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G.R. No. L-2598 June 29, 1950

C. ARNOLD HALL and BRADLEY P. HALL, petitioners,vs.

EDMUNDO S. PICCIO, Judge of the Court of First Instance of Leyte, FRED BROWN,

EMMA BROWN, HIPOLITA CAPUCIONG, in his capacity as receiver of the Far EasternLumber and Commercial Co., Inc., respondents.

This is petition to set aside all the proceedings had in civil case No. 381 of the Court of FirstInstance of Leyte and to enjoin the respondent judge from further acting upon the same.

Facts: (1) on May 28, 1947, the petitioners C. Arnold Hall and Bradley P. Hall, and therespondents Fred Brown, Emma Brown, Hipolita D. Chapman and Ceferino S. Abella, signed

and acknowledged in Leyte, the article of incorporation of the Far Eastern Lumber andCommercial Co., Inc., organized to engage in a general lumber business to carry on as generalcontractors, operators and managers, etc. Attached to the article was an affidavit of the treasurer

stating that 23,428 shares of stock had been subscribed and fully paid with certain propertiestransferred to the corporation described in a list appended thereto.

(2) Immediately after the execution of said articles of incorporation, the corporation proceeded todo business with the adoption of by-laws and the election of its officers.

(3) On December 2, 1947, the said articles of incorporation were filed in the office of theSecurities and Exchange Commissioner, for the issuance of the corresponding certificate ofincorporation.

(4) On March 22, 1948, pending action on the articles of incorporation by the aforesaid

governmental office, the respondents Fred Brown, Emma Brown, Hipolita D. Chapman andCeferino S. Abella filed before the Court of First Instance of Leyte the civil case numbered 381,entitled "Fred Brown et al. vs. Arnold C. Hall et al.", alleging among other things that the FarEastern Lumber and Commercial Co. was an unregistered partnership; that they wished tohave it dissolved because of bitter dissension among the members, mismanagement and

fraud by the managers and heavy financial losses.

(5) The defendants in the suit, namely, C. Arnold Hall and Bradley P. Hall, filed a motion todismiss, contesting the court's jurisdiction and the sufficiently of the cause of action.

(6) After hearing the parties, the Hon. Edmund S. Piccio ordered the dissolution of the company;

and at the request of plaintiffs, appointed of the properties thereof, upon the filing of a P20,000bond.

(7) The defendants therein (petitioners herein) offered to file a counter-bond for the discharge ofthe receiver, but the respondent judge refused to accept the offer and to discharge the receiver.Whereupon, the present special civil action was instituted in this court. It is based upon two mainpropositions, to wit:

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(a) The court had no jurisdiction in civil case No. 381 to decree the dissolution of the company,because it being a de facto corporation, dissolution thereof may only be ordered in a quowarranto proceeding instituted in accordance with section 19 of the Corporation Law.

(b) Inasmuch as respondents Fred Brown and Emma Brown had signed the article of

incorporation but only a partnership.

Discussion: The second proposition may at once be dismissed. All the parties are informed thatthe Securities and Exchange Commission has not, so far, issued the corresponding certificate ofincorporation. All of them know, or sought to know, that the personality of a corporation beginsto exist only from the moment such certificate is issued not before (sec. 11, CorporationLaw). The complaining associates have not represented to the others that they were incorporatedany more than the latter had made similar representations to them. And as nobody was led tobelieve anything to his prejudice and damage, the principle of estoppel does not apply.Obviously this is not an instance requiring the enforcement of contracts with the corporationthrough the rule of estoppel.

The first proposition above stated is premised on the theory that, inasmuch as the Far EasternLumber and Commercial Co., is a de facto corporation, section 19 of the Corporation Lawapplies, and therefore the court had not jurisdiction to take cognizance of said civil case number381. Section 19 reads as follows:

. . . The due incorporation of any corporations claiming in good faith to be a corporationunder this Act and its right to exercise corporate powers shall not be inquired intocollaterally in any private suit to which the corporation may be a party, but such inquirymay be had at the suit of the Insular Government on information of the Attorney-General.

There are least two reasons why this section does not govern the situation. Not having obtainedthe certificate of incorporation, the Far Eastern Lumber and Commercial Co. even itsstockholders may not probably claim "in good faith" to be a corporation.

Under our statue it is to be noted (Corporation Law, sec. 11) that it is the issuance of acertificate of incorporation by the Director of the Bureau of Commerce and Industrywhich calls a corporation into being. The immunity if collateral attack is granted tocorporations "claiming in good faith to be a corporation under this act." Such a claim iscompatible with the existence of errors and irregularities; but not with a total orsubstantial disregard of the law. Unless there has been an evident attempt to comply withthe law the claim to be a corporation "under this act" could not be made "in good faith."(Fisher on the Philippine Law of Stock Corporations, p. 75. See also Humphreys vs.Drew, 59 Fla., 295; 52 So., 362.)

Second, this is not a suit in which the corporation is a party. This is a litigation betweenstockholders of the alleged corporation, for the purpose of obtaining its dissolution. Even theexistence of a de jure corporation may be terminated in a private suit for its dissolution betweenstockholders, without the intervention of the state.

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There might be room for argument on the right of minority stockholders to sue for dissolution;1but that question does not affect the court's jurisdiction, and is a matter for decision by the judge,subject to review on appeal. Whkch brings us to one principal reason why this petition may notprosper, namely: the petitioners have their remedy by appealing the order of dissolution at theproper time.

There is a secondary issue in connection with the appointment of a receiver. But it must beadmitted that receivership is proper in proceedings for dissolution of a company or corporation,and it was no error to reject the counter-bond, the court having declared the dissolution. As to theamount of the bond to be demanded of the receiver, much depends upon the discretion of the trialcourt, which in this instance we do not believe has been clearly abused.

Judgment: The petition will, therefore, be dismissed, with costs. The preliminary injunctionheretofore issued will be dissolved.

G.R. No. L-11442 May 23, 1958

MANUELA T. VDA. DE SALVATIERRA, petitioner,vs.

HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of First Instance ofLeyte, Branch II, and SEGUNDINO REFUERZO, respondents.

Jimenez, Tantuico, Jr. and Tolete for petitioner.

Francisco Astilla for respondent Segundino Refuerzo.

FELIX,J.:

This is a petition forcertiorari filed by Manuela T. Vda. de Salvatierra seeking to nullify theorder of the Court of First Instance of Leyte in Civil Case No. 1912, dated March 21, 1956,relieving Segundino Refuerzo of liability for the contract entered into between the former and thePhilippine Fibers Producers Co., Inc., of which Refuerzo is the president. The facts of the caseare as follows:

Manuela T. Vda. de Salvatierra appeared to be the owner of a parcel of land located atMaghobas, Poblacion, Burauen, Teyte. On March 7, 1954, said landholder entered into a contractof lease with the Philippine Fibers Producers Co., Inc., allegedly a corporation "duly organizedand existing under the laws of the Philippines, domiciled at Burauen, Leyte, Philippines, andwith business address therein, represented in this instance by Mr. Segundino Q. Refuerzo, the

President". It was provided in said contract, among other things, that the lifetime of the leasewould be for a period of 10 years; that the land would be planted to kenaf, ramie or other cropssuitable to the soil; that the lessor would be entitled to 30 per cent of the net income accruingfrom the harvest of any, crop without being responsible for the cost of production thereof; andthat after every harvest, the lessee was bound to declare at the earliest possible time the incomederived therefrom and to deliver the corresponding share due the lessor.

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Apparently, the aforementioned obligations imposed on the alleged corporation were notcomplied with because on April 5, 1955, Alanuela T. Vda, de Salvatierra filed with the Court ofFirst Instance of Leyte a complaint against the Philippine Fibers Producers Co., Inc., andSegundino Q. Refuerzo, for accounting, rescission and damages (Civil Case No. 1912). Sheaverred that sometime in April, 1954, defendants planted kenaf on 3 hectares of the leased

property which crop was, at the time of the commencement of the action, already harvested,processed and sold by defendants; that notwithstanding that fact, defendants refused to render anaccounting of the income derived therefrom and to deliver the lessor's share; that the estimatedgross income was P4,500, and the deductible expenses amounted to P1,000; that as defendants'refusal to undertake such task was in violation of the terms of the covenant entered into betweenthe plaintiff and defendant corporation, a rescission was but proper.

As defendants apparently failed to file their answer to the complaint, of which they wereallegedly notified, the Court declared them in default and proceeded to receive plaintiff'sevidence. On June 8, 1955, the lower Court rendered judgment granting plaintiff's prayer, andrequired defendants to render a complete accounting of the harvest of the land subject of the

proceeding within 15 days from receipt of the decision and to deliver 30 per cent of the netincome realized from the last harvest to plaintiff, with legal interest from the date defendantsreceived payment for said crop. It was further provide that upon defendants' failure to abide bythe said requirement, the gross income would be fixed at P4,200 or a net income of P3,200 afterdeducting the expenses for production, 30 per cent of which or P960 was held to be due theplaintiff pursuant to the aforementioned contract of lease, which was declared rescinded.

