CORPO Case Digests for by-laws

BY-LAWS 1. Gokongwei Commission

vs.

Securities

and

Exchange

[GR L-45911, 11 April 1979] Facts: [SEC Case 1375] On 22 October 1976, John Gokongwei Jr., as stockholder of San Miguel Corporation, filed with the Securities and Exchange Commission (SEC) a petition for "declaration of nullity of amended by-laws, cancellation of certificate of filing of amended by-laws, injunction and damages with prayer for a preliminary injunction" against the majority of the members of the Board of Directors and San Miguel Corporation as an unwilling petitioner. As a first cause of action, Gokongwei alleged that on 18 September 1976, Andres Soriano, Jr., Jose M. Soriano, Enrique Zobel, Antonio Roxas, Emeterio Buñao, Walthrode B. Conde, Miguel Ortigas, and Antonio Prieto amended by bylaws of the corporation, basing their authority to do so on a resolution of the stockholders adopted on 13 March 1961, when the outstanding capital stock of the corporation was only P70,139.740.00, divided into 5,513,974 common shares at P10.00 per share and 150,000 preferred shares at P100.00 per share. At the time of the amendment, the outstanding and paid up shares totalled 30,127,043, with a total par value of P301,270,430.00. It was contended that according to section 22 of the Corporation Law and Article VIII of the by-laws of the corporation, the power to amend, modify, repeal or adopt new by-laws may be delegated to the Board of Directors only by the affirmative vote of stockholders representing not less than 2/3 of the subscribed and paid up capital stock of the corporation, which 2/3 should have been computed on the basis of the capitalization at the time of the amendment. Since the amendment was based on the 1961 authorization, Gokongwei contended that the Board acted without authority and in usurpation of the power of the stockholders. As a second cause of action, it was alleged that the authority granted in 1961 had already been exercised in 1962 and 1963, after which the authority of the Board ceased to exist. As a third cause of action, Gokongwei averred that the membership of the Board of Directors had changed since the authority was given in 1961, there being 6 new directors. As a fourth cause of action, it was claimed that prior to the questioned amendment, Gokogwei had all the qualifications to be a director of the corporation, being a substantial stockholder thereof; that as a stockholder, Gokongwei had acquired rights inherent in stock ownership, such as the rights to vote and to be voted upon in the election of directors; and that in amending the by-laws, Soriano, et. al. purposely provided for Gokongwei's disqualification and deprived him of his vested right as afore-mentioned, hence the

amended by-laws are null and void. As additional causes of action, it was alleged that corporations have no inherent power to disqualify a stockholder from being elected as a director and, therefore, the questioned act is ultra vires and void; that Andres M. Soriano, Jr. and/or Jose M. Soriano, while representing other corporations, entered into contracts (specifically a management contract) with the corporation, which was avowed because the questioned amendment gave the Board itself the prerogative of determining whether they or other persons are engaged in competitive or antagonistic business; that the portion of the amended by-laws which states that in determining whether or not a person is engaged in competitive business, the Board may consider such factors as business and family relationship, is unreasonable and oppressive and, therefore, void; and that the portion of the amended by-laws which requires that "all nominations for election of directors shall be submitted in writing to the Board of Directors at least five (5) working days before the date of the Annual Meeting" is likewise unreasonable and oppressive. It was, therefore, prayed that the amended by-laws be declared null and void and the certificate of filing thereof be cancelled, and that Soriano, et. al. be made to pay damages, in specified amounts, to Gokongwei. On 28 October 1976, in connection with the same case, Gokongwei filed with the Securities and Exchange Commission an "Urgent Motion for Production and Inspection of Documents", alleging that the Secretary of the corporation refused to allow him to inspect its records despite request made by Gokongwei for production of certain documents enumerated in the request, and that the corporation had been attempting to suppress information from its stockholders despite a negative reply by the SEC to its query regarding their authority to do so. The motion was opposed by Soriano, et. al. The Corporation, Soriano, et. al. filed their answer, and their opposition to the petition, respectively. Meanwhile, on 10 December 1976, while the petition was yet to be heard, the corporation issued a notice of special stockholders' meeting for the purpose of "ratification and confirmation of the amendment to the By-laws", setting such meeting for 10 February 1977. This prompted Gokongwei to ask the SEC for a summary judgment insofar as the first cause of action is concerned, for the alleged reason that by calling a special stockholders' meeting for the aforesaid purpose, Soriano, et. al. admitted the invalidity of the amendments of 18 September 1976. The motion for summary judgment was opposed by Soriano, et. al. Pending action on the motion, Gokongwei filed an "Urgent Motion for the Issuance of a Temporary Restraining Order", praying that pending the determination of Gokongwei's application for the issuance of a preliminary injunction and or Gokongwei's motion for summary judgment, a temporary

restraining order be issued, restraining Soriano, et. al. from holding the special stockholders' meeting as scheduled. This motion was duly opposed by Soriano, et. al. On 10 February 1977, Cremation issued an order denying the motion for issuance of temporary restraining order. After receipt of the order of denial, Soriano, et. al. conducted the special stockholders' meeting wherein the amendments to the by-laws were ratified. On 14 February 1977, Gokongwei filed a consolidated motion for contempt and for nullification of the special stockholders' meeting. A motion for reconsideration of the order denying Gokongwei's motion for summary judgment was filed by Gokongwei before the SEC on 10 March 1977. [SEC Case 1423] Gokongwei alleged that, having discovered that the corporation has been investing corporate funds in other corporations and businesses outside of the primary purpose clause of the corporation, in violation of section 17-1/2 of the Corporation Law, he filed with SEC, on 20 January 1977, a petition seeking to have Andres M. Soriano, Jr. and Jose M. Soriano, as well as the corporation declared guilty of such violation, and ordered to account for such investments and to answer for damages. On 4 February 1977, motions to dismiss were filed by Soriano, et. al., to which a consolidated motion to strike and to declare Soriano, et. al. in default and an opposition ad abundantiorem cautelam were filed by Gokongwei. Despite the fact that said motions were filed as early as 4 February 1977, the Commission acted thereon only on 25 April 1977, when it denied Soriano, et. al.'s motions to dismiss and gave them two (2) days within which to file their answer, and set the case for hearing on April 29 and May 3, 1977. Soriano, et. al. issued notices of the annual stockholders' meeting, including in the Agenda thereof, the "reaffirmation of the authorization to the Board of Directors by the stockholders at the meeting on 20 March 1972 to invest corporate funds in other companies or businesses or for purposes other than the main purpose for which the Corporation has been organized, and ratification of the investments thereafter made pursuant thereto." By reason of the foregoing, on 28 April 1977, Gokongwei filed with the SEC an urgent motion for the issuance of a writ of preliminary injunction to restrain Soriano, et. al. from taking up Item 6 of the Agenda at the annual stockholders' meeting, requesting that the same be set for hearing on 3 May 1977, the date set for the second hearing of the case on the merits. The SEC, however, cancelled the dates of hearing originally scheduled and reset the same to May 16 and 17, 1977, or after the scheduled annual stockholders' meeting. For the purpose of urging the Commission to act, Gokongwei filed an urgent manifestation on 3 May 1977, but this notwithstanding, no action has been taken up to the date of the filing of the instant petition.

