SECOND DIVISION

[G.R. No. 132358. April 12, 2002.]

MILA YAP SUMNDAD, petitioner, vs. JOHN WILLIAM HARRIGAN and BORACAY BEACH CLUB HOTEL, INC., (BBCHI), respondent.

Stephen C. Arceno for petitioner.

Enrique M. Belo for Boracay Beach Club Hotel, Inc.

Meer Meer and Meer and Fortun Narvasa & Salazar for respondent Harrigan.

SYNOPSIS

Respondent Harrigan filed a collection case against respondent corporation for P8,000,000.00 representing the corporation's loans or advances. Harrigan amended his complaint to state that respondent corporation disposed of and continues to actually dispose of corporate properties and funds "in fraud of its creditors." Petitioner, claiming ownership of the property, filed an urgent motion for leave to intervene. Petitioner's motion was granted, but instead of filing a complaint or an answer in intervention, moved to dismiss the amended complaint. When the same was denied, petitioner filed several motions for additional time to answer. She, however, failed to file the same and was subsequently declared as in default. Trying to regain her standing, petitioner filed several motions and pleading but without moving to lift the order of default. Meanwhile, Harrigan moved to execute the judgment, which the trial court granted. Petitioner then raised the issue to the Court of Appeals by way of a petition for certiorari, prohibition and mandamus. The petition was dismissed and his motion for reconsideration was denied. Hence, this petition for review on certiorari. Petitioner claimed that the trial court had no jurisdiction over the case being an intra-corporate dispute with the allegation of "in fraud of creditors" in the amended complaint.

It was held that the jurisdiction of courts are conferred by law and determined by the allegations in the complaint; that the allegation in the complaint seeking the collection of advances or loans from the corporation falls within the jurisdiction of the Regional Trial Court; that intra-corporate disputes, under the provision of Republic Act No. 8799, falls within the jurisdiction of Regional Trial Courts and no longer the Securities and Exchange Commission; and that certiorari is not a substitute for lost appeal.

SYLLABUS

1. REMEDIAL LAW; ACTIONS; JURISDICTION OVER SUBJECT MATTER, CONFERRED BY LAW AND DETERMINED BY ALLEGATIONS IN COMPLAINT. — The rule is that jurisdiction over the subject matter of the case is conferred by law and determined by the allegations of the

complaint. Therefore, to resolve the issue raised to us, an interpretation and application of the law on jurisdiction, must be made vis-à-vis the averments of the petitioner's complaint.

2. ID.; ID.; ID.; CASE AT BAR. — Now, from the averments of the amended complaint filed with the trial court as quoted above, Harrigan seeks to collect from BBCHI his advances or loans in the amount of at least P8 million, which are demandable in character pursuant to their agreement, including interest at 20% per annum accruing from September 1, 1990. The cause of action of the suit is, clearly, for the collection of a sum of money.

3. ID.; ID.; COMPLAINT; ALLEGATION OF "FRAUD OF CREDITORS" CAN ONLY MEAN "TO THE PREJUDICE OF CREDITORS"; CASE AT BAR. — In Alleje vs. CA, "fraud" is defined as a generic term embracing all multifarious means which human ingenuity can devise, and which are resorted to by one individual to secure an advantage over another by  false suggestions or by suppression of truth and includes all surprise, trick, cunning, dissembling and any unfair way by which another is cheated. Within the context of the complaint as quoted above, the phrase "in fraud of creditors" can only mean, "to the prejudice of creditors" and not to the use of devises or schemes tantamount to fraud and misrepresentation employed by the Board of Directors, business associates or its officers and partners to divert corporate funds and assets for personal use, as contemplated in Section 5 of PD 902-A. TCDcSE

4. ID.; ID.; INTRA-CORPORATE DISPUTES, NOW UNDER THE JURISDICTION OF THE REGIONAL TRIAL COURTS. — Equally unavailing is petitioner's contention that the case involves an intra-corporate controversy, or one between the corporation and its stockholder transposing it within the domain of the SEC. It should be noted that the issue has become moot and academic because with Republic Act No. 8799, Securities Regulation Code, it is now the Regional Trial Court and no longer the SEC that has jurisdiction. Under Section 5.2 of Republic Act No. 8799, original and exclusive jurisdiction to hear and decide, cases involving intra-corporate controversies have been transferred to a court of general jurisdiction or the appropriate Regional Trial Court.

5. ADMINISTRATIVE LAW; ADMINISTRATIVE AGENCIES AND TRIBUNALS, WITH LIMITED JURISDICTION. — Foregoing given, Harrigan's complaint against petitioner to recoup his financial exposure with BBCHI was properly lodged with the regular court and not with the SEC. This view is in accord with the rudimentary principle that administrative agencies, like the SEC, are tribunals of limited jurisdiction and, as such, could wield only such powers as are specifically granted to them by their enabling statutes.

6. REMEDIAL LAW; SPECIAL CIVIL ACTIONS; CERTIORARI; NOT A SUBSTITUTE FOR LOST OR LAPSED APPEAL. — Given our disquisition that the complaint for sum of money was instituted with the proper court, petitioner's remedy before the appellate court should have been a timely appeal and not certiorari. Therefore, the appellate court was correct in dismissing petitioner's petition for certiorari for being time-barred. Indeed, certiorari cannot be used as a substitute for lost or lapsed remedy of appeal, especially if such loss was occasioned by one's own neglect or error in the choice of remedies. As long as a court acts within its jurisdiction, any alleged errors committed in the exercise of its jurisdiction will amount to nothing more than errors of judgment reviewable by timely appeal and not by a special civil action of certiorari.

7. ID.; SUPREME COURT; NOT A TRIER OF FACTS. — Neither does petitioner's last assigned error merit our consideration, as any discussion on this issue of "personality" is merely academic. As earlier stated, whether or not petitioner has the personality to question the RTC order against BBCHI is a matter that should have been properly threshed out in an appeal filed with the CA. By allowing said order to become final and executory without interposing an appeal and by having incorrectly availed of the extraordinary remedy of certiorari, we can no longer, at this late hour, deal on this issue. We hasten to add that this issue requires delving into the facts of the case. Basic is the rule that this court is not a trier of facts. HCSEcI

D E C I S I O N

QUISUMBING, J p:

This petition for review on certiorari seeks to annul and set aside the decision promulgated on October 1, 1997, by the Court of Appeals, affirming the decision of the Regional Trial Court of Makati, Branch 61, which ruled in favor of respondent John William Harrigan, ordering respondent Boracay Beach Club Hotel Inc. to pay P8 million plus interest, attorney's fees and costs.

The facts of this case disclose that on February 6, 1995, Harrigan filed a complaint docketed as Civil Case No. 95-223 for collection of a sum of money with prayer for preliminary attachment with the RTC Makati against respondent BBCHI. 1

Harrigan prayed for the issuance of a writ of preliminary attachment pending the hearing of the case, which was granted by the trial court on March 2, 1995, after he posted an attachment bond of P2 million. 2

On March 6, 1995, Harrigan filed an amended complaint 3 impleading the management committee of BBCHI through its acting chairman, Corazon T. Tirol. The following material facts were alleged in the complaint, as amended: 4

xxx xxx xxx

3. Pursuant to a joint venture agreement between plaintiff and one Mila Yap-Sumndad, a Filipino and alleged owner of a 3,000 sq. m. land in Boracay, Aklan, to establish and develop a first-class tourist resort on said land which was assigned to defendant BBCHI, plaintiff invested in, and paid P1 Million for 8,000 shares of defendant corporation corresponding to 40% of its authorized capital stock.