No appeal therefrom having been perfected within the reglementary period, the Court, uponmotion of plaintiff, issued a writ of execution, in virtue of which the Provincial Sheriff of Leytecaused the attachment of 3 parcels of land registered in the name of Segundino Refuerzo. Noproperty of the Philippine Fibers Producers Co., Inc., was found available for attachment. OnJanuary 31, 1956, defendant Segundino Refuerzo filed a motion claiming that the decisionrendered in said Civil Case No. 1912 was null and void with respect to him, there being noallegation in the complaint pointing to his personal liability and thus prayed that an order beissued limiting such liability to defendant corporation. Over plaintiff's opposition, the Court aquo granted the same and ordered the Provincial Sheriff of Leyte to release all propertiesbelonging to the movant that might have already been attached, after finding that the evidence onrecord made no mention or referred to any fact which might hold movant personally liabletherein. As plaintiff's petition for relief from said order was denied, Manuela T. Vda. deSalvatierra instituted the instant action asserting that the trial Judge in issuing the ordercomplained of, acted with grave abuse of discretion and prayed that same be declared a nullity.

From the foregoing narration of facts, it is clear that the order sought to be nullified was issuedby tile respondent Judge upon motion of defendant Refuerzo, obviously pursuant to Rule 38 ofthe Rules of Court. Section 3 of said Rule, however, in providing for the period within whichsuch a motion may be filed, prescribes that:

SEC. 3. WHEN PETITION FILED; CONTENTS AND VERIFICATION. A petitionprovided for in either of the preceding sections of this rule must be verified, filed withinsixty days after the petitioner learns of the judgment, order, or other proceeding to be set

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aside, and not more than six months after such judgment or order was entered, or suchproceeding was taken; and must be must be accompanied with affidavit showing thefraud, accident, mistake, or excusable negligence relied upon, and the facts constitutingthe petitioner is good and substantial cause of action or defense, as the case may be,which he may prove if his petition be granted". (Rule 38)

The aforequoted provision treats of 2 periods, i.e., 60 days after petitioner learns of the judgment,and not more than 6 months after the judgment or order was rendered, both of which must besatisfied. As the decision in the case at bar was under date of June 8, 1955, whereas the motionfiled by respondent Refuerzo was dated January 31, 1956, or after the lapse of 7 months and 23days, the filing of the aforementioned motion was clearly made beyond the prescriptive periodprovided for by the rules. The remedy allowed by Rule 38 to a party adversely affected by adecision or order is certainly an alert of grace or benevolence intended to afford said litigant apenultimate opportunity to protect his interest. Considering the nature of such relief and thepurpose behind it, the periods fixed by said rule are non-extendible and never interrupted; norcould it be subjected to any condition or contingency because it is of itself devised to meet a

condition or contingency (Palomares vs. Jimenez,

*

G.R. No. L-4513, January 31, 1952). On thisscore alone, therefore, the petition for a writ ofcertiorari filed herein may be granted. However,taking note of the question presented by the motion for relief involved herein, We deem it wiseto delve in and pass upon the merit of the same.

Refuerzo, in praying for his exoneration from any liability resulting from the non-fulfillment ofthe obligation imposed on defendant Philippine Fibers Producers Co., Inc., interposed thedefense that the complaint filed with the lower court contained no allegation which would holdhim liable personally, for while it was stated therein that he was a signatory to the lease contract,he did so in his capacity as president of the corporation. And this allegation was found by theCourt a quo to be supported by the records. Plaintiff on the other hand tried to refute thisaverment by contending that her failure to specify defendant's personal liability was due to thefact that all the time she was under the impression that the Philippine Fibers Producers Co., Inc.,represented by Refuerzo was a duly registered corporation as appearing in the contract, but asubsequent inquiry from the Securities and Exchange Commission yielded otherwise. While as ageneral rule a person who has contracted or dealt with an association in such a way as torecognize its existence as a corporate body is estopped from denying the same in an actionarising out of such transaction or dealing, (Asia Banking Corporation vs. Standard Products Co.,46 Phil., 114; Compania Agricola de Ultramar vs. Reyes, 4 Phil., 1; Ohta Development Co.; vs.Steamship Pompey, 49 Phil., 117), yet this doctrine may not be held to be applicable where fraudtakes a part in the said transaction. In the instant case, on plaintiff's charge that she was unawareof the fact that the Philippine Fibers Producers Co., Inc., had no juridical personality, defendantRefuerzo gave no confirmation or denial and the circumstances surrounding the execution of thecontract lead to the inescapable conclusion that plaintiff Manuela T. Vda. de Salvatierra wasreally made to believe that such corporation was duly organized in accordance with law.

There can be no question that a corporation with registered has a juridical personality separateand distinct from its component members or stockholders and officers such that a corporationcannot be held liable for the personal indebtedness of a stockholder even if he should be itspresident (Walter A. Smith Co. vs. Ford, SC-G.R. No. 42420) and conversely, a stockholder or

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member cannot be held personally liable for any financial obligation be, the corporation inexcess of his unpaid subscription. But this rule is understood to refer merely to registeredcorporations and cannot be made applicable to the liability of members of an unincorporatedassociation. The reason behind this doctrine is obvious-since an organization which before thelaw is non-existent has no personality and would be incompetent to act and appropriate for itself

the powers and attribute of a corporation as provided by law; it cannot create agents or conferauthority on another to act in its behalf; thus, those who act or purport to act as its representativesor agents do so without authority and at their own risk. And as it is an elementary principle oflaw that a person who acts as an agent without authority or without a principal is himselfregarded as the principal, possessed of all the rights and subject to all the liabilities of a principal,a person acting or purporting to act on behalf of a corporation which has no valid existenceassumes such privileges and obligations and comes personally liable for contracts entered into orfor other acts performed as such, agent (Fay vs. Noble, 7 Cushing [Mass.] 188. Cited in IITolentino's Commercial Laws of the Philippines, Fifth Ed., P. 689-690). Considering thatdefendant Refuerzo, as president of the unregistered corporation Philippine Fibers Producers Co.,Inc., was the moving spirit behind the consummation of the lease agreement by acting as its

representative, his liability cannot be limited or restricted that imposed upon corporateshareholders. In acting on behalf of a corporation which he knew to be unregistered, he assumedthe risk of reaping the consequential damages or resultant rights, if any, arising out of suchtransaction.

Wherefore, the order of the lower Court of March 21, 1956, amending its previous decision onthis matter and ordering the Provincial Sheriff of Leyte to release any and all properties ofmovant therein which might have been attached in the execution of such judgment, is hereby setaside and nullified as if it had never been issued. With costs against respondent SegundinoRefuerzo. It is so ordered.

G.R. No. L-23241 March 14, 1925

HENRY FLEISCHER, plaintiff-appellee,vs.BOTICA NOLASCO CO., INC., defendant-appellant.

Antonio Gonzalez for appellant.Emilio M. Javier for appellee.

JOHNSON,J.:

This action was commenced in the Court of First Instance of the Province of Oriental Negros onthe 14th day of August, 1923, against the board of directors of the Botica Nolasco, Inc., acorporation duly organized and existing under the laws of the Philippine Islands. The plaintiffprayed that said board of directors be ordered to register in the books of the corporation fiveshares of its stock in the name of Henry Fleischer, the plaintiff, and to pay him the sum of P500for damages sustained by him resulting from the refusal of said body to register the shares ofstock in question. The defendant filed a demurrer on the ground that the facts alleged in thecomplaint did not constitute sufficient cause of action, and that the action was not brought

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against the proper party, which was the Botica Nolasco, Inc. The demurrer was sustained, andthe plaintiff was granted five days to amend his complaint.

On November 15, 1923, the plaintiff filed an amended complaint against the Botica Nolasco,Inc., alleging that he became the owner of five shares of stock of said corporation, by purchase

from their original owner, one Manuel Gonzalez; that the said shares were fully paid; and thatthe defendant refused to register said shares in his name in the books of the corporation in spiteof repeated demands to that effect made by him upon said corporation, which refusal caused himdamages amounting to P500. Plaintiff prayed for a judgment ordering the Botica Nolasco, Inc. toregister in his name in the books of the corporation the five shares of stock recorded in saidbooks in the name of Manuel Gonzalez, and to indemnify him in the sum of P500 as damages,and to pay the costs. The defendant again filed a demurrer on the ground that the amendedcomplaint did not state facts sufficient to constitute a cause of action, and that said amendedcomplaint was ambiguous, unintelligible, uncertain, which demurrer was overruled by the court.