Gokongwei filed a petition for petition for certiorari, mandamus and injunction, with prayer for issuance of writ of preliminary injunction, with the Supreme Court, alleging that there appears a deliberate and concerted inability on the part of the SEC to act. Issue: 1. Whether the corporation has the power to provide for the (additional) qualifications of its directors. 2. Whether the disqualification of a competitor from being elected to the Board of Directors is a reasonable exercise of corporate authority. 3. Whether the SEC gravely abused its discretion in denying Gokongwei's request for an examination of the records of San Miguel International, Inc., a fully owned subsidiary of San Miguel Corporation. 4. Whether the SEC gravely abused its discretion in allowing the stockholders of San Miguel Corporation to ratify the investment of corporate funds in a foreign corporation. Held: 1. It is recognized by all authorities that "every corporation has the inherent power to adopt by-laws 'for its internal government, and to regulate the conduct and prescribe the rights and duties of its members towards itself and among themselves in reference to the management of its affairs.'" In this jurisdiction under section 21 of the Corporation Law, a corporation may prescribe in its bylaws "the qualifications, duties and compensation of directors, officers and employees." This must necessarily refer to a qualification in addition to that specified by section 30 of the Corporation Law, which provides that "every director must own in his right at least one share of the capital stock of the stock corporation of which he is a director." Any person "who buys stock in a corporation does so with the knowledge that its affairs are dominated by a majority of the stockholders and that he impliedly contracts that the will of the majority shall govern in all matters within the limits of the act of incorporation and lawfully enacted by-laws and not forbidden by law." To this extent, therefore, the stockholder may be considered to have "parted with his personal right or privilege to regulate the disposition of his property which he has invested in the capital stock of the corporation, and surrendered it to the will of the majority of his fellow incorporators. It can not therefore be justly said that the contract, express or implied, between the corporation and the stockholders is infringed by any act of the former which is authorized by a majority." Pursuant to section 18 of the Corporation Law, any corporation may amend its articles of incorporation by a vote or written assent of the stockholders representing at least two-thirds of the subscribed capital stock of the

corporation. If the amendment changes, diminishes or restricts the rights of the existing shareholders, then the dissenting minority has only one right, viz.: "to object thereto in writing and demand payment for his share." Under section 22 of the same law, the owners of the majority of the subscribed capital stock may amend or repeal any by-law or adopt new by-laws. It cannot be said, therefore, that Gokongwei has a vested right to be elected director, in the face of the fact that the law at the time such right as stockholder was acquired contained the prescription that the corporate charter and the by-law shall be subject to amendment, alteration and modification. 2. Although in the strict and technical sense, directors of a private corporation are not regarded as trustees, there cannot be any doubt that their character is that of a fiduciary insofar as the corporation and the stockholders as a body are concerned. As agents entrusted with the management of the corporation for the collective benefit of the stockholders, "they occupy a fiduciary relation, and in this sense the relation is one of trust." "The ordinary trust relationship of directors of a corporation and stockholders is not a matter of statutory or technical law. It springs from the fact that directors have the control and guidance of corporate affairs and property and hence of the property interests of the stockholders. Equity recognizes that stockholders are the proprietors of the corporate interests and are ultimately the only beneficiaries thereof." A director is a fiduciary. Their powers are powers in trust. He who is in such fiduciary position cannot serve himself first and his cestuis second. He cannot manipulate the affairs of his corporation to their detriment and in disregard of the standards of common decency. He cannot by the intervention of a corporate entity violate the ancient precept against serving two masters. He cannot utilize his inside information and strategic position for his own preferment. He cannot violate rules of fair play by doing indirectly through the corporation what he could not do so directly. He cannot violate rules of fair play by doing indirectly through the corporation what he could not do so directly. He cannot use his power for his personal advantage and to the detriment of the stockholders and creditors no matter how absolute in terms that power may be and no matter how meticulous he is to satisfy technical requirements. For that power is at all times subject to the equitable limitation that it may not be exercised for the aggrandizement, preference, or advantage of the fiduciary to the exclusion or detriment of the cestuis. The doctrine of "corporate opportunity" is precisely a recognition by the courts that the fiduciary standards could not be upheld where the fiduciary was acting for two entities with competing interests. This doctrine rests fundamentally on the unfairness, in particular circumstances, of an officer or director taking advantage of an opportunity for his own personal profit when the interest of the corporation justly

calls for protection. It is not denied that a member of the Board of Directors of the San Miguel Corporation has access to sensitive and highly confidential information, such as: (a) marketing strategies and pricing structure; (b) budget for expansion and diversification; (c) research and development; and (d) sources of funding, availability of personnel, proposals of mergers or tie-ups with other firms. It is obviously to prevent the creation of an opportunity for an officer or director of San Miguel Corporation, who is also the officer or owner of a competing corporation, from taking advantage of the information which he acquires as director to promote his individual or corporate interests to the prejudice of San Miguel Corporation and its stockholders, that the questioned amendment of the by-laws was made. Certainly, where two corporations are competitive in a substantial sense, it would seem improbable, if not impossible, for the director, if he were to discharge effectively his duty, to satisfy his loyalty to both corporations and place the performance of his corporation duties above his personal concerns. The offer and assurance of Gokongwei that to avoid any possibility of his taking unfair advantage of his position as director of San Miguel Corporation, he would absent himself from meetings at which confidential matters would be discussed, would not detract from the validity and reasonableness of the by-laws involved. Apart from the impractical results that would ensue from such arrangement, it would be inconsistent with Gokongwei's primary motive in running for board membership — which is to protect his investments in San Miguel Corporation. More important, such a proposed norm of conduct would be against all accepted principles underlying a director's duty of fidelity to the corporation, for the policy of the law is to encourage and enforce responsible corporate management. 3. Pursuant to the second paragraph of section 51 of the Corporation Law, "(t)he record of all business transactions of the corporation and minutes of any meeting shall be open to the inspection of any director, member or stockholder of the corporation at reasonable hours." 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. The "general rule that stockholders are entitled to full information as to the management of the corporation and the manner of expenditure of its funds, and to inspection to obtain such information, especially where it appears that the company is being mismanaged or that it is being managed for the personal benefit of officers or directors or certain of the stockholders to the exclusion of others." While the right of a stockholder to examine the books and records of a corporation for a lawful purpose is a matter of law, the right of such stockholder to examine the books and records of a whollyowned subsidiary of the corporation in which he is a stockholder is a different thing. Stockholders are entitled to inspect the books and records of a corporation in order to investigate the conduct of the management, determine the financial condition of the corporation, and generally take an account of the stewardship of the officers and directors. herein, considering that the foreign subsidiary is wholly owned by San Miguel Corporation and, therefore, under Its control, it would be more in accord with equity, good faith and fair dealing to construe the statutory right of petitioner as stockholder to inspect the books and records of the corporation as extending to books and records of such wholly owned subsidiary which are in the corporation's possession and control. 4. Section 17-1/2 of the Corporation Law allows a corporation to "invest its funds in any other corporation or business or for any purpose other than the main purpose for which it was organized" provided that its Board of Directors has been so authorized by the affirmative vote of stockholders holding shares entitling them to exercise at least two-thirds of the voting power. If the investment is made in pursuance of the corporate purpose, it does not need the approval of the stockholders. It is only when the purchase of shares is done solely for investment and not to accomplish the purpose of its incorporation that the vote of approval of the stockholders holding shares entitling them to exercise at least two-thirds of the voting power is necessary. As stated by the corporation, the purchase of beer manufacturing facilities by SMC was an investment in the same business stated as its main purpose in its Articles of Incorporation, which is to manufacture and market beer. It appears that the original investment was made in 1947-1948, when SMC, then San Miguel Brewery, Inc., purchased a beer brewery in Hongkong (Hongkong Brewery & Distillery, Ltd.) for the manufacture and marketing of San Miguel beer thereat. Restructuring of the investment was made in 1970-1971 thru the organization of SMI in Bermuda as a tax free reorganization. Assuming arguendo that the Board of Directors of SMC had no authority to make the assailed investment, there is no question that a corporation, like an

individual, may ratify and thereby render binding upon it the originally unauthorized acts of its officers or other agents. This is true because the questioned investment is neither contrary to law, morals, public order or public policy. It is a corporate transaction or contract which is within the corporate powers, but which is defective from a purported failure to observe in its execution the requirement of the law that the investment must be authorized by the affirmative vote of the stockholders holding two-thirds of the voting power. This requirement is for the benefit of the stockholders. The stockholders for whose benefit the requirement was enacted may, therefore, ratify the investment and its ratification by said stockholders obliterates any defect which it may have had at the outset. Besides, the investment was for the purchase of beer manufacturing and marketing facilities which is apparently relevant to the corporate purpose. The mere fact that the corporation submitted the assailed investment to the stockholders for ratification at the annual meeting of 10 May 1977 cannot be construed as an admission that the corporation had committed an ultra vires act, considering the common practice of corporations of periodically submitting for the ratification of their stockholders the acts of their directors, officers and managers. 2. Loyola Grand Villas Association, Inc vs CA