4. To finance the construction of new buildings and the acquisition of furniture, equipment and other facilities of said resort, called Boracay Beach Club Hotel and owned by BBCHI, plaintiff gave advances or loans to said defendant, which as of October 2, 1990, already amounted to P1,000,000.00 . . .

5. Plaintiff continued to give advances to defendant BBCHI to complete the construction of the buildings and facilities of the Boracay Beach Club Hotel resort, which advances or loans was determined to be at least P8,000,000.00. Said loans, which are demandable in character and subject to interest of 20% per annum accruing from September 1, 1990, are to be serviced and paid by defendant BBCHI. SaIACT

xxx xxx xxx

9. Considering that as of September 1994, defendant has failed to service and pay, not only its above-mentioned demand able loans but even the accrued interests thereon which, as of December 31, 1994, already amounted to P393,451.07, plaintiff through his counsel demanded from defendant, through its officer and SEC-appointed manager, for settlement of the latter's said unpaid obligations.

10. Despite plaintiff's foregoing written demands for payment of its due obligations, the defendant has refused and failed to do so. 5

The trial court admitted the amended complaint and issued an amended order for the issuance of writ of attachment. 6

On March 29, 1995, petitioner Mila Yap Sumndad filed an "Urgent Motion for Leave to Intervene with Prayer for Status Quo Order and/or Suspension" praying that she be allowed to intervene either as plaintiff or defendant. 7 The trial court granted said motion on June 8, 1995 and gave petitioner ten days to file either a complaint or an answer in intervention. 8

 

Instead of filing an answer, petitioner moved to dismiss the amended complaint based on the following grounds: (1) forum shopping; (2) lack of jurisdiction; (3) failure to state a cause of action; and (4) litis pendentia. 9 This was denied by the RTC in its order dated October 17, 1995. 10 Thereafter, Sumndad filed 6 motions for additional time to file an answer. 11

Upon motion of Harrigan, petitioner was declared in default on March 21, 1996, for failure to answer within the reglementary period and the trial court proceeded with the ex-parte presentation of evidence. 12

On April 18, 1996, Harrigan filed a Motion for Judgment on the Pleadings. 13

On several occasions, petitioner attempted to regain her standing in court by filing numerous pleadings and motions. On October 1, 1996, the trial court resolved her motions in this wise: HCaEAT

A scrutiny of the entire records of this case show that Intervenor MILA YAP SUMNDAD, for failure to file COMPLAINT or ANSWER IN INTERVENTION, was declared in default per Order of 21 March 1996 and received by counsel for Intervenor on 10 May 1996, and subsequent thereto Intervenor MILA YAP SUMNDAD filed the following pleadings, to wit:

1. Manifestation and Opposition to Motion for Judgment on the Pleadings filed on 20 May 1996;

2. Motion to Suspend Proceedings filed on 28 May 1996;

3. Supplement to the Opposition to Motion for Judgment on the Pleadings with Manifestation to file Motion to Lift Order of Default filed on 17 June 1996;

4. Supplement to "Motion to Suspend Proceedings" on ground of Prejudicial Question and Forum Shopping;

5. Motion to Consolidate Above-Entitled Case with Civil Case No. 4847 of the RTC, Branch 7, Kalibo, Aklan filed on 03 September 1996.

The records likewise show that Intervenor MILA YAP SUMNDAD despite its Supplement to the Opposition to Motion for Judgment on the Pleadings with Manifestation to file Motion to Lift Order of Default filed on 17 July 1996 (Italics ours) has not, until now, filed the necessary motion to lift Order of Default, dated 21 March 1996.

In view of the foregoing, and the Order of 21 March 1996 declaring Intervenor MILA YAP SUMNDAD [in default,] not having been lifted, Intervenor has no standing in court, or considered out of court, and

consequently can no longer appear herein, or expect her pleadings to be acted upon. (citation omitted) 14

On the same date, the trial court, acting on Harrigan's motion for judgment on the pleadings, decreed: HDAaIc

A perusal of the ANSWERS filed by the defendants in this case for a SUM OF MONEY evidently failed to tender an issue and therefore, pursuant to Section 1, Rule 19, Rules of Court, JUDGMENT ON THE PLEADINGS is hereby rendered in favor of plaintiff and as against defendant BORACAY BEACH CLUB HOTEL, INC. (BBCHI), who is hereby ordered to:

1. PAY plaintiff the sum of EIGHT MILLION (P8,000,000.00) PESOS, Philippine Currency, plus 12% interest per annum computed from 27 July 1993, until fully paid;

2. PAY attorney's fees in the amount of P200,000.00, plus appearance fee of P2,000.00 per hearing attended by the counsel; and to

3. PAY the costs. 15

Not satisfied with the decision, petitioner moved for reconsideration. 16 In the meantime, Harrigan moved for the execution of judgment. 17 By order dated March 11, 1997, the trial court denied petitioner's motion for reconsideration and granted Harrigan's motion for execution of judgment. 18

Thereafter, a writ of execution was issued. 19

On May 7, 1997, petitioner filed with the Court of Appeals, a petition for certiorari, prohibition and mandamus, docketed as CA-G.R. SP No. 44088. 20 On October 1, 1997, the CA dismissed the petition for lack of merit. 21

Petitioner again moved for reconsideration. This, too, was denied in a resolution dated January 21, 1998. 22

Hence this petition for review on certiorari ascribing the following errors to the appellate court below:

I

THE COURT OF APPEALS, SIXTH DIVISION HAS SO FAR SANCTIONED THE ERRONEOUS EXERCISE OF JURISDICTION BY THE REGIONAL TRIAL COURT, MAKATI BRANCH 61 OVERCIVIL CASE NO. 95-223, FILED BY PRIVATE RESPONDENT JOHN HARRIGAN, AGAINST BORACAY BEACH CLUB HOTEL INC., OF WHICH HE ALLEGES TO BE A STOCKHOLDER (40%) FOR COLLECTION OF A SUM OF MONEY, BASED ON ALLEGED FRAUD, WHICH IS A SUBJECT MATTER CLEARLY WITHIN THE ORIGINAL AND EXCLUSIVE JURISDICTION OF THE SECURITIES AND EXCHANGE COMMISSION, UNDER SEC. 5 PD 902-A. FOR SUCH CLEAR ERROR OF JURISDICTION CERTIORARI NOT ORDINARY APPEAL IS THE CORRECT REMEDY. 23

II

THE COURT OF APPEALS HAS CAPRICIOUSLY, GROSSLY AND PATENTLY ERRED IN HOLDING THAT PETITIONER'S REMEDY IS APPEAL AND NOT CERTIORARI, WHICH REMEDY WAS LOST FOR FAILURE TO APPEAL WITHIN THE REGLEMENTARY PERIOD OF

APPEAL, INCONSISTENTLY CATEGORIZING THE ALLEGED ERRORS AS ONE OF JUDGMENT AND NOT OFJURISDICTION. 24

III.

THE COURT OF APPEALS HAS ERRONEOUSLY RULED THAT THE PETITION FOR CERTIORARI HAS BEEN FILED BELATEDLY COUNTING THE THREE (3) MONTHS PERIOD NOT FROM APRIL 27, 1997 THE DATE OF RECEIPT OF THE DENIAL OF THE MOTION FOR RECONSIDERATION OF THE JUDGMENT ON THE PLEADINGS DATED OCTOBER 1, 1996 SUBJECT OFCERTIORARI BUT FROM MARCH 21, 1996, THE DATE OF THE DENIAL OF THE MOTION FOR RECONSIDERATION OF THE ORDER DENYING MOTION TO DISMISS. 25

IV.