The defendant answered the amended complaint denying generally and specifically each and

every one of the material allegations thereof, and, as a special defense, alleged that thedefendant, pursuant to article 12 of its by-laws, had preferential right to buy from the plaintiffsaid shares at the par value of P100 a share, plus P90 as dividends corresponding to the year1922, and that said offer was refused by the plaintiff. The defendant prayed for a judgmentabsolving it from all liability under the complaint and directing the plaintiff to deliver to thedefendant the five shares of stock in question, and to pay damages in the sum of P500, and thecosts.

Upon the issue presented by the pleadings above stated, the cause was brought on for trial, at theconclusion of which, and on August 21, 1924, the Honorable N. Capistrano, judge, held that, inhis opinion, article 12 of the by-laws of the corporation which gives it preferential right to buy its

shares from retiring stockholders, is in conflict with Act No. 1459 (Corporation Law), especiallywith section 35 thereof; and rendered a judgment ordering the defendant corporation, through itsboard of directors, to register in the books of said corporation the said five shares of stock in thename of the plaintiff, Henry Fleischer, as the shareholder or owner thereof, instead of the originalowner, Manuel Gonzalez, with costs against the defendant.

The defendant appealed from said judgment, and now makes several assignment of error, all ofwhich, in substance, raise the question whether or not article 12 of the by-laws of the corporationis in conflict with the provisions of the Corporation Law (Act No. 1459).

There is no controversy as to the facts of the present case. They are simple and may be stated asfollows:

That Manuel Gonzalez was the original owner of the five shares of stock in question, Nos. 16,17, 18, 19 and 20 of the Botica Nolasco, Inc.; that on March 11, 1923, he assigned and deliveredsaid five shares to the plaintiff, Henry Fleischer, by accomplishing the form of endorsementprovided on the back thereof, together with other credits, in consideration of a large sum ofmoney owed by Gonzalez to Fleischer (Exhibits A, B, B-1, B-2, B-3, B-4); that on March 13,1923, Dr. Eduardo Miciano, who was the secretary-treasurer of said corporation, offered to buy

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from Henry Fleischer, on behalf of the corporation, said shares of stock, at their par value ofP100 a share, for P500; that by virtue of article 12 of the by-laws of Botica Nolasco, Inc., saidcorporation had the preferential right to buy from Manuel Gonzalez said shares (Exhibit 2); thatthe plaintiff refused to sell them to the defendant; that the plaintiff requested Doctor Miciano toregister said shares in his name; that Doctor Miciano refused to do so, saying that it would be in

contravention of the by-laws of the corporation.

It also appears from the record that on the 13th day of March, 1923, two days after theassignment of the shares to the plaintiff, Manuel Gonzales made a written statement to the BoticaNolasco, Inc., requesting that the five shares of stock sold by him to Henry Fleischer be notedtransferred to Fleischer's name. He also acknowledged in said written statement the preferentialright of the corporation to buy said five shares (Exhibit 3). On June 14, 1923, Gonzalez wrote aletter to the Botica Nolasco, withdrawing and cancelling his written statement of March 13, 1923(Exhibit C), to which letter the Botica Nolasco on June 15, 1923, replied, declaring that hiswritten statement was in conformity with the by-laws of the corporation; that his letter of June14th was of no effect, and that the shares in question had been registered in the name of the

Botica Nolasco, Inc., (Exhibit X).

As indicated above, the important question raised in this appeal is whether or not article 12 of theby-laws of the Botica Nolasco, Inc., is in conflict with the provisions of the Corporation Law(Act No. 1459). Appellant invoked said article as its ground for denying the request of theplaintiff that the shares in question be registered in his (plaintiff's) name, and for claiming that it(Botica Nolasco, Inc.) had the preferential right to buy said shares from Gonzalez. Appellantnow contends that article 12 of the said by-laws is in conformity with the provisions of Act No.1459. Said article is as follows:

ART. 12. Las acciones de la Corporacion pueden ser transferidas a otra persona, pero

para que estas transferencias tengan validez legal, deben constar en los registros de laCorporacion con el debido endoso del accionista a cuyo nombre se ha expedido la acciono acciones que se transfieran, o un documento de transferencia.Entendiendose que,ningun accionista transferira accion alguna a otra persona sin participar antes por escritoal Secretario-Tesorero.En igualdad de condiciones, la sociedad tendra el derecho deadquirir para si la accion o acciones que se traten de transferir. (Exhibit 2.)

The above-quoted article constitutes a by-law or regulation adopted by the Botica Nolasco, Inc.,governing the transfer of shares of stock of said corporation. The latter part of said article createsin favor of the Botica Nolasco, Inc., a preferential right to buy, under the same conditions, theshare or shares of stock of a retiring shareholder. Has said corporation any power, under theCorporation Law (Act. No. 1459), to adopt such by-law?

The particular provisions of the Corporation Law referring to transfer of shares of stock are asfollows:

SEC. 13. Every corporation has the power:

x x x x x x x x x

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(7) To make by-laws, not inconsistent with any existing law, for the fixing or changing ofthe number of its officers and directors within the limits prescribed by law, and for thetransferring of its stock, the administration of its corporate affairs, etc.

x x x x x x x x x

SEC. 35. The capital stock of stock corporations shall de divided into shares for whichcertificates signed by the president or the vice-president, countersigned by the secretaryor clerk and sealed with the seal of the corporation, shall be issued in accordance with theby-laws. Shares of stock so issued are personal property and may be transferred bydelivery of the certificate indorsed by the owneror his attorney in fact or other personlegally authorized to make the transfer.No transfer, however, shall be valid, except asbetween the parties, until the transfer is entered and noted upon the books of thecorporation so as to show the names of the parties to the transaction, that date of the

transfer, the number of the certificate, and the number of shares transferred.

No share of stock against which the corporation holds any unpaid claim shall betransferable on the books of the corporation.

Section 13, paragraph 7, above-quoted, empowers a corporation to make by-laws, notinconsistent with any existing law, for the transferring of its stock. It follows from said provision,that a by-law adopted by a corporation relating to transfer of stock should be in harmony with thelaw on the subject of transfer of stock. The law on this subject is found in section 35 of Act No.1459 above quoted. Said section specifically provides that the shares of stock"are personalproperty and may be transferred by delivery of the certificate indorsed by the owner, etc."Saidsection 35 defines the nature, character and transferability of shares of stock. Under said sectionthey are personal property and may be transferred as therein provided. Said section contemplates

no restriction as to whom they may be transferred or sold. It does not suggest that anydiscrimination may be created by the corporation in favor or against a certain purchaser. Theholder of shares, as owner of personal property, is at liberty, under said section, to dispose ofthem in favor of whomsoever he pleases, without any other limitation in this respect, than thegeneral provisions of law. Therefore, a stock corporation in adopting a by-law governing transferof shares of stock should take into consideration the specific provisions of section 35 of Act No.1459, and said by-law should be made to harmonize with said provisions. It should not beinconsistent therewith.

The by-law now in question was adopted under the power conferred upon the corporation bysection 13, paragraph 7, above quoted; but in adopting said by-law the corporation hastranscended the limits fixed by law in the same section, and has not taken into consideration theprovisions of section 35 of Act No. 1459.

As a general rule, the by-laws of a corporation are valid if they are reasonable and calculated tocarry into effect the objects of the corporation, and are not contradictory to the general policy ofthe laws of the land. (Supreme Commandery of the Knights of the Golden Rule vs. Ainsworth,71 Ala., 436; 46 Am. Rep., 332.)

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On the other hand, it is equally well settled that by-laws of a corporation must be reasonable andfor a corporate purpose, and always within the charter limits. They must always be strictlysubordinate to the constitution and the general laws of the land. They must not infringe thepolicy of the state, nor be hostile to public welfare. (46 Am. Rep., 332.) They must not disturbvested rights or impair the obligation of a contract, take away or abridge the substantial rights of

stockholder or member, affect rights of property or create obligations unknown to the law.(People's Home Savings Bankvs. Superior Court, 104 Cal., 649; 43 Am. St. Rep., 147; Irelandvs. Globe Milling Co., 79 Am. St. Rep., 769.)

The validity of the by-law of a corporation is purely a question of law. (South Florida RailroadCo. vs. Rhodes, 25 Fla., 40.)

The power to enact by-laws restraining the sale and transfer of stock must be found in thegoverning statute or the charter. Restrictions upon the traffic in stock must have theirsource in legislative enactment, as the corporation itself cannot create such impediments.By-law are intended merely for the protection of the corporation, and prescribe regulation

and not restriction; they are always subject to the charter of the corporation. Thecorporation, in the absence of such a power, cannot ordinarily inquire into or pass uponthe legality of the transaction by which its stock passes from one person to another, norcan it question the consideration upon which a sale is based. A by-law cannot take awayor abridge the substantial rights of stockholder. Under a statute authorizing by- laws forthe 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 theright of sale. (4 Thompson on Corporations, sec. 4137, p. 674.

