MANILA GAS CORPORATION, plaintiff and appellant, 

vs. THE
COLLECTOR OF INTERNAL REVENUE, defendant and appellee.

This is an action brought by the Manila Gas Corporation against the

Collector of Internal Revenue for the recovery of P56,757.37, which the
plaintiff was required by the defendant to deduct and withhold from the
various sums paid by it to foreign corporations as dividends and interest
on bonds and other indebtedness and which the plaintiff paid under
protest. On the trial court dismissing the complaint, with costs, the
plaintiff appealed assigning as the principal errors alleged to have been
committed the following:
"1. The trial court erred in holding that the dividends paid by the plaintiff
corporation were subject to income tax in the hands of its stockholders, because to
impose the tax thereon would be to impose a tax on the plaintiff, in violation of the
terms of its franchise, and would, moreover, be oppressive and inequitable.
"2. The trial court erred in not holding that the interest on bonds and other
indebtedness of the plaintiff corporation, paid by it outside of the Philippine Islands
to corporations not residing therein, were not, on the part of the recipients thereof,
income from Philippine sources, and hence not subject to Philippine income tax.”

The facts, as stated by the appellant and as accepted by the appellee,

may be summarized as follows: The plaintiff is a corporation organized
under the laws of the Philippine Islands. It operates a gas plant in the
City of Manila and f urnishes gas service to the people of the metropolis
and surrounding municipalities by virtue of a franchise granted to it by
the Philippine Government. Associatedwith the plaintiff are the Islands
Gas and Electric Company domiciled in New York, United States, and
the General Finance Company domiciled in Zurich, Switzerland. Neither
of these last mentioned corporations is resident in the Philippines.
For the years 1930, 1931, and 1932, dividends in the sum of
P1,348,847.50 were paid by the plaintiff to the Islands Gas and Electric
Company in the capacity of stockholders upon which withholding
income taxes were paid to the defendant totalling P40,460.03 For the
same years interest on bonds in the sum of P411,600 was paid by the
plaintiff to the Islands Gas and Electric Company upon which with-
holding income taxes were paid to the defendant totalling P12,348.
Finally for the stated time period, interest on other indebtedness in the
sum of P131,644.90 was paid by the plaintiff to the Islands Gas and
Electric Company and the General Finance Company respectively upon
which withholding income taxes were paid to the defendant totalling
P3,949.34.
Some uncertainty existing regarding the place of payment, we will
not go into this factor of the case at this point, except to remark that the
bonds and other tokens of indebtedness are not to be found in the record.
However, Exhibits E, F, and G, certified correct by the treasurer of the
Manila Gas Corporation, purport to prove that the place of payment was
the United States and Switzerland.
The appeal naturaly divides into two subjects, one covered by the
first assigned error, and the other by the second assigned error. We will
discuss these subjects and errors in order.
1. Appellant first contends that the dividends paid by it to its
stockholders, the Islands Gas and Electric Company, were not
subject to tax because to impose a tax thereon would be to do so on
the plaintiff corporation, in violation of the terms of its franchise and
would, moreover, be oppressive and inequitable. This argument is
predicated on the constitutional provision that no law impairing the
obligation of contracts shall be enacted. The particular portion of the
franchise which is invoked provides:

"The grantee shall annually on the fifth day of January of each year
pay to the City of Manila and the municipalities in the Province of Rizal
in which gas is sold, two and onehalf per centum of the gross receipts
within said city and municipalities, respectively, during the preceding
year. Said payment shall be in lieu of all taxes, Insular, provincial and
municipal, except taxes on the real estate, buildings, plant, machinery,
and other personal property belonging to the grantee.”

The trial judge was of the opinion that the instant case was governed by
our previous decision in the case of Philippine Telephone and Telegraph
Co. vs. Collector of Internal Revenue ([1933], 58 Phil., 639). In this
view we concur. It is true that the tax exemption provision relating to the
Manila Gas Corporation hereinbefore quoted differs in phraseology from
the tax exemption provision to be found in the franchise of the
Telephone and Telegraph Company, but the ratio decidendi of the two
cases is substantially the same. As there held and as now confirmed, a
corporation has a personality distinct from that of its stockholders,
enabling the taxing power to reach the latter when they receive
dividends from the corporation. It must be considered as settled in this
jurisdiction that dividends of a domestic corporation, which are paid and
delivered in cash to foreign corporations as stockholders, are subject to
the payment of the income tax, the exemption clause in the charter of the
corporation notwithstanding.
For the foregoing reasons, we are led to sustain the decision of the
trial court and to overrule appellant's first assigned error.
2. In support of its second assignment of error, appellant contends
that, as the Islands Gas and Electric Company and the General Finance
Company are domiciled in theUnited States and Switzerland
respectively, and as the interest on the bonds and other indebtedness
earned by said corporations has been paid in their respective domiciles,
this is not income from Philippine sources within the meaning of the
Philippine Income Tax Law. Citing sections 10 (a) and 13 (e) of Act No.
2833, the Income Tax Law, appellant asserts that their applicability has
been squarely determined by decisions of this court in the cases of
Manila Railroad Co.   vs.   Collector of Internal Revenue (No. 31196,
promulgated December 2, 1929, not reported), and Philippine Railway
Co. vs. Posadas (No. 38766, promulgated October 30, 1933 [58 Phil.,
968]), wherein it was held that interest paid to non-resident individuals
or corporations is not income from Philippine sources, and hence not
subject to the Philippine income tax. The SolicitorGeneral answers with
the observation that the cited decisions interpreted the Income Tax Law
before it was amended by Act No. 3761 to cover the interest on bonds
and other obligations or securities paid "within or without the Philippine
Islands." Appellant rebuts this argument by "assuming, for the sake of
the argument, that by the amendment introduced to section 13 of Act No.
2833 by Act No. 3761 the Legislature intended that interest received by
non-residents is to be considered income from Philippine sources and so
is subject to tax," but with the necessary sequel that the amendatory
statute is invalid and unconstitutional as being beyond the power of the
Legislature to enact.
Taking first under observation the last point, it is to be observed that
neither in the pleadings, the decision of the trial court, nor the
assignment of errors, was the question of the validity of Act No. 3761
raised. Under such circumstances, and no jurisdictional issue being
involved, we do not feel that it is the duty of the court to pass on the
constitutional question, and accordingly will refrain from doing so.
(Cadwallader-Gibson Lumber Co. 'vs. Del Rosario [1913], 26 Phil,, 192;
Macondray & Co. vs. Benito and Ocampo, p.137, ante; State vs. Burke
[1972], 175 Ala., 561.)
As to the applicability of the local cases cited and of the Porto Rican
case of Domenech vs. United Porto Rican Sugar Co. ([1932], 62 F. [2d],
552), we need only observe that these cases announced good law, but
that each case must be decided on its particular facts. In other words, in
the opinion of the majority of the court, the facts at bar and the facts in
those cases can be clearly differentiated. Also, in the case at bar there is
some uncertainty concerning the place of payment, which under one
view could be considered the Philippines and under another view the
United States and Switzerland, but which cannot be definitely
determined without the necessary documentary evidence before us.
The approved doctrine is that no state may tax anything not within its
jurisdiction without violating the due process clause of the constitution.
The taxing power of a state does not extend beyond its territorial limits,
but within such limits it may tax persons, property, income, or business.
If an interest in property is taxed, the situs of either the property or
interest must be f ound within the state. If an income is taxed, the
recipient thereof must have a domicile within the state or the property or
business out of which the income issues must be situated within the state
so that the income may be said to have a situs therein. Personal property
may be separated from its owner, and he may be taxed on its account at
the place where the property is although it is not the place of his own
domicile and even though he is not a citizen or resident of the state
which imposes the tax. But debts owing by corporations are obligations
of the debtors, and only possess value in the hands of the creditors.
(Farmers Loan Co.   vs.   Minnesota [1930], 280 U. S., 204; Union
Refrigerator Transit Co. vs. Kentucky [1905], 199 U.. S., 194; State Tax
on Foreignheld Bonds [1873], 15 Wall., 300; Buck vs. Beach [1907],
PHILIPPINE REPORTS ANNOTATED 206 U. S., 392; State   ex
rel   Manitowoc Gas Co.   vs.   Wis. Tax Comm. [1915], 161 Wis., 111;
United States Revenue Act of 1932, sec. 143.)
These views concerning situs for taxation purposes apply as well to
an organized, unincorporated territory or to a Commonwealth having the
status of the Philippines.
Pushing to one side that portion of Act No. 3761 which permits
taxation of interest on bonds and other indebtedness paid without the
Philippine Islands, the question is if the income was derived from
sources within the Philippine Islands.
In the judgment of the majority of the court, the question should be
answered in the affirmative. The Manila Gas Corporation operates its
business entirely within the Philippines. Its earnings, therefore, come
from local sources. The place of material delivery of the interest to the
foreign corporations paid out of the revenue of the domestic corporation
is of no particular moment. The place of payment even if conceded to be
outside of the country cannot alter the fact that the income was derived
from the Philippines. The word "source" conveys only one idea, that of
origin, and the origin of the income was the Philippines.
In synthesis, therefore, we hold that conditions have not been
provided which justify the court in passing on the constitutional question
suggested; that the f acts while somewhat obscure differ from the facts
to be found in the cases relied upon, and that the Collector of Internal
Revenue was justified in withholding income taxes on interest on bonds
and other indebtedness paid to non-resident corporations because this
income was received from sources within the Philippine Islands as
authorized by the Income Tax Law. For the foregoing reasons, the
second assigned error will be overruled.
Before concluding, it is but fair to state that the writer's opinion on
the first subject and the first assigned error herein discussed is accurately
set forth, but that his opinion

on the second subject and the second assigned error is not accurately
reflected, because on this last division his views coincide with those of
the appellant. However, in the interest of the prompt disposition of this
case, the decision has been written up in accordance with instructions
received from the court.
Judgment affirmed, with the costs of this instance assessed against
the appellant.
Hull, Vickers, Imperial, Butte, and Recto, JJ., concur.
 ALFREDO CHING, petitioner,   vs.   THE SECRETARY OF
JUSTICE, ASST. CITY PROSECUTOR CECILYN BURGOS-
VILLAVERT, JUDGE EDGARDO SUDIAM of the Regional Trial
Court, Manila, Branch 52; RIZAL COMMERCIAL BANKING
CORP. and THE PEOPLE OF THE PHILIP-PINES, respondents.

Corporation Law; The law specifically makes the officers, employees or

other officers or persons responsible for the offense, without prejudice to the
civil liabilities of such corporation and/or board of directors, officers, or
other officials or employees responsible for the offense.—Though the
entrustee is a corporation, nevertheless, the law specifically makes
the   officers, employees or other officers or persons responsible for the
offense, without prejudice to the civil liabilities of such corporation and/or
board of directors, officers, or other officials or employees responsible for the
offense. The rationale is that such officers or employees are vested with the
authority and responsibility to devise means necessary to ensure compliance
with the law and, if they fail to do so, are held criminally accountable; thus,
they have a responsible share in the violations of the law.

Same;   Same;   If the crime is committed by a corporation or other

juridical entity, the directors, officers, employees or other officers thereof
responsible for the offense shall be charged and penalized for the crime; A
corporation may be charged and prosecuted for a crime if the imposable
penalty is fine.—If the crime is committed by a corporation or other juridical
entity, the directors, officers, employees or other officers thereof responsible
for the offense shall be charged andenalized for the crime, precisely because
of the nature of the crime and the penalty therefor. A corporation cannot be
arrested and imprisoned; hence, cannot be penalized for a crime punishable
by imprisonment. However, a corporation may be charged and prosecuted for
a crime if the imposable penalty is fine. Even if the statute prescribes both
fine and imprisonment as penalty, a corporation may be prosecuted and, if
found guilty, may be fined.
Same;   Same;   When a penal statute does not expressly apply to
corporations, it does not create an offense for which a corporation may be
punished; Corporate officers or employees, through whose act, default or
omission the corporation commits a crime, are themselves individually guilty of
the crime.—When a criminal statute designates an act of a corporation or a crime
and prescribes punishment therefor, it creates a criminal offense which,
otherwise, would not exist and such can be committed only by the corporation.
But when a penal statute does not expressly apply to corporations, it does not
create an offense for which a corporation may be punished. On the other hand, if
the State, by statute, defines a crime that may be committed by a corporation but
prescribes the penalty therefor to be suffered by the officers, directors, or
employees of such corporation or other persons responsible for the offense, only
such individuals will suffer such penalty. Corporate officers or employees,
through whose act, default or omission the corporation commits a crime, are
themselves individually guilty of the crime.

PETITION for review on certiorari of the decision and resolution of the

Court of Appeals.

The facts are stated in the opinion of the Court.

     Pamela Jane C. Jalandoni for petitioner.
     Ponce Enrile, Reyes & Manalastas for respondent RCBC.