THE COURT OF APPEALS CLEARLY AND WHIMSICALLY ERRED IN HOLDING THAT THE PETITIONER LACKS PERSONALITY TO QUESTION THE DECISION AGAINST BORACAY BEACH CLUB HOTEL INC. WHICH DECISION DOES NOT CONCERN HER ALLEGEDLY. 26

The central issue raised in the petition is: Is it the regular court or the Securities and Exchange Commission (SEC) that has jurisdiction over the subject matter of the case?

Petitioner insists that it is the SEC that has jurisdiction by virtue of Presidential Decree No. 902-A (Reorganization of the Securities and Exchange Commission with Additional Powers) because the complaint alludes to fraud committed by respondent corporation, and the complainant is a stockholder of the respondent corporation.

Private respondent, on the other hand, maintains that jurisdiction is lodged with the regular courts, it being a simple collection case.

The petition is unmeritorious.

First. The rule is that jurisdiction over the subject matter of the case is conferred by law and determined by the allegations of the complaint. 27 Therefore, to resolve the issue raised to us, an interpretation and application of the law on jurisdiction, must be made vis-à-vis the averments of the petitioner's complaint.

The law on jurisdiction of the SEC, Section 5 of PD 902-A, states that in addition to the regulatory and adjudicative functions of the SEC over corporations, partnerships and other forms of associations registered with it as expressly granted under the existing laws and decrees, it shall have original and exclusive jurisdiction to hear and decide cases involving devises or schemes employed by or any acts of the Board of Directors, business associates, its officers and partners, amounting to fraud and misrepresentation which may be detrimental to the interest of the public and/or to the stockholders, partners, members of associations or organizations registered with the Commission. 28

Now, from the averments of the amended complaint filed with the trial court as quoted above, Harrigan seeks to collect from BBCHI his advances or loans in the amount of at least P8 million, which are demandable in character pursuant to their agreement, 29 including interest at 20% per annum accruing from September 1, 1990. The cause of action of the suit is, clearly, for the collection of a sum of money.

However, petitioner interprets said collection complaint as one involving mainly the issue of fraud committed by respondent corporation, which makes the controversy fall under the ambit of PD 902-A. The particular portion of the amended complaint referred to by petitioner states:

14. In so allowing another person to have the absolute and uncontrolled possession, management, and utilization of the buildings and facilities of the Boracay Beach Club Hotel resort without any corresponding financial return or material benefit therefor, and the misappropriation by said third party of the income from the operation of the resort business therein, since July 28, 1994 and up to the present or for a period of over seven (7) months now, defendant has, in effect, disposed of and continues to ACTUALLY DISPOSE of and/or wantonly waste/dissipate said corporate properties and funds, in fraud of its creditors, which include herein plaintiff. 30

To our mind, from the totality of the complaint filed by Harrigan, the main issue is whether or not he is entitled to collect the loan and not whether or not he was defrauded by BBCHI. The mere use of the phrase "in fraud of creditors" does not, ipso facto, throw the case within SEC's jurisdiction. The amended complaint filed by Harrigan does not sufficiently allege acts amounting to fraud and misrepresentation committed by respondent corporation.

In Alleje vs. CA, 31 "fraud" is defined as a generic term embracing all multifarious means which human ingenuity can devise, and which are resorted to by one individual to secure an advantage over another by false suggestions or by suppression of truth and includes all surprise, trick, cunning, dissembling and any unfair way by which another is cheated.Within the context of the complaint as quoted above, the phrase "in fraud of creditors" can only mean, "to the prejudice of creditors" and not to the use of devises or schemes tantamount to fraud and misrepresentation employed by the Board of Directors, business associates or its officers and partners to divert corporate funds and assets for personal use, as contemplated in Section 5 of PD 902-A. CaSAcH

Equally unavailing is petitioner's contention that the case involves an intra-corporate controversy, or one between the corporation and its stockholder transposing it within the domain of the SEC. It should be noted that the issue has become moot and academic because with Republic Act No. 8799, Securities Regulation Code, it is now the Regional Trial Court and no longer the SEC that has jurisdiction. Under Section 5.2 of Republic Act No. 8799, 32 original and exclusive jurisdiction to hear and decide cases involving intra-corporate controversies have been transferred to a court of general jurisdiction or the appropriate Regional Trial Court. 33

 

Foregoing given, Harrigan's complaint against petitioner to recoup his financial exposure with BBCHI was properly lodged with the regular court and not with the SEC. This view is in accord with the rudimentary principle that administrative agencies, like the SEC, are tribunals of limited jurisdiction and, as such, could wield only such powers as are specifically granted to them by their enabling statutes. 34

Given our disquisition that the complaint for sum of money was instituted with the proper court, petitioner's remedy before the appellate court should have been a timely appeal and not certiorari. Therefore, the appellate court was correct in dismissing petitioner's petition for certiorari for being time-barred. Indeed, certiorari cannot be used as a substitute for lost or lapsed remedy of appeal, especially if such loss was occasioned by one's own neglect or error in the choice of remedies. 35 As long as a court acts within its jurisdiction, any alleged errors committed in the exercise of its jurisdiction will amount to nothing more than errors of judgment reviewable by timely appeal and not by a special civil action of certiorari. 36

It is now moot and academic to delve into the third assigned error raised by petitioner, i.e., that the CA erred in ruling that three month reglementary period for filing a petition for certiorari has already lapsed.

Neither does petitioner's last assigned error merit our consideration, as any discussion on this issue of "personality" is merely academic. As earlier stated, whether or not petitioner has the personality to question the RTC order against BBCHI is a matter that should have been properly threshed out in an appeal filed with the CA. By allowing said order to become final and executory without interposing an appeal and by having incorrectly availed of the extraordinary remedy of certiorari, we can no longer, at this late hour, deal on this issue. We hasten to add that this issue requires delving into the facts of the case. Basic is the rule that this court is not a trier of facts.

WHEREFORE, the instant petition is DENIED for lack of merit and the challenged decision of the Court of Appeals of October 1, 1997 in CA-G.R. SP No. 44088 is hereby AFFIRMED. Costs against the petitioner.

SO ORDERED.

Bellosillo, Mendoza and De Leon, Jr., JJ., concur

||| (Sumndad v. Harrigan, G.R. No. 132358, April 12, 2002)

THIRD DIVISION

[G.R. No. 146313. October 31, 2006.]

FLORENCIO ORENDAIN, petitioner, vs. BF HOMES, INC., respondent.

D E C I S I O N

VELASCO, JR., J p:

Before us is a Petition for Review on Certiorari praying for the reversal of the August 18, 2000 Decision and December 6, 2000 Resolution of the Court of Appeals (CA) in CA-G.R. SP No. 48263 entitledFlorencio B. Orendain v. Hon. Alfredo R. Enriquez, Presiding Judge of RTC-Br. 275, Las Piñas, and BF Homes, Inc., which affirmed the December 4, 1996 and April 22, 1998 Orders of the Las Piñas RTC finding that said court, not SEC, has jurisdiction over Civil Case No. LP-96-0022 for reconveyance of the lot covered by TCT No. T-36482 to respondent BF Homes, Inc. ('BF Homes' for brevity).