The right of unrestrained transfer of shares inheres in the very nature of a corporation,and courts will carefully scrutinize any attempt to impose restrictions or limitations upon

the right of stockholders to sell and assign their stock. The right to impose any restraintin this respect must be conferred upon the corporation either by the governing statute orby the articles of the corporation. It cannot be done by a by-law without statutory orcharter authority. (4 Thompson on Corporations, sec. 4334, pp. 818, 819.)

The jus disponendi, being an incident of the ownership of property, the general rule(subject to exceptions hereafter pointed out and discussed) is that every owner ofcorporate shares has the same uncontrollable right to alien them which attaches to the

ownership of any other species of property. A shareholder is under no obligation torefrain from selling his shares at the sacrifice of his personal interest, in order to securethe welfare of the corporation, or to enable another shareholder to make gains and profits.(10 Cyc., p. 577.)

It follows from the foregoing that a corporation has no power to prevent or to restraintransfers of its shares, unless such power is expressly conferred in its charter or

governing statute. This conclusion follows from the further consideration that by-laws orother regulations restraining such transfers, unless derived from authority expressly

granted by the legislature, would be regarded as impositions in restraint of trade. (10Cyc., p. 578.)

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The foregoing authorities go farther than the stand we are taking on this question. They hold thatthe power of a corporation to enact by-laws restraining the sale and transfer of shares, should notonly be in harmony with the law or charter of the corporation, but such power should beexpressly granted in said law or charter.

The only restraint imposed by the Corporation Law upon transfer of shares is found in section 35of Act No. 1459, quoted above, as follows: "No transfer, however, shall be valid, except asbetween the parties, until the transfer is entered and noted upon the books of the corporation soas to show the names of the parties to the transaction, the date of the transfer, the number of thecertificate, and the number of shares transferred." This restriction is necessary in order that theofficers of the corporation may know who are the stockholders, which is essential in conductingelections of officers, in calling meeting of stockholders, and for other purposes. but anyrestriction of the nature of that imposed in the by-law now in question, is ultra vires, violative ofthe property rights of shareholders, and in restraint of trade.

And moreover, the by-laws now in question cannot have any effect on the appellee. He had no

knowledge of such by-law when the shares were assigned to him. He obtained them in good faithand for a valuable consideration. He was not a privy to the contract created by said by-lawbetween the shareholder Manuel Gonzalez and the Botica Nolasco, Inc. Said by-law cannotoperate to defeat his rights as a purchaser.

An unauthorized by-law forbidding a shareholder to sell his shares without first offeringthem to the corporation for a period of thirty days is not binding upon an assignee of thestock as a personal contract, although his assignor knew of the by-law and took part in itsadoption. (10 Cyc., 579; Ireland vs. Globe Milling Co., 21 R.I., 9.)

When no restriction is placed by public law on the transfer of corporate stock, a purchaser

is not affected by any contractual restriction of which he had no notice. (Brinkerhoff-Farris Trust and Savings Co. vs. Home Lumber Co., 118 Mo., 447.)

The assignment of shares of stock in a corporation by one who has assented to anunauthorized by-law has only the effect of a contract by, and enforceable against, theassignor; the assignee is not bound by such by-law by virtue of the assignment alone.(Ireland vs. Globe Milling Co., 21 R.I., 9.)

A by-law of a corporation which provides that transfers of stock shall not be valid unlessapproved by the board of directors, while it may be enforced as a reasonable regulationfor the protection of the corporation against worthless stockholders, cannot be madeavailable to defeat the rights of third persons. (Farmers' and Merchants' Bank of Linevillevs. Wasson, 48 Iowa, 336.)

Counsel for defendant incidentally argues in his brief, that the plaintiff does not have any right ofaction against the defendant corporation, but against the president and secretary thereof,inasmuch as the signing and registration of shares is incumbent upon said officers pursuant tosection 35 of the Corporation Law. This contention cannot be sustained now. The questionshould have been raised in the lower court. It is too late to raise it now in this appeal. Besides, as

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stated above, the corporation was made defendant in this action upon the demurrer of theattorney of the original defendant in the lower court, who contended that the Botica Nolasco,Inc., should be made the party defendant in this action. Accordingly, upon order of the court, thecomplaint was amended and the said corporation was made the party defendant.

Whenever a corporation refuses to transfer and register stock in cases like the present, mandamuswill lie to compel the officers of the corporation to transfer said stock upon the books of thecorporation. (26 Cyc. 347; Hagervs. Bryan, 19 Phil., 138.)

In view of all the foregoing, we are of the opinion, and so hold, that the decision of the lowercourt is in accordance with law and should be and is hereby affirmed, with costs. So ordered

G.R. No. L-28113 March 28, 1969

THE MUNICIPALITY OF MALABANG, LANAO DEL SUR, and AMER MACAORAO

BALINDONG, petitioners,

vs.PANGANDAPUN BENITO, HADJI NOPODIN MACAPUNUNG, HADJI HASANMACARAMPAD, FREDERICK V. DUJERTE MONDACO ONTAL, MARONSONG

ANDOY, MACALABA INDAR LAO. respondents.

L. Amores and R. Gonzales for petitioners.Jose W. Diokno for respondents.

CASTRO,J.:

The petitioner Amer Macaorao Balindong is the mayor of Malabang, Lanao del Sur,

while the respondent Pangandapun Bonito is the mayor, and the rest of the respondents are thecouncilors, of the municipality of Balabagan of the same province. Balabagan was formerly apart of the municipality of Malabang, having been created on March 15, 1960, by ExecutiveOrder 386 of the then President Carlos P. Garcia, out of barrios and sitios 1 of the lattermunicipality.

The petitioners brought this action for prohibition to nullify Executive Order 386 and torestrain the respondent municipal officials from performing the functions of their respectiveoffice relying on the ruling of this Court in Pelaez v. Auditor General2 andMunicipality of SanJoaquin v. Siva. 3

InP

elaez this Court, through Mr. Justice (now Chief Justice) Concepcion, ruled:

(1) thatsection 23 of Republic Act 2370 [Barrio Charter Act, approved January 1, 1960], by vesting thepower to create barrios in the provincial board, is a "statutory denial of the presidential authorityto create a new barrio [and] implies a negation of the biggerpower to create municipalities," and(2) that section 68 of the Administrative Code, insofar as it gives the President the power tocreate municipalities, is unconstitutional (a) because it constitutes an undue delegation oflegislative power and (b) because it offends against section 10 (1) of article VII of theConstitution, which limits the President's power over local governments to mere supervision. As

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this Court summed up its discussion: "In short, even if it did not entail an undue delegation oflegislative powers, as it certainly does, said section 68, as part of the Revised AdministrativeCode, approved on March 10, 1917, must be deemed repealed by the subsequent adoption of theConstitution, in 1935, which is utterly incompatible and inconsistent with said statutoryenactment."

On the other hand, the respondents, while admitting the facts alleged in the petition,nevertheless argue that the rule announced in Pelaez can have no application in this case becauseunlike the municipalities involved in Pelaez, the municipality of Balabagan is at least a de factocorporation, having been organized under color of a statute before this was declaredunconstitutional, its officers having been either elected or appointed, and the municipality itselfhaving discharged its corporate functions for the past five years preceding the institution of thisaction. It is contended that as a de facto corporation, its existence cannot be collaterally attacked,although it may be inquired into directly in an action forquo warranto at the instance of the Stateand not of an individual like the petitioner Balindong.

It is indeed true that, generally, an inquiry into the legal existence of a municipality isreserved to the State in a proceeding forquo warranto or other direct proceeding, and that onlyin a few exceptions may a private person exercise this function of government. 4 But the ruledisallowing collateral attacks applies only where the municipal corporation is at least a de factocorporations. 5 For where it is neither a corporation de jure norde facto, but a nullity, the rule isthat its existence may be, questioned collaterally or directly in any action or proceeding by anyone whose rights or interests ate affected thereby, including the citizens of the territoryincorporated unless they are estopped by their conduct from doing so. 6

And so the threshold question is whether the municipality of Balabagan is a de factocorporation. As earlier stated, the claim that it is rests on the fact that it was organized before the

promulgation of this Court's decision inP

elaez.

7

Accordingly, we address ourselves to the question whether a statute can lend color ofvalidity to an attempted organization of a municipality despite the fact that such statute issubsequently declared unconstitutional.lawphi1.et

This has been a litigiously prolific question, sharply dividing courts in the United States.Thus, some hold that a de facto corporation cannot exist where the statute or charter creating it isunconstitutional because there can be no de facto corporation where there can be no de jure one,

8 while others hold otherwise on the theory that a statute is binding until it is condemned asunconstitutional. 9

An early article in the Yale Law Journal offers the following analysis:

It appears that the true basis for denying to the corporation a de facto status lay inthe absence of any legislative act to give vitality to its creation. An examination of thecases holding, some of them unreservedly, that a de facto office or municipal corporationcan exist under color of an unconstitutional statute will reveal that in no instance did the

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invalid act give life to the corporation, but that either in other valid acts or in theconstitution itself the office or the corporation was potentially created....