Before the Court is a petition for review on certiorari of the Decision  of 1

the Court of Appeals (CA) in CA-G.R. SP No. 57169 dismissing the

petition for   certiorari, prohibition and mandamus filed by petitioner
Alfredo Ching, and its Resolution   dated June 28, 2004 denying the
2

motion for reconsideration thereof.

Petitioner was the Senior Vice-President of Philippine Blooming
Mills, Inc. (PBMI). Sometime in September to October 1980, PBMI,
through petitioner, applied with the Rizal Commercial Banking
Corporation (respondent bank) for the issuance of commercial letters of
credit to finance its importation of assorted goods. 3

Respondent bank approved the application, and irrevocable letters of

credit were issued in favor of petitioner. The goods were purchased and
delivered in trust to PBMI. Petitioner signed 13 trust receipts  as surety,
4

acknowledging delivery of the following goods:

T/R Date Maturit Principal Description of Goods
Nos. Grante y Date
d
1845 12-05- 03-05- P1,596,470.0
79.9425 M/T “SDK”
80 81 5 Brand Synthetic
Graphite Electrode
1853 12-08- 03-06- P198,150.67 3,000 pcs. (15 bundles)
80 81 Calorized Lance Pipes
1824 11-28- 02-26- P707,879.71 One Lot High Fired
80 81 Refractory Tundish
Bricks
1798 11-21-8 02-19-8 P835,526.25 5 cases spare parts for

0 1 CCM
1808 11-21-8 02-19-8 P370,332.52 200 pcs. ingot moulds
0 1
2042 01-30-8 04-30-8 P469,669.29 High Fired Refractory

1 1 Nozzle Bricks
1801 11-21-8 02-19-8 P2,001,715.1 Synthetic Graphite

0 1 7 Electrode [with] ta-

pered pitch filed
nipples
1857 12-09-8 03-09-8 P197,843.61 3,000 pcs. (15 bundles

0 1 calorized lance pipes
[)]
1895 12-17-8 03-17-8 P67,652.04 Spare parts for Spec-

0 1 trophotometer
1911 12-22-8 03-20-8 P91,497.85 50 pcs. Ingot moulds
0 1
2041 01-30-8 04-30-8 P91,456.97 50 pcs. Ingot moulds
1 1
2099 02-10-8 05-11-8 P66,162.26 8 pcs. Kubota Rolls for

1 1 rolling mills
 2100 02-10-8 05-12-8 P210,748.00 Spare parts for Laco-

1 1 laboratory Equipment5

Under the receipts, petitioner agreed to hold the goods in trust for the
said bank, with authority to sell but not by way of conditional sale,
pledge or otherwise; and in case such goods were sold, to turn over the
proceeds thereof as soon as received, to apply against the relative
acceptances and payment of other indebtedness to respondent bank. In
case the goods remained unsold within the specified period, the goods
were to be returned to respondent bank without any need of demand.
Thus, said “goods, manufactured products or proceeds thereof, whether
in the form of money or bills, receivables, or accounts separate and
capable of identification” were respondent bank’s property.
When the trust receipts matured, petitioner failed to return the goods
to respondent bank, or to return their value amounting to P6,940,280.66
despite demands. Thus, the bank filed a criminal complaint
for   estafa   against petitioner in the Office of the City Prosecutor of
6

Manila.
After the requisite preliminary investigation, the City Prosecutor
found probable cause estafa under Article 315, paragraph 1(b) of the
Revised Penal Code, in relation to Presidential Decree (P.D.) No. 115,
otherwise known as the Trust Receipts Law. Thirteen (13) Informations
were filed against the petitioner before the Regional Trial Court (RTC)
of Manila. The cases were docketed as Criminal Cases No. 86-42169 to
86-42181, raffled to Branch 31 of said court.
Petitioner appealed the resolution of the City Prosecutor to the then
Minister of Justice. The appeal was dismissed in a Resolution   dated
7

March 17, 1987, and petitioner moved for its reconsideration. On

December 23, 1987, the Minister of Justice granted the motion, thus
reversing the previous resolution finding probable cause against
petitioner.  The City Prosecutor was ordered to move for the withdrawal
8

of the Informations.
 This time, respondent bank filed a motion for reconsideration, which,
however, was denied on February 24, 1988.   The RTC, for its part,
9

granted the Motion to Quash the Informations filed by petitioner on the

ground that the material allegations therein did not amount to estafa.10

In the meantime, the Court rendered judgment in   Allied Banking

Corporation v. Ordoñez,  holding that the penal provision of P.D. No.
11

115 encompasses any act violative of an obligation covered by the trust

receipt; it is not limited to transactions involving goods which are to be
sold (retailed), reshipped, stored or processed as a component of a
product ultimately sold. The Court also ruled that “the non-payment of
the amount covered by a trust receipt is an act violative of the obligation
of the entrustee to pay.”
12

On February 27, 1995, respondent bank re-filed the criminal

complaint for   estafa   against petitioner before the Office of the City
Prosecutor of Manila. The case was docketed as I.S. No. 95B-07614.
Preliminary investigation ensued. On December 8, 1995, the City
Prosecutor ruled that there was no probable cause to charge petitioner
with violating P.D. No. 115, as petitioner’s liability was only civil, not
criminal, having signed the trust receipts as surety.  Respondent bank
13

appealed the resolution to the Department of Justice (DOJ) via petition

for review, alleging that the City Prosecutor erred in ruling:
1. That there is no evidence to show that respondent participated in
the misappropriation of the goods subject of the trust receipts;
2. That the respondent is a mere surety of the trust receipts; and
3. That the liability of the respondent is only civil in nature.
14

On July 13, 1999, the Secretary of Justice issued Resolution No.

250  granting the petition and reversing the assailed resolution of the
15

City Prosecutor. According to the JusticeSecretary, the petitioner, as

Senior Vice-President of PBMI, executed the 13 trust receipts and as
such, was the one responsible for the offense. Thus, the execution of said
receipts is enough to indict the petitioner as the official responsible for
violation of P.D. No. 115. The Justice Secretary also declared that
petitioner could not contend that P.D. No. 115 covers only goods
ultimately destined for sale, as this issue had already been settled
in Allied Banking Corporation v. Ordoñez,  where the Court ruled that
16

P.D. No. 115 is “not limited to transactions in goods which are to be sold
(retailed), reshipped, stored or processed as a component of a product
ultimately sold but covers failure to turn over the proceeds of the sale of
entrusted goods, or to return said goods if unsold or not otherwise
disposed of in accordance with the terms of the trust receipts.”
The Justice Secretary further stated that the respondent bound
himself under the terms of the trust receipts not only as a corporate
official of PBMI but also as its surety; hence, he could be proceeded
against in two (2) ways: first, as surety as determined by the Supreme
Court in its decision in Rizal Commercial Banking Corporation v. Court
of Appeals;   and   second, as the corporate official responsible for the
17

offense under P.D. No. 115, via criminal prosecution. Moreover, P.D.

No. 115 explicitly allows the prosecution of corporate officers “without
prejudice to the civil liabilities arising from the criminal offense.” Thus,
according to the Justice Secretary, following Rizal Commercial Banking
Corporation, the civil liability imposed is clearly separate and distinct
from the criminal liability of the accused under P.D. No. 115.
Conformably with the Resolution of the Secretary of Justice, the City
Prosecutor filed 13 Informations against petitioner for violation of P.D.
No. 115 before the RTC of Manila. The cases were docketed as Criminal
Cases No. 99-178596 to99-178608 and consolidated for trial before
Branch 52 of said court. Petitioner filed a motion for reconsideration,
which the Secretary of Justice denied in a Resolution  dated January 17,
18

2000.
Petitioner then filed a petition for   certiorari, prohibition and
mandamus with the CA, assailing the resolutions of the Secretary of
Justice on the following grounds:
1. THE RESPONDENTS ARE ACTING WITH AN UNEVEN
HAND AND IN FACT, ARE ACTING OPPRESSIVELY
AGAINST ALFREDO CHING WHEN THEY ALLOWED HIS
PROSECUTION DESPITE THE FACT THAT NO EVIDENCE
 HAD BEEN PRESENTED TO PROVE HIS PARTICIPATION IN
THE ALLEGED TRANSACTIONS.
2. THE RESPONDENT SECRETARY OF JUSTICE COMMITTED
AN ACT IN GRAVE ABUSE OF DISCRETION AND IN
EXCESS OF HIS JURISDICTION WHEN THEY CONTINUED
PROSECUTION OF THE PETITIONER DESPITE THE
LENGTH OF TIME INCURRED IN THE TERMINATION OF
THE PRELIMINARY INVESTIGATION THAT SHOULD
JUSTIFY THE DISMISSAL OF THE INSTANT CASE.

3. THE RESPONDENT SECRETARY OF JUSTICE AND

ASSISTANT CITY PROSECUTOR ACTED IN GRAVE ABUSE
OF DISCRETION AMOUNTING TO AN EXCESS OF
JURISDICTION WHEN THEY CONTINUED THE
PROSECUTION OF THE PETITIONER DESPITE LACK OF
SUFFICIENT BASIS. 19

In his petition, petitioner incorporated a certification stating that “as far

as this Petition is concerned, no action or proceeding in the Supreme
Court, the Court of Appeals or different divisions thereof, or any tribunal
or agency. It is finally certified that if the affiant should learn that a
similar action or proceeding has been filed or is pending before the
Supreme Court, the Court of Appeals, or different divisions thereof, of
any other tribunal or agency, it hereby undertakesto notify this
Honorable Court within five (5) days from such notice.” 20

In its Comment on the petition, the Office of the Solicitor General

alleged that—
A.
THE HONORABLE SECRETARY OF JUSTICE CORRECTLY RULED THAT
PETITIONER ALFREDO CHING IS THE OFFICER RESPONSIBLE FOR THE
OFFENSE CHARGED AND THAT THE ACTS OF PETITIONER FALL WITHIN
THE AMBIT OF VIOLATION OF P.D. [No.] 115 IN RELATION TO ARTICLE
315, PAR. 1(B) OF THE REVISED PENAL CODE.
B.
 THERE IS NO MERIT IN PETITIONER’S CONTENTION THAT EXCESSIVE
DELAY HAS MARRED THE CONDUCT OF THE PRELIMINARY
INVESTIGATION OF THE CASE, JUSTIFYING ITS DISMISSAL.
C.
THE PRESENT SPECIAL CIVIL ACTION FOR CERTIORARI,
PROHIBITION AND MANDAMUS IS NOT THE PROPER MODE OF REVIEW
FROM THE RESOLUTION OF THE DEPARTMENT OF JUSTICE. THE
PRESENT PETITION MUST THEREFORE BE DISMISSED.21

On April 22, 2004, the CA rendered judgment dismissing the petition for
lack of merit, and on procedural grounds. On the procedural issue, it
ruled that (a) the certification of non-forum shopping executed by
petitioner and incorporated in the petition was defective for failure to
comply with the first two of the three-fold undertakings prescribed in
Rule 7, Section 5 of the Revised Rules of Civil Procedure; and (b) the
petition for certiorari, prohibition and mandamus was not the proper
remedy of the petitioner.
On the merits of the petition, the CA ruled that the assailed resolutions
of the Secretary of Justice were correctly issued for the following
reasons: (a) petitioner, being the Senior Vice-President of PBMI and the
signatory to the trust receipts, is criminally liable for violation of P.D.
No. 115; (b) the issue raised by the petitioner, on whether he violated
P.D. No. 115 by his actuations, had already been resolved and laid to rest
in Allied Bank Corporation v. Ordoñez;  and (c) petitioner was estopped
22

from raising the City Prosecutor’s delay in the final disposition of the
preliminary investigation because he failed to do so in the DOJ.
Thus, petitioner filed the instant petition, alleging that:
I
THE COURT OF APPEALS ERRED WHEN IT DISMISSED THE PETITION ON
THE GROUND THAT THE CERTIFICATION OF NON-FORUM SHOPPING
INCORPORATED THEREIN WAS DEFECTIVE.
II
THE COURT OF APPEALS ERRED WHEN IT RULED THAT NO GRAVE
ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION WAS COMMITTED BY THE SECRETARY OF JUSTICE IN
COMING OUT WITH THE ASSAILED RESOLUTIONS.23

The Court will delve into and resolve the issues seriatim.