BF Homes, Inc. is a domestic corporation operating under Philippine laws and organized primarily to develop and sell residential lots and houses and other related realty business. 1

Records show that respondent BF Homes had to avail itself of financial assistance from various sources to enable it to buy properties and convert them into residential subdivisions. This resulted in its incurring liabilities amounting to PhP 1,542,805,068.23 2 as of July 31, 1984. On the other hand, during its business operations, it was able to acquire properties and assets worth PhP 2,482,843,358.81 as of July 31, 1984, which, if liquidated, were more than enough to pay all its creditors. 3

Despite its solvent status, respondent filed a Petition for Rehabilitation and for Declaration in a State of Suspension of Payments under Section 4 of PD No. 1758 before the Securities and Exchange Commission (SEC) because of the following:

(a) the predatory acts of the Central Bank of trying to take over Banco Filipino and hand it cheap to its unidentified principal and its buyer financing facility with Banco Filipino has been suspended such that it cannot now consummate its sales transactions necessary for it to generate cash to service and/or liquidate its various maturing obligations;

(b) the libelous [circulars] made by the Central Bank to banks under its supervision that its deposit accounts and other transactions with them were being examined such that the creditors of [BF Homes] have [begun] insisting on full liquidation under pain of foreclosure of their notes . . .; and ACcaET

(c) the [liquidation] of [BF Homes'] assets cannot be made in such a short time as demanded by its creditors. 4

In the said petition, respondent prayed that — in the meantime it was continuing its business operations — it be afforded time to pay its aforesaid obligations, freed from various proceedings either judicially or extra-judicially against its assets and properties. Also,

respondent highlighted the importance of and prayed for a Rehabilitation Receiver in the petition. Such receiver, according to respondent, was "imperative to oversee the management and operations of [BF Homes] so that its business may not be paralyzed and the interest of the creditors may not be prejudiced." It further argued that "rehabilitation [was] feasible and imperative because otherwise, in view of the extent of its involvement in the shelter program of the government and in the nation's home mortgage insurance system, which has a secured coverage for at least P900 M of [BF Homes'] P1.5 B liabilities, not only [the] creditors, [buyers, and stockholders] of the petitioner corporation may suffer but the public as well." 5

In SEC Case No. 2693, the SEC subsequently issued its March 18, 1985 Order which stated:

WHEREFORE, in the interest of the parties-litigants, as well as the general public, and in order to prevent [paralyzation] of business operation[s] of the B.F. Homes, Inc., a Management Committee is hereby created composed of:

1. Atty. Florencio Orendain as Chairman

2. Representative of B. F. Homes, Inc. — member

3. Representative of Home Financing Commission — member

4. Two (2) representatives from the major creditors — members

xxx xxx xxx

Accordingly, with the creation of the Management Committee, all actions for claims against B.F. Homes, Inc. pending before the court, tribunal, board or body are hereby deemed suspended. 6

Thereafter, on February 2, 1988, the SEC ordered the appointment of a rehabilitation receiver, FBO Management Networks, Inc., with petitioner Orendain as Chairman to prevent paralyzation of BF Homes' business operations. 7

On October 8, 1993, a Deed of Absolute Sale 8 was executed by and between BF Homes — represented by petitioner Orendain — as absolute and registered owner, and the Local Superior of the Franciscan Sisters of the Immaculate Phils., Inc. (LSFSIPI) over a parcel of land situated at Barangay Pasong Papaya, BF International, Municipality of Las Piñas, Metro Manila, covered by Transfer Certificate of Title No. T-36482.

The portion of land sold to LSFSIPI was 7,800 square meters, more or less, for Nineteen Million Five Hundred Thousand Pesos (PhP 19,500,000.00). 9

Meanwhile, on November 7, 1994, the SEC hearing panel released an Omnibus Order 10 which admitted and confirmed the Closing Report submitted by the receiver, petitioner Orendain. It further appointed a new Committee of Receivers composed of the eleven (11) members of the Board of Directors of BF Homes with Albert C. Aguirre as the Chairman of the Committee. Consequently, receiver Orendain was relieved of his duties and responsibilities. DEICHc

In its August 22, 1995 Order, 11 the SEC denied BF Homes' and the intervenor-derivative suitor Eduardo S. Rodriguez's motions for reconsideration of its November 7, 1994 Omnibus Order.

On January 23, 1996, BF Homes filed a Complaint before the Las Piñas RTC against LSFSIPI and petitioner Orendain, in Civil Case No. LP-96-0022, for reconveyance of the property covered by TCT No. T-36482 — alleging, inter alia, that the LSFSIPI transacted with Orendain in his individual capacity and therefore, neither FBO Management, Inc. nor Orendain had title to the property transferred. Moreover, BF Homes averred that the selling price was grossly

inadequate or insufficient amounting to fraud and conspiracy with the LSFSIPI. BF Homes also stated that the total assessed value of the property was approximately PhP 802,330.00. Hence, it prayed in the Complaint that LSFSIPI reconvey the disputed property or, if reconveyance was no longer feasible, pay the present value of the property. 12

On March 21, 1996, the LSFSIPI filed its Answer with Compulsory Counterclaim, 13 stating, among others, that (1) the Complaint stated no cause of action since there was a valid sale with sufficient consideration, and there was no fraud; (2) it was barred by a prior judgment of a tribunal with sufficient jurisdiction over the matter, and BF Homes was liable for forum shopping; and (3) BF Homes could not question its own acts by way of estoppel.

On June 14, 1996, Florencio B. Orendain filed a Motion to Dismiss stating that (1) the RTC had no jurisdiction over the reconveyance suit; (2) the Complaint was barred by the finality of the November 7, 1994 Omnibus Order of the SEC hearing panel; and (3) BF Homes, acting through its Committee of Receivers, had neither the interest nor the personality to prosecute the said action, in the absence of SEC's clear and actual authorization for the institution of the said suit. 14

On July 15, 1996, BF Homes filed its Opposition 15 to petitioner's Motion to Dismiss, alleging that the case was within the exclusive jurisdiction of the RTC, not the SEC, considering that the case was an ordinary reconveyance suit. Likewise, BF Homes alleged that the cause of action was not barred by the perceived finality of the SEC November 7, 1994 Omnibus Order, and that the general powers of a receiver authorized BF Homes to institute actions to recover the property.

On December 4, 1996, RTC Las Piñas, Branch 275 issued an Order denying the June 14, 1996 Motion to Dismiss for lack of merit. 16

However, on May 8, 1997, the SEC rendered its Order, as follows:

WHEREFORE, premises considered, the decision of the hearing panel denying the motion for intervention of Mr. Eduardo Rodriguez is hereby AFFIRMED. The Commission hereby receives and notes the Closing Report of the Management Network and the Joaquin Cunanan Audit Report for inclusion in the records of the case without going into the merits and veracity of the contents thereof; the order to pay the attorney's fees of Balgos and Perez is hereby SET ASIDE; the resolution of the issue on the alleged payment of receiver's fees of FBO Management Network is hereby deferred, and the order to pay the additional fees of the receiver is hereby set aside until after the Commission en banc finally clears and releases FBO Management Networks from its accountabilities in accordance with the policies and orders of the Commission on the receivership. 17

On December 27, 1997, petitioner Orendain filed his Motion for Reconsideration 18 of the RTC December 4, 1996 Order. Consequently, BF Homes filed its January 17, 1997 Opposition 19 to Orendain's Motion for Reconsideration; and on April 22, 1998, the RTC issued an Order denying the Motion for Reconsideration for lack of merit and petitioner Orendain was directed to file his answer to the Complaint within ten (10) days from receipt of the Order. 20

Petitioner then filed his Answer Ex Abudante Ad Cautelam with Compulsory Counterclaims 21 on May 29, 1998.