The principle that color of title under an unconstitutional statute can exist onlywhere there is some other valid law under which the organization may be effected, or at

least an authority in potentiaby the state constitution, has its counterpart in the negativepropositions that there can be no color of authority in an unconstitutional statute thatplainly so appears on its face or that attempts to authorize the ousting of a de jure ordefacto municipal corporation upon the same territory; in the one case the fact would implythe imputation of bad faith, in the other the new organization must be regarded as a mereusurper....

As a result of this analysis of the cases the following principles may be deducedwhich seem to reconcile the apparently conflicting decisions:

I. The color of authority requisite to the organization of a de facto municipal

corporation may be:

1. A valid law enacted by the legislature.

2. An unconstitutional law, valid on its face, which has either (a) beenupheld for a time by the courts or (b) not yet been declared void; providedthat a warrant for its creation can be found in some other valid law or inthe recognition of its potential existence by the general laws orconstitution of the state.

II. There can be no de facto municipal corporation unless either directly or

potentially, such a de jure corporation is authorized by some legislative fiat.

III. There can be no color of authority in an unconstitutional statute alone, theinvalidity of which is apparent on its face.

IV. There can be no de facto corporation created to take the place of an existingde jure corporation, as such organization would clearly be a usurper.10

In the cases where a de facto municipal corporation was recognized as such despite thefact that the statute creating it was later invalidated, the decisions could fairly be made to rest onthe consideration that there was some other valid law giving corporate vitality to the

organization. Hence, in the case at bar, the mere fact that Balabagan was organized at a timewhen the statute had not been invalidated cannot conceivably make it a de facto corporation, as,independently of the Administrative Code provision in question, there is no other valid statute togive color of authority to its creation. Indeed, inMunicipality of San Joaquin v. Siva, 11 this Courtgranted a similar petition for prohibition and nullified an executive order creating themunicipality of Lawigan in Iloilo on the basis of thePelaez ruling, despite the fact that themunicipality was created in 1961, before section 68 of the Administrative Code, under which the

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President had acted, was invalidated. 'Of course the issue ofde facto municipal corporation didnot arise in that case.

In Norton v. Shelby Count, 12 Mr. Justice Field said: "An unconstitutional act is not a law;it confers no rights; it imposes no duties; it affords no protection; it creates no office; it is, in

legal contemplation, as inoperative as though it had never been passed." Accordingly, he heldthat bonds issued by a board of commissioners created under an invalid statute wereunenforceable.

Executive Order 386 "created no office." This is not to say, however, that the acts doneby the municipality of Balabagan in the exercise of its corporate powers are a nullity because theexecutive order "is, in legal contemplation, as inoperative as though it had never been passed."For the existence of Executive, Order 386 is "an operative fact which cannot justly be ignored."As Chief Justice Hughes explained in Chicot County Drainage Districtv. Baxter State Bank:13

The courts below have proceeded on the theory that the Act of Congress, having

been found to be unconstitutional, was not a law; that it was inoperative, conferring norights and imposing no duties, and hence affording no basis for the challenged decree.Norton v. Shelby County, 118 U.S. 425, 442; Chicago, I. & L. Ry. Co. v. Hackett, 228U.S. 559, 566. It is quite clear, however, that such broad statements as to the effect of adetermination of unconstitutionality must be taken with qualifications. The actualexistence of a statute, prior to such a determination, is an operative fact and may haveconsequences which cannot justly be ignored. The past cannot always be erased by a newjudicial declaration. The effect of the subsequent ruling as to invalidity may have to beconsidered in various aspects with respect to particular relations, individual andcorporate, and particular conduct, private and official. Questions of rights claimed tohave become vested, of status of prior determinations deemed to have finality and acted

upon accordingly, of public policy in the light of the nature both of the statute and of itsprevious application, demand examination. These questions are among the most difficultof those which have engaged the attention of courts, state and federal, and it is manifestfrom numerous decisions that an all-inclusive statement of a principle of absoluteretroactive invalidity cannot be justified.

There is then no basis for the respondents' apprehension that the invalidation of theexecutive order creating Balabagan would have the effect of unsettling many an act done inreliance upon the validity of the creation of that municipality. 14

ACCORDINGLY, the petition is granted, Executive Order 386 is declared void, and therespondents are hereby permanently restrained from performing the duties and functions of theirrespective offices. No pronouncement as to costs.

Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez and Capistrano, JJ., concur.

Teehankee and Barredo, JJ., took no part.

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Separate Opinions

FERNANDO,J., concurring:

I concur fully with the well-written opinion of Justice Castro. It breaks new ground; it

strikes out new paths. It is precisely because of its impact on the power of judicial review ofexecutive acts that I deem a few additional words would not be amiss.

1. Insofar as the effect of a declaration of unconstitionality is concerned, the latter andmore realistic trend reflected in Chicot County Drainage District v. Baxter State Bank1

had previously elicited our approval. Thus: "'Rutter vs. Esteban (93 Phil. 68) may beconstrued to mean that at the time of the decision the Moratorium law could no longer bevalidly applied because of the prevailing circumstances. At any rate, although the generalrule is that an unconstitutional statute 'confers no right, creates no office, affords noprotection and justifies no acts performed under it.' ... there are several instances whereincourts, out of equity, have relaxed its operation ... or qualified its effects 'since the actual

existence of a statute prior to such declaration is an operative fact, and may haveconsequences which cannot justly be ignored' ... and a realistic approach is eroding thegeneral doctrine ....'" 2 Also: "We have taken note, of the fact that, on June 30, 1961,Section 25 of Reorganization Plan No. 20-A had been declared unconstitutional by thisCourt in the case of Corominas, et al. v. The Labor Standards Commission, et al., .... Itappears, however, that the Plaintiff had filed his claim before Regional Office No. 4 ofthe Department of Labor on July 26, 1960, or about one year before said Section 25 hadbeen declared unconstitutional. The circumstance that Section 25 of Reorganization PlanNo. 20-A had been declared unconstitutional should not be counted against the defendantin the present case. In the case of Manila Motor Co., Inc. v. Flores, ..., this Court upheldthe right of a party under the Moratorium Law which had accrued in his favor before said

law was declared unconstitutional by this Court in the case of Rutter v. Esteban, 93 Phil.68." 3

2. Nothing can be clearer therefore in the light of the two above cases than that a previousdeclaration of invalidity of legislative acts would not be bereft of legal results. Wouldthat view hold true of nullification of executive acts? There might have been doubts as tothe correct answer before. There is none now.

A judicial decision annulling a presidential exercise of authority4

is not withoutits effect either. That much is evident from the holding now reached. The act strickendown, whether proceeding from the legislature or the Executive, could in the language ofthe Chicot County case, be considered, prior to the declaration of invalidity, as "anoperative fact and may have consequences which cannot justly be ignored."

Thus the frontiers of the law have been extended, a doctrine which to some maycome into play when a statute is voided is now considered equally applicable to aPresidential act that has met a similar fate. Such a result should not occasion surprise.That is to be expected.

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Nor is this all. If there be admission of the force of the assertion that the Pelaez opinionwent no further than to locate in the challenged Executive orders creating municipal corporationsan act in excess of statutory authority, then our decision in this case is all the more noteworthyfor the more hospitable scope accorded the Chicot doctrine. For as originally formulated, itwould merely recognize that during its existence, prior to its being declared violative of the

constitute, the statute must be deemed an operative fact. Today we decide that such a doctrineextends to a Presidential act held void not only on the ground of unconstitutional infirmity butalso because in excess of the statutory power conferred. That to me is the more significant aspectof this decision. To repeat, to that point of view I yield full concurrence.

I do so because it appears to me a logical corollary to the principle of separation ofpowers. Once we accept the basic doctrine that each department as a coordinate agency ofgovernment is entitled to the respect of the other two, it would seem to follow that at the veryleast, there is a presumption of the validity of the act performed by it, unless subsequentlydeclared void in accordance with legally accepted principles. The rule of law cannot be satisfiedwith anything less.

Since under our Constitution, judicial review exists precisely to test the validity ofexecutive or legislative acts in an appropriate legal proceeding, there is always the possibility oftheir being declared inoperative and void. Realism compels the acceptance of the thought thatthere could be a time-lag between the initiation of such Presidential or congressional exercise ofpower and the final declaration of nullity. In the meanwhile, it would be productive of confusion,perhaps at times even of chaos, if the parties affected were left free to speculate as to its fatebeing one of doom, thus leaving them free to disobey it in the meanwhile. Since, however, theorderly processes of government not to mention common sense, requires that the presumption ofvalidity be accorded an act of Congress or an order of the President, it would be less than fair,and it may be productive of injustice, if no notice of its existence as a fact be paid to it, even ifthereafter, it is stricken down as contrary, in the case of Presidential act, either to theConstitution or a controlling statute.