The petitioner avers that the CA erred in dismissing his petition on a
mere technicality. He claims that the rules of procedure should be used
to promote, not frustrate, substantial justice. He insists that the Rules of
Court should be construed liberally especially when, as in this case, his
substantial rights are adversely affected; hence, the deficiency in
hiscertification of non-forum shopping should not result in the dismissal
of his petition.
The Office of the Solicitor General (OSG) takes the opposite view,
and asserts that indubitably, the certificate of non-forum shopping
incorporated in the petition before the CA is defective because it failed
to disclose essential facts about pending actions concerning similar
issues and parties. It asserts that petitioner’s failure to comply with the
Rules of Court is fatal to his petition. The OSG cited Section 2, Rule 42,
as well as the ruling of this Court in Melo v. Court of Appeals. 24

We agree with the ruling of the CA that the certification of non-forum

shopping petitioner incorporated in his petition before the appellate court
is defective. The certification reads:
“It is further certified that as far as this Petition is concerned, no action or
proceeding in the Supreme Court, the Court of Appeals or different divisions
thereof, or any tribunal or agency.
It is finally certified that if the affiant should learn that a similar action or
proceeding has been filed or is pending before the Supreme Court, the Court of
Appeals, or different divisions thereof, of any other tribunal or agency, it
hereby undertakes to notify this Honorable Court within five (5) days from
such notice.”25
Under Section 1, second paragraph of Rule 65 of the Revised Rules of
Court, the petition should be accompanied by a sworn certification of
non-forum shopping, as provided in the third paragraph of Section 3,
Rule 46 of said Rules. The latter provision reads in part:
SEC. 3.   Contents and filing of petition; effect of noncompliance with
requirements.—The petition shall contain the full names and actual addresses
of all the petitioners and respondents, a concise statement of the matters
involved, the factual background of the case and the grounds relied upon for
the relief prayed for.
xxx

The petitioner shall also submit together with the petition a sworn certification
that he has not theretofore commenced any other action involving the same
issues in the Supreme Court, the Court of Appeals or different divisions
thereof, or any other tribunal or agency; if there is such other action or
proceeding, he must state the status of the same; and if he should thereafter
learn that a similar action or proceeding has been filed or is pending before the
Supreme Court, the Court of Appeals, or different divisions thereof, or any
other tribunal or agency, he undertakes to promptly inform the aforesaid courts
and other tribunal or agency thereof within five (5) days therefrom. x x x

Compliance with the certification against forum shopping is separate

from and independent of the avoidance of forum shopping itself. The
requirement is mandatory. The failure of the petitioner to comply with
the foregoing requirement shall be sufficient ground for the dismissal of
the petition without prejudice, unless otherwise provided. 26

Indubitably, the first paragraph of petitioner’s certification is

incomplete and unintelligible. Petitioner failed to certify that he “had not
heretofore commenced any other action involving the same issues in the
Supreme Court, the Court of Appeals or the different divisions thereof or
any other tribunal or agency” as required by paragraph 4, Section 3,
Rule 46 of the Revised Rules of Court.
We agree with petitioner’s contention that the certification is
designed to promote and facilitate the orderly administration of justice,
and therefore, should not be interpreted with absolute literalness. In his
works on the Revised Rules of Civil Procedure, former Supreme Court
Justice Florenz Regalado states that, with respect to the contents of the
certification which the pleader may prepare, the rule of substantial
compliance may be availed of.   However, there must be aspecial
27
circumstance or compelling reason which makes the strict application of
the requirement clearly unjustified. The instant petition has not alleged
any such extraneous circumstance. Moreover, as worded, the
certification cannot even be regarded as substantial compliance with the
procedural requirement. Thus, the CA was not informed whether, aside
from the petition before it, petitioner had commenced any other action
involving the same issues in other tribunals.
On the merits of the petition, the CA ruled that the petitioner failed to
establish that the Secretary of Justice committed grave abuse of
discretion in finding probable cause against the petitioner for violation
of estafa under Article 315, paragraph 1(b) of the Revised Penal Code,
in relation to P.D. No. 115. Thus, the appellate court ratiocinated:

Be that as it may, even on the merits, the arguments advanced in

support of the petition are not persuasive enough to justify the desired
conclusion that respondent Secretary of Justice gravely abused its
discretion in coming out with his assailed Resolutions. Petitioner posits
that, except for his being the Senior Vice-President of the PBMI, there is
no iota of evidence that he was a participes crimines in violating the
trust receipts sued upon; and that his liability, if at all, is purely civil
because he signed the said trust receipts merely as a x x x surety and not
as the entrustee. These assertions are, however, too dull that they cannot
even just dent the findings of the respondent Secretary, viz.:
“x x x it is apropos to quote section 13 of PD 115 which states in
part, viz.:
‘x x x If the violation or offense is committed by a corporation,
partnership, association or other judicial entities, the penalty provided
for in this Decree shall be imposed upon the directors, officers,
employees or other officials or persons therein responsible for the
offense, without prejudice to the civil liabilities arising from the criminal
offense.’
“There is no dispute that it was the respondent, who as senior vice-
president of PBM, executed the thirteen (13) trust receipts. As such, the
law points to him as the official responsible for the offense. Since a
corporation cannot be proceeded against criminally becauseit cannot
commit crime in which personal violence or malicious intent is required,
criminal action is limited to the corporate agents guilty of an act
amounting to a crime and never against the corporation itself (West
Coast Life Ins. Co. vs. Hurd, 27 Phil. 401; Times, [I]nc. v. Reyes, 39
SCRA 303). Thus, the execution by respondent of said receipts is
enough to indict him as the official responsible for violation of PD 115.
“Parenthetically, respondent is estopped to still contend that PD 115
covers only goods which are ultimately destined for sale and not goods,
like those imported by PBM, for use in manufacture. This issue has
already been settled in the   Allied Banking Corporation case, supra,
where he was also a party, when the Supreme Court ruled that PD 115 is
‘not limited to transactions in goods which are to be sold (retailed),
reshipped, stored or processed as a component or a product ultimately
sold’ but ‘covers failure to turn over the proceeds of the sale of entrusted
goods, or to return said goods if unsold or disposed of in accordance
with the terms of the trust receipts.’
“In regard to the other assigned errors, we note that the respondent
bound himself under the terms of the trust receipts not only as a
corporate official of PBM but also as its surety. It is evident that these
are two (2) capacities which do not exclude the other. Logically, he can
be proceeded against in two (2) ways: first, as surety as determined by
the Supreme Court in its decision in RCBC vs. Court of Appeals, 178
SCRA 739; and, secondly, as the corporate official responsible for the
offense under PD 115, the present case is an appropriate remedy under
our penal law.
“Moreover, PD 115 explicitly allows the prosecution of corporate
officers ‘without prejudice to the civil liabilities arising from the
criminal offense’ thus, the civil liability imposed on respondent in RCBC
vs. Court of Appeals   case is clearly separate and distinct from his
criminal liability under PD 115.’” 28

Petitioner asserts that the appellate court’s ruling is erroneous because

(a) the transaction between PBMI and respondent bank is not a trust
receipt transaction; (b) he entered into the transaction and was sued in
his capacity as PBMISenior Vice-President; (c) he never received the
goods as an entrustee for PBMI, hence, could not have committed any
dishonesty or abused the confidence of respondent bank; and (d) PBMI
acquired the goods and used the same in operating its machineries and
equipment and not for resale.
The OSG, for its part, submits a contrary view, to wit:
34.Petitioner further claims that he is not a person responsible for the
offense allegedly because “[b]eing charged as the Senior Vice-
President of Philippine Blooming Mills (PBM), petitioner cannot
be held criminally liable as the transactions sued upon were clearly
entered into in his capacity as an officer of the corporation” and
that [h]e never received the goods as an entrustee for PBM as he
never had or took possession of the goods nor did he commit
dishonesty nor “abuse of confidence in transacting with RCBC.”
Such argument is bereft of merit.

35.Petitioner’s being a Senior Vice-President of the Philippine

Blooming Mills does not exculpate him from any liability.
Petitioner’s responsibility as the corporate official of PBM who
received the goods in trust is premised on Section 13 of P.D. No.
115, which provides:

Section 13. Penalty Clause.—The failure of an entrustee to turn over the

proceeds of the sale of the goods, documents or instruments
covered by a trust receipt to the extent of the amount owing to the
entruster or as appears in the trust receipt or to return said goods,
documents or instruments if they were not sold or disposed of in
accordance with the terms of the trust receipt shall constitute the
crime of estafa, punishable under the provisions of Article Three
hundred and fifteen, paragraph one (b) of Act Numbered Three
thousand eight hundred and fifteen, as amended, otherwise known
as the Revised Penal Code.   If the violation or offense is
committed by a corporation, partnership, association or other
 juridical entities, the penalty provided for in this Decree shall
be imposed upon the directors, officers, employees or other
officials or persons therein responsible for the offense, without
prejudice to the civil liabilities arising from the criminal
offense. (Emphasis supplied)

36.Petitioner having participated in the negotiations for the trust

receipts and having received the goods for PBM, it was inevitable
that the petitioner is the proper corporate officer to be proceeded
against by virtue of the PBM’s violation of P.D. No. 115.” 29

The ruling of the CA is correct.

In Mendoza-Arce v. Office of the Ombudsman (Visayas),  this Court

30

held that the acts of a   quasi-judicial   officer may be assailed by the

aggrieved party   via   a petition for   certiorari   and enjoined (a) when
necessary to afford adequate protection to the constitutional rights of the
accused; (b) when necessary for the orderly administration of justice; (c)
when the acts of the officer are without or in excess of authority; (d)
where the charges are manifestly false and motivated by the lust for
vengeance; and (e) when there is clearly no prima facie case against the
accused.   The Court also declared that, if the officer conducting a
31

preliminary investigation (in that case, the Office of the Ombudsman)

acts without or in excess of his authority and resolves to file an
Information despite the absence of probable cause, such act may be
nullified by a writ of certiorari. 32

Indeed, under Section 4, Rule 112 of the 2000 Rules of Criminal

Procedure,   the Information shall be prepared by the Investigating
33

Prosecutor against the respondent only if he or she finds probable cause

to hold such respondent for trial. The Investigating Prosecutor acts
without or in excess of his authority under the Rule if the Information is
filed against the respondent despite absence of evidence showing
probablecause therefor.   If the Secretary of Justice reverses the
34

Resolution of the Investigating Prosecutor who found no probable cause

to hold the respondent for trial, and orders such prosecutor to file the
Information despite the absence of probable cause, the Secretary of
Justice acts contrary to law, without authority and/or in excess of
authority. Such resolution may likewise be nullified in a petition
for certiorari under Rule 65 of the Revised Rules of Civil Procedure. 35

A preliminary investigation, designed to secure the respondent

against hasty, malicious and oppressive prosecution, is an inquiry to
determine whether (a) a crime has been committed; and (b) whether
there is probable cause to believe that the accused is guilty thereof. It is a
means of discovering the person or persons who may be reasonably
charged with a crime. Probable cause need not be based on clear and
convincing evidence of guilt, as the investigating officer acts upon
probable cause of reasonable belief. Probable cause implies probability
of guilt and requires more than bare suspicion but less than evidence
which would justify a conviction. A finding of probable cause needs only
to rest on evidence showing that more likely than not, a crime has been
committed by the suspect. 36

However, while probable cause should be determined in a summary

manner, there is a need to examine the evidence with care to prevent
material damage to a potential accused’s constitutional right to liberty
and the guarantees of freedom and fair play  and to protect the State
37

from the burden of unnecessary expenses in prosecuting alleged offenses

andholding trials arising from false, fraudulent or groundless charges. 38

In this case, petitioner failed to establish that the Secretary of Justice

committed grave abuse of discretion in issuing the assailed resolutions.
Indeed, he acted in accord with law and the evidence.
Section 4 of P.D. No. 115 defines a trust receipt transaction, thus:

“Section 4.   What constitutes a trust receipt transaction.—A trust

receipt transaction, within the meaning of this Decree, is any transaction
by and between a person referred to in this Decree as the entruster, and
another person referred to in this Decree as entrustee, whereby the
entruster, who owns or holds absolute title or security interests over
certain specified goods, documents or instruments, releases the same to
the possession of the entrustee upon the latter’s execution and delivery
to the entruster of a signed document called a “trust receipt” wherein the
entrustee binds himself to hold the designated goods, documents or
instruments in trust for the entruster and to sell or otherwise dispose of
the goods, documents or instruments with the obligation to turn over to
the entruster the proceeds thereof to the extent of the amount owing to
the entruster or as appears in the trust receipt or the goods, documents or
instruments themselves if they are unsold or not otherwise disposed of,
in accordance with the terms and conditions specified in the trust receipt,
or for other purposes substantially equivalent to any of the following:

1. In case of goods or documents, (a) to sell the goods or procure

their sale; or (b) to manufacture or process the goods with the
purpose of ultimate sale;   Provided, That, in the case of goods
delivered under trust receipt for the purpose of manufacturing or
processing before its ultimate sale, the entruster shall retain its title
over the goods whether in its original or processed form until the
entrustee has complied fully with his obligation under the trust
receipt; or (c) to load, unload, ship or otherwise deal with them in a
manner preliminary or necessary to their sale; or2. In the case of
instruments a) to sell or procure their sale or exchange; or b) to
deliver them to a principal; or c) to effect the consummation of some
transactions involving delivery to a depository or register; or d) to
effect their presentation, collection or renewal.