On July 13, 1998, petitioner filed before the CA a Petition for Certiorari and Prohibition with Prayer for the Issuance of a Temporary Restraining Order and/or Bonded Writ of Preliminary Injunction 22 which sought to annul the RTC December 4, 1996 and April 22, 1998 Orders,

denying petitioner's Motion to Dismiss and Motion for Reconsideration. Petitioner alleged that these motions were issued without jurisdiction or with grave abuse of discretion amounting to lack or in excess of jurisdiction. aSTAcH

 

The Ruling of the Court of Appeals

In its August 18, 2000 Decision, the CA held that the action for reconveyance filed by BF Homes was within the exclusive jurisdiction of the RTC. In the rehabilitation case, the LSFSIPI was not a party to the said case and did not have any intra-corporate relation with petitioner at the time of the sale. The SEC could not acquire jurisdiction over the Franciscan Sisters; while petitioner Orendain was sued in his individual capacity and not in his official capacity as receiver. 23

Moreover, the CA stated that at the time the assailed orders were issued, the subject SEC Order had not yet attained finality; that there was no identity between the first and the second action with respect to the parties; and that the SEC November 7, 1994 Omnibus Order relied on by Orendain was not a decision on the merits of BF Homes' Petition for Rehabilitation and for a Declaration in a State of Suspension of Payments under Sec. 4 of P.D. No. 1758.

According to the CA:

Although this Court is not oblivious to the fact that the SEC en banc in a Decision dated May 8, 1997, affirmed the denial of the intervention filed by Rodriguez, still the said order did not go into the merits of the intervention but merely refused to give due recognition to the intervention as it was allegedly "untimely." Therefore, the contention of petitioner that the principle of res judicata is applicable in the case at bar does not hold water. 24

The CA ultimately rendered its judgment in this wise:

WHEREFORE, premises considered, the instant petition is DISMISSED for failure to clearly show grave abuse of discretion and the assailed orders dated December 4, 1996 and April 22, 1998, are hereby AFFIRMED in toto without costs to petitioner. 25

Hence, this petition is before us.

The Court's Ruling

Petitioner avers that the CA erred in holding that (1) the complaint a quo is a simple reconveyance suit and hence, can be heard and tried by the court a quo; (2) res judicata is inapplicable to the complaint a quo; and (3) the Committee of Receivers may institute an action against a former receiver without prior SEC approval. 26

The petition is not meritorious.

Action for Reconvenyance in the RTC Does Not Involve Intra-Corporate Dispute

The issue central to this petition is: which has jurisdiction over the action for reconveyance — the RTC or SEC.

Petitioner Orendain argues that it is the SEC that has jurisdiction by virtue of Presidential Decree No. 902-A since BF Homes' suit was instituted against him as its former receiver. He also avers that BF Homes' allegations were nothing more than protestations against the former receiver who entered into a transaction during BF Homes' regime of rehabilitation; and that the assailed transaction was consummated at the time the SEC had placed BF Homes

under rehabilitation. Therefore, according to petitioner, the SEC, which appointed the rehabilitation receiver, has the sole power to decide the issue as to whether petitioner acted within the scope of the vested authority.

Petitioner also claims that the resolution of the instant controversy depends on the ratification by the SEC of the acts of its agent, the receiver. Also, he asserts that for the RTC to insist on hearing and deciding the case below is to dislodge the appointing body from reviewing, ratifying, confirming, or overruling the acts of its appointee; and such would constitute undue interference on the jurisdiction of the SEC by a court of equal jurisdiction. Further, petitioner claims that the questions of whether the receiver of a company undergoing rehabilitation acted within the scope of his authority, and whether a transaction consummated during the rehabilitation proceedings is impermissible, are matters not within the province of a regular court acting on an ordinary reconveyance suit. Petitioner avers that the undisputed fact is that at the time of the said transaction, respondent was operating under rehabilitation whereby receivership places all matters arising from, incidental, or connected with the implementation of said rehabilitation proceedings beyond the jurisdiction of regular courts. In addition, petitioner avers that the property in question is one of the many properties which formed part of a pool of assets placed under receivership and that he was the Chairman of the FBO Management, Inc. — the SEC-appointed Rehabilitation Receiver at the time of the transaction. TaDCEc

WE hold OTHERWISE.

In Speed Distributing Corp. v. CA, we held that:

Jurisdiction over the subject matter is conferred by law. The nature of an action, as well as which court or body has jurisdiction over it, is determined based on the allegations contained in the complaint of the plaintiff, irrespective of whether or not plaintiff is entitled to recover upon all or some of the claims asserted therein. It cannot depend on the defenses set forth in the answer, in a motion to dismiss, or in a motion for reconsideration by the defendant (citations omitted). 27

In the case at bench, the BF Homes' Complaint for reconveyance was filed on January 23, 1996 against LSFSIPI and Florencio B. Orendain, in Civil Case No. LP-96-002.

In 1996, Section 5 of PD No. 902-A, 28 which was approved on March 11, 1976, was still the law in force — whereby the SEC still had original and exclusive jurisdiction to hear and decide cases involving:

b) controversies arising out of intra-corporate or partnership relations, between and among stockholders, members, or associates; between any and/or all of them and the corporation, partnership, or association of which they are stockholders, members or associates, respectively; and between such corporation, partnership or association and the state insofar as it concerns their individual franchise or right to exist as such entity.

Clearly, the controversy involves matters purely civil in character and is beyond the ambit of the limited jurisdiction of the SEC. As held in Viray v. Court of Appeals, "[t]he better policy in determining which body has jurisdiction over a case would be to consider not only [1] the status or relationship of the parties but also [2] the nature of the question that is the subject of their controversy." 29

More so, in Speed Distributing Corp., we held that:

The first element requires that the controversy must arise out of intra-corporate or partnership relations between any or all of the parties and the corporation, partnership or association of which they are stockholders, members or associates; between any or all of them and the corporation, partnership or association of which they are stockholders, members or associates, respectively; and between such corporation, partnership or association and the State insofar as it concerns their individual franchises. The second element requires that the dispute among the parties be intrinsically connected with the regulation of the corporation. If the nature of the controversy involves matters that are purely civil in character, necessarily, the case does not involve an intra-corporate controversy. The determination of whether a contract is simulated or not is an issue that could be resolved by applying pertinent provisions of the Civil Code (citations omitted). 30

However, Section 5 of PD No. 902-A does not apply in the instant case. The LSFSIPI is neither an officer nor a stockholder of BF Homes, and this case does not involve intra-corporate proceedings. In addition, the seller, petitioner Orendain, is being sued in his individual capacity for the unauthorized sale of the property in controversy. Hence, we find no cogent reason to sustain petitioner's manifestation that the resolution of the instant controversy depends on the ratification by the SEC of the acts of its agent or the receiver because the act of Orendain was allegedly not within the scope of his authority as receiver. Furthermore, the determination of the validity of the sale to LSFSIPI will necessitate the application of the provisions of the Civil Code on obligations and contracts, agency, and other pertinent provisions.

In addition, jurisdiction over the case for reconveyance is clearly vested in the RTC as provided in paragraph (2), Section 19, B.P. Blg. 129, to wit:

Jurisdiction in civil cases. — Regional Trial Courts shall exercise exclusive [and] original jurisdiction

(1) In all civil actions in which the subject of the litigation is incapable of pecuniary estimation; and

(2) In all civil actions which involve the title to, or possession of, real property or any interest therein, where the assessed value of the property involved exceeds Twenty Thousand pesos (P20,000.00) or for civil actions in Metro Manila, where such value exceeds Fifty Thousand pesos (P50,000.00) . . .