The far-reaching import in the above sense of the decision we now render calls, to mymind, for an articulation of further reflection on its varied implications. We have here anillustration to paraphrase Dean Pound, of the law being stable and yet far from standing still.That is as it ought to be; that is how law grows. It is in that sense that the judicial process isimpressed with creativity, admittedly within limits rather narrowly confined. That in itself is tohold fast to the appropriate role of the judiciary, far from insignificant as our decision discloses.Hence, this separate concurring opinion, which, I trust, will make manifest why my agreementwith what Justice Castro had so ably expressed in the opinion of the Court is wholehearted andentire.

G.R. No. L-26649 July 13, 1927

THE GOVERNMENT OF THE PHILIPPINE ISLANDS (on relation of the Attorney-General), plaintiff,vs.EL HOGAR FILIPINO, defendant.

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Attorney-GeneralJaranilla and Solicitor-General Reyes for plaintiff.Fisher, DeWitt, Perkins and Brady; Camus, Delgado and Recto and Antonio Sanz for defendant.

Wm. J. Rohde as amicus curiae.

STREET,J.:

This is a quo warrantoproceeding instituted originally in this court by the Government of thePhilippine Islands on the relation of the Attorney-General against the building and loanassociation known as El Hogar Filipino, for the purpose of depriving it of its corporate franchise,excluding it from all corporate rights and privileges, and effecting a final dissolution of saidcorporation. The complaint enumerates seventeen distinct causes of action, to all of which thedefendant has answered upon the merits, first admitting the averments of the first paragraph inthe statement of the first cause of action, wherein it is alleged that the defendant was organized inthe year 1911 as a building and loan association under the laws of the Philippine Islands, andthat, since its organization, the corporation has been doing business in the Philippine Islands,with its principal office in the City of Manila. Other facts alleged in the various causes of action

in the complaint are either denied in the answer or controverted in legal effect by other facts.

After issue had been thus joined upon the merits, the attorneys entered into an elaborateagreement as to the fact, thereby removing from the field of dispute such matters of fact as arenecessary to the solution of the controversy. It follows that we are here confronted only with thelegal questions arising upon the agreed statement.

On March 1, 1906, the Philippine Commission enacted what is known as the Corporation Law(Act No. 1459) effective upon April 1 of the same year. Section 171 to 190, inclusive, of this Actare devoted to the subject of building and loan associations, defining their objects makingvarious provisions governing their organization and administration, and providing for the

supervision to be exercised over them. These provisions appear to be adopted from Americanstatutes governing building and loan associations and they of course reflect the ideals andprinciples found in American law relative to such associations. The respondent, El HogarFilipino, was apparently the first corporation organized in the Philippine Islands under theprovisions cited, and the association has been favored with extraordinary success. The articles ofincorporation bear the date of December 28, 1910, at which time capital stock in the associationhad been subscribed to the amount of P150,000 of which the sum of P10,620 had been paid in.Under the law as it then stood, the capital of the Association was not permitted to exceedP3,000,000, but by Act No. 2092, passed December 23, 1911, the statute was so amended as topermit the capitalization of building and loan associations to the amount of ten millions. Soonthereafter the association took advantage of this enactment by amending its articles so as toprovide that the capital should be in an amount not exceeding the then lawful limit. From thetime of its first organization the number of shareholders has constantly increased, with the resultthat on December 31, 1925, the association had 5,826 shareholders holding 125,750 shares, witha total paid-up value of P8,703,602.25. During the period of its existence prior to the date lastabove-mentioned the association paid to withdrawing stockholders the amount ofP7,618,257,.72; and in the same period it distributed in the form of dividends among itsstockholders the sum of P7,621,565.81.

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First cause of action. The first cause of action is based upon the alleged illegal holding by therespondent of the title to real property for a period in excess of five years after the property hadbeen bought in by the respondent at one of its own foreclosure sales. The provision of lawrelevant to the matter is found in section 75 of Act of Congress of July 1, 1902 (repeated insubsection 5 of section 13 of the Corporation Law.) In both of these provisions it is in substance

declared that while corporations may loan funds upon real estate security and purchase real estatewhen necessary for the collection of loans, they shall dispose of real estate so obtained withinfive years after receiving the title.

In this connection it appears that in the year 1920 El Hogar Filipino was the holder of a recordedmortgage upon a tract of land in the municipality of San Clemente, Province of Tarlac, assecurity for a loan of P24,000 to the shareholders of El Hogar Filipino who were the owners ofsaid property. The borrowers having defaulted in their payments, El Hogar Filipino foreclosedthe mortgage and purchased the land at the foreclosure sale for the net amount of theindebtedness, namely, the sum of P23,744.18. The auction sale of the mortgaged property tookplace November 18, 1920, and the deed conveying the property to El Hogar Filipino was

executed and delivered December 22, 1920. On December 27, 1920, the deed conveying theproperty to El Hogar Filipino was sent to the register of deeds of the Province of Tarlac, with therequest that the certificate of title then standing in the name of the former owners be cancelledand that a new certificate of title be issued in the name of El Hogar Filipino. Said deed wasreceived in the office of the register of deeds of Tarlac on December 28, 1920, together with theold certificate of title, and thereupon the register made upon the said deed the followingannotation:

The foregoing document was received in this office at 4.10 p. m., December 28, 1920,according to entry 1898, page 50 of Book One of the Day Book and registered on theback of certificate of title No. 2211 and its duplicate, folio 193 of Book A-10 of theregister of original certificate. Tarlac, Tarlac, January 12, 1921. (Sgd.) SILVINO LOPEZDE JESUS,Register of Deeds.

For months no reply was received by El Hogar Filipino from the register of deeds of Tarlac, andletters were written to him by El Hogar Filipino on the subject in March and April, 1921,requesting action. No answer having been received to these letters, a complaint was made by ElHogar Filipino to the Chief of the General Land Registration Office; and on May 7, 1921, thecertificate of title to the San Clemente land was received by El Hogar Filipino from the registerof deeds of Tarlac.

On March 10, 1921, the board of directors of El Hogar Filipino adopted a resolution authorizingVicente Bengzon, an agent of the corporation, to endeavor to find a buyer for the San Clementeland. On July 27, 1921, El Hogar Filipino authorized one Jose Laguardia to endeavor to find apurchaser for the San Clemente land for the sum of P23,000 undertaking to pay the saidLaguardia a commission of 5 per centum of the selling price for his services, but no offers topurchase were obtained through this agent or through the agent Bengzon. In July, 1923, plans ofthe San Clemente land were sent to Mr. Luis Gomez, Mr. J. Gonzalez and Mr. Alfonso deCastelvi, as prospective purchasers, but no offers were received from them. In January, 1926, theagent not having succeeded in finding a buyer, the San Clemente land was advertised for sale by

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El Hogar Filipino inEl Debate, La Vanguardia and Taliba, three newspapers of generalcirculation in the Philippine Islands published in the City of Manila. On March 16, 1926, the firstoffer for the purchase of the San Clemente land was received by El Hogar Filipino. This offerwas made to it in writing by one Alcantara, who offered to buy it for the sum of P4,000,Philippine currency, payable P500 in cash, and the remainder within thirty days. Alcantara's

offer having been reported by the manager of El Hogar Filipino to its board of directors, it wasdecided, by a resolution adopted at a meeting of the board held on March 25, 1926, to accept theoffer, and this acceptance was communicated to the prospective buyer. Alcantara was givensuccessive extensions of the time, the last of which expired April 30, 1926, within which to makethe payment agreed upon; and upon his failure to do so El Hogar Filipino treated the contractwith him as rescinded, and efforts were made at once to find another buyer. Finally the land wassold to Doa Felipa Alberto for P6,000 by a public instrument executed before a notary public atManila, P. I., on July 30, 1926.

Upon consideration of the facts above set forth it is evident that the strict letter of the law wasviolated by the respondent; but it is equally obvious that its conduct has not been characterized

by obduracy or pertinacity in contempt of the law. Moreover, several facts connected with theincident tend to mitigate the offense. The Attorney-General points out that the respondentacquired title on December 22, 1920, when the deed was executed and delivered, by which theproperty was conveyed to it as purchaser at its foreclosure sale, and this title remained in it untilJuly 30, 1926, when the property was finally sold to Felipa Alberto. The interval between thesetwo conveyances is thus more than five years; and it is contended that the five year period didnot begin to run against the respondent until May 7, 1921, when the register of deeds of Tarlacdelivered the new certificate of title to the respondent pursuant to the deed by which the propertywas acquired. As an equitable consideration affecting the case this contention, though notdecisive, is in our opinion more than respectable. It has been held by this court that a purchaserof land registered under the Torrens system cannot acquire the status of an innocent purchaserfor value unless his vendor is able to place in his hands an owner's duplicate showing the title ofsuch land to be in the vendor (Director of Lands vs. Addison, 49, Phil., 19; Rodriguez vs.Llorente, G. R. No. 266151). It results that prior to May 7, 1921, El Hogar Filipino was not reallyin a position to pass an indefeasible title to any purchaser. In this connection it will be noted thatsection 75 of the Act of Congress of July 1, 1902, and the similar provision in section 13 of theCorporation Law, allow the corporation "five years after receiving the title," within which todispose of the property. A fair interpretation of these provisions would seem to indicate that thedate of the receiving of the title in this case was the date when the respondent received theowner's certificate, or May 7, 1921, for it was only after that date that the respondent had anunequivocal and unquestionable power to pass a complete title. The failure of the respondent toreceive the certificate sooner was not due in any wise to its fault, but to unexplained delay on thepart of the register of deeds. For this delay the respondent cannot be held accountable.

