
which WE quote, viz.:
„the corporation continues to be a body corporate for three
(3) years after its dissolution for purposes of prosecuting and
defending suits by and against it and for enabling it to settle
and close its affairs, culminating in the disposition and
distribution of its remaining assets. It may, during the three-
year term, appoint a trustee or a receiver who may act beyond
that period. The termination of the life of a juridical entity
does not by itself cause the extinction or diminution of the
rights and li-

_______________

38 CA Rollo, pp. 497-504.

610

610 SUPREME COURT REPORTS ANNOTATED

Yu vs. Yukayguan

abilities of such entity x x x nor those of its owners and

creditors. If the three-year extended life has expired without
a trustee or receiver having been expressly designated by the
corporation within that period, the board of directors (or
trustees) x x x may be permitted to so continue as „trustees‰
by legal implication to complete the corporate liquidation.
Still in the absence of a board of directors or trustees, those
having any pecuniary interest in the assets, including not
only the shareholders but likewise the creditors of the
corporation, acting for and in its behalf, might make proper
representation with the Securities and Exchange
 Commission, which has primary and sufficiently broad
jurisdiction in matters of this nature, for working out
a final settlement of the corporate concerns.‰
In the absence of a trustee or board of director in the case at bar
for purposes above mentioned, the lower court under Republic Act
No. [8799] (otherwise known as the Securities and Exchange
Commission) as implemented by A.M. No. 00-8-10-SC (Transfer of
Cases from the Securities and Exchange Commission to the
Regional Trial Courts) which took effect on October 1, 2001, is the
proper forum for working out the final settlement of the corporate
concern.‰39

Hence, the Court of Appeals ruled:

„WHEREFORE, premises considered, the motion for

reconsideration is GRANTED. The order dated February 15, 2006
is hereby SET ASIDE and the instant case is REMANDED to the
lower court to take the necessary proceedings in resolving with
deliberate dispatch any and all corporate concerns towards final
settlement.‰40

Petitioners filed a Motion for Reconsideration41 of the

foregoing Resolution, but it was denied by the Court of
Appeals in its other assailed Resolution dated 19 April
2007.
In the Petition at bar, petitioners raise the following
issues:

_______________

39 Rollo, pp. 21-22.

40 Id., at p. 22.
41 CA Rollo, pp. 512-519.

611

VOL. 589, JUNE 18, 2009 611

Yu vs. Yukayguan

I.
WHETHER OR NOT THE ASSAILED RESOLUTIONS[,] WHICH
VIOLATED THE CONSTITUTION OF THE PHILIPPINES,
JURISPRUDENCE AND THE LAW[,] ARE NULL AND VOID[.]
II.
WHETHER OR NOT THE ASSAILED RESOLUTIONS WAS (sic)
ISSUED WITHOUT JURISDICTION[.]
III.
WHETHER OR NOT THE HONORABLE COURT OF APPEALS
SERIOUSLY ERRED IN REMANDING THIS CASE TO THE
LOWER COURT FOR THE REASON CITED IN THE ASSAILED
RESOLUTIONS, AND WITHOUT RESOLVING THE GROUNDS
FOR THE [RESPONDENTSÊ] MOTION FOR
RECONSIDERATION. (sic) INASMUCH AS [THE] REASON
CITED WAS A NON-ISSUE IN THE CASE.
IV.
WHETHER OR NOT REMANDING THIS CASE TO THE
REGIONAL TRIAL COURT VIOLATES THE SUMMARY
PROCEDURE FOR INTRA-CORPORATE CASES.42

The crux of petitionersÊ contention is that the Court of

Appeals committed grievous error in reconsidering its
Decision dated 15 February 2006 on the basis of extraneous
matters, which had not been previously raised in
respondentsÊ Complaint before the RTC, or in their Petition
for Review and Motion for Reconsideration before the
appellate court; i.e., the adjudication, disposition,
conveyance, and distribution of the properties and assets of
Winchester, Inc. among its stockholders, allegedly pursuant
to the amicable settlement of the parties. The fact that the
parties were able to agree before the Court of Appeals to
submit for resolution respondentsÊ Motion for
Reconsideration of the 15 February 2006 Decision of the
same court, independently of any intended settlement
between the parties as regards the dissolution of the
corporation