Homeowners

(South)

Loyola Grand Villas Homeowners Association, Inc. (LGVHAI) was organized on 8 February 1983 as the homeowners' association for Loyola Grand Villas. It was also registered as the sole homeowners' association in the said village with the Home Financing Corporation (which eventually became Home Insurance Guarantee Corporation ["HIGC"]).However, the association was not able file its corporate by-laws. The LGVHAI officers then tried to registered its By-Laws in 1988, but they failed to do so. They then discovered that there were two other homeowners' organizations within the subdivision - the Loyola Grand Villas Homeowners (North) Association, Inc. [North Association] and herein Petitioner Loyola Grand Villas Homeowners (South) Association, Inc.["South Association”]. Upon inquiry by the LGVHAI to HIGC, it was discovered that LGVHAI was dissolved for its failure to submit its bylaws within the period required by the Corporation Code and for its non-user of corporate charter because HIGC had not received any report on the association's activities. These paved the way for the formation of the North and South Associations. LGVHAI then lodged a complaint with HIGC Hearing Officer Danilo Javier, and questioned the revocation of its registration. Hearing Officer Javier ruled in favor of

LGVHAI, revoking the registration of the North and South Associations.

assuming that the existence of a ground, the penalty is not necessarily revocation, but may only be suspension.

Petitioner South Association appealed the ruling, contending that LGVHAI's failure to file its by-laws within the period prescribed by Section 46 of the Corporation Code effectively automatically dissolved the corporation. The Appeals Board of the HIGC and the Court of Appeals both rejected the contention of the Petitioner affirmed the decision of Hearing Officer Javier.

By-Laws are indispensable to corporations, since they are required by law for an orderly management of corporations. However, failure to file them within the period prescribed does not equate to the automatic dissolution of a corporation.

Issue: W/N LGVHAI's failure to file its by-laws within the period prescribed by Section 46 of the Corporation Code had the effect of automatically dissolving the said corporation. Ruling: No. The pertinent provision of the Corporation Code that is the focal point of controversy in this case states: Sec. 46. Adoption of by-laws. - Every corporation formed under this Code, must within one (1) month after receipt of official notice of the issuance of its certificate of incorporation by the Securities and Exchange Commission, adopt a code of by-laws for its government not inconsistent with this Code. Ordinarily, the word "must" connotes an imposition of duty which must be enforced. However, the word "must" in a statute, like "shall," is not always imperative. It may be consistent with an ecercise of discretion. If the language of a statute, considered as a whole with due regard to its nature and object, reveals that the legislature intended to use the words "shall" and "must" to be directory, they should be given that meaning. The legislative deliberations of the Corporation Code reveals that it was not the intention of Congress to automatically dissolve a corporation for failure to file the By-Laws on time. Moreover, By-Laws may be necessary to govern the corporation, but By-Laws are still subordinate to the Articles of Incorporation and the Corporation Code. In fact, there are cases where By-Laws are unnecessary to the corporate existence and to the valid exercise of corporate powers. The Corporation Code does not expressly provide for the effects of non-filing of By-Laws. However, these have been rectified by Section 6 of PD 902-A which provides that SEC shall possess the power to suspend or revoke, after proper notice and hearing, the franchise or certificate of registration of corporations upon failure to file By-Laws within the required period. This shows that there must be notice and hearing before a corporation is dissolved for failure to file its By-Laws. Even

3. China Banking Corporation vs. Court of Appeals [GR 117604, 26 March 1997] Facts: On 21 August 1974, Galicano Calapatia, Jr., a stockholder of Valley Golf & Country Club, Inc. (VGCCI), pledged his Stock Certificate 1219 to China Banking Corporation (CBC). On 16 September 1974, CBC wrote VGCCI requesting that the pledge agreement be recorded in its books. In a letter dated 27 September 1974, VGCCI replied that the deed of pledge executed by Calapatia in CBC's favor was duly noted in its corporate books. On 3 August 1983, Calapatia obtained a loan of P20,000.00 from CBC, payment of which was secured by the pledge agreement still existing between Calapatia and CBC. Due to Calapatia's failure to pay his obligation, CBC, on 12 April 1985, filed a petition for extrajudicial foreclosure before Notary Public Antonio T. de Vera of Manila, requesting the latter to conduct a public auction sale of the pledged stock. On 14 May 1985, CBC informed VGCCI of the foreclosure proceedings and requested that the pledged stock be transferred to its name and the same be recorded in the corporate books. However, on 15 July 1985, VGCCI wrote CBC expressing its inability to accede to CBC's request in view of Calapatia's unsettled accounts with the club. Despite the foregoing, Notary Public de Vera held a public auction on 17 September 1985 and CBC emerged as the highest bidder at P20,000.00 for the pledged stock. Consequently, CBC was issued the corresponding certificate of sale. On 21 November 1985, VGCCI sent Calapatia a notice demanding full payment of his overdue account in the amount of P18,783.24. Said notice was followed by a demand letter dated 12 December 1985 for the same amount and another notice dated 22 November 1986 for P23,483.24. On 4 December 1986, VGCCI caused to be published in the newspaper Daily Express a notice of auction sale of a number of its stock certificates, to be held on 10 December 1986 at 10:00 a.m. Included therein was Calapatia's own share of stock (Stock Certificate 1219). Through a letter dated 15 December 1986, VGCCI informed Calapatia of the termination of his membership due to the sale of his share of stock in the 10 December 1986 auction. On 5 May 1989, CBC advised VGCCI that it is the new owner of Calapatia's Stock Certificate 1219 by virtue of being the highest bidder in the 17 September 1985 auction and requested that a new certificate of stock

be issued in its name. On 2 March 1990, VGCCI replied that "for reason of delinquency" Calapatia's stock was sold at the public auction held on 10 December 1986 for P25,000.00. On 9 March 1990, CBC protested the sale by VGCCI of the subject share of stock and thereafter filed a case with the Regional Trial Court of Makati for the nullification of the 10 December 1986 auction and for the issuance of a new stock certificate in its name. On 18 June 1990, the Regional Trial Court of Makati dismissed the complaint for lack of jurisdiction over the subject matter on the theory that it involves an intra-corporate dispute and on 27 August 1990 denied CBC's motion for reconsideration. On 20 September 1990, CBC filed a complaint with the Securities and Exchange Commission (SEC) for the nullification of the sale of Calapatia's stock by VGCCI; the cancellation of any new stock certificate issued pursuant thereto; for the issuance of a new certificate in petitioner's name; and for damages, attorney's fees and costs of litigation. On 3 January 1992, SEC Hearing Officer Manuel P. Perea rendered a decision in favor of VGCCI, stating in the main that considering that the said share is delinquent, VGCCI had valid reason not to transfer the share in the name of CBC in the books of VGCCI until liquidation of delinquency. Consequently, the case was dismissed. On 14 April 1992, Hearing Officer Perea denied CBC's motion for reconsideration. CBC appealed to the SEC en banc and on 4 June 1993, the Commission issued an order reversing the decision of its hearing officer; holding that CBC has a prior right over the pledged share and because of pledgor's failure to pay the principal debt upon maturity, CBC can proceed with the foreclosure of the pledged share; declaring that the auction sale conducted by VGCCI on 10 December 1986 is declared NULL and VOID; and ordering VGCCI to issue another membership certificate in the name of CBC. VGCCI sought reconsideration of the order. However, the SEC denied the same in its resolution dated 7 December 1993. The sudden turn of events sent VGCCI to seek redress from the Court of Appeals. On 15 August 1994, the Court of Appeals rendered its decision nullifying and setting aside the orders of the SEC and its hearing officer on ground of lack of jurisdiction over the subject matter and, consequently, dismissed CBC's original complaint. The Court of Appeals declared that the controversy between CBC and VGCCI is not intra-corporate; nullifying the SEC orders and dismissing CBC’s complaint. CBC moved for reconsideration but the same was denied by the Court of Appeals in its resolution dated 5 October 1994. CBC filed the petition for review on certiorari. Issue: Whether CBC is bound by VGCCI's by-laws. Held: In order to be bound, the third party must have acquired knowledge of the pertinent by-laws at the time