Again, it is urged for the respondent that the period between March 25, 1926, and April 30, 1926,should not be counted as part of the five-year period. This was the period during which therespondent was under obligation to sell the property to Alcantara, prior to the rescission of thecontract by reason of Alcantara's failure to make the stipulated first payment. Upon this point thecontention of the respondent is, in our opinion, well founded. The acceptance by it of Alcantara'soffer obligated the respondent to Alcantara; and if it had not been for the default of Alcantara,

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the effective sale of the property would have resulted. The respondent was not at all chargeablewith the collapse of these negotiations; and hence in any equitable application of the law thisperiod should be deducted from the five-year period within which the respondent ought to havemade the sale. Another circumstance explanatory of the respondent's delay in selling the propertyis found in the fact that it purchased the property for the full amount of the indebtedness due to it

from the former owner, which was nearly P24,000. It was subsequently found that the propertywas not salable for anything like that amount and in the end it had to be sold for P6,000,notwithstanding energetic efforts on the part of the respondent to find a purchaser upon betterterms.

The question then arises whether the failure of the respondent to get rid of the San Clementeproperty within five years after it first acquired the deed thereto, even supposing the five-yearperiod to be properly counted from that date, is such a violation of law as should work aforfeiture of its franchise and require a judgment to be entered for its dissolution in this action ofquo warranto. Upon this point we do not hesitate to say that in our opinion the corporation hasnot been shown to have offended against the law in a manner that should entail a forfeiture of its

charter. Certainly no court with any discretion to use in the matter would visit upon therespondent and its thousands of shareholders the extreme penalty of the law as a consequence ofthe delinquency here shown to have been committed.

The law applicable to the case is in our opinion found in section 212 of the Code of CivilProcedure, as applied by this court in Government of the Philippine Islands vs. Philippine SugarEstates Development Co. (38 Phil., 15). This section (212), in prescribing the judgment to berendered against a corporation in an action ofquo warranto, among other things says:

. . . When it is found and adjudged that a corporation has offended in any matter ormanner which does not by law work as a surrender or forfeiture, or has misused a

franchise or exercised a power not conferred by law, but not of such a character as towork a surrender or forfeiture of its franchise, judgment shall be rendered that it be outsetfrom the continuance of such offense or the exercise of such power.

This provision clearly shows that the court has a discretion with respect to the infliction ofcapital punishment upon corporation and that there are certain misdemeanors and misuses offranchises which should not be recognized as requiring their dissolution. In Government of thePhilippine Islands vs. Philippine Sugar Estates Development Co. (38 Phil., 15), it was found thatthe offending corporation had been largely (though indirectly) engaged in the buying and holdingor real property for speculative purposes in contravention of its charter and contrary to theexpress provisions of law. Moreover, in that case the offending corporation was found to be stillinterested in the properties so purchased for speculative at the time the action was brought.Nevertheless, instead of making an absolute and unconditional order for the dissolution of thecorporation, the judgment of ouster was made conditional upon the failure of the corporation todiscontinue its unlawful conduct within six months after final decision. In the case before us therespondent appears to have rid itself of the San Clemente property many months prior to theinstitution of this action. It is evident from this that the dissolution of the respondent would notbe an appropriate remedy in this case. We do not of course undertake to say that a corporationmight not be dissolved for offenses of this nature perpetrated in the past, especially if its conduct

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had exhibited a willful obduracy and contempt of law. We content ourselves with holding thatupon the facts here before us the penalty of dissolution would be excessively severe and fraughtwith consequences altogether disproportionate to the offense committed.

The evident purpose behind the law restricting the rights of corporations with respect to the

tenure of land was to prevent the revival of the entail (mayorazgo) or other similar institution bywhich land could be fettered and its alienation hampered over long periods of time. In the casebefore us the respondent corporation has in good faith disposed of the piece of property whichappears to have been in its hands at the expiration of the period fixed by law, and a fairexplanation is given of its failure to dispose of it sooner. Under these circumstances thedestruction of the corporation would bring irreparable loss upon the thousand of innocentshareholders of the corporation without any corresponding benefit to the public. The discretionpermitted to this court in the application of the remedy ofquo warranto forbids so radical a useof the remedy.

But the case for the plaintiff supposes that the discretion of this court in matters like that now

before us has been expressly taken away by the third section of Act No. 2792, and that thedissolution of the corporation is obligatory upon the court a mere finding that the respondent hasviolated the provision of the Corporation Law in any respect. This makes necessary to examinethe Act last above-mentioned with some care. Upon referring thereto, we find that it consists ofthree sections under the following style:

No. 2792. An Act to amend certain sections of the Corporation Law, Act NumberedFourteen hundred and fifty-nine, providing for the publication of the assets and liabilitiesof corporations registering in the Bureau of Commerce and Industry, determining theliability of the officers of corporations with regard to the issuance of stock or bonus,establishing penalties for certain things, and for other purposes.

The first two section contain amendments to the Corporation Law with respect to matters withwhich we are not here concurred. The third section contains anew enactment to be inserted assection 190 (A) in the corporation Law immediately following section 190. This new sectionreads as follows:

SEC. 190. (A). Penalties. The violation of any of the provisions of this Act and itsamendments not otherwise penalized therein, shall be punished by a fine of not more thanone thousand pesos, or by imprisonment for not more than five years, or both, in thediscretion of the court. If the violation being proved, be dissolved by quo warrantoproceedings instituted by the Attorney-General or by any provincial fiscal, by order ofsaid Attorney-General: Provided, That nothing in this section provided shall be construedto repeal the other causes for the dissolution of corporation prescribed by existing law,and the remedy provided for in this section shall be considered as additional to theremedies already existing.

The contention for the plaintiff is to the effect that the second sentence in this enactment hasentirely abrogated the discretion of this court with respect to the application of the remedy ofqouwarranto, as expressed in section 212 of the Code of Civil Procedure, and that it is now

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mandatory upon us to dissolved any corporation whenever we find that it has committed anyviolation of the Corporation Law, however trivial. In our opinion in this radical view of themeaning of the enactment is untenable. When the statute says, "If the violation is committed by acorporation, the same shall, upon such violation being proved, be dissolved by quo warrantoproceedings . . .," the intention was to indicate that the remedy against the corporation shall be by

action ofquo warranto. There was no intention to define the principles governing said remedy,and it must be understood that in applying the remedy the court is still controlled by theprinciples established in immemorial jurisprudence. The interpretation placed upon this languagein the brief of the Attorney-General would be dangerous in the extreme, since it would actuallyplace the life of all corporate investments in the official. No corporate enterprise of any momentcan be conducted perpetually without some trivial misdemeanor against corporate law beingcommitted by some one or other of its numerous employees. As illustrations of the preposterouseffects of the provision, in the sense contended for by the Attorney-General, the attorneys for therespondent have called attention to the fact that under section 52 of the Corporation Law, abusiness corporation is required to keep a stock book and a transfer book in which the names ofstockholders shall kept in alphabetical order. Again, under section 94, railroad corporations are

required to cause all employees working on passenger trains or at a station for passengers to weara badge on his cap or hat which will indicate his office. Can it be supposed that the Legislatureintended to penalize the violation of such provisions as these by dissolution of the corporationinvolved? Evidently such could not have been the intention; and the only way to avoid theconsequence suggested is to hold, as we now hold, that the provision now under considerationhas not impaired the discretion of this court in applying the writ ofquo warranto.

Another way to put the same conclusion is to say that the expression "shall be dissolved by quowarranto proceedings" means in effect, "may be dissolved by quo warranto proceedings in thediscretion of the court." The proposition that the word "shall" may be construed as "may", whenaddressed by the Legislature to the courts, is well supported in jurisprudence. In the case ofBeckervs. Lebanon and M. St. Ry. Co., (188 Pa., 484), the Supreme Court of Pennsylvania hadunder consideration a statute providing as follows:

It shall be the duty of the court . . . to examine, inquire and ascertain whether suchcorporation does in fact posses the right or franchise to do the act from which suchalleged injury to private rights or to the rights and franchises of other corporations results;and if such rights or franchises have not been conferred upon such corporations, suchcourts, it exercising equitable power,shall, by injunction, at suit of the private parties orother corporations, restrain such injurious acts.