_______________

42 Rollo, pp. 71-72.

612

612 SUPREME COURT REPORTS ANNOTATED

Yu vs. Yukayguan

and distribution of its assets, only proves the distinction

and independence of these matters from one another.
Petitioners also contend that the assailed Resolution dated
18 July 2006 of the Court of Appeals, granting respondentsÊ
Motion for Reconsideration, failed to clearly and distinctly
state the facts and the law on which it was based.
Remanding the case to the RTC, petitioners maintain, will
violate the very essence of the summary nature of the
Interim Rules of Procedure Governing Intra-Corporate
Controversies, as this will just entail delay, protract
litigation, and revert the case to square one.
The Court finds the instant Petition meritorious.
To recapitulate, the case at bar was initiated before the
RTC by respondents as a derivative suit, on their own
behalf and on behalf of Winchester, Inc., primarily in order
to compel petitioners to account for and reimburse to
the said corporation the corporate assets and funds which
the latter allegedly misappropriated for their personal
benefit. During the pendency of the proceedings before the
court a quo, the parties were able to reach an amicable
settlement wherein they agreed to divide the assets of
Winchester, Inc. among themselves. This amicable
settlement was already partially implemented by the
parties, when respondents repudiated the same, for which
reason the RTC proceeded with the case on its merits. On
10 November 2004, the RTC promulgated its Decision
dismissing respondentsÊ Complaint for failure to comply
with essential pre-requisites before they could avail
themselves of the remedies under the Interim Rules of
Procedure Governing Intra-Corporate Controversies; and
for inadequate substantiation of respondentsÊ allegations in
said Complaint after consideration of the pleadings and
evidence on record.
In its Decision dated 15 February 2006, the Court of
Appeals affirmed, on appeal, the findings of the RTC that
respondents did not abide by the requirements for a
derivative suit, nor were they able to prove their case by a
preponderance of evidence. Respondents filed a Motion for
Reconsid-

613

VOL. 589, JUNE 18, 2009 613

Yu vs. Yukayguan

eration of said judgment of the appellate court, insisting

that they were able to meet all the conditions for filing a
derivative suit. Pending resolution of respondentsÊ Motion
for Reconsideration, the Court of Appeals urged the parties
to again strive to reach an amicable settlement of
their dispute, but the parties were unable to do so. The
parties were not able to submit to the appellate court,
within the given period, any amicable settlement; and filed,
instead, their Position Papers. This effectively meant
that the parties opted to submit respondentsÊ Motion for
Reconsideration of the 15 February 2006 Decision of the
Court of Appeals, and petitionersÊ opposition to the same,
for resolution by the appellate court on the merits.
It was at this point that the case took an unexpected
turn.
In accordance with respondentsÊ allegation in their
Position Paper that the parties subsequently filed with the
SEC, and the SEC already approved, a petition for
dissolution of Winchester, Inc., the Court of Appeals
remanded the case to the RTC so that all the corporate
concerns between the parties regarding Winchester, Inc.
could be resolved towards final settlement.
In one stroke, with the use of sweeping language, which
utterly lacked support, the Court of Appeals converted the
derivative suit between the parties into liquidation
proceedings.
The general rule is that where a corporation is an
injured party, its power to sue is lodged with its board of
directors or trustees. Nonetheless, an individual
stockholder is permitted to institute a derivative suit on
behalf of the corporation wherein he holds stocks in order
to protect or vindicate corporate rights, whenever the
officials of the corporation refuse to sue, or are the ones to
be sued, or hold the control of the corporation. In such
actions, the suing stockholder is regarded as a nominal
party, with the corporation as the real party in interest. A
derivative action is a suit by a shareholder to enforce a
corporate cause of action. The corporation is a necessary
party to the suit. And the relief which is granted is a

614

614 SUPREME COURT REPORTS ANNOTATED

Yu vs. Yukayguan

judgment against a third person in favor of the corporation.