the transaction or agreement between said third party and the shareholder was entered into. Herein, at the time the pledge agreement was executed. VGCCI could have easily informed CBC of its by-laws when it sent notice formally recognizing CBC as pledgee of one of its shares registered in Calapatia's name. CBC's belated notice of said by-laws at the time of foreclosure will not suffice. Bylaws signifies the rules and regulations or private laws enacted by the corporation to regulate, govern and control its own actions, affairs and concerns and its stockholders or members and directors and officers with relation thereto and among themselves in their relation to it. In other words, by-laws are the relatively permanent and continuing rules of action adopted by the corporation for its own government and that of the individuals composing it and having the direction, management and control of its affairs, in whole or in part, in the management and control of its affairs and activities. The purpose of a by-law is to regulate the conduct and define the duties of the members towards the corporation and among themselves. They are self-imposed and, although adopted pursuant to statutory authority, have no status as public law. Therefore, it is the generally accepted rule that third persons are not bound by by-laws, except when they have knowledge of the provisions either actually or constructively. For the exception to the general accepted rule that third persons are not bound by by-laws to be applicable and binding upon the pledgee, knowledge of the provisions of the VGCCI By-laws must be acquired at the time the pledge agreement was contracted. Knowledge of said provisions, either actual or constructive, at the time of foreclosure will not affect pledgee's right over the pledged share. Article 2087 of the Civil Code provides that it is also of the essence of these contracts that when the principal obligation becomes due, the things in which the pledge or mortgage consists maybe alienated for the payment to the creditor. Further, VGCCI's contention that CBC is dutybound to know its by-laws because of Article 2099 of the Civil Code which stipulates that the creditor must take care of the thing pledged with the diligence of a good father of a family, fails to convince. CBC was never informed of Calapatia's unpaid accounts and the restrictive provisions in VGCCI's by-laws. Furthermore, Section 63 of the Corporation Code which provides that "no shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation" cannot be utilized by VGCCI. The term "unpaid claim" refers to "any unpaid claim arising from unpaid subscription, and not to any indebtedness which a subscriber or stockholder may owe the corporation arising from any other transaction." Herein, the subscription for the share in question has been fully paid as evidenced by the issuance of Membership Certificate 1219. What

Calapatia owed the corporation were merely the monthly dues. Hence, Section 63 does not apply. 4. Grace Christian High School vs CA 281 SCRA 133 – Business Organization – Corporation Law – Members of the Corporate Board Grace Christian High School (GCHS) is an educational institution in Grace Village (QC?). Grace Village Association, Inc. (GVAI)is the homeowners association in Grace Village. GVAI has an existing by-laws which was already in effect since 1968. But in 1975, the board of directors made a draft amending the by-laws whereby the representative of GCHS shall have a permanent seat in the 15-seat board. The draft however was never presented to the general membership for approval. But nevertheless, the representative of GCHS held a seat in the board for 15 years until in 1990 when a proposal was made to the board to reconsider the practice of allowing the GCHS representative in taking a permanent seat. Thereafter, an election was scheduled for the 15 seat in the board. GCHS opposed the election as it insists that the election should only be for 14 directors because it has a permanent seat. GVAI argued that GCHS claim has no basis because the 1975 proposed amendment was never ratified. GCHS averred that it was ratified when it was allowed to take the seat for 15 years and as such its right has already vested. ISSUE: Whether or not the representative from Grace Christian High School should be allowed to have a permanent seat in the board of directors. HELD: No. The Corporation Code is clear when it provides that members of the board of a corporation must be elected by the stockholders (stock corporation) or the members (non-stock corporation). Admittedly, there are corporations who allow some of their directors to sit in the board without being elected – but such practice cannot prevail over provisions of law. Practice, no matter how long continued, cannot give rise to any vested right if it is contrary to law. Further, there is no reason as to why a representative from GCHS should be given an automatic seat. It should therefore go through the process of election. It cannot also be argued that the draft of the bylaws in 1975 was ratified when GCHS was allowed to take its seat for 15 years without an election. In the first place, the proposal was merely a draft and even if passed and approved by the general membership, it cannot be given effect because it is void and contrary to the law. GCHS’ seat in the corporate board is at best merely tolerated by GVAI.

5. Barba vs Liceo de Cagayan FACTS: Petitioner Dr. Ma. Mercedes L. Barba (Barba) was the Dean of the College of Physical Therapy of respondent Liceo de Cagayan University, Inc. (Liceo). In the school year 2003 to 2004, the College of Physical Therapy suffered a dramatic decline in the number of enrollees from a total of 1,121 students in the school year 1995 to 1996 to only 29 students in the first semester of school year 2003 to 2004. Due to the low number of enrollees, Liceo decided to freeze the operation of the College of Physical Therapy indefinitely. Thereafter, the College of Physical Therapy ceased operations and Barba went on leave without pay starting. Subsequently, Liceo sent Barba a letter dated April 27, 2005 instructing Barba to return to work on and report to Ma. Chona Palomares, the Acting Dean of the College of Nursing, to receive her teaching load and assignment as a full-time faculty member in that department. Barba did not report to Palomares and requested for the processing of her separation benefits in view of the closure of the College of Physical Therapy. Another letter was sent to Barba but the latter still refused to return to work. Hence, Liceo sent Barba a notice terminating her services on the ground of abandonment. Barba filed a complaint before the Labor Arbiter for illegal dismissal, payment of separation pay and retirement benefits againstLiceo. She alleged that her transfer to the College of Nursing as a faculty member is a demotion amounting to constructive dismissal. The LA ruled that Barba was not constructively dismissed. The NLRC reversed the LA. Liceo went to the CA and filed a Supplemental Petition raising for the first time the issue of lack of jurisdiction of the Labor Arbiter and the NLRC over the case. Liceo claimed that a College Dean is a corporate officer under its by-laws and Barba was a corporate officer of Liceo since her appointment was approved by the board of directors. Thus, Liceo maintained that the jurisdiction over the case is with the regular courts and not with the labor tribunals. In its original Decision, the CA reversed the NLRC resolutions. The CA did not find merit in Liceos assertion in its Supplemental Petition that the position of Barba as College Dean was a corporate office. The CA further found that no constructive dismissal occurred nor has Barba abandoned her work.