The sale of goods, documents or instruments by a person in the

business of selling goods, documents or instruments for profit who, at
the outset of the transaction, has, as against the buyer, general property
rights in such goods, documents or instruments, or who sells the same to
the buyer on credit, retaining title or other interest as security for the
payment of the purchase price, does not constitute a trust receipt
transaction and is outside the purview and coverage of this Decree.”
An entrustee is one having or taking possession of goods, documents or
instruments under a trust receipt transaction, and any successor in
interest of such person for the purpose of payment specified in the trust
receipt agreement.   The entrustee is obliged to: (1) hold the goods,
39

documents or instruments in trust for the entruster and shall dispose of

them strictly in accordance with the terms and conditions of the trust
receipt; (2) receive the proceeds in trust for the entruster and turn over
the same to the entruster to the extent of the amount owing to the
entruster or as appears on the trust receipt; (3) insure the goods for their
total value against loss from fire, theft, pilferage or other casualties; (4)
keep said goods or proceeds thereof whether in money or whatever
form, separate and capable of identification as property of the entruster;
(5) return the goods, documents or instruments in the event of non-sale
or upon demand of the entruster; and (6) observe all other terms and
conditions of the trust receipt not contrary to the provisions of the
decree.40

The entruster shall be entitled to the proceeds from the sale of the
goods, documents or instruments released under a trust receipt to the
entrustee to the extent of the amount owing to the entruster or as appears
in the trust receipt, or to the return of the goods, documents or
instruments in case of non-sale, and to the enforcement of all other rights
conferred on him in the trust receipt; provided, such are not contrary to
the provisions of the document. 41

In the case at bar, the transaction between petitioner and respondent

bank falls under the trust receipt transactions envisaged in P.D. No. 115.
Respondent bank imported the goods and entrusted the same to PBMI
under the trust receipts signed by petitioner, as entrustee, with the bank
as entruster. The agreement was as follows:
And in consideration thereof, I/we hereby agree to hold said goods in
trust for the said BANK as its property with liberty to sell the same
within ____days from the date of the execution of this Trust Receipt and
for the Bank’s account, but without authority to make any other
disposition whatsoever of the said goods or any part thereof (or the
proceeds) either by way of conditional sale, pledge or otherwise.
 I/we agree to keep the said goods insured to their full value against
loss from fire, theft, pilferage or other casualties as directed by the
BANK, the sum insured to be payable in case of loss to the BANK, with
the understanding that the BANK is, not to be chargeable with the
storage premium or insurance or any other expenses incurred on said
goods.
In case of sale, I/we further agree to turn over the proceeds thereof as
soon as received to the BANK, to apply against the relative acceptances
(as described above) and for the payment of any other indebtedness of
mine/ours to the BANK. In case of non-sale within the period specified
herein, I/we agree to return the goods under this Trust Receipt to the
BANK without any need of demand.
I/we agree to keep the said goods, manufactured products or proceeds
thereof, whether in the form of money or bills, receivables, or accounts
separate and capable of identification as property of the BANK. 42

It must be stressed that P.D. No. 115 is a declaration by legislative

authority that, as a matter of public policy, the failure of person to turn
over the proceeds of the sale of the goods covered by a trust receipt or to
return said goods, if not sold, is a public nuisance to be abated by the
imposition of penal sanctions. 43

The Court likewise rules that the issue of whether P.D. No. 115
encompasses transactions involving goods procured as a component of a
product ultimately sold has been resolved in the affirmative in Allied
Banking Corporation v. Ordoñez.44 The law applies to goods used by the
entrustee in the operation of its machineries and equipment. The non-
payment of the amount covered by the trust receipts or the non-return of
the goods covered by the receipts, if not sold or otherwise not disposed
of, violate the entrustee’s obligation to pay the amount or to return the
goods to the entruster.
In Colinares v. Court of Appeals,  the Court declared that there are
45

two possible situations in a trust receipt transaction. The first is covered

by the provision which refers to money received under the obligation
involving the duty to   deliver   it (entregarla) to the owner of the
merchandise sold. The second is covered by the provision which refers
to merchandise received under the obligation to return it (devolvera) to
the owner.  Thus, failure of the entrustee to turn over the proceeds of the
46

sale of the goods covered by the trust receipts to the entruster or to

return said goods if they were not disposed of in accordance with the
terms of the trust receipt is a crime under P.D. No. 115, without need of
proving intent to defraud. The law punishes dishonesty and abuse of
confidence in the handling of money or goods to the prejudice of the en-
truster, regardless of whether the latter is the owner or not. A mere
failure to deliver the proceeds of the sale of the goods, if not sold,
constitutes a criminal offense that causes prejudice, not only to another,
but more to the public interest.47

The Court rules that although petitioner signed the trust receipts
merely as Senior Vice-President of PBMI and had no physical
possession of the goods, he cannot avoid prosecution for violation of
P.D. No. 115.
The penalty clause of the law, Section 13 of P.D. No. 115 reads:

“Section 13.   Penalty Clause.—The failure of an entrustee to turn

over the proceeds of the sale of the goods, documents or instruments
covered by a trust receipt to the extent of the amount owing to the
entruster or as appears in the trust receipt or to return said goods,
documents or instruments if they were not sold or disposed of in
accordance with the terms of the trust receipt shall constitute the crime
of estafa, punishable under the provisions of Article Three hundred and
fifteen, paragraph one (b) of Act Numbered Three thousand eight
hundred and fifteen, as amended, otherwise known as the Revised Penal
Code. If the violation or offense is committed by a corporation,
partnership, association or other juridical entities, the penalty provided
for in this Decree shall be imposed upon the directors, officers,
employees or other officials or persons therein responsible for the
offense, without prejudice to the civil liabilities arising from the criminal
offense.”
The crime defined in P.D. No. 115 is malum prohibitum but is classified
as estafa under paragraph 1(b), Article 315 of the Revised Penal Code,
or   estafa   with abuse of confidence. It may be committed by a
corporation or other juridical entity or by natural persons. However, the
penalty for the crime is imprisonment for the periods provided in said
Article 315, which reads:
Though the entrustee is a corporation, nevertheless, the law specifically
makes the officers, employees or other officers or persons responsible
for the offense, without prejudice to the civil liabilities of such
corporation and/or board of directors, officers, or other officials or
employees responsible for the offense. The rationale is that such officers
or employees are vested with the authority and responsibility to devise
means necessary to ensure compliance with the law and, if they fail to
do so, are held criminally accountable; thus, they have a responsible
share in the violations of the law.
48

If the crime is committed by a corporation or other juridical entity,

the directors, officers, employees or other officers thereof responsible for
the offense shall be charged and penalized for the crime, precisely
because of the nature of the crime and the penalty therefor. A corporation
cannot be arrested and imprisoned; hence, cannot be penalized for a
crime punishable by imprisonment.   However, a corporation may be
49

charged and prosecuted for a crime if the imposable penalty is fine. Even
if the statute prescribes both fine and imprisonment as penalty, a
corporation may be prosecuted and, if found guilty, may be fined. 50

A crime is the doing of that which the penal code forbids to be done,
or omitting to do what it commands. A necessary part of the definition of
every crime is the designation of the author of the crime upon whom the
penalty is to be inflicted. When a criminal statute designates an act of a
corporation or a crime and prescribes punishment therefor, it creates a
criminal offense which, otherwise, would not exist and such can be
committed only by the corporation. But when a penal statute does not
expressly apply to corporations, it does not create an offense for which a
corporation may be punished. On the other hand, if the State, by statute,
defines a crime that may be committed by a corporation but prescribes
the penalty therefor to be suffered by the officers, directors, or
employees of such corporation or other persons responsible for the
offense, only such individuals will suffer such penalty.   Corporate
51

officers or employees, through whose act, default or omission the

corporation commits a crime, are themselves individually guilty of the
crime.52

The principle applies whether or not the crime requires the

consciousness of wrongdoing. It applies to those corporate agents who
themselves commit the crime and to those, who, by virtue of their
managerial positions or other similar relation to the corporation, could
be deemed responsible for its commission, if by virtue of their
relationship to the corporation, they had the power to prevent the act.
 Moreover, all parties active in promoting a crime, whether agents or
53

not, are principals.  Whether such officers or employees are benefited by

54

their delictual acts is not a touchstone of their criminal liability. Benefit

is not an operative fact.
In this case, petitioner signed the trust receipts in question. He
cannot, thus, hide behind the cloak of the separate corporate personality
of PBMI. In the words of Chief Justice Earl Warren, a corporate officer
cannot protect himself behind a corporation where he is the actual,
present and efficient actor.55

IN LIGHT OF ALL THE FOREGOING, the petition is DENIED for

lack of merit. Costs against the petitioner.
SO ORDERED.
          Panganiban   (C.J., Chairperson),   Ynares-Santiago,   Austria-
Martinez and Chico-Nazario, JJ., concur.
Petition denied.
Note.—The Rules of Civil Procedure on forum shopping should be
applied with liberality. (Barroso vs. Ampig, Jr., 328 SCRA 530 [2000])
J.R.S, BUSINESS CORPORATION, J.R. DA SlLVA 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.

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.
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.
APPEAL from a judgment of the Court of First Instance of Manila.
The facts are stated in the opinion of the Court.
     Felipe N. Aurea for petitioners.
     Tañada, Teehankee & 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 ....................................................................... P50,000.00

) ....................................................
b Interest at 12% per 5,706.14
) annum ..........................................................................
....................
c Liquidated damages at 7% per 3,330.58
) annum ..........................................................................
...
d Costs of 135.60
) suit ................................................................................
....................................
e Attorney's 2,000.00
) 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 801305
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."
On May 15, 1962, one day after the date fixed in the compromise
agreement, within which the judgment debt would be paid, but was not,
respondent Imperial Insurance Inc., filed a "Motion for the Insurance of
a Writ of Execution". On May 23, 1962, a Writ of Execution was issued
by respondent Sheriff of Manila and on May 26, 1962, Notices of Sale
were sent out for the auction of the personal properties of the petitioner
J.R.S. Business Corporation. On June 2, 1962, a Notice of Sale of the
"whole capital stocks of the defendants JRS Business Corporation, the
business name, right of operation, the whole assets, furnitures and
equipments, the total liabilities, and Net Worth, books of accounts, etc.,
etc." of the petitioner corporation was handed down. On June 9, the
petitioner, thru counsel, presented an "Urgent Petition for Postponement
of Auction Sale and for Release of Levy on the Business Name and
Right to Operate of Defendant JRS Business Corporation", stating that
petitioners were busy negotiating for a loan with which to pay the
judgment debt; that the judgment was for money only and, therefore,
plaintiff (respondent Insurance Company) was not authorized to take
over and appropriate for its own use, the business name of the
defendants; that the right to operate under the franchise, was not
transferable and could not be considered a personal or immovable,
property, subject to levy and sale. On June 10, 1962, a Supplemental
Motion for Release of Execution, was filed by counsel of petitioner JRS
Business Corporation, claiming that the capital stocks thereof, could not
be levied upon and sold under execution.

Under date of June 20, 1962, petitioner's counsel presented a pleading

captioned "Very Urgent Motion 'for Postponement of Public Auction
Sale and for Ruling on Motion for Release of Levy on 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 properties and started running the
affairs and operating the business of the JRS Business Corporation.
Hence, the present .appeal.
It would seem that the matters which need determination are (1)
whether the respondent Judge acted without or in excess of his
jurisdiction or with grave abuse of discretion in promulgating the Order
of June 21, 1962, denying the motion for postponement of the scheduled
sale at public auction, of the properties of petitioner; and (2) whether the
business name or trade name, franchise (right to operate) and capital
stocks of the petitioner are properties or property rights which could be
the subject of levy, execution and sale.
The respondent Court's act of postponing the scheduled sale was
within the discretion of respondent Judge, the exercise of which, one
way or the other, did not constitute grave abuse of discretion and/or
excess of jurisdiction. There was a decision rendered and the
corresponding writ of execution was issued. Respondent Judge had
jurisdiction over the matter and erroneous conclusions of law or fact, if
any, committed in the exercise of such jurisdiction are merely errors of
judgment, not correctible 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, x x x 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. Sec. 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.Ed. 1102, 6 Ann. Cas. 253;   Arthur v.
Commercial   &   Railroad Bank, 9 Smedes   &   M. 894, 48 Ana. Dec.
719), but the special 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. sec. 1225; 14A C J. 644; 3
Thompson on Corp. [2d Ed.] sec. 2908; Arthur v. Commercial & R.R.
Bank, supra; McAIIister v. Plant, 54 Miss. 106).''

The right to operate a messenger and express delivery service, by virtue

of a legislative enactment, is admittedly a secondary franchise (R.A. No.
3260, entitled "An Act granting the JRS Business Corporation a
franchise to conduct a messenger and express service)" and, as such,
under our corporation law, is subject to levy and sale on execution
together and including all the property necessary for the enjoyment
thereof, The law, however, indicates the procedure under which the same
(secondary franchise and the properties necessary for its enjoyment) may
be sold under execution. Said franchise can be sold under execution,
when such sale is especially decreed and ordered in the judgment and it
becomes effective only when the sale is confirmed by the Court after due
notice (Sec. 56, Corp. Law). The compromise agreement and the
judgment based thereon, do not contain any special decree or order
making the franchise answerable for the judgment debt The same thing
may be stated with respect to petitioner's trade name or business name
and its capital stock.