Similarly, if a corporation has a defense to an action
against it and is not asserting it, a stockholder may
intervene and defend on behalf of the corporation.43 By
virtue of Republic Act No. 8799, otherwise known as the
Securities Regulation Code, jurisdiction over intra-
corporate disputes, including derivative suits, is now vested
in the Regional Trial Courts designated by this Court
pursuant to A.M. No. 00-11-03-SC promulgated on 21
November 2000.
In contrast, liquidation is a necessary consequence of
the dissolution of a corporation. It is specifically governed
by Section 122 of the Corporation Code, which reads:

„SEC. 122. Corporate liquidation.·Every corporation whose

charter expires by its own limitation or is annulled by forfeiture or
otherwise, or whose corporate existence for other purposes is
terminated in any other manner, shall nevertheless be continued as
a body corporate for three (3) years after the time when it would
have been so dissolved, for the purpose of prosecuting and
defending suits by or against it and enabling it to settle and close
its affairs, to dispose of and convey its property and to distribute its
assets, but not for the purpose of continuing the business for which
it was established.
At any time during said three (3) years, said corporation is
authorized and empowered to convey all of its property to trustees
for the benefit of stockholders, members, creditors, and other
persons in interest. From and after any such conveyance by the
corporation of its property in trust for the benefit of its
stockholders, members, creditors and others in interest, all interest
which the corporation had in the property terminates, the legal
interest vests in the trustees, and the beneficial interest in the
stockholders, members, creditors or other persons in interest.
Upon winding up of the corporate affairs, any asset distributable
to any creditor or stockholder or member who is unknown or cannot
be found shall be escheated to the city or municipality where such
assets are located.

_______________

43 Chua v. Court of Appeals, G.R. No. 150793, 19 November 2004, 443 SCRA
259, 266-267.

615

VOL. 589, JUNE 18, 2009 615

Yu vs. Yukayguan

Except by decrease of capital stock and as otherwise allowed by

this Code, no corporation shall distribute any of its assets or
property except upon lawful dissolution and after payment of all its
debts and liabilities.‰

Following the voluntary or involuntary dissolution of a

corporation, liquidation is the process of settling the affairs
of said corporation, which consists of adjusting the debts
and claims, that is, of collecting all that is due the
corporation, the settlement and adjustment of claims
against it and the payment of its just debts.44 More
particularly, it entails the following:

„Winding up the affairs of the corporation means the collection of

all assets, the payment of all its creditors, and the distribution of
the remaining assets, if any among the stockholders thereof in
accordance with their contracts, or if there be no special contract, on
the basis of their respective interests. The manner of liquidation or
winding up may be provided for in the corporate by-laws and this
would prevail unless it is inconsistent with law.‰45

It may be undertaken by the corporation itself, through

its Board of Directors; or by trustees to whom all corporate
assets are conveyed for liquidation; or by a receiver
appointed by the SEC upon its decree dissolving the
corporation.46
Glaringly, a derivative suit is fundamentally distinct
and independent from liquidation proceedings. They are
neither part of each other nor the necessary consequence of
the other. There is totally no justification for the Court of
Appeals to convert what was supposedly a derivative suit
instituted by respondents, on their own behalf and on
behalf of Winchester, Inc. against petitioners, to a
proceeding for the liquidation of Winchester, Inc.

_______________

44 See China Banking Corp. v. M. Michelin & Cie, 58 Phil 261, 266
(1933).
45 Campos, The Corporation Code: Comments, Notes and Selected
Cases (Vol. 2, 1990 ed.), p. 415.
46 Id., at pp. 415-416.