Unsatisfied, both Barba and Liceo sought reconsideration of the CA decision. Thereafter, the CA reversed its earlier ruling. Hence,Barba filed the present petition. ISSUES: I. Whether or not the labor tribunals have jurisdiction over Barbas complaint for constructive dismissal? II. Whether or not Barba was constructively dismissed? HELD: The petition is granted. MERCANTILE LAW: corporate officers FIRST ISSUE: Labor tribunals have jurisdiction over Barbas complaint. Corporate officers are elected or appointed by the directors or stockholders, and are those who are given that character either by the Corporation Code or by the corporations by-laws. Section 25 of the Corporation Code enumerates corporate officers as the president, the secretary, the treasurer and such other officers as may be provided for in the by-laws. In Matling Industrial and Commercial Corporation v. Coros, the phrase "such other officers as may be provided for in the by-laws" has been clarified, thus: "Conformably with Section 25, a position must be expressly mentioned in the By-Laws in order to be considered as a corporate office. The rest of the corporate officers could be considered only as employees of subordinate officials." However, an assiduous perusal of these documents does not convince us that Barba occupies a corporate office position in the university. In Liceos by-laws, there are four officers specifically mentioned, namely, a president, a vice president, a secretary and a treasurer. In addition, it is provided that there shall be other appointive officials, a College Director and heads of departments whose appointments, compensations, powers and duties shall be determined by the board of directors. It is worthy to note that a College Dean is not among the corporate officers mentioned in Liceos by-laws. Barba was not directly elected nor appointed by the board of directors to any corporate office but her appointment was merely approved by the board together with the other academic deans of respondent university in accordance with the procedure prescribed in Liceos Administrative Manual. Though the board of directors may create appointive positions other than the positions of corporate officers, the persons occupying such positions cannot be deemed as corporate officers as contemplated by Section 25 of the Corporation Code. Thus, petitioner, being an employee of respondent, her complaint for illegal/constructive dismissal against respondent was properly within the jurisdiction of the LaborArbiter and the NLRC.

LABOR LAW: constructive dismissal On the issue of constructive dismissal, we agree with the Labor Arbiter and the appellate courts earlier ruling that Barba was not constructively dismissed.Barbas letter of appointment specifically appointed her as Dean of the College of Physical Therapy and Doctor-in-Charge of the Rehabilitation Clinic "for a period of three years effective July 1, 2002 unless sooner revoked for valid cause or causes." Evidently, Barbas appointment as College Dean was for a fixed term, subject to reappointment and revocation or termination for a valid cause. When Liceo decided to close its College of Physical Therapy due to drastic decrease in enrollees,Barbas appointment as its College Dean was validly revoked and her subsequent assignment to teach in the College of Nursing was justified as it is still related to her scholarship studies in Physical Therapy. Particularly, for a transfer not to be considered a constructive dismissal, the employer must be able to show that such transfer is not unreasonable, inconvenient, or prejudicial to the employee. GRANTED. 6. Fleischer vs Botica Nolasco Lessons Applicable: Right of First Refusal (Corporate Law) FACTS: 

March 13, 1923: Manuel Gonzales made a written statement to the Botica Nolasco, Inc., requesting that 5 shares of stock sold by him to Henry Fleischer be noted transferred to Fleischer's name



He also acknowledged in said written statement the preferential right of the corporation to buy said five shares



June 14, 1923: he withdraw and cancelled his written statement of March 13, 1923



Nolasco replied that his letter of June 14th was of no effect, and that the shares in question had been registered in the name of the Botica Nolasco, Inc.,



November 15, 1923: Fleischer



filed an amended complaint against the Botica Nolasco, Inc., alleging that he became the owner of 5 shares of fully paid stock of Botica Nolasco Co (Nolasco) by purchase from their original owner, Manuel Gonzalez



Despite repeated demands, Nolasco refused to register said shares in his name in the books of the corporation



caused him damages amounting to P500

 

 

Nolasco's defense: article 12 of its by-laws: it had preferential right to buy the shares at the par value of P100/share, plus P90 as dividends corresponding to the year 1922 offer was refused by Fleischer Trial Court: favored Fleischer and ordered the shared be registered

ISSUE: W/N article 12 of Nolasco's by-laws is in conflict with Act No. 1459 (Corporation Law), especially with section 35 (Now Sec. 63) HELD: Affirmed. mandamus will lie to compel the officers of the corporation to transfer said stock upon the books of the corporation 



Section 13, paragraph 7, above-quoted, empowers a corporation to make by-laws, not inconsistent with any existing law, for the transferring of its stock. section 35 of Act No. 1459 (now Sec. 63)



contemplates no restriction as to whom they may be transferred or sold



It does not suggest that any discrimination may be created by the corporation in favor or against a certain purchaser.



The holder of shares, as owner of personal property, is at liberty, under said section, to dispose of them in favor of whomsoever he pleases, without any other limitation in this respect, than the general provisions of law



GR: the by-laws of a corporation are valid if they are reasonable and calculated to carry into effect the objects of the corporation, and are not contradictory to the general policy of the laws of the land



A by-law cannot take away or abridge the substantial rights of stockholder.



Under a statute authorizing by- laws for the transfer of stock, a corporation can do no more than prescribe a general mode of transfer on the corporate books and cannot justify an unreasonable restriction upon the right of sale.



by-law cannot operate to defeat his rights as a purchaser who obtained them in good faith and for a valuable consideration

7. PMI Colleges vs NLRC 277 SCRA 462 – Business Organization – Corporation Law – By-laws and Innocent Third Persons

In 1991, PMI Colleges hired the services of Alejandro Galvan for the latter to teach in said institution. However, for unknown reasons, PMI defaulted from paying the remunerations due to Galvan. Galvan made demands but were ignored by PMI. Eventually, Galvan filed a labor case against PMI. Galvan got a favorable judgment from the Labor Arbiter; this was affirmed by the National Labor Relations Commission. On appeal, PMI reiterated, among others, that the employment of Galvan is void because it did not comply with its by-laws. Apparently, the by-laws require that an employment contract must be signed by the Chairman of the Board of PMI. PMI asserts that Galvan’s employment contract was not signed by the Chairman of the Board. ISSUE: Whether or not Galvan’s employment contract is void. HELD: No. PMI Colleges never even presented a copy of the by-laws to prove the existence of such provision. But even if it did, the employment contract cannot be rendered invalid just because it does not bear the signature of the Chairman of the Board of PMI. By-Laws operate merely as internal rules among the stockholders, they cannot affect or prejudice third persons who deal with the corporation, unless they have knowledge of the same. In this case, PMI was not able to prove that Galvan knew of said provision in the by-laws when he was employed by PMI. 8. Sawadjaan vs CA FULL TEXT: This is a petition for certiorari under Rule 65 of the Rules of Court of the Decision [1] of the Court of Appeals of 30 March 1999 affirming Resolutions No. 94-4483 and No. 95-2754 of the Civil Service Commission (CSC) dated 11 August 1994 and 11 April 1995, respectively, which in turn affirmed Resolution No. 2309 of the Board of Directors of the Al-Amanah Islamic Investment Bank of the Philippines (AIIBP) dated 13 December 1993, finding petitioner guilty of Dishonesty in the Performance of Official Duties and/or Conduct Prejudicial to the Best Interest of the Service and dismissing him from the service, and its Resolution [2] of 15 December 1999 dismissing petitioners Motion for Reconsideration. The records show that petitioner Sappari K. Sawadjaan was among the first employees of the Philippine Amanah Bank (PAB) when it was created by virtue of Presidential Decree No. 264 on 02 August 1973. He rose through the ranks, working his way up from his initial designation as security guard, to settling clerk, bookkeeper, credit investigator, project analyst, appraiser/ inspector, and eventually, loans analyst.[3]