Incidentally, the trade name or business name corresponds to the initials

of the President of the petitioner corporation and there can be no serious
dispute regarding the fact that a trade name or business name and capital
stock are necessarily included in the enjoyment of the franchise. Like
that of a franchise, the law mandates, that property necessary for the
enjoyment of said franchise, can only be sold to satisfy a judgment debt
if the decision especially so provides. As We have stated heretofore, no
such directive appears in the decision. Moreover, a trade name or
business name cannot be sold separately from the franchise, and the
capital stock of the petitioner corporation or any other corporation, for
the matter, represents the interest and is the property of stockholders in
the corporation, who can only be depived 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.
         Bengzon, C.J., Padilla, Bautista Angelo, Concepcion, Reyes,
J.B.L., Regala and Makalintal, JJ., concur.
Sale of properties of petitioner set aside.

Note.—On the issue whether the business name or tradename, and

franchise (right) to operate are properties or property rights which could
be the subject of levy, execution or sale, there is a statutory authority to
the effect that the goodwill of a business is property, and may be
transferred together with the right to use the name under which the
business is conducted (Art. 521, new Civil Code). The same holds true
with respect to a trade-name or trade-mark (Art. 520, Id.). The franchise
of a corporation is also considered property   (Cf. Long Island Water
Supply v. Brooklyn, 166 U.S. 685; Halili v. Public Service Commission,
et al.,   49 O.G. 825;   Manila Electric Company v. Public Service
Commission, etc., L-18638-40, June 30, 1964).
MA. BELEN FLORDELIZA C. ANG-ABAYA, FRANCIS JASON
A. ANG, HANNAH ZORAYDA A. ANG, and VICENTE G.
GENATO, petitioners, vs. EDUARDO G. ANG, respondent.

Corporation Law; Stockholder’s Right of Inspection; The stockholder’s right of

inspection of the corporation’s books and records is based upon their ownership
of the assets and property of the corporation, but the inspection has to be
germane to his interest as a stockholder, and has to be proper and lawful in
character and not inimical to the interest of the corporation.—In Gokongwei, Jr.
v. Securities and Exchange Commission, 89 SCRA 336 (1979), this Court
explained the rationale behind a stockholder’s right to inspect corporate books,
to wit: The stockholder’s right of inspection of the corporation’s books and
records is based upon their ownership of the assets and property of the
corporation. It is, therefore, an incident of ownership of the corporate property,
whether this ownership or interest be termed an equitable ownership, a
beneficial ownership, or a quasi-ownership. This right is predicated upon the
necessity of self-protection. It is generally held by majority of the courts that
where the right is granted by statute to the stockholder, it is given to him as such
and must be exercised by him with respect to his interest as a stockholder and for
some purpose germane thereto or in the interest of the corporation. In other
words, the inspection has to be germane to the petitioner’s interest as a
stockholder, and has to be proper and lawful in character and not inimical to
the interest of the corporation. In Republic v. Sandiganbayan, 199 SCRA 39
(1991), the Court declared that the right to inspect and/or examine the records of
a corporation under Section 74 of the Corporation Code is circumscribed by the
express limitation contained in the succeeding proviso, which states that: [I]t
shall be a defense to any action under this section that the person demanding to
examine and copy excerpts from the corporation’s records and minutes   has
improperly used any information secured through any prior examination of the
records or minutes of such corporation or of any other corporation, or was not
acting in good faith or for a legitimate purpose in making his demand.
Same; Same; Criminal Law; Violation of Section 74 of the Corporation Code;
Elements.—In order therefore for the penal provision under Section 144 of the
Corporation Code to apply in a case of violation of a stockholder or member’s
right to inspect the corporate books/records as provided for under Section 74 of
the Corporation Code, the following elements must be present: First. A director,
trustee, stockholder or member has made a prior demand in writing for a copy of
excerpts from the corporation’s records or minutes; Second. Any officer or agent
of the concerned corporation shall refuse to allow the said director, trustee,
stockholder or member of the corporation to examine and copy said
excerpts; Third. If such refusal is made pursuant to a resolution or order of the
board of directors or trustees, the liability under this section for such action shall
be imposed upon the directors or trustees who voted for such refusal;
and, Fourth. Where the officer or agent of the corporation sets up the defense
that the person demanding to examine and copy excerpts from the corporation’s
records and minutes has improperly used any information secured through any
prior examination of the records or minutes of such corporation or of any other
corporation, or was not acting in good faith or for a legitimate purpose in making
his demand, the contrary must be shown or proved.
Same; Same; Same; Justifying Circumstances; Criminal Procedure;
Preliminary Investigations; In a criminal complaint for violation of Section 74 of
the Corporation Code, the defense of improper use or motive is in the nature of a
justifying circumstance that would exonerate those who raise and are able to
prove the same; If justifying circumstances are claimed as a defense, they should
at least be raised during preliminary investigation—the consideration and
determination of justifying circumstances as a defense is a relevant subject of
preliminary investigation.—In a criminal complaint for violation of Section 74
of the Corporation Code, the defense of improper use or motive is in the nature
of a justifying circumstance that would exonerate those who raise and are able to
prove the same. Accordingly, where the corporation denies inspection on the
ground of improper motive or purpose, the burden of proof is taken from the
shareholder and placed on the corporation. This being the case, it would be
improper for the prosecutor, during preliminary investigation, to refuse or fail to
address the defense of improper use or motive, given its express statutory
recognition. In the past we have declared that if justifying circumstances are
claimed as a defense, they should have at least been raised during preliminary
investigation; which settles the view that the consideration and determination of
justifying circumstances as a defense is a relevant subject of preliminary
investigation.
Same; Same; Same; Same; Same; Same; In the appraisal of the case presented
to him for resolution, the duty of a prosecutor is more to do justice and less to
prosecute.—A preliminary investigation is in effect a realistic judicial appraisal
of the merits of the case; sufficient proof of the guilt of the criminal respondent
must be adduced so that when the case is tried, the trial court may not be bound,
as a matter of law, to order an acquittal. Although a preliminary investigation is
not a trial and is not intended to usurp the function of the trial court, it is not a
casual affair; the officer conducting the same investigates or inquires into the
facts concerning the commission of the crime with the end in view of
determining whether or not an information may be prepared against the accused.
After all, the purpose of preliminary investigation is not only to determine
whether there is sufficient ground to engender a well-founded belief that a crime
has been committed and the respondent therein is probably guilty thereof and
should be held for trial; it is just as well for the purpose of securing the innocent
against hasty, malicious and oppressive prosecution, and to protect him from an
open and public accusation of a crime, from the trouble, expense and anxiety of
a public trial. More importantly, in the appraisal of the case presented to him for
resolution, the duty of a prosecutor is more to do justice and less to prosecute.

This Petition for Review on Certiorari1 under Rule 45 of the Rules of

Court assails the March 6, 2007 Decision2of the Court of Appeals in CA-
G.R. SP No. 94708, which nullified and set aside the July 26, 2005 and
March 29, 2006 Resolutions3   of the Secretary of Justice in I.S. No.
MAL-2004-1167 directing the withdrawal of the information filed
against petitioners for violation of Section 74 of the Corporation Code.
Also assailed is the June 19, 2007 Resolution4  denying the Motion for
Reconsideration.
Vibelle Manufacturing Corporation (VMC) and Genato Investments,
Inc. (Genato) (collectively referred to as “the corporations”) are family-
owned corporations, where petitioners Ma. Belen Flordeliza C. Ang-
Abaya (Flordeliza), Francis Jason A. Ang (Jason), Vincent G. Genato
(Vincent), Hanna Zorayda A. Ang (Hanna) and private respondent
Eduardo G. Ang (Eduardo) are shareholders, officers and members of
the board of directors.
Prior to the instant controversy, VMC, Genato, and Oriana
Manufacturing Corporation (Oriana) filed Civil Case No. 4257-MC,
which is a case for damages with prayer for issuance of a temporary
restraining order (TRO) and/or writ of preliminary injunction against
herein respondent Eduardo, together with Michael Edward Chi Ang
(Michael), and some other persons for allegedly conniving to
fraudulently wrest control/management of the corporations.5   Eduardo
allegedly borrowed substantial amounts of money from the said
corporations without any intention to repay; that he repeatedly
demanded for increases in his monthly allowance and for more cash
advances contrary to existing corporate policies; that he harassed
petitioner Flordeliza to transfer and/or sell certain corporate and personal
properties in order to pay off his personal obligations; that he attempted
to forcibly evict petitioner Jason from his office and claim it as his own;
that he interfered with and disrupted the daily business operations of the
corporations; that Michael was placed on preventive suspension due to
prolonged absence without leave and commission of acts of disloyalty
such as carrying out orders of Eduardo which were detrimental to their
business, using privileged information and confidential documents/data
obtained in his capacity as Vice President of the corporations, and
admitting to have sabotaged their distribution system and operations.
During the pendency of Civil Case No. 4257-MC, particularly in July,
2004, Eduardo sought permission to inspect the corporate books of
VMC and Genato on account of petitioners’ alleged failure and/or
refusal to update him on the financial and business activities of these
family corporations.6   Petitioners denied the request claiming that
Eduardo would use the information obtained from said inspection for
purposes inimical to the corporations’ interests, considering that: “a) he
is harassing and/or bullying the Corporation[s] into writing off
P165,071,586.55 worth of personal advances which he had unlawfully
obtained in the past; b) he is unjustly demanding that he be given the
office currently occupied by Mr. Francis
Jason Ang, the Vice-President for Finance and Corporate Secretary; c)
he is usurping the rights belonging exclusively to the Corporation; and
d) he is coercing and/or trying to inveigle the Directors and/or Officers
of the Corporation to give in to his baseless demands involving specific
corporate assets.”7

Because of petitioners’ refusal to grant his request to inspect the

corporate books of VMC and Genato, Eduardo filed an Affidavit-
Complaint8  against petitioners Flordeliza and Jason, charging them with
violation (two counts) of Section 74, in relation to Section 144, of the
Corporation Code of the Philippines.9   Ma. Belinda G. Sandejas
(Belinda), Vincent, and Hanna were subsequently impleaded for likewise
denying respondent’s request to inspect the corporate books. Petitioners
filed a Joint Counter-Affidavit praying for the dismissal of the complaint
for lack of factual and legal basis, or for the suspension of the same
while Civil Case No. 4257-MC is still pending resolution.10 They denied
violating Section 74 of the Corporation Code and reiterated the
allegations contained in their complaint in Civil Case No. 4257-MC.
Petitioners blamed Eduardo’s lavish lifestyle, which is funded by
personal loans and cash advances from the family corporations. They
alleged that Eduardo consistently pressured petitioner Flordeliza, his
daughter, to improperly transfer ownership of the corporations’ V.A.G.
Building to him;11 to disregard the company policy prohibiting advances
by shareholders; to unduly increase his corporate monthly allowance;
and to sell her Wack-Wack Golf proprietary share and use the proceeds
thereof to pay his personal financial obligations. When the proposed
transfer of the V.A.G. Building did not materialize, petitioners claim that
Eduardo instituted an action to compel the donation of said property to
him.12  Furthermore, they claim that Eduardo attempted to forcibly evict
petitioner Jason from his office at VMC so he can occupy the same; that
Eduardo and his cohorts constantly created trouble by intervening in the
daily operations of the corporations without the knowledge or consent of
the board of directors.
 Meanwhile, in Civil Case No. 4257-MC, the trial court rendered a
Decision granting the permanent injunction applied for by the
corporations.13  However, the Court of Appeals subsequently rendered a
Decision14 declaring that Eduardo, his son Michael, and the other persons
impleaded in Civil Case No. 4257-MC, were imprudently declared in
default by the trial court. The appellate court thus annulled the
permanent injunction issued by the trial court and remanded the case for
further proceedings. VMC, Genato, and Oriana corporations filed a
Petition for Review on Certiorari before this Court, but the same was
denied for failure to sufficiently show any reversible error in the
Decision of the Court of Appeals.15 The three corporations filed a Motion
for Reconsideration, but the same was denied with finality on June 25,
2008.
Meanwhile, on February 3, 2005, the City Prosecutor’s Office of
Malabon City issued a Resolution16  recommending that petitioners be
charged with two counts of violation of Section 74 of the Corporation
Code, but dismissed the complaint against Belinda for lack of evidence.
17   Petitioners filed a Petition for Review18   before the Department of

Justice (DOJ), which reversed the recommendation of the City

Prosecutor of Malabon City.19   The dispositive portion of the DOJ
Resolution dated July 26, 2005, reads:
“Wherefore, premises considered, the assailed resolution is REVERSED
and SET ASIDE. The City Prosecutor of Malabon City is hereby
directed to cause the withdrawal of the corresponding information filed
against respondents [herein petitioners] for violation of Section 74 of the
Corporation Code of the Philippines and to report the action taken
thereon within ten (10) days from the receipt hereof.