616

616 SUPREME COURT REPORTS ANNOTATED

Yu vs. Yukayguan
 While it may be true that the parties earlier reached an
amicable settlement, in which they agreed to already
distribute the assets of Winchester, Inc., and in effect
liquidate said corporation, it must be pointed out that
respondents themselves repudiated said amicable
settlement before the RTC, even after the same had been
partially implemented; and moved that their case be set for
pre-trial. Attempts to again amicably settle the dispute
between the parties before the Court of Appeals were
unsuccessful.
Moreover, the decree of the Court of Appeals to remand
the case to the RTC for the „final settlement of corporate
concerns‰ was solely grounded on respondentsÊ allegation in
its Position Paper that the parties had already filed before
the SEC, and the SEC approved, the petition to dissolve
Winchester, Inc. The Court notes, however, that there is
absolute lack of evidence on record to prove said allegation.
Respondents failed to submit copies of such petition for
dissolution of Winchester, Inc. and the SEC Certification
approving the same. It is a basic rule in evidence that each
party must prove his affirmative allegation. Since it was
respondents who alleged the voluntary dissolution of
Winchester, Inc., respondents must, therefore, prove it.47
This respondents failed to do.
Even assuming arguendo that the parties did submit a
petition for the dissolution of Winchester, Inc. and the same
was approved by the SEC, the Court of Appeals was still
without jurisdiction to order the final settlement by the
RTC of the remaining corporate concerns. It must be
remembered that the Complaint filed by respondents
before the RTC essentially prayed for the accounting and
reimbursement by petitioners of the corporate funds and
assets which they purportedly misappropriated for their
personal use; surrender by the petitioners of the corporate
books for the inspection of respondents; and payment by
petitioners to respondents of damages.

_______________

47 See Genuino Ice Co., Inc. v. Magpantay, G.R. No. 147790, 27 June
2006, 493 SCRA 195, 205.

617
 VOL. 589, JUNE 18, 2009 617
Yu vs. Yukayguan

There was nothing in respondentsÊ Complaint which sought

the dissolution and liquidation of Winchester, Inc. Hence,
the supposed dissolution of Winchester, Inc. could not have
resulted in the conversion of respondentsÊ derivative suit to
a proceeding for the liquidation of said corporation, but
only in the dismissal of the derivative suit based on either
compromise agreement or mootness of the issues.
Clearly, in issuing its assailed Resolutions dated 18 July
2006 and 19 April 2007, the Court of Appeals already went
beyond the issues raised in respondentsÊ Motion for
Reconsideration. Instead of focusing on whether it erred in
affirming, in its 15 February 2006 Decision, the dismissal
by the RTC of respondentsÊ Complaint due to respondentsÊ
failure to comply with the requirements for a derivative
suit and submit evidence to support their allegations, the
Court of Appeals unduly concentrated on respondentsÊ
unsubstantiated allegation that Winchester, Inc. was
already dissolved and speciously ordered the remand of the
case to the RTC for proceedings so vitally different from
that originally instituted by respondents.
Despite the foregoing, the Court still deems it
appropriate to already look into the merits of respondentsÊ
Motion for Reconsideration of the 15 February 2006
Decision of the Court of Appeals, for the sake of finally
putting an end to the case at bar.
In their said Motion for Reconsideration, respondents
argued that: (1) they had sufficiently exhausted all
remedies before filing the derivative suit; and (2)
respondent JosephÊs Supplemental Affidavit and its
annexes should have been taken into consideration, since
the submission thereof was allowed by the rules of
procedure, as well as by the RTC in its Order dated 26
August 2004.
As regards the first ground of sufficient exhaustion by
respondents of all remedies before filing a derivative suit,
the Court subscribes to the ruling to the contrary of the
Court of Appeals in its Decision dated 16 February 2006.