In February 1988, while still designated as appraiser/investigator, Sawadjaan was assigned to inspect the properties offered as collaterals by Compressed Air Machineries and Equipment Corporation (CAMEC) for a credit line of Five Million Pesos (P5,000,000.00). The properties consisted of two parcels of land covered by Transfer Certificates of Title (TCTs) No. N-130671 and No. C-52576. On the basis of his Inspection and Appraisal Report,[4] the PAB granted the loan application. When the loan matured on 17 May 1989, CAMEC requested an extension of 180 days, but was granted only 120 days to repay the loan.[5] In the meantime, Sawadjaan was promoted to Loans Analyst I on 01 July 1989.[6] In January 1990, Congress passed Republic Act 6848 creating the AIIBP and repealing P.D. No. 264 (which created the PAB). All assets, liabilities and capital accounts of the PAB were transferred to the AIIBP,[7] and the existing personnel of the PAB were to continue to discharge their functions unless discharged.[8] In the ensuing reorganization, Sawadjaan was among the personnel retained by the AIIBP. When CAMEC failed to pay despite the given extension, the bank, now referred to as the AIIBP, discovered that TCT No. N-130671 was spurious, the property described therein non-existent, and that the property covered by TCT No. C-52576 had a prior existing mortgage in favor of one Divina Pablico. On 08 June 1993, the Board of Directors of the AIIBP created an Investigating Committee to look into the CAMEC transaction, which had cost the bank Six Million Pesos (P6,000,000.00) in losses.[9] The subsequent events, as found and decided upon by the Court of Appeals,[10] are as follows: On 18 June 1993, petitioner received a memorandum from Islamic Bank [AIIBP] Chairman Roberto F. De Ocampo charging him with Dishonesty in the Performance of Official Duties and/or Conduct Prejudicial to the Best Interest of the Service and preventively suspending him.

In his memorandum dated 8 September 1993, petitioner informed the Investigating Committee that he could not submit himself to the jurisdiction of the Committee because of its alleged partiality. For his failure to appear before the hearing set on 17 September 1993, after the hearing of 13 September 1993 was postponed due to the Manifestation of even date filed by petitioner, the Investigating Committee declared petitioner in default and the prosecution was allowed to present its evidence ex parte. On 08 December 1993, the Investigating Committee rendered a decision, the pertinent portions of which reads as follows: In view of respondent SAWADJAANS abject failure to perform his duties and assigned tasks as appraiser/inspector, which resulted to the prejudice and substantial damage to the Bank, respondent should be held liable therefore. At this juncture, however, the Investigating Committee is of the considered opinion that he could not be held liable for the administrative offense of dishonesty considering the fact that no evidence was adduced to show that he profited or benefited from being remiss in the performance of his duties. The record is bereft of any evidence which would show that he received any amount in consideration for his non-performance of his official duties. This notwithstanding, respondent cannot escape liability. As adverted to earlier, his failure to perform his official duties resulted to the prejudice and substantial damage to the Islamic Bank for which he should be held liable for the administrative offense of CONDUCT PREJUDICIAL TO THE BEST INTEREST OF THE SERVICE. Premises considered, the Investigating Committee recommends that respondent SAPPARI SAWADJAAN be meted the penalty of SIX (6) MONTHS and ONE (1) DAY SUSPENSION from office in accordance with the Civil Service Commissions Memorandum Circular No. 30, Series of 1989. On 13 December 1993, the Board of Directors of the Islamic Bank [AIIBP] adopted Resolution No. 2309 finding petitioner guilty of Dishonesty in the Performance of Official Duties and/or Conduct Prejudicial to the Best Interest of the Service and imposing the penalty of Dismissal from the Service. On reconsideration, the Board of Directors of the Islamic Bank [AIIBP] adopted the Resolution No. 2332 on 20 February 1994 reducing the penalty imposed on petitioner

from dismissal to suspension for a period of six (6) months and one (1) day. On 29 March 1994, petitioner filed a notice of appeal to the Merit System Protection Board (MSPB). On 11 August 1994, the CSC adopted Resolution No. 944483 dismissing the appeal for lack of merit and affirming Resolution No. 2309 dated 13 December 1993 of the Board of Directors of Islamic Bank. On 11 April 1995, the CSC adopted Resolution No. 952574 denying petitioners Motion for Reconsideration. On 16 June 1995, the instant petition was filed with the Honorable Supreme Court on the following assignment of errors: I. Public respondent Al-Amanah Islamic Investment Bank of the Philippines has committed a grave abuse of discretion amounting to excess or lack of jurisdiction when it initiated and conducted administrative investigation without a validly promulgated rules of procedure in the adjudication of administrative cases at the Islamic Bank. II. Public respondent Civil Service Commission has committed a grave abuse of discretion amounting to lack of jurisdiction when it prematurely and falsely assumed jurisdiction of the case not appealed to it, but to the Merit System Protection Board. III. Both the Islamic Bank and the Civil Service Commission erred in finding petitioner Sawadjaan of having deliberately reporting false information and therefore guilty of Dishonesty and Conduct Prejudicial to the Best Interest of the Service and penalized with dismissal from the service. On 04 July 1995, the Honorable Supreme Court En Banc referred this petition to this Honorable Court pursuant to Revised Administrative Circular No. 1-95, which took effect on 01 June 1995. We do not find merit [in] the petition. Anent the first assignment of error, a reading of the records would reveal that petitioner raises for the first time the alleged failure of the Islamic Bank [AIIBP] to promulgate rules of procedure governing the adjudication and disposition of administrative cases involving its personnel. It is a rule that issues not properly brought and ventilated below may not be raised for the first time on appeal, save in exceptional circumstances (Casolita, Sr. v. Court of Appeals, 275 SCRA 257) none of which, however,

obtain in this case. Granting arguendo that the issue is of such exceptional character that the Court may take cognizance of the same, still, it must fail. Section 26 of Republic Act No. 6848 (1990) provides: Section 26. Powers of the Board. The Board of Directors shall have the broadest powers to manage the Islamic Bank, x x x The Board shall adopt policy guidelines necessary to carry out effectively the provisions of this Charter as well as internal rules and regulations necessary for the conduct of its Islamic banking business and all matters related to personnel organization, office functions and salary administration. (Italics ours) On the other hand, Item No. 2 of Executive Order No. 26 (1992) entitled Prescribing Procedure and Sanctions to Ensure Speedy Disposition of Administrative Cases directs, all administrative agencies to adopt and include in their respective Rules of Procedure provisions designed to abbreviate administrative proceedings. The above two (2) provisions relied upon by petitioner does not require the Islamic Bank [AIIBP] to promulgate rules of procedure before administrative discipline may be imposed upon its employees. The internal rules of procedures ordained to be adopted by the Board refers to that necessary for the conduct of its Islamic banking business and all matters related to personnel organization, office functions and salary administration. On the contrary, Section 26 of RA 6848 gives the Board of Directors of the Islamic Bank the broadest powers to manage the Islamic Bank. This grant of broad powers would be an idle ceremony if it would be powerless to discipline its employees. The second assignment of error must likewise fail. The issue is raised for the first time via this petition for certiorari. Petitioner submitted himself to the jurisdiction of the CSC. Although he could have raised the alleged lack of jurisdiction in his Motion for Reconsideration of Resolution No. 94-4483 of the CSC, he did not do so. By filing the Motion for Reconsideration, he is estopped from denying the CSCs jurisdiction over him, as it is settled rule that a party who asks for an affirmative relief cannot later on impugn the action of the tribunal as without jurisdiction after an adverse result was meted to him. Although jurisdiction over the subject matter of a case may be objected to at any stage of the proceedings even on appeal, this particular rule, however, means that jurisdictional issues in a case can be raised only during the proceedings in said case and during the appeal of said case (Aragon v. Court of Appeals, 270

SCRA 603). The case at [for] certiorari and not an appeal.