Likewise, in DMRC Enterprises v. Este del Sol Mountain Reserve, Inc., the Court said:

Nowhere in said decree [PD 902-A] do we find even so much as an intimidation [sic] that absolute jurisdiction and control is vested in the Securities and Exchange Commission inall matters affecting corporations. To uphold the respondents' arguments would remove without the legal imprimatur from the regular courts all conflicts over matters involving or affecting corporations, regardless of the nature of the transactions which give rise to such dispute. The courts would then be divested of jurisdiction not by reason of the nature of the dispute submitted to them for adjudication, but solely for the reason that the dispute involves a corporation. This cannot be done. To do so would not only be to encroach on the legislative prerogative to grant and revoke jurisdiction of the courts but such a sweeping interpretation may suffer

constitutional infirmity. Neither can we reduce jurisdiction of the court by judicial fiat ([citing] Article X, Section 1, The [1973] Constitution). 31

Res Judicata Does Not Apply in the Action for Reconveyance

According to petitioner, dismissal of the complaint is proper based on res judicata. He alleged that on September 28, 1994, he filed a Petition for Rehabilitation and for Declaration in a State of Suspension of Payments docketed as SEC Case No. 2693; and that sometime in 1994, FBO Management Network, Inc. submitted its Closing Report to the SEC. In said report, the receiver disclosed the conveyance of the property to the LSFSIPI. It is the same transaction which BF Homes seeks to nullify in the complaint a quo.

 

We are not persuaded.

There are two (2) aspects to the doctrine of res judicata:

The first, known as "bar by prior judgment," is the effect of a judgment as a bar to the prosecution of a second action upon the same claim, demand or cause of action. The second, known as "conclusiveness of judgment," issues actually and directly resolved in a former suit cannot again be raised in any future case between the same parties involving a different cause of action. 32

A case is barred by prior judgment when the following requisites are present: "(1) the former judgment is final; (2) it is rendered by a court having jurisdiction over the subject matter and the parties; (3) it is a judgment or an order on the merits; and (4) there is — between the first and second actions — identity of parties, of subject matter, and causes of action." 33

Petitioner asserts that bar by prior judgment exists since the May 8, 1997 Order of the SEC en banc had become final which would effectively preclude the adjudication of Civil Case No. LP-96-0022.

We DISAGREE.

While the said SEC order denied the motion for intervention filed by intervenor Eduardo S. Rodriguez, it did not, however, resolve the issues raised in the motion on the merits. A judgment is "on the merits when it amounts to a legal declaration of the respective rights and duties of the parties based upon the disclosed facts (emphasis supplied and citation omitted)." 34 It is apparent that the SEC order in question merely acknowledged the Closing Report for inclusion in the records of the case. It did not, however, pass upon the merits and veracity of the report's contents. As such, it cannot, in any wise, be considered as an adjudication of the rights and obligations of the parties relating to the subject matter of the action. ASIDTa

Likewise, it appears that between the first and second actions, there was no identity of parties, of subject matter, and of cause of action. Hence, res judicata does not apply in the instant case.

The second type of res judicata is "conclusiveness of judgment." In Francisco v. Co, this Court elucidated the nature of this principle, thus:

"Conclusiveness of judgment" operates as a bar even if there is no identity as between the first and second causes of judgment. Under the doctrine, any right, fact, or matter in issue directly adjudicated or necessarily involved in the determination of an action before a competent court in which judgment is rendered on the merits is conclusively settled by the judgment therein and cannot again be

litigated between the parties and their privies whether or not the claim, demand, purpose, or subject matter of the two actions is the same.

Evidently, "conclusiveness of judgment" may operate to bar the second case even if there is no identity of causes of action. The judgment is conclusive in the second case, only as to those matters actually and directly controverted and determined, and not as to matters merely involved therein. 35

A perusal of the SEC case would show that reconveyance of the property in controversy was neither an issue nor a relief sought by any party in the SEC proceedings. Evidently, the SEC November 7, 1994 Omnibus Order did not mention any reconveyance of property. 36

Eduardo S. Rodriguez, the intervenor in the SEC case, did not demand the reversion of the disputed property precisely because the SEC has no jurisdiction over the action for reconveyance. Assuming, arguendo, that intervenor Rodriguez raised the issue on the validity of petitioner's acts in his capacity as receiver, still, the SEC November 7, 1994 Omnibus Order did not delve into the merits of the intervention nor did the order give due course to the intervention as it was untimely.

Thus, there is no "conclusiveness of judgment" as the reconveyance of the lot sold to LSFSIPI was not directly decided or necessarily involved and adjudicated in the said SEC order.

Furthermore, petitioner argues that the Committee of Receivers should have sought prior clearance from the SEC before instituting the action for reconveyance before the RTC, because it does not have the legal capacity to sue. This is incorrect. One of the general powers of a receiver under Rule 59, Section 6 of the Rules of Court is the power to bring and defend suits in such capacity.

Petitioner also contends that an action filed by a successor-receiver against him as predecessor-receiver is not allowed under Rule 59, Section 6 without leave of court which appointed him; as Section 6 provides that "no action may be filed by or against a receiver without leave of the court which appointed him." This is bereft of merit.

The rule talks of the current receiver of the company and not the previous receiver like petitioner Orendain. The reason behind Rule 59, Section 6, which requires leave of court for all suits by or against the present receiver, is to forestall any undue interference with the receiver's performance of duties through improvident suits. Apparently, such situation cannot apply to Orendain who is no longer BF Homes' receiver.

Moreover, the instant petition has been rendered moot and academic by the passage of RA 8799 or The Securities Regulation Code which took effect on August 8, 2000. 37

Section 5.2 of RA 8799 transferred exclusive and original jurisdiction of the SEC over actions involving intra-corporate controversies to the courts of general jurisdiction or the appropriate RTC. In the transition, all intra-corporate cases pending in the SEC, which were not ripe for adjudication as of August 8, 2000, were turned over to the RTC. Congress thereby recognized the expertise and competence of the RTC to take cognizance of and resolve cases involving intra-corporate controversies. Thus, "whether or not the issue is intra-corporate, it is now the [RTC] and no longer the SEC that takes cognizance of [and resolves cases involving intra-corporate controversies]." 38

Section 5.2 of RA 8799 explicitly provides:

The Commission's jurisdiction over all cases enumerated under Section 5 of Presidential Decree No. 902-A is hereby transferred to the Courts of general jurisdiction or the appropriate Regional Trial Court: Provided, That the Supreme Court in the exercise of its authority may designate

the Regional Trial Court branches that shall exercise jurisdiction over the cases. The Commission shall retain jurisdiction over pending cases involving intra-corporate disputes submitted for final resolution which should be resolved within one (1) year from the enactment of this Code. The Commission shall retain jurisdiction over pending suspension of payment/rehabilitation cases filed as of 30 June 2000 until finally disposed (emphasis supplied). AEIHCS

Subsequently, on January 23, 2001, the Supreme Court issued Supplemental Administrative Circular No. 8-01 which ordered that effective March 1, 2000, "all SEC cases originally assigned or transmitted to the regular RTC shall be transferred to the branches of the regular RTC specially designated to hear such cases in accordance with AM No. 00-11-03-SC."

During the Bicameral Conference Committee's discussions on the conflicting provisions of Senate Bill No. 1220 and House Bill No. 8015 on the "Amendments to the Securities, Regulations and Enforcement Act," former Senator Raul S. Roco rendered his report, 39 as follows:

The first major departure is as regards the Security Exchange Commission. The Securities and Exchange Commission has been authorized under this proposal to reorganize itself. As an administrative agency, we strengthened it and at the same time we take away the quasi-judicial functions. The quasi-judicial functions are now given back to the courts of general jurisdiction — the Regional Trial Court, except for two categories of cases (emphasis supplied).