618

618 SUPREME COURT REPORTS ANNOTATED

 Yu vs. Yukayguan

The Court has recognized that a stockholderÊs right to

institute a derivative suit is not based on any express
provision of the Corporation Code, or even the Securities
Regulation Code, but is impliedly recognized when the said
laws make corporate directors or officers liable for damages
suffered by the corporation and its stockholders for
violation of their fiduciary duties. Hence, a stockholder
may sue for mismanagement, waste or dissipation of
corporate assets because of a special injury to him for
which he is otherwise without redress. In effect, the
suit is an action for specific performance of an obligation
owed by the corporation to the stockholders to assist its
rights of action when the corporation has been put in
default by the wrongful refusal of the directors or
management to make suitable measures for its protection.
The basis of a stockholderÊs suit is always one in equity.
However, it cannot prosper without first complying with
the legal requisites for its institution.48
Section 1, Rule 8 of the Interim Rules of Procedure
Governing Intra-Corporate Controversies lays down the
following requirements which a stockholder must comply
with in filing a derivative suit:

„Sec. 1. Derivative action.·A stockholder or member may bring

an action in the name of a corporation or association, as the case
may be, provided, that:

(1) He was a stockholder or member at the time the acts or transactions

subject of the action occurred and at the time the action was filed;
(2) He exerted all reasonable efforts, and alleges the same with
particularity in the complaint, to exhaust all remedies available
under the articles of incorporation, by-laws, laws or rules governing
the corporation or partnership to obtain the relief he desires;

_______________

48 Bitong v. Court of Appeals, 354 Phil. 516, 545; 292 SCRA 503,
533 (1998).

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 Yu vs. Yukayguan

(3) No appraisal rights are available for the act or acts complained of;
and
(4) The suit is not a nuisance or harassment suit.‰

A perusal of respondentsÊ Complaint before the RTC

would reveal that the same did not allege with
particularity that respondents exerted all reasonable
efforts to exhaust all remedies available under the articles
of incorporation, by-laws, laws or rules governing
Winchester, Inc. to obtain the relief they desire.
Respondents assert that their compliance with said
requirement was contained in respondent JosephÊs
Affidavit, which was attached to respondentsÊ Complaint.
Respondent Joseph averred in his Affidavit that he tried
for a number of times to talk to petitioner Anthony to settle
their differences, but the latter would not listen.
Respondents additionally claimed that taking further
remedies within the corporation would have been idle
ceremony, considering that Winchester, Inc. was a family
corporation and it was impossible to expect petitioners to
take action against themselves who were the ones accused
of wrongdoing.
The Court is not persuaded.
The wordings of Section 1, Rule 8 of the Interim Rules of
Procedure Governing Intra-Corporate Controversies are
simple and do not leave room for statutory construction.
The second paragraph thereof requires that the stockholder
filing a derivative suit should have exerted all reasonable
efforts to exhaust all remedies available under the
articles of incorporation, by-laws, laws or rules governing
the corporation or partnership to obtain the relief he
desires; and to allege such fact with particularity in
the complaint. The obvious intent behind the rule is to
make the derivative suit the final recourse of the
stockholder, after all other remedies to obtain the relief
sought had failed.
The allegation of respondent Joseph in his Affidavit of
his repeated attempts to talk to petitioner Anthony
regarding

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620 SUPREME COURT REPORTS ANNOTATED
Yu vs. Yukayguan