bar

is

a

petition

But even on the merits the argument must falter. Item No. 1 of CSC Resolution No. 93-2387 dated 29 June 1993, provides: Decisions in administrative cases involving officials and employees of the civil service appealable to the Commission pursuant to Section 47 of Book V of the Code (i.e., Administrative Code of 1987) including personnel actions such as contested appointments shall now be appealed directly to the Commission and not to the MSPB. In Rubenecia v. Civil Service Commission, 244 SCRA 640, 651, it was categorically held: . . . The functions of the MSPB relating to the determination of administrative disciplinary cases were, in other words, re-allocated to the Commission itself. Be that as it may, (i)t is hornbook doctrine that in order `(t)o ascertain whether a court (in this case, administrative agency) has jurisdiction or not, the provisions of the law should be inquired into. Furthermore, `the jurisdiction of the court must appear clearly from the statute law or it will not be held to exist.(Azarcon v. Sandiganbayan, 268 SCRA 747, 757) From the provision of law abovecited, the Civil Service Commission clearly has jurisdiction over the Administrative Case against petitioner. Anent the third assignment of error, we likewise do not find merit in petitioners proposition that he should not be liable, as in the first place, he was not qualified to perform the functions of appraiser/investigator because he lacked the necessary training and expertise, and therefore, should not have been found dishonest by the Board of Directors of Islamic Bank [AIIBP] and the CSC. Petitioner himself admits that the position of appraiser/inspector is one of the most serious [and] sensitive job in the banking operations. He should have been aware that accepting such a designation, he is obliged to perform the task at hand by the exercise of more than ordinary prudence. As appraiser/investigator, he is expected, among others, to check the authenticity of the documents presented by the borrower by comparing them with the originals on file with the proper government office. He should have made it sure that the technical descriptions in the location plan on file with the Bureau of Lands of Marikina, jibe with that indicated in the TCT of the collateral offered by CAMEC, and that the mortgage in favor of the Islamic Bank was duly annotated at the back of the copy of the TCT kept by the Register of Deeds of Marikina. This, petitioner failed to do, for which he must be held liable. That he did not profit

from his false report is of no moment. Neither the fact that it was not deliberate or willful, detracts from the nature of the act as dishonest. What is apparent is he stated something to be a fact, when he really was not sure that it was so. WHEREFORE, above premises considered, the instant Petition is DISMISSED, and the assailed Resolutions of the Civil Service Commission are hereby AFFIRMED. On 24 March 1999, Sawadjaans counsel notified the court a quo of his change of address,[11] but apparently neglected to notify his client of this fact. Thus, on 23 July 1999, Sawadjaan, by himself, filed a Motion for New Trial[12] in the Court of Appeals based on the following grounds: fraud, accident, mistake or excusable negligence and newly discovered evidence. He claimed that he had recently discovered that at the time his employment was terminated, the AIIBP had not yet adopted its corporate by-laws. He attached a Certification[13] by the Securities and Exchange Commission (SEC) that it was only on 27 May 1992 that the AIIBP submitted its draft by-laws to the SEC, and that its registration was being held in abeyance pending certain corrections being made thereon. Sawadjaan argued that since the AIIBP failed to file its bylaws within 60 days from the passage of Rep. Act No. 6848, as required by Sec. 51 of the said law, the bank and its stockholders had already forfeited its franchise or charter, including its license to exist and operate as a corporation,[14] and thus no longer have the legal standing and personality to initiate an administrative case. Sawadjaans counsel subsequently adopted his motion, but requested that it be treated as a motion for reconsideration.[15] This motion was denied by the court a quo in its Resolution of 15 December 1999.[16] Still disheartened, Sawadjaan filed the present petition for certiorari under Rule 65 of the Rules of Court challenging the above Decision and Resolution of the Court of Appeals on the ground that the court a quo erred: i) in ignoring the facts and evidences that the alleged Islamic Bank has no valid by-laws; ii) in ignoring the facts and evidences that the Islamic Bank lost its juridical personality as a corporation on 16 April 1990; iii) in ignoring the facts and evidences that the alleged Islamic Bank and its alleged Board of Directors have no jurisdiction to act in the manner they did in the absence of a valid by-laws; iv) in not correcting the acts of the Civil Service Commission who erroneously rendered the assailed Resolutions No. 94-4483 and No. 95-2754 as a result of fraud, falsification and/or misrepresentations committed by Farouk A. Carpizo and his group, including Roberto F. de Ocampo; v) in affirming an unconscionably

harsh and/or excessive penalty; and vi) in failing to consider newly discovered evidence and reverse its decision accordingly. Subsequently, petitioner Sawadjaan filed an Exparte Urgent Motion for Additional Extension of Time to File a Reply (to the Comments of Respondent Al-Amanah Investment Bank of the Philippines),[17] Reply (to Respondents Consolidated Comment,)[18] and Reply (to the Alleged Comments of Respondent Al-Amanah Islamic Bank of the Philippines).[19] On 13 October 2000, he informed this Court that he had terminated his lawyers services, and, by himself, prepared and filed the following: 1) Motion for New Trial; [20] 2) Motion to Declare Respondents in Default and/or Having Waived their Rights to Interpose Objection to Petitioners Motion for New Trial; [21] 3) Ex-Parte Urgent Motions to Punish Attorneys Amado D. Valdez, Elpidio J. Vega, Alda G. Reyes, Dominador R. Isidoro, Jr., and Odilon A. Diaz for Being in Contempt of Court & to Inhibit them from Appearing in this Case Until they Can Present Valid Evidence of Legal Authority; [22] 4) Opposition/Reply (to Respondent AIIBPs Alleged Comment);[23] 5) Ex-Parte Urgent Motion to Punish Atty. Reynaldo A. Pineda for Contempt of Court and the Issuance of a Commitment Order/Warrant for His Arrest; [24] 6) Reply/Opposition (To the Formal Notice of Withdrawal of Undersigned Counsel as Legal Counsel for the Respondent Islamic Bank with Opposition to Petitioners Motion to Punish Undersigned Counsel for Contempt of Court for the Issuance of a Warrant of Arrest); [25] 7) Memorandum for Petitioner; [26] 8) Opposition to SolGens Motion for Clarification with Motion for Default and/or Waiver of Respondents to File their Memorandum; [27] 9) Motion for Contempt of Court and Inhibition/Disqualification with Opposition to OGCCs Motion for Extension of Time to File Memorandum;[28] 10) Motion for Enforcement (In Defense of the Rule of Law); [29] 11) Motion and Opposition (Motion to Punish OGCCs Attorneys Amado D. Valdez, Efren B. Gonzales, Alda G. Reyes, Odilon A. Diaz and Dominador R. Isidoro, Jr., for Contempt of Court and the Issuance of a Warrant for their Arrest; and Opposition to their Alleged Manifestation and Motion Dated February 5, 2002); [30] 12) Motion for Reconsideration of Item (a) of Resolution dated 5 February 2002 with Supplemental Motion for Contempt of Court;[31] 13) Motion for Reconsideration of Portion of Resolution Dated 12 March 2002; [32] 14) Ex-Parte Urgent Motion for Extension of Time to File Reply Memorandum (To: CSC and AIIBPs Memorandum); [33] 15) Reply Memorandum (To: CSCs Memorandum) With Ex-Parte Urgent Motion for Additional Extension of time to File Reply Memorandum (To: AIIBPs Memorandum);[34] and 16) Reply Memorandum (To: OGCCs Memorandum for Respondent AIIBP).[35]