SO ORDERED.” 20

The DOJ denied Eduardo’s Motion for Reconsideration21   in a

Resolution22   dated March 29, 2006. On appeal, the Court of Appeals
rendered the assailed Decision, the dispositive portion of which states:
“WHEREFORE, the instant petition is partially GRANTED. The
assailed Resolutions of public respondent dated July 26, 2005 and March
29, 2006 are hereby NULLIFIED and SET ASIDE. However, due to the
present existence of a prejudicial question, the criminal case docketed
I.S. No. MAL-2004-1167 is hereby SUSPENDED until Civil Case No.
4257-MC is decided on the merits with finality.”
23

The appellate court ruled that the Secretary of Justice committed

grave abuse of discretion amounting to lack or excess of jurisdiction in
reversing the Resolutions of the Malabon City Prosecutor and in finding
that Eduardo did not act in good faith when he demanded for the
examination of VMC and Genato’s corporate books. It further held that
Eduardo can demand said examination as a stockholder of both
corporations; that Eduardo raised legitimate questions that necessitated
inspection of the corporate books and records; and that petitioners’
refusal to allow inspection created probable cause to believe that they
have committed a violation of Section 74 of the Corporation Code.
On June 19, 2007, the Court of Appeals denied the Motions for
Reconsideration filed by petitioners and the Secretary of Justice.
24 Hence, this petition raising the following issues:

WHETHER OR NOT THE HONORABLE COURT OF APPEALS

WAS CORRECT IN ITS FINDING THAT THE HONORABLE
JUSTICE SECRETARY’S REVERSAL OF THE MALABON CITY
PROSECUTOR’S   RESOLUTION   FINDING PROBABLE CAUSE
AGAINST HEREIN PETITIONERS WAS DONE CONTRARY TO
THE APPLICABLE LAW AND JURISPRUDENCE TANTAMOUNT
TO GRAVE ABUSE OF DISCRETION.

WHETHER OR NOT THE HONORABLE JUSTICE SECRETARY

COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING TO
LACK OR EXCESS OF JURISDICTION IN REVERSING THE
RESOLUTION OF THE MALABON CITY PROSECUTOR FINDING
PROBABLE CAUSE AGAINST PETITIONERS AFTER
PRELIMINARY INVESTIGATION FOR VIOLATION OF SECTION
74 OF THE CORPORATION CODE OF THE PHILIPPINES.

WHETHER OR NOT THE HONORABLE JUSTICE SECRETARY

COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING TO
LACK OR EXCESS OF JURISDICTION IN FINDING THAT
PETITIONERS ACTED IN GOOD FAITH WHEN THEY DENIED
PRIVATE RESPONDENT’S DEMAND FOR INSPECTION OF
CORPORATE BOOKS. 25

We grant the petition.

Probable cause, for purposes of filing a criminal information, has
been defined as such facts as are sufficient to engender a well-founded
belief that a crime has been committed and that respondent is probably
guilty thereof. It is such a state of facts in the mind of the prosecutor as
would lead a person of ordinary caution and prudence to believe or
entertain an honest or strong suspicion that a thing is so. The term does
not mean “actual or positive cause”; nor does it import absolute
certainty. It is merely based on opinion and reasonable belief. Thus, a
finding of probable cause does not require an inquiry into whether there
is sufficient evidence to procure a conviction. It is enough that it is
believed that the act or omission complained of constitutes the offense
charged. Precisely, there is a trial for the reception of prosecution’s
evidence in support of the charge.”26
The determination of the existence of probable cause lies within the
discretion of the prosecuting officers after conducting a preliminary
investigation upon complaint of an offended party. Their decisions are
reviewable by the Secretary of Justice who may direct the filing of the
corresponding information or to move for the dismissal of the case.27
In reversing the Resolutions of the Secretary of Justice directing the
withdrawal of the information filed against petitioners for lack of
probable cause, the Court of Appeals held that it was beyond the
Secretary of Justice’s authority to determine the motives of Eduardo in
seeking an inspection of the corporations’ books and papers.
 In order that probable cause to file a criminal case may be arrived at,
or in order to engender the well-founded belief that a crime has been
committed, the elements of the crime charged should be present.28 This is
based on the principle that every crime is defined by its elements,
without which there should be—at the most—no criminal offense.

In   Gokongwei, Jr. v. Securities and Exchange Commission,29   this

Court explained the rationale behind a stockholder’s right to inspect
corporate books, to wit:
“The stockholder’s right of inspection of the corporation’s books and
records is based upon their ownership of the assets and property of the
corporation. It is, therefore, an incident of ownership of the corporate
property, whether this ownership or interest be termed an equitable
ownership, a beneficial ownership, or a quasi-ownership. This right is
predicated upon the necessity of self-protection. It is generally held by
majority of the courts that where the right is granted by statute to the
stockholder, it is given to him as such and must be exercised by him with
respect to his interest as a stockholder and for some purpose germane
thereto or in the interest of the corporation.   In other words, the
inspection has to be germane to the petitioner’s interest as a
stockholder, and has to be proper and lawful in character and not
inimical to the interest of the corporation.”30 (Emphasis supplied)

In Republic v. Sandiganbayan,31  the Court declared that the right to

inspect and/or examine the records of a corporation under Section 74 of
the Corporation Code is circumscribed by the express limitation
contained in the succeeding proviso, which states that:
“[I]t shall be a defense to   any   action under this section that the person
demanding to examine and copy excerpts from the corporation’s records and
minutes has improperly used any information secured through any prior
examination of the records or minutes of such corporation or of any other
corporation, or was not acting in good faith or for a legitimate purpose in
making his demand.” (Emphasis supplied)
 Thus, contrary to Eduardo’s insistence, the stockholder’s right to
inspect corporate books is not without limitations. While the right of
inspection was enlarged under the Corporation Code as opposed to the
old Corporation Law (Act No. 1459, as amended), “It is now expressly
required as a condition for such examination that the one requesting it
must not have been guilty of using improperly any information secured
through a prior examination, or that the person asking for such
examination must be acting in good faith and for a legitimate purpose in
making his demand.”32(Emphasis supplied)

In order therefore for the penal provision under Section 144 of the
Corporation Code to apply in a case of violation of a stockholder or
member’s right to inspect the corporate books/records as provided for
under Section 74 of the Corporation Code, the following elements must
be present:
First. A director, trustee, stockholder or member has made a prior demand
in writing for a copy of excerpts from the corporation’s records or minutes;
Second. Any officer or agent of the concerned corporation shall refuse to
allow the said director, trustee, stockholder or member of the corporation to
examine and copy said excerpts;
Third. If such refusal is made pursuant to a resolution or order of the board
of directors or trustees, the liability under this section for such action shall be
imposed upon the directors or trustees who voted for such refusal; and,
Fourth. Where the officer or agent of the corporation sets up the defense
that the person demanding to examine and copy excerpts from the
corporation’s records and minutes has improperly used any information
secured through any prior examination of the records or minutes of such
corporation or of any other corporation, or was not acting in good faith or for a
legitimate purpose in making his demand, the contrary must be shown or
proved.
Thus, in a criminal complaint for violation of Section 74 of the
Corporation Code, the defense of improper use or motive is in the nature
of a justifying circumstance that would exonerate those who raise and
are able to prove the same. Accordingly, where the corporation denies
inspection on the ground of improper motive or purpose, the burden of
proof is taken from the shareholder and placed on the corporation.33 This
being the case, it would be improper for the prosecutor, during
preliminary investigation, to refuse or fail to address the defense of
improper use or motive, given its express statutory recognition. In the
past we have declared that if justifying circumstances are claimed as a
defense, they should have at least been raised during preliminary
investigation;34   which settles the view that the consideration and
determination of justifying circumstances as a defense is a relevant
subject of preliminary investigation.
A preliminary investigation is in effect a realistic judicial appraisal of the
merits of the case; sufficient proof of the guilt of the criminal respondent
must be adduced so that when the case is tried, the trial court may not be
bound, as a matter of law, to order an acquittal.35 Although a preliminary
investigation is not a trial and is not intended to usurp the function of the
trial court, it is not a casual affair; the officer conducting the same
investigates or inquires into the facts concerning the commission of the
crime with the end in view of determining whether or not an information
may be prepared against the accused.36   After all, the purpose of
preliminary investigation is not only to determine whether there is
sufficient ground to engender a well-founded belief that a crime has been
committed and the respondent therein is probably guilty thereof and
should be held for trial; it is just as well for the purpose of securing the
innocent against hasty, malicious and oppressive prosecution, and to
protect him from an open and public accusation of a crime, from the
trouble, expense and anxiety of a public trial.37  More importantly, in the
appraisal of the case presented to him for resolution, the duty of a
prosecutor is more to do justice and less to prosecute.38

If the prosecutor is convinced during preliminary investigation of the

validity of the respondent’s claim of a justifying circumstance, then he
must dismiss the complaint; if not, then he must file the requisite
information. This is his discretion, the exercise of which we grant
sufficient latitude.39
In the instant case, the Court finds that the Court of Appeals erred in
declaring that the Secretary of Justice exceeded his authority when he
conducted an inquiry on the petitioners’ defense of improper use and
motive on Eduardo’s part. As a necessary element in the offense of
refusal to honor a stockholder/member’s right to inspect the corporate
books/records, it was incumbent upon the Secretary of Justice to
determine that all the elements which constitute said offense are present,
in line with our ruling in Duterte v. Sandiganbayan.
A preliminary investigation is the crucial sieve in the criminal justice
system which spells for an individual the difference between months if
not years of agonizing trial and possibly jail term, on the one hand, and
peace of mind and liberty, on the other. Thus, we have characterized the
right to a preliminary investigation as not a mere formal or technical
right but a substantive one, forming part of due process in criminal
justice.40 Due process, in the instant case, requires that an inquiry into the
motive behind Eduardo’s attempt at inspection should have been made
even during the preliminary investigation stage, just as soon as
petitioners set up the defense of improper use and motive.
Petitioners argue that Eduardo’s demand for an inspection of the
corporations’ books is based on the latter’s attempt in bad faith at having
his more than P165 million advances from the corporations written off;
that Eduardo is unjustly demanding that he be given the office of Jason,
or the Vice Presidency for Finance and Corporate Secretary; that
Eduardo is usurping rights belonging exclusively to the corporations;
and Eduardo’s attempts at coercing the corporations, their directors and
officers into giving in to his baseless demands involving specific
corporate assets. Specifically, petitioners accuse Eduardo of the
following:
“1. He is a spendthrift, using the family corporations’ resources to
sustain his extravagant lifestyle. During his incumbency as officer of
VMC and Genato (from 1984 to 2000), he was able to obtain massive
amounts by way of cash advances from these corporations, amounting to
more than P165 million;
 2. He is exercising undue pressure upon petitioners in order to
acquire ownership, through the forced execution of a deed of donation,
over the VAG Building in San Juan, which building belongs to Genato;
3. He is putting pressure on the corporations, through their directors
and officers, for the latter to disregard their respective policies which
prohibit the grant of cash advances to stockholders.
4. At one time, he coerced Flordeliza for the latter to sell her Wack-
Wack Golf Proprietary Share;
5. In May 2003, without the requisite authority, he called a
“stockholders’ meeting” to demand an increase in his P140,000.00
monthly allowance from the corporation to P250,000.00; demand a cash
advance of US$10,000; and to demand that the corporations shoulder the
medical and educational expenses of his family as well as those of the
other stockholders;
6. In November 2003, he demanded that he be given an office
within the corporations’ premises. In December 2003, he stormed the
corporations’ common office, ordered the employees to vacate the
premises, summoned the directors to a meeting, and there he berated
them for not acting on his requests. In January 2004, he returned to the
office, demanding the transfer of the Accounting Department and for
Jason to vacate his office by the end of the month. He likewise left a
letter which contained his demands. At the end of January 2004, he
returned, ordered the employees to leave the premises and demanded
that Jason surrender his office and vacate his desk. He did this no less
than four (4) times. As a result, the respective boards of directors of the
corporations resolved to ban him from the corporate premises;
7. He has been interfering in the everyday operations of VMC and
Genato, usurping the duties, rights and authority of the directors and
officers thereof. He attempted to lease out a warehouse within the VMC
premises without the knowledge and consent of its directors and officers;
during the wake of the former President of VMC and Genato, he issued
instructions for the employees to close down operations for the whole
duration of the wake, against the corporate officers’ instructions to attend
the wake by batch, so as not to hamper business operations; he has
caused chaos and confusion in VMC and Genato as a result; 41

8. He is out to sabotage the family corporations.” 42

These serious allegations are supported by official and other

documents, such as board resolutions, treasurer’s affidavits and written
communication from the respondent Eduardo himself, who appears to
have withheld his objections to these charges. His silence virtually
amounts to an acquiescence.43  Taken together, all these serve to justify
petitioners’ allegation that Eduardo was not acting in good faith and for
a legitimate purpose in making his demand for inspection of the
corporate books. Otherwise stated, there is lack of probable cause to
support the allegation that petitioners violated Section 74 of the
Corporation Code in refusing respondent’s request for examination of
the corporation books.
WHEREFORE, the Petition for Review on Certiorari is GRANTED.
The March 6, 2007 Decision and June 19, 2007 Resolution of the Court
of Appeals in CA-G.R. SP No. 94708 are REVERSED and SET ASIDE.
The July 26, 2005 and March 29, 2006 Resolutions of the Secretary of
Justice directing the withdrawal of the information filed against
petitioners for violation of Section 74 of the Corporation Code are
accordingly REINSTATED and AFFIRMED.
SO ORDERED.
 CLASSES OF CORPORATION

PHILIPPINE SOCIETY FOR THE PREVENTION OF CRUELTY

TO ANIMALS, petitioners,   vs.   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), respondents.