their dispute hardly constitutes „all reasonable efforts to

exhaust all remedies available.‰ Respondents did not refer
to or mention at all any other remedy under the articles of
incorporation or by-laws of Winchester, Inc., available for
dispute resolution among stockholders, which respondents
unsuccessfully availed themselves of. And the Court is not
prepared to conclude that the articles of incorporation and
by-laws of Winchester, Inc. absolutely failed to provide for
such remedies.
Neither can this Court accept the reasons proffered by
respondents to excuse themselves from complying with the
second requirement under Section 1, Rule 8 of the Interim
Rules of Procedure Governing Intra-Corporate
Controversies. They are flimsy and insufficient, compared
to the seriousness of respondentsÊ accusations of fraud,
misappropriation, and falsification of corporate records
against the petitioners. The fact that Winchester, Inc. is a
family corporation should not in any way exempt
respondents from complying with the clear requirements
and formalities of the rules for filing a derivative suit.
There is nothing in the pertinent laws or rules supporting
the distinction between, and the difference in the
requirements for, family corporations vis-à-vis other types
of corporations, in the institution by a stockholder of a
derivative suit.
The Court further notes that, with respect to the third
and fourth requirements of Section 1, Rule 8 of the Interim
Rules of Procedure Governing Intra-Corporate
Controversies, the respondentsÊ Complaint failed to allege,
explicitly or otherwise, the fact that there were no
appraisal rights available for the acts of petitioners
complained of, as well as a categorical statement that the
suit was not a nuisance or a harassment suit.
As to respondentsÊ second ground in their Motion for
Reconsideration, the Court agrees with the ruling of the
Court of Appeals, in its 15 February 2006 Decision, that
respondent JosephÊs Supplemental Affidavit and additional
evidence were

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 Yu vs. Yukayguan

inadmissible since they were only appended by respondents

to their Memorandum before the RTC. Section 8, Rule 2 of
the Interim Rules of Procedure Governing Intra-Corporate
Controversies is crystal clear that:

„Sec. 8. Affidavits, documentary and other evidence.·Affidavits

shall be based on personal knowledge, shall set forth such facts as
would be admissible in evidence, and shall show affirmatively that
the affiant is competent to testify on the matters stated therein.
The affidavits shall be in question and answer form, and shall
comply with the rules on admissibility of evidence.
Affidavits of witnesses as well as documentary and other
evidence shall be attached to the appropriate pleading,
Provided, however, that affidavits, documentary and other
evidence not so submitted may be attached to the pre-trial
brief required under these Rules. Affidavits and other
evidence not so submitted shall not be admitted in evidence,
except in the following cases:

(1) Testimony of unwilling, hostile, or adverse party witnesses. A witness

is presumed prima facie hostile if he fails or refuses to execute an
affidavit after a written request therefor;
(2) If the failure to submit the evidence is for meritorious and compelling
reasons; and
(3) Newly discovered evidence.

In case of (2) and (3) above, the affidavit and evidence must be
submitted not later than five (5) days prior to its introduction in
evidence.‰ (Emphasis ours.)

According to the afore-quoted provision, the parties

should attach the affidavits of witnesses and other
documentary evidence to the appropriate pleading, which
generally should mean the complaint for the plaintiff and
the answer for the respondent. Affidavits and documentary
evidence not so submitted must already be attached to the
respective pre-trial briefs of the parties. That the parties
should have already identified and submitted to the trial
court the affidavits of their witnesses and documentary
evidence by the time of pre-

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622 SUPREME COURT REPORTS ANNOTATED

 Yu vs. Yukayguan

trial is strengthened by the fact that Section 1, Rule 4 of

the Interim Rules of Procedure Governing Intra-Corporate
Controversies require that the following matters should
already be set forth in the partiesÊ pre-trial briefs:

„Section 1. Pre-trial conference, mandatory nature.·Within five

(5) days after the period for availment of, and compliance with, the
modes of discovery prescribed in Rule 3 hereof, whichever comes
later, the court shall issue and serve an order immediately setting
the case for pre-trial conference, and directing the parties to submit
their respective pre-trial briefs. The parties shall file with the court
and furnish each other copies of their respective pre-trial brief in
such manner as to ensure its receipt by the court and the other
party at least five (5) days before the date set for the pre-trial.
The parties shall set forth in their pre-trial briefs, among other
matters, the following:
xxxx
(4) Documents not specifically denied under oath by either
or both parties;
xxxx
(7) Names of witnesses to be presented and the summary
of their testimony as contained in their affidavits supporting
their positions on each of the issues;
(8) All other pieces of evidence, whether documentary or
otherwise and their respective purposes.‰