In case of corporate disputes, only those that are now submitted for final determination of the SEC will remain with the SEC. So, all those cases, both memos of the plaintiff and defendant, that have been submitted for resolution will continue. At the same time, cases involving rehabilitation, bankruptcy, suspension of payments and receiverships that were filed before June 30, 2000 will continue with the SEC. In other words, we are avoiding the possibility, upon approval of this bill, of people filing cases with the SEC, in a manner of speaking, to select their court.

. . . It is only right now with this bill that we clarify the independent functions, not only in terms of monetary polity, by giving it to the Monetary Board, but in matters of commerce and securities and capital formation, by giving them to the [SEC], with sufficient powers to monitor and regulate capital formation in the Philippines.

That is the first major departure . . . in terms of the powers and responsibilities of the [SEC]. In registration of securities, exempt transactions [and exempt securities], these are very technical and there are modifications . . . The registration and monitoring of securities are basically the same as the old law.

Pre-need plans . . . remain with the SEC. Originally we wanted the SEC to concentrate on commerce, corporations and the securities regulation, but pre-need plan[s] under the Senate report was really with the SEC and under the House report, it was recommended to remain with the SEC without prejudice to a subsequent law if we should decide to do so to have the pre-need plans transferred to the Office of the Insurance Commissioner. . . .

Thus, it is unequivocal that the jurisdiction to try and decide cases originally assigned to the SEC under Section 5 of PD 902-A has been transferred to the RTC. For clarity, we quote those cases under Section 5, PD 902-A, which now fall within the RTC's jurisdiction, as follows:

(a) Devices or schemes employed by or any acts of the board of directors, business associates, its officers or partners, amounting to fraud and misrepresentation which may be detrimental to the interest of the public and/or stockholders, partners, members of associations registered with the Commission;

 

(b) Controversies arising out of intra-corporate or partnership relations, between and among stockholders, members, or associates; between any or all of them and the corporation, partnership or association and the State insofar as it concerns their individual franchise or right as such entity;

(c) Controversies in the election or appointment of directors, trustees, officers or managers of such corporations, partnerships, or associations; ACEIac

(d) Petitioners of corporations, partnerships or associations to be declared in the state of suspension of payment in cases where the corporation, partnership or association possesses sufficient property to cover all its debts but foresees the impossibility of meeting them when they fall due or in cases where the corporation, partnership or association has no sufficient assets to cover its liabilities but is under the management of a rehabilitation receiver or management committee created pursuant to this Decree.

The remaining powers and functions of the SEC are enumerated in Section 5 of RA 8799, to wit:

Powers and Functions of the Commission. — [5.1] The Commission shall act with transparency and shall have the powers and functions provided by this Code, Presidential Decree No. 902-A, the Corporation Code, the Investment Houses Law, the Financing Company Act and other existing law[s]. Pursuant thereto the Commission shall have, among others, the following powers and functions:

(a) Have jurisdiction and supervision over all corporations, partnerships or associations who are the grantees of primary franchises and/or a license or permit issued by the Government;

(b) Formulate policies and recommendations on issues concerning the securities market, advise Congress and other government agencies on all aspects of the securities marker and propose legislation and amendments thereto;

(c) Approve, reject, suspend, revoke or require amendments to registration statements, and registration and licensing applications;

(d) Regulate, investigate and supervise the activities of persons to ensure compliance;

(e) Supervise, monitor, suspend or take over the activities of exchanges, clearing agencies and other SROs;

(f) Impose sanctions for the violation of laws and the rules, regulations and orders issued pursuant thereto;

(g) Prepare, approve, amend or repeal rules, regulations, and orders, and issue opinions and provide guidance on and supervise compliance with such rules, regulations and orders;

(h) Enlist the aid and support of and/or deputize any and all enforcement agencies of the Government, civil or military as well as any private institution, corporation, firm, associations or person in the implementation of its powers and functions under this Code;

(i) Issue cease and desist orders to prevent fraud or injury to the investing public;

(j) Punish for contempt of the Commission, both direct and indirect, in accordance with the pertinent provisions of and penalties prescribed by the Rules of Court;

(k) Compel the officers of any registered corporation or association to call meetings of stockholders or members thereof under its supervision;

(l) Issue subpoena duces tecum and summon witnesses to appear in any proceedings of the Commission and in appropriate cases, order the examination, search and seizure of all documents, papers, files and records, tax returns, and books of accounts of any entity or person under investigation as may be necessary for the proper disposition of the cases before it, subject to the provision of existing laws; SCHATc

(m) Suspend, or revoke, after notice and hearing the franchise or certificate of registration of corporations, partnerships or associations, upon any of the grounds provided by law; and

(n) Exercise such other powers as my be provided by law as well as those which may be implied from, or which are necessary or incidental to the carrying out of, the express powers granted the Commission to achieve the objectives and purposes of these laws.

Juxtaposing the jurisdiction of the RTC under RA 8799 and the powers that were retained by the SEC, it is clear that the SEC retained its administrative, regulatory, and oversight powers over all corporations, partnerships, and associations who are grantees of primary franchises, and/or a license or permit issued by the Government. However, theSecurities Regulations Code (SRC) is clear that when there is a controversy arising out of intra-corporate relations, between and among stockholders, members or associates, and between, any, or all of them and the corporation, it is the RTC, not SEC, which has jurisdiction over the case.

Thus, when the complaint involves "an active antagonistic assertion of a legal right on one side and a denial thereof on the other concerning a real, and not a mere theoretical question or issue," 40 a cause of action involving a delict or wrongful act or omission committed by a party in violation of the primary right of another, 41 or an actual controversy involving rights

which are legally demandable or enforceable, 42 the jurisdiction over this complaint is lodged with the RTC but not the SEC.

The passage of RA 8799 has put to rest petitioner Orendain's claim that it is the SEC and not the RTC that has jurisdiction over Civil Case No. LP-96-0022. At present, the instant petition has nothing to stand on and perforce must fail.

WHEREFORE, the August 18, 2000 Decision and December 6, 2000 Resolution of the Court of Appeals in CA-G.R. SP No. 48263 is hereby AFFIRMED IN TOTO.

SO ORDERED.

Quisumbing, Carpio, Carpio Morales and Tinga, JJ., concur.

||| (Orendain v. BF Homes, Inc., G.R. No. 146313, October 31, 2006)

THIRD DIVISION

[G.R. No. 153886. January 14, 2004.]

MEL V. VELARDE, petitioner, vs. LOPEZ, INC., respondent.

D E C I S I O N

CARPIO MORALES, J p:

This petition for review on certiorari under Rule 45 of the Rules of Court, which seeks to review the decision 1 and resolution 2 of the Court of Appeals, raises the issue of whether the defendant in a complaint for collection of sum of money can raise a counterclaim for retirement benefits, unpaid salaries and incentives, and other benefits arising from services rendered by him in a subsidiary of the plaintiff corporation.