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 petitioner’s 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 petitioner’s 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 petitioner 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 latter’s initiative, and not
through the Government Service Insurance System which should be the
case if the employees are considered government employees is another
indication of petitioner’s nature as a private entity.—The employees of
the petitioner are registered and covered by the Social Security System
at the latter’s 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
petitioner’s 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 determinewhether 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 latter’s 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.

SPECIAL CIVIL ACTION in the Supreme Court. Certiorari and

Prohibition.
The facts are stated in the opinion of the Court.
     Gerardo M. Lobo II for petitioner.
     Elizabeth S. Zosa, Janet D. Nacion and Alexander B. Juliano for
Commission on Audit, et al.
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   dated 1

September 14, 2005 issued by the respondents which constituted the

audit team, as well as its September 23, 2005 Letter   informing the
2

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

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 anonimas under 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.
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.

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,  which reads, in its entirety, thus:
4
Be it enacted by the National Assembly of the Philippines:
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:
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.
Approved, November 8, 1936.” (Emphasis supplied)

Immediately thereafter, then President Manuel L. Quezon issued

Executive Order (E.O.) No. 63 dated November 12, 1936, portions of
which provide:

“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.
xxxx
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)”
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  addressed to the petitioner. The petitioner demurred on the ground
5

that it was a private entity not under 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 nongovernmental 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)”

Petitioner explained thus:

 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 law under which it
may be organized and incorporated, nor a Securities and Exchange
Commission which would have passed upon its organization and
incorporation.
b.That Executive Order No. 63, issued during the Commonwealth
period, effectively deprived the petitioner of its power to make
arrests, and that the petitioner lost its operational funding,
underscore the fact that it exercises no governmental function. In
fine, the government itself, by its overt acts, confirmed petitioner’s
status as a private juridical entity.

The COA General Counsel issued a Memorandum  dated May 6, 2004,

6

asserting that the petitioner was subject to its audit authority. In a letter
dated May 17, 2004,  respondent COA informed the petitioner of the
7

result of the evaluation, furnishing it with a copy of said Memorandum

dated May 6, 2004 of the General Counsel.
Petitioner thereafter filed with the respondent COA a Request for Re-
evaluation dated May 19, 2004,  insisting that it was a private domestic
8

corporation.
Acting on the said request, the General Counsel of respondent COA,
in a Memorandum dated July 13, 2004,  affirmed her earlier opinion that
9

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.
 Petitioner received on September 27, 2005 the subject COA Office
Order 2005-021 dated September 14, 2005 and the COA Letter dated
September 23, 2005.
Hence, herein Petition on the following grounds:
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.
B.
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

The essential question before this Court is whether the petitioner

qualifies as a government agency that may be subject to audit by
respondent COA.
Petitioner argues:   first, even though it was created by special
legislation in 1905 as there was no general law then existing under
which it may be organized or incorporated, it exercises no governmental
functions because these have been revoked by C.A. No. 148 and E.O.
No. 63; second, nowhere in its charter is it indicated that it is a public
corporation, unlike, for instance, C.A. No. 111 which created the Boy
Scouts of the Philippines, defined its powers and purposes, and
specifically stated that it was “An Act to Create a Public Corporation” in
which, even as amended by Presidential Decree No. 460, the law still
adverted to the Boy Scouts of the Philippines as a “public corporation,”
all of which are not obtaining in the charter of the petitioner; third, if it
were a government body, there would have been no need for the State to
grant it tax exemptions under Republic Act No. 1178, and the fact that it
was so exempted strengthens its position that it is a private
institution;   fourth, the employees of the petitioner are registered and
covered by the Social Security System at the latter’s 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 receive any form of financial
assistance from the government, since C.A. No. 148, amending Section
5 of Act No. 1285, states that 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”; sixth, C.A. No. 148 effectively deprived the
petitioner of its powers to make arrests and serve processes as these
functions were placed in the hands of the police force;   seventh, no
government appointee or representative sits on the board of trustees of
the petitioner; eighth, a reading of the provisions of its charter (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 from both the private and the
public sectors.
The respondents contend that since the petitioner is a “body politic”
created by virtue of a special legislation and endowed with a
governmental purpose, then, indubitably, the COA may audit the
financial activities of the latter. Respondents in effect divide their
contentions into six strains: first, the test to determine whether an entity
is a government corporation lies in the manner of its creation, and, since
the petitioner was created by virtue of a special charter, it is thus a
government corporation subject to respondents’ auditing power; second,
the petitioner exercises “sovereign powers,” that is, it is tasked to
enforce the laws for the protection and welfare of animals which
“ultimately redound to the public good and welfare,” and, therefore, it is
deemed to be a government “instrumentality” as defined under the
Administrative Code of 1987, the purpose of which is connected with
the administration of government, as purportedly affirmed by American
jurisprudence; third, by virtue of Section 23,11
Title II, Book III of the same Code, the Office of the President exercises
supervision or control over the petitioner; fourth, under the same Code,
the requirement under its special charter for the petitioner to render a
report to the Civil Governor, whose functions have been inherited by the
Office of the President, clearly reflects the nature of the petitioner as a
government instrumentality; fifth, despite the passage of the Corporation
Code, the law creating the petitioner had not been abolished, nor had it
been re-incorporated under any general corporation law; and
finally, sixth, Republic Act No. 8485, otherwise known as the “Animal
Welfare Act of 1998,” designates the petitioner as a member of its
Committee on Animal Welfare which is attached to the Department of
Agriculture.
In view of the phrase “One-half of all the fines imposed and collected
through the efforts of said society,” the Court, in a Resolution dated
January 30, 2007, required the Office of the Solicitor General (OSG) and
the parties to comment on: a) petitioner’s authority to impose fines and
the validity of the provisions of Act No. 1285 and Commonwealth Act
No. 148 considering that there are no standard measures provided for in
the aforecited laws as to the manner of implementation, the specific
violations of the law, the person/s 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 separate one and adopt for the purpose that of the OSG.

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 animal welfare laws; such privilege, however, was
subsequently abolished by C.A. No. 148; that it continues to exist as a
private corporation since it was created by the Philippine Commission
before the effectivity of the 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  relating to the prevention of cruelty to animals and the protection
12

of animals; that even prior to the amendment of Act No. 1285, petitioner
was only entitled to share in the fines imposed; C.A. 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.
The petition is impressed with merit.
The arguments of the parties, interlaced as they are, can be disposed
of in five points.
First, the Court agrees with the petitioner that the “charter test”
cannot be applied.
Essentially, the “charter test” as it stands today provides:

“[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. x x
x” (Emphasis supplied) 13

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:

“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 foregoing proscription has been carried over to the 1973 and the
1987 Constitutions. Section 16 of Article XII of the present 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.”

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

And since the underpinnings of the charter test had been introduced
by the 1935 Constitution and not earlier, it 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 provided.  All
16

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 from
the language used. In case of doubt, the doubt must be resolved against
the retrospective effect.
17
 There are a few exceptions. Statutes can be given retroactive effect in
the following cases: (1) when the law itself so expressly provides; (2) in
case of remedial statutes; (3) in case of curative statutes; (4) in case of
laws interpreting others; and (5) in case of laws creating new rights.
 None of the exceptions is present in the instant case.
18

The general principle of prospectivity of the law likewise applies to

Act No. 1459, otherwise known as the 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 entity. Even the Corporation Law
respects the rights and powers of juridical entities organized
beforehand, viz.:

“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).
As pointed out by the OSG, both the 1935 and 1987 Constitutions
contain transitory provisions maintaining all 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 created by virtue of a special
law does not necessarily qualify it as a public corporation.
What then is the nature of the petitioner as a corporate entity? What
legal regime governs its rights, powers, and duties?
 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.
The textual foundation of the charter test, which placed a limitation
on the power of the legislature, first appeared in the 1935 Constitution.
However, the petitioner was incorporated in 1905 by virtue of Act No.
1258, a law antedating the Corporation Law (Act No. 1459) by a year,
and the 1935 Constitution, by thirty years. There being neither a general
law on the formation and organization of private corporations nor a
restriction on the legislature to create private corporations by direct
legislation, the Philippine Commission at that moment in history was
well within its powers in 1905 to constitute the petitioner as a private
juridical entity.

Time and again the Court must caution even the most brilliant
scholars of the law and all constitutional historians on the danger of
imposing legal concepts of a later date on facts of an earlier date.20

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.
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
quasi-public corporation, a kind of private domestic corporation, which
the Court will further elaborate on under the fourth point.
Second, a reading of petitioner’s 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 petitioner shall be
managed or 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 its members 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.”

Third. The employees of the petitioner are registered and covered by the
Social Security System at the latter’s 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 petitioner’s nature as a private entity. Section 1 of Republic
Act No. 1161, as amended by Republic Act No. 8282, other wise known
as the 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)

Fourth. 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
21

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
22
corporations and transportation companies.  It must be stressed that a
23

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.
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 latter’s 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. 25

It is clear that the amendments introduced by C.A. No. 148 revoked

the powers of the petitioner to arrest offenders of animal welfare laws
and the power to serve processes in connection therewith.
Fifth. The respondents argue that since the charter of the petitioner
requires the latter to render periodic reports to the Civil Governor, whose
functions have been inherited by the President, the petitioner is,
therefore, a government instrumentality.
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, quasipublic, or private corporations—as
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.  Here, the
26

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
investigating, examining and auditing the petitioner’s fiscal and financial
affairs.
SO ORDERED.
          Puno   (C.J.),   Quisumbing,   Ynares-Santiago,   Sandoval-
Gutierrez,   Carpio,   Corona,   Carpio-Morales,   Azcuna,   Tinga,   Chico-
Nazario, Garcia, Velasco, Jr., Nachura and Reyes, JJ., concur.
Petition granted.
Note.—Congress cannot enact a law creating a private corporation
with a special charter. Since private corporation can not have special
charter, it follows that Congress can create corporations with special
charters only if such corporations are government-owned or controlled.
(Feliciano vs. Commission on Audit, 419 SCRA 363 [2004])
ATRIUM MANAGEMENT CORPORATION, petitioner,   vs.   COURT
OF APPEALS, E.T. HENRY AND CO., LOURDES VICTORIA M. DE
LEON, RAFAEL DE LEON, JR., AND HI-CEMENT CORPORATION,
respondents.

Corporation Law; Ultra Vires Acts; Checks; The act of issuing checks for the

purpose of securing a loan to finance the activities of the corporation is well
within the ambit of a valid corporate act, hence, not an ultra vires act.—Hi-
Cement, however, maintains that the checks were not issued for consideration
and that Lourdes and E.T. Henry engaged in a “kiting operation” to raise funds
for E.T. Henry, who admittedly was in need of financial assistance. The Court
finds that there was no sufficient evidence to show that such is the case. Lourdes
M. de Leon is the treasurer of the corporation and is authorized to sign checks
for the corporation. At the time of the issuance of the checks, there were
sufficient funds in the bank to cover payment of the amount of P2 million pesos.
It is, however, our view that there is basis to rule that the act of issuing the
checks was well within the ambit of a valid corporate act, for it was for securing
a loan to finance the activities of the corporation, hence, not an ultra vires act.

Same;   Same;   Words and Phrases;   “Ultra Vires Acts,” Explained.