Also, according to Section 2, Rule 4 of the Interim Rules

of Procedure Governing Intra-Corporate Controversies,49 it
is the

_______________

49 Section 2, of Rule 4 provides:

Sec. 2. Nature and purpose of pre-trial conference.·During the pre-
trial conference, the court shall, with its active participation, ensure that
the parties consider in detail all of the following:
xxxx
(6) Objections to the admissibility of testimonial, documentary and
other evidence;

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 Yu vs. Yukayguan

duty of the court to ensure during the pre-trial conference

that the parties consider in detail, among other things,
objections to the admissibility of testimonial, documentary,
and other evidence, as well as objections to the form or
substance of any affidavit, or part thereof.
Obviously, affidavits of witnesses and other
documentary evidence are required to be attached to a
partyÊs pre-trial brief, at the very last instance, so that the
opposite party is given the opportunity to object to the form
and substance, or the admissibility thereof. This is, of
course, to prevent unfair surprises and/or to avoid the
granting of any undue advantage to the other party to the
case.
True, the parties in the present case agreed to submit
the case for judgment by the RTC, even before pre-trial, in
accordance with Section 4, Rule 4 of the Interim Rules of
Procedure Governing Intra-Corporate Controversies:

Sec. 4. Judgment before pre-trial.·If after submission of the

pre-trial briefs, the court determines that, upon consideration
of the pleadings, the affidavits and other evidence
submitted by the parties, a judgment may be rendered, the court
may order the parties to file simultaneously their respective
memoranda within a non-extendible period of twenty (20) days
from receipt of the order. Thereafter, the court shall render
judgment, either full or otherwise, not later than ninety (90) days
from the expiration of the period to file the memoranda.‰

Even then, the afore-quoted provision still requires,

before the court makes a determination that it can render
judgment before pre-trial, that the parties had submitted
their pre-trial briefs and the court took into consideration
the pleadings, affidavits and other evidence submitted by
the parties. Hence, cases wherein the court can render
judgment prior to pre-trial, do not depart from or constitute
an exception to the

_______________

(7) Objections to the form or substance of any affidavit, or part thereof.

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624 SUPREME COURT REPORTS ANNOTATED

 Yu vs. Yukayguan

requisite that affidavits of witnesses and documentary

evidence should be submitted, at the latest, with the
partiesÊ pre-trial briefs. Taking further into account that
under Section 4, Rule 4 of the Interim Rules of Procedure
Governing Intra-Corporate Controversies parties are
required to file their memoranda simultaneously, the same
would mean that a party would no longer have any
opportunity to dispute or rebut any new affidavit or
evidence attached by the other party to its memorandum.
To violate the above-quoted provision would, thus,
irrefragably run afoul the former partyÊs constitutional
right to due process.
In the instant case, therefore, respondent JosephÊs
Supplemental Affidavit and the additional documentary
evidence, appended by respondents only to their
Memorandum submitted to the RTC, were correctly
adjudged as inadmissible by the Court of Appeals in its 15
February 2006 Decision for having been belatedly
submitted. Respondents neither alleged nor proved that the
documents in question fall under any of the three
exceptions to the requirement that affidavits and
documentary evidence should be attached to the
appropriate pleading or pre-trial brief of the party, which is
particularly recognized under Section 8, Rule 2 of the
Interim Rules of Procedure Governing Intra-Corporate
Controversies.
WHEREFORE, premises considered, the Petition for
Review under Rule 45 of the Rules of Court is hereby
GRANTED. The assailed Resolutions dated 18 July 2006
and 19 April 2007 of the Court of Appeals in CA-G.R. SP
No. 00185 are hereby REVERSED AND SET ASIDE. The
Decision dated 15 February 2006 of the Court of Appeals is
hereby AFFIRMED. No costs.
SO ORDERED.

Ynares-Santiago (Chairperson), Velasco, Jr., Nachura

and Peralta, JJ., concur.

Petition granted, resolutions reversed and set aside.

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