Petitioners efforts are unavailing, and we deny his petition for its procedural and substantive flaws. The general rule is that the remedy to obtain reversal or modification of the judgment on the merits is appeal. This is true even if the error, or one of the errors, ascribed to the court rendering the judgment is its lack of jurisdiction over the subject matter, or the exercise of power in excess thereof, or grave abuse of discretion in the findings of fact or of law set out in the decision. [36] The records show that petitioners counsel received the Resolution of the Court of Appeals denying his motion for reconsideration on 27 December 1999. The fifteen day reglamentary period to appeal under Rule 45 of the Rules of Court therefore lapsed on 11 January 2000. On 23 February 2000, over a month after receipt of the resolution denying his motion for reconsideration, the petitioner filed his petition for certiorari under Rule 65. It is settled that a special civil action for certiorari will not lie as a substitute for the lost remedy of appeal, [37] and though there are instances[38] where the extraordinary remedy ofcertiorari may be resorted to despite the availability of an appeal,[39] we find no special reasons for making out an exception in this case. Even if we were to overlook this fact in the broader interests of justice and treat this as a special civil action for certiorari under Rule 65,[40] the petition would nevertheless be dismissed for failure of the petitioner to show grave abuse of discretion. Petitioners recurrent argument, tenuous at its very best, is premised on the fact that since respondent AIIBP failed to file its by-laws within the designated 60 days from the effectivity of Rep. Act No. 6848, all proceedings initiated by AIIBP and all actions resulting therefrom are a patent nullity. Or, in his words, the AIIBP and its officers and Board of Directors, . . . [H]ave no legal authority nor jurisdiction to manage much less operate the Islamic Bank, file administrative charges and investigate petitioner in the manner they did and allegedly passed Board Resolution No. 2309 on December 13, 1993 which is null and void for lack of an (sic) authorized and valid by-laws. The CIVIL SERVICE COMMISSION was therefore affirming, erroneously, a null and void Resolution No. 2309 dated December 13, 1993 of the Board of Directors of Al-Amanah Islamic Investment Bank of the Philippines in CSC Resolution No. 94-4483 dated August 11, 1994. A motion for reconsideration thereof was denied by the CSC in its Resolution No. 952754 dated April 11, 1995. Both acts/resolutions of the CSC are erroneous, resulting from fraud, falsifications and misrepresentations of the alleged Chairman and CEO

Roberto F. de Ocampo and the alleged Director Farouk A. Carpizo and his group at the alleged Islamic Bank.[41] Nowhere in petitioners voluminous pleadings is there a showing that the court a quo committed grave abuse of discretion amounting to lack or excess of jurisdiction reversible by a petition for certiorari. Petitioner already raised the question of AIIBPs corporate existence and lack of jurisdiction in his Motion for New Trial/Motion for Reconsideration of 27 May 1997 and was denied by the Court of Appeals. Despite the volume of pleadings he has submitted thus far, he has added nothing substantial to his arguments. The AIIBP was created by Rep. Act No. 6848. It has a main office where it conducts business, has shareholders, corporate officers, a board of directors, assets, and personnel. It is, in fact, here represented by the Office of the Government Corporate Counsel, the principal law office of government-owned corporations, one of which is respondent bank.[42] At the very least, by its failure to submit its by-laws on time, the AIIBP may be considered a de facto corporation[43] whose right to exercise corporate powers may not be inquired into collaterally in any private suit to which such corporations may be a party.[44] Moreover, a corporation which has failed to file its bylaws within the prescribed period does not ipso facto lose its powers as such. The SEC Rules on Suspension/Revocation of the Certificate of Registration of Corporations,[45] details the procedures and remedies that may be availed of before an order of revocation can be issued. There is no showing that such a procedure has been initiated in this case. In any case, petitioners argument is irrelevant because this case is not a corporate controversy, but a labor dispute; and it is an employers basic right to freely select or discharge its employees, if only as a measure of self-protection against acts inimical to its interest. [46] Regardless of whether AIIBP is a corporation, a partnership, a sole proprietorship, or a sari-saristore, it is an undisputed fact that AIIBP is the petitioners employer. AIIBP chose to retain his services during its reorganization, controlled the means and methods by which his work was to be performed, paid his wages, and, eventually, terminated his services.[47] And though he has had ample opportunity to do so, the petitioner has not alleged that he is anything other than an employee of AIIBP. He has neither claimed, nor shown, that he is a stockholder or an officer of the corporation. Having accepted employment from AIIBP, and rendered his services to the said bank, received his salary,

and accepted the promotion given him, it is now too late in the day for petitioner to question its existence and its power to terminate his services. One who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there was in fact no corporation.[48] Even if we were to consider the facts behind petitioner Sawadjaans dismissal from service, we would be hard pressed to find error in the decision of the AIIBP. As appraiser/investigator, the petitioner was expected to conduct an ocular inspection of the properties offered by CAMEC as collaterals and check the copies of the certificates of title against those on file with the Registry of Deeds. Not only did he fail to conduct these routine checks, but he also deliberately misrepresented in his appraisal report that after reviewing the documents and conducting a site inspection, he found the CAMEC loan application to be in order. Despite the number of pleadings he has filed, he has failed to offer an alternative explanation for his actions. When he was informed of the charges against him and directed to appear and present his side on the matter, the petitioner sent instead a memorandum questioning the fairness and impartiality of the members of the investigating committee and refusing to recognize their jurisdiction over him. Nevertheless, the investigating committee rescheduled the hearing to give the petitioner another chance, but he still refused to appear before it. Thereafter, witnesses were presented, and a decision was rendered finding him guilty of dishonesty and dismissing him from service. He sought a reconsideration of this decision and the same committee whose impartiality he questioned reduced their recommended penalty to suspension for six months and one day. The board of directors, however, opted to dismiss him from service. On appeal to the CSC, the Commission found that Sawadjaans failure to perform his official duties greatly prejudiced the AIIBP, for which he should be held accountable. It held that: . . . (I)t is crystal clear that respondent SAPPARI SAWADJAAN was remiss in the performance of his duties as appraiser/inspector. Had respondent performed his duties as appraiser/inspector, he could have easily noticed that the property located at Balintawak, Caloocan City covered by TCT No. C-52576 and which is one of the properties offered as collateral by CAMEC is encumbered to Divina Pablico. Had respondent reflected such fact in

his appraisal/inspection report on said property the ISLAMIC BANK would not have approved CAMECs loan of P500,000.00 in 1987 and CAMECs P5 Million loan in 1988, respondent knowing fully well the Banks policy of not accepting encumbered properties as collateral. Respondent SAWADJAANs reprehensible act is further aggravated when he failed to check and verify from the Registry of Deeds of Marikina the authenticity of the property located at Mayamot, Antipolo, Rizal covered by TCT No. N-130671 and which is one of the properties offered as collateral by CAMEC for its P5 Million loan in 1988. If he only visited and verified with the Register of Deeds of Marikina the authenticity of TCT No. N-130671 he could have easily discovered that TCT No. N-130671 is fake and the property described therein non-existent. ... This notwithstanding, respondent cannot escape liability. As adverted to earlier, his failure to perform his official duties resulted to the prejudice and substantial damage to the ISLAMIC BANK for which he should be held liable for the administrative offense of CONDUCT PREJUDICIAL TO THE BEST INTEREST OF THE SERVICE.[49]

From the foregoing, we find that the CSC and the court a quo committed no grave abuse of discretion when they sustained Sawadjaans dismissal from service. Grave abuse of discretion implies such capricious and whimsical exercise of judgment as equivalent to lack of jurisdiction, or, in other words, where the power is exercised in an arbitrary or despotic manner by reason of passion or personal hostility, and it must be so patent and gross as to amount to an evasion of positive duty or to a virtual refusal to perform the duty enjoined or to act at all in contemplation of law.[50] The records show that the respondents did none of these; they acted in accordance with the law. WHEREFORE, the petition is DISMISSED. The Decision of the Court of Appeals of 30 March 1999 affirming Resolutions No. 94-4483 and No. 95-2754 of the Civil Service Commission, and its Resolution of 15 December 1999 are hereby AFFIRMED. Costs against the petitioner.