In an action based on this statute the plaintiff claimed injunctive relief as a matter of right. Butthis was denied the court saying:

Notwithstanding, therefore, the use of the imperative "shall" the injunction is not to begranted unless a proper case for injunction be made out, in accordance with the principlesand practice of equity. The word "shall" when used by the legislature to a court, is usuallya grant of authority and means "may", and even if it be intended to be mandatory it mustbe subject to the necessary limitation that a proper case has been made out for theexercise of the power.

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Other authorities amply sustain this view (People vs. Nusebaum, 66 N. Y. Supp., 129, 133; WestWisconsin R. Co. vs. Foley, 94 U. S., 100, 103; 24 Law. Ed., 71; Clancy vs. McElroy, 30 Wash.,567; 70 Pac., 1095; State vs. West, 3 Ohio State, 509, 511;In re Lent, 40 N. Y. Supp., 570, 572;16 Misc. Rep., 606; Ludlow vs. Ludlow's Executors, 4 N. J. Law [1 Sothard], 387, 394; Whipplevs. Eddy, 161 Ill., 114;43 N. E., 789, 790; Borkheim vs. Fireman's Fund Ins. Co., 38 Cal., 505,

506; Beasleyvs. People, 89 Ill., 571, 575; Donnelly

vs. Smith, 128 Iowa, 257; 103 N. W., 776).

But section 3 of Act No. 2792 is challenged by the respondent on the ground that the subject-matter of this section is not expressed in the title of the Act, with the result that the section isinvalid. This criticism is in our opinion well founded. Section 3 of our organic law (Jones Bill)declares, among other things, that "No bill which may be enacted into law shall embrace morethan one subject, and that subject shall be expressed in the title of the bill." Any law or part of alaw passed by the Philippine Legislature since this provision went into effect and offendingagainst its requirement is necessarily void.

Upon examining the entire Act (No. 2792), we find that it is directed to three ends which are

successively dealt with in the first three sections of the Act. But it will be noted that these threematters all relate to the Corporation Law; and it is at once apparent that they might properly havebeen embodied in a single Act if a title of sufficient unity and generality had been prefixedthereto. Furthermore, it is obvious, even upon casual inspection, that the subject-matter of eachof the first two sections is expressed and defined with sufficient precision in the title. Withrespect to the subject-matter of section 3 the only words in the title which can be taken to refer tothe subject-matter of said section are these, "An Act . . . establishing penalties for certain things,and for other purposes." These words undoubtedly have sufficient generality to cover thesubject-matter of section 3 of the Act. But this is not enough. The Jones Law requires that thesubject-matter of the bill "shall be expressed in the title of the bill."

When reference is had to the expression "establishing penalties for certain things," it is obviousthat these words express nothing. The constitutional provision was undoubtedly adopted in orderthat the public might be informed as to what the Legislature is about while bills are in process ofpassage. The expression "establishing penalties for certain things" would give no definiteinformation to anybody as to the project of legislation intended under this expression. Anexamination of the decided cases shows that courts have always been indulgent of the practicesof the Legislature with respect to the form and generality of title, for if extreme refinements wereindulged by the courts, the work of legislation would be unnecessarily hampered. But, as hasbeen observed by the California court, there must be some reasonable limit to the generality oftitles that will be allowed. The measure of legality is whether the title is sufficient to give noticeof the general subject of the proposed legislation to the persons and interests likely to beaffected.

In Lewis vs. Dunne (134 Cal., 291), the court had before it a statute entitled "An Act to revise theCode of Civil Procedure of the State of California, by amending certain sections, repealingothers, and adding certain new sections." This title was held to embrace more than one subject,which were not sufficiently expressed in the title. In discussing the question the court said:

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* * * It is apparent that the language of the title of the act in question, in and of itself,express no subject whatever. No one could tell from the title alone what subject oflegislation was dealt with in the body of the act; such subject so far as the title of the actinforms us, might have been entirely different from anything to be found in the act itself.

We cannot agree with the contention of some of respondent's counsel apparently tosome extent countenanced by a few authorities that the provision of the constitution inquestion can be entirely avoided by the simple device of putting into the title of an actwords which denote a subject "broad" enough to cover everything. Under that view, thetitle, "An act concerning the laws of the state," would be good, and the convention andpeople who framed and adopted the constitution would be convicted of the folly ofelaborately constructing a grave constitutional limitation of legislative power upon a mostimportant subject, which the legislature could at once circumvent by a mere verbal trick.The word "subject" is used in the constitution embrace but "one subject" it necessarilyimplies what everybody knows that there are numerous subjects of the legislation,and declares that only one of these subjects shall embraced in any one act. All subjects

cannot be conjured into one subject by the mere magic of a word in a title.

InRadervs. Township of Union (39 N. J. L., 509, 515), the Supreme Court of New Jersey madethe following observation:

* * * It is true, that it may be difficult to indicate, by a formula, how specialized the titleof a statute must be; but it is not difficult to conclude that it must mean something in theway of being a notice of what is doing. Unless it does not enough that it embraces thelegislative purpose it must express it; and where the language is too general, it willaccomplish the former, but not the latter. Thus, a law entitled "An act for a certainpurpose," would embrace any subject, but would express none, and, consequently, it

would not stand the constitutional test.

The doctrine properly applicable in matters of this kind is, we think, fairly summed up in acurrent repository of jurisprudence in the following language:

* * * While it may be difficult to formulate a rule by which to determine the extent towhich the title of a bill must specialize its object, it may be safely assumed that the titlemust not only embrace the subject of proposed legislation, but also express it clearly andfully enough to give notice of the legislative purpose. (25 R. C. L., p. 853.)

In dealing with the problem now before us the words "and for other purposes "found at the endof the caption of Act No. 2792, must be laid completely out of consideration. They expressnothing, and amount to nothing as a compliance with the constitutional requirement to whichattention has been directed. This expression "(for other purposes") is frequently found in the titleof acts adopted by the Philippine Legislature; and its presence in our laws is due to the adoptionby our Legislature of the style used in Congression allegation. But it must be remembered thatthe legislation of Congress is subject to no constitutional restriction with respect to the title ofbills. Consequently, in Congressional legislation the words "and for other purposes" at leastserve the purpose of admonishing the public that the bill whose heading contains these words

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contains legislation upon other subjects than that expressed in the title. Now, so long as thePhilippine Legislature was subject to no restriction with respect to the title of bills intended forenactment into general laws, the expression "for other purposes" could be appropriately used intitles, not precisely for the purpose of conveying information as to the matter legislated upon, butfor the purpose ad admonishing the public that any bill containing such words in the title might

contain other subjects than that expressed in the definitive part of the title. But, when congressadopted the Jones Law, the restriction with which we are now dealing became effective here andthe words "for other purposes" could no longer be appropriately used in the title of legislativebills. Nevertheless, the custom of using these words has still been followed, although they can nolonger serve to cover matter not germane to the bill in the title of which they are used. But thefutility of adding these words to the style of any act is now obvious (Cooley, Const. Lims., 8thed., p. 302)

In the brief for the plaintiff it is intimated that the constitutional restriction which we have beendiscussing is more or less of a dead letter in this jurisdiction; and it seems to be taken for grantedthat no court would ever presume to hold a legislative act or part of a legislative act invalid for

non-compliance with the requirement. This is a mistake; and no utterance of this court can becited as giving currency to any such notion. On the contrary the discussion contained in CentralCapiz vs. Ramirez (40 Phil., 883), shows that when a case arises where a violation of therestriction is apparent, the court has no alternative but to declare the legislation affected therebyto be invalid.

Second cause of action. The second cause of action is based upon a charge that the respondentis owning and holding a business lot, with the structure thereon, in the financial district of theCity of Manila is excess of its reasonable requirements and in contravention of subsection 5 ofsection 13 of the corporation Law. The facts on which this charge is based appear to be these:

On August 28, 1913, the respondent purchased 1,413 square meters of land at the corner of JuanLuna Street and the Muelle de la Industria, in the City of Manila, immediately adjacent to thebuilding then occupied by the Hongkong and Shanghai Banking Corporation. At the time therespondent acquired this lot there stood upon it a building, then nearly fifty years old, which wasoccupied in part by the offices of an importing firm and in part by warehouses of the same firm.The material used in the construction was Guadalupe stone and hewn timber, and the buildingcontained none of the facilities usually found in a modern office building.

In purchase of a design which had been formed prior to the purchase of the property, thedirectors of the El Hogar Filipino caused the old building to be demolished; and they erectedthereon a modern reinforced concrete office building. As at first constructed the new buildingwas three stories high in the main, but in 1920, in order to obtain greater advantage from the useof the land, an additional story was added to the building, making a structure of four storiesexcept in one corner where an additional story was place, making it five stories high over an areaof 117.52 square meters. It is admitted in the plaintiffs brief that this "noble and imposingstructure" to use the words of the Attorney-General "has greatly improved the aspect of thebanking and commercial district of Manila and has greatly contributed to the movement andcampaign for the Manila Bea