On January 6, 1997, Eugenio Lopez Jr., then President of respondent Lopez, Inc., as LENDER, and petitioner Mel Velarde, then General Manager of Sky Vision Corporation (Sky Vision), a subsidiary of respondent, as BORROWER, forged a notarized loan agreement covering the amount of ten million (P10,000,000.00) pesos. The agreement expressly provided for, among other things, the manner of payment and the circumstances constituting default which would give the lender the right to declare the loan together with accrued interest immediately due and payable. 3

Sec. 6 of the agreement detailed what constituted an "event of default" as follows:

Section 6

Each of the following events and occurrences shall constitute an Event of Default ("Event of Default") under this Agreement:

a) the BORROWER fails to make payment when due and payable of any amount he is obligated to pay under this Agreement;

b) the BORROWER fails to mortgage in favor of the LENDER real property sufficient to cover the amount of the LOAN. 4

As petitioner failed to pay the installments as they became due, respondent, apparently in answer to a proposal of petitioner respecting the settlement of the loan, advised him by letter dated July 15, 1998 that he may use his retirement benefits in Sky Vision in partial settlement of his loan after he settles his accountabilities to the latter and gives his written instructions to it (Sky Vision). 5

Petitioner protested the computation indicated in the July 15, 1998 letter, he asserting that the imputed unliquidated advances from Sky Vision had already been properly liquidated. 6

On August 18, 1998, respondent filed a complaint for collection of sum of money with damages at the Regional Trial Court (RTC) of Pasig City against petitioner, alleging that petitioner violated the above-quoted Section 6 of the loan agreement as he failed to put up the needed collateral for the loan and pay the installments as they became due, and that despite his receipt of letters of demand dated December 1, 1997 7 and January 13, 1998, 8 he refused to pay.

In his answer, petitioner alleged that the loan agreement did not reflect his true agreement with respondent, it being merely a "cover document" to evidence the reward to him of ten million pesos (P10,000,000.00) for his loyalty and excellent performance as General Manager of Sky Vision and that the payment, if any was expected, was in the form of continued service; and that it was when he was compelled by respondent to retire that the form of payment agreed upon was rendered impossible, prompting the late Eugenio Lopez, Jr. to agree that his retirement benefits from Sky Vision would instead be applied to the loan. 9

By way of compulsory counterclaim, petitioner claimed that he was entitled to retirement benefits from Sky Vision in the amount of P98,280,000.00, unpaid salaries in the amount of P2,740,000.00, unpaid incentives in the amount of P500,000, unpaid share from the "net income of Plaintiff corporation," equity in his service vehicle in the amount of P1,500,000, reasonable return on the stock ownership plan for services rendered as General Manager, and moral damages and attorney's fees. 10

Petitioner thus prayed for the dismissal of the complaint and the award of the following sums of money in the form of compulsory counterclaims:

1. P103,020,000.00, PLUS the value of Defendant's stock options and unpaid share from the net income with Plaintiff corporation (to be computed) as actual damages; DaEATc

2. P15,000,000.00, as moral damages; and

3. P1,500,000.00, as attorney's fees plus appearance fees and the costs of suit. 11

Respondent filed a manifestation and a motion to dismiss the counterclaim for want of jurisdiction, which drew petitioner to assert in his comment and opposition thereto that the veil of corporate fiction must be pierced to hold respondent liable for his counterclaims.

By Order of January 3, 2000, Branch 155 of the RTC of Pasig denied respondent's motion to dismiss the counterclaim on the following premises: A counterclaim being essentially a complaint, the principle that a motion to dismiss hypothetically admits the allegations of the complaint is applicable; the counterclaim is compulsory, hence, within its jurisdiction; and there is identity of interest between respondent and Sky Vision to merit the piercing of the veil of corporate fiction. 12

Respondent's motion for reconsideration of the trial court's Order of January 3, 2000 having been denied, it filed a Petition for Certiorari at the Court of Appeals which held that respondent is not the real party-in-interest on the counterclaim and that there was failure to show the presence of any of the circumstances to justify the application of the principle of "piercing the veil of corporate fiction." The Orders of the trial court were thus set aside and the counterclaims of petitioner were accordingly dismissed. 13

The Court of Appeals having denied petitioner's motion for reconsideration, the instant Petition for Review was filed which assigns the following errors:

I.

THE COURT OF APPEALS GRAVELY ERRED IN RULING THAT THE RTC BRANCH 155 ALLEGEDLY ACTED WITH GRAVE ABUSE OF DISCRETION IN ISSUING THE ORDERS DATED JANUARY 3, 2000 AND OCTOBER 9, 2000 CONSIDERING THAT THE GROUNDS RAISED BY RESPONDENT LOPEZ, INC. IN ITS PETITION FOR CERTIORARI INVOLVED MERE ERRORS OF JUDGMENT AND NOT ERRORS OF JURISDICTION.

II.

THE COURT OF APPEALS GRAVELY ERRED IN RULING THAT RESPONDENT LOPEZ, INC. IS NOT THE REAL PARTY-IN-INTEREST AS PARTY-DEFENDANT ON THE COUNTERCLAIMS OF PETITIONER VELARDE CONSIDERING THAT THE FILING OF RESPONDENT LOPEZ, INC.'S MANIFESTATION AND MOTION TO DISMISS COUNTERCLAIM HAD THE EFFECT OF HYPOTHETICALLY ADMITTING THE TRUTH OF THE MATERIAL AVERMENTS OF THE ANSWER, WHICH MATERIAL AVERMENTS SUFFICIENTLY ALLEGED THAT RESPONDENT LOPEZ, INC. COMMITTED ACTS WHICH SHOW THAT ITS SUBSIDIARY, SKY VISION, WAS A MERE BUSINESS CONDUIT OR ALTER EGO OF THE FORMER, THUS, JUSTIFYING THE PIERCING OF THE VEIL OF CORPORATE FICTION.

III.

THE COURT OF APPEALS GRAVELY ERRED IN RULING THAT THE COUNTERCLAIMS OF PETITIONER VELARDE ARE NOT COMPULSORY. 14

While petitioner correctly invokes the ruling in Atienza v. Court of Appeals 15 to postulate that not every denial of a motion to dismiss can be corrected by certiorari under Rule 65 and that, as a general rule, the remedy from such denial is to appeal in due course after a decision has been rendered on the merits, there are exceptions thereto, as when the court in denying the motion to dismiss acted without or in excess of jurisdiction or with patent grave abuse of discretion, 16 or when the assailed interlocutory order is patently erroneous and the remedy of appeal would not afford adequate and expeditious relief, 17 or when the ground for the motion to dismiss is improper venue, 18 res judicata, 19 or lack of jurisdiction 20 as in the case at bar.

Early on, it bears noting, when the case was still with the trial court, respondent filed a motion to dismiss the counterclaims to assail its jurisdiction, respondent asserting that the counterclaims, being money claims arising from a labor relationship, are within the exclusive competence of the National Labor Relations Commission. 21 On the other hand, petitioner alleged that due to the tortuous manner he was coerced into retirement, it is the Regional Trial Courts (RTCs) and not the National Labor Relations Commission which has exclusive jurisdiction over his counterclaims.

In determining which has jurisdiction over a case, the averments of the complaint/counterclaim, taken as a whole, are considered. 22 In his counterclaim, petitioner alleged that:

xxx xxx xxx

29. It was only on July 15, 1998 that Lopez, Inc. submitted a computation of the retirement benefit due to the Defendant. (Copy attached as ANNEX 4). Immediately after receiving this computation, Defendant immediately informed Plaintiff of the erroneous figure used as salary in the computation of benefits. This was done in a telephone conversation with a certain Atty. Amina Amado of Lopez, Inc.

29.1 The Defendant also informed her that the so called "unliquidated advances amounting to P422,922.87 since 1995" had all been properly liquidated as reflected in all the reports of the company. The Defendant reminded Atty. Amado of unpaid incentives and salaries for 1997.

29.2 Defendant likewise informed Plaintiff that the one month for every year of service as a basis for the computation of the Defendant's retirement benefit is erroneous. This computation is even less than what the rank and file employees get. That CEO's, COO's and senior executives of