—“An   ultra vires   act is one committed outside the object for which a
corporation is created as defined by the law of its organization and therefore
beyond the power conferred upon it by law.” The term   “ultra vires”   is
“distinguished from an illegal act for the former is merely voidable which may
be enforced by performance, ratification, or estoppel, while the latter is void and
cannot be validated.”
Same;   Same;   Instances when personal liability of corporate directors,
trustees or officers may validly attach.—The next question to determine is
whether Lourdes M. de Leon and Antonio de las Alas were personally liable for
the checks issued as corporate officers and authorized signatories of the check.
“Personal liability of a corporate director, trustee or officer along (although not
necessarily) with the corporation may so validly attach, as a rule, only when: “1.
He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or
gross negligence in directing its affairs, or (c) for conflict of interest, resulting in
damages to the corporation, its stockholders or other persons; “2. He consents to
the issuance of watered down stocks or who, having knowledge thereof, does not
forthwith file with the corporate secretary his written objection thereto; “3. He
agrees to hold himself personally and solidarily liable with the corporation; or
“4. He is made, by a specific provision of law, to personally answer for his
corporate action.”
Same; Same; Checks; A treasurer of a corporation whose negligence in
signing a confirmation letter for rediscounting of crossed checks, knowing fully
well that the checks were strictly endorsed for deposit only to the payee’s
account and not to be further negotiated, resulting in damage to the corporation
may be personally liable therefor.—In the case at bar, Lourdes M. de Leon and
Antonio de las Alas as treasurer and Chairman of HiCement were authorized to
issue the checks. However, Ms. de Leon was negligent when she signed the
confirmation letter requested by Mr. Yap of Atrium and Mr. Henry of E.T. Henry
for the rediscounting of the crossed checks issued in favor of E.T. Henry. She
was aware that the checks were strictly endorsed for deposit only to the payee’s
account and not to be further negotiated. What is more, the confirmation letter
contained a clause that was not true, that is, “that the checks issued to E.T. Henry
were in payment of Hydro oil bought by Hi-Cement from E.T. Henry.” Her
negligence resulted in damage to the corporation. Hence, Ms. de Leon may be
held personally liable therefor.

What is before the Court are separate appeals from the decision of the
Court of Appeals,  ruling that Hi-Cement Corporation is not liable for
1

four checks amounting to P2 million issued to E.T. Henry and Co. and
discounted to Atrium Management Corporation.
On January 3, 1983, Atrium Management Corporation filed with the
Regional Trial Court, Manila an action for collection of the proceeds of
four postdated checks in the total amount of P2 million. Hi-Cement
Corporation through its corporate signatories, petitioner Lourdes M. de
Leon,   treasurer, and the late Antonio de las Alas, Chairman, issued
2

checks in favor of E.T. Henry and Co. Inc., as payee. E.T. Henry and
Co., Inc., in turn, endorsed the four checks to petitioner Atrium
Management Corporation for valuable consideration. Upon presentment
for payment, the drawee bank dishonored all four checks for the
common reason “payment stopped.” Atrium, thus, instituted this action
after its demand for payment of the value of the checks was denied. 3
 After due proceedings, on July 20, 1989, the trial court rendered a
decision ordering Lourdes M. de Leon, her husband Rafael de Leon,
E.T. Henry and Co., Inc. and Hi-Cement Corporation to pay petitioner
Atrium, jointly and severally, the amount of P2 million corresponding to
the value of the four checks, plus interest and attorney’s fees.
4

On appeal to the Court of Appeals, on March 17, 1993, the Court of

Appeals promulgated its decision modifying the decision of the trial
court, absolving Hi-Cement Corporation from liability and dismissing
the complaint as against it. The appellate court ruled that: (1) Lourdes
M. de Leon was not authorized to issue the subject checks in favor of
E.T. Henry, Inc.; (2) The issuance of the subject checks by Lourdes M.
de Leon and the late Antonio de las Alas constituted ultra vires acts; and
(3) The subject checks were not issued for valuable consideration.5

At the trial, Atrium presented as its witness Carlos C. Syquia who

testified that in February 1981, Enrique Tan of E.T. Henry approached
Atrium for financial assistance, offering to discount four RCBC checks
in the total amount of P2 million, issued by Hi-Cement in favor of E.T.
Henry. Atrium agreed to discount the checks, provided it be allowed to
confirm with Hi-Cement the fact that the checks represented payment for
petroleum products which E.T. Henry delivered to Hi-Cement. Carlos C.
Syquia identified two letters, dated February 6, 1981 and February 9,
1981 issued by Hi-Cement through Lourdes M. de Leon, as treasurer,
confirming the issuance of the four checks in favor of E.T. Henry in
payment for petroleum products. 6

Respondent Hi-Clement presented as witness Ms. Erlinda Yap who

testified that she was once a secretary to the treasurer of Hi-Cement,
Lourdes M. de Leon, and as such she was familiar with the four RCBC
checks as the postdated checks issued by Hi-Cement to E.T. Henry upon
instructions of Ms. de Leon. She testified that E.T. Henry offered to give
Hi-Cement a loan which the subject checks would secure as collateral. 7

On July 20, 1989, the Regional Trial Court, Manila, Branch 09

rendered a decision, the dispositive portion of which reads:
 “WHEREFORE, in view of the foregoing considerations, and
plaintiff having proved its cause of action by preponderance of evidence,
judgment is hereby rendered ordering all the defendants except
defendant Antonio de las Alas to pay plaintiff jointly and severally the
amount of TWO MILLION (P2,000,000.00) PESOS with the legal rate
of interest from the filling of the complaint until fully paid, plus the sum
of TWENTY THOUSAND (P20,000.00) PESOS as and for attorney’s
fees and the cost of suit.”
All other claims are, for lack of merit dismissed.
SO ORDERED.” 8

In due time, both Lourdes M. de Leon and Hi-Cement appealed to the

Court of Appeals. 9

Lourdes M. de Leon submitted that the trial court erred in ruling that
she was solidarity liable with Hi-Cement for the amount of the check.
Also, that the trial court erred in ruling that Atrium was an ordinary
holder, not a holder in due course of the rediscounted checks. 10

Hi-Cement on its part submitted that the trial court erred in ruling
that even if Hi-Cement did not authorize the issuance of the checks, it
could still be held liable for the checks. And assuming that the checks
were issued with its authorization, the same was without any
consideration, which is a defense against a holder in due course and that
the liability shall be borne alone by E.T Henry.11

On March 17, 1993, the Court of Appeals promulgated its decision

modifying the ruling of the trial court, the dispositive portion of which
reads:

“Judgement is hereby rendered:

(1)dismissing the plaintiffs complaint as against defendants Hi-

Cement Corporation and Antonio De las Alas;
(2) ordering the defendants E.T. Henry and Co., Inc. and Lourdes M.
de Leon, jointly and severally to pay the plaintiff the sum of TWO
MILLION PESOS (P2,000,000.00) with interest at the legal rate from
the filling of the complaint until fully paid, plus P20,000.00 for
attorney’s fees.
(3) ordering the plaintiff and defendants E.T. Henry and Co., Inc. and
Lourdes M. de Leon, jointly and severally to pay defendant Hi-Cement
Corporation, the sum of P20,000.00 as and for attorney’s fees.

With cost in this instance against the appellee Atrium Management

Corporation and appellant Lourdes Victoria M. de Leon.
So ordered.”12
Hence, the recourse to this Court. 13

The issues raised are the following:

In G.R. No. 109491 (Atrium, petitioner):
1.Whether the issuance of the questioned checks was an ultra vires act;
2.Whether Atrium was not a holder in due course and for value; and
3.Whether the Court of Appeals erred in dismissing the case against
Hi-Cement and ordering it to pay P20,000.00 as attorney’s fees. 14

In G.R. No. 121794 (de Leon, petitioner):

1.Whether the Court of Appeals erred in holding petitioner personally

liable for the Hi-Cement checks issued to E.T. Henry;
2. Whether the Court of Appeals erred in ruling that Atrium is a holder in
due course;
3. Whether the Court of Appeals erred in ruling that petitioner Lourdes
M. de Leon as signatory of the checks was personally liable for the
value of the checks, which were declared to be issued without
consideration;
4. Whether the Court of Appeals erred in ordering petitioner to pay Hi-
Cement attorney’s fees and costs. 15

We affirm the decision of the Court of Appeals.

We first resolve the issue of whether the issuance of the checks was
an ultra vires act. The record reveals that Hi-Cement Corporation issued
the four (4) checks to extend financial assistance to E.T. Henry, not as
payment of the balance of the P30 million pesos cost of hydro oil
delivered by E.T. Henry to Hi-Cement. Why else would petitioner de
Leon ask for counterpart checks from E.T. Henry if the checks were in
payment for hydro oil delivered by E.T. Henry to Hi-Cement?
Hi-Cement, however, maintains that the checks were not issued for
consideration and that Lourdes and E.T. Henry engaged in a “kiting
operation” to raise funds for E.T. Henry, who admittedly was in need of
financial assistance. The Court finds that there was no sufficient
evidence to show that such is the case. Lourdes M. de Leon is the
treasurer of the corporation and is authorized to sign checks for the
corporation. At the time of the issuance of the checks, there were
sufficient funds in the bank to cover payment of the amount of P2
million pesos.
It is, however, our view that there is basis to rule that the act of
issuing the checks was well within the ambit of a valid corporate act, for
it was for securing a loan to finance the activities of the corporation,
hence, not an ultra vires act.
“An ultra vires act is one committed outside the object for which a
corporation is created as defined by the law of its organization and
therefore beyond the power conferred upon it by law.”  The term “ultra
16

vires”   is “distinguished from an illegal act for the former is merely

voidable which may be enforced by performance, ratification, or
estoppel, while the latter is void and cannot be validated.” 17

The next question to determine is whether Lourdes M. de Leon and

Antonio de las Alas were personally liable for the checks issued as
corporate officers and authorized signatories of the check.
“Personal liability of a corporate director, trustee or officer along
(although not necessarily) with the corporation may so validly attach, as
a rule, only when:
“1. He assents (a) to a patently unlawful act of the corporation, or (b)
for bad faith or gross negligence in directing its affairs, or (c) for
 conflict of interest, resulting in damages to the corporation, its
stockholders or other persons;
“2.He consents to the issuance of watered down stocks or who, having
knowledge thereof, does not forthwith file with the corporate
secretary his written objection thereto;
“3.He agrees to hold himself personally and solidarity liable with the
corporation; or
“4.He is made, by a specific provision of law, to personally answer for
his corporate action.” 18

In the case at bar, Lourdes M. de Leon and Antonio de las Alas as

treasurer and Chairman of Hi-Cement were authorized to issue the
checks. However, Ms. de Leon was negligent when she signed the
confirmation letter requested by Mr. Yap of Atrium and Mr. Henry of
E.T. Henry for the rediscounting of the crossed checks issued in favor of
E.T. Henry. She was aware that the checks were strictly endorsed for
deposit only to the payee’s account and not to be further negotiated.
What is more, the confirmation letter contained a clause that was not
true, that is, “that the checks issued to E.T. Henry were in payment of
Hydro oil bought by Hi-Cement from E.T. Henry.” Her negligence
resulted in damage to the corporation. Hence, Ms. de Leon may be held
personally liable therefor.

The next issue is whether or not petitioner Atrium was a holder of the
checks in due course. The Negotiable Instruments Law, Section 52
defines a holder in due course, thus:
“A holder in due course is a holder who has taken the instrument under the
following conditions:
(a)That it is complete and regular upon its face;
(b)That he became the holder of it before it was overdue, and without notice
that it had been previously dishonored, if such was the fact;
(c)That he took it in good faith and for value;
(d)That at the time it was negotiated to him he had no notice of any infirmity
in the instrument or defect in the title of the person negotiating it.”
In the instant case, the checks were crossed checks and specifically
indorsed for deposit to payee’s account only. From the beginning,
Atrium was aware of the fact that the checks were all for deposit only to
payee’s account, meaning E.T. Henry. Clearly, then, Atrium could not be
considered a holder in due course.
However, it does not follow as a legal proposition that simply
because petitioner Atrium was not a holder in due course for having
taken the instruments in question with notice that the same was for
deposit only to the account of payee E.T. Henry that it was altogether
precluded from recovering on the instrument. The Negotiable
Instruments Law does not provide that a holder not in due course can not
recover on the instrument. 19

The disadvantage of Atrium in not being a holder in due course is

that the negotiable instrument is subject to defenses as if it were non-
negotiable.  One such defense is absence or failure of consideration.
20 21

We need not rule on the other issues raised, as they merely follow as
a consequence of the foregoing resolutions.

WHEREFORE, the petitions are hereby DENIED. The decision and

resolution of the Court of Appeals in CA-G.R. CV No. 26686, are
hereby AFFIRMED in toto.
No costs.
SO ORDERED.
          Davide, Jr.   (C.J., Chairman),   Puno,   Kapunan   and   Ynares-
Santiago, JJ., concur.
Petition denied, judgment and resolution affirmed in toto.
Note.—Issuing a crossed check imposes no legal obligation on the
drawee not to honor such a check. (Gempesaw vs. Court of Appeals, 218
SCRA 682 [1993])
In legal parlance, “ultra vires” act refers to one which is not within
the corporate powers conferred by the Corporation Code or articles of
incorporation or not necessary or incidental in the exercise of the powers
so conferred. (Lopez Realty, Inc. vs. Fontecha, 247 SCRA 183 [1995])
 The crossing of a check with the phrase “Payee’s Account Only,” is a
warning that the check should be deposited only in the account of the
payee. (Philippine Commercial International Bank vs. Court of
Appeals, 350 SCRA 446 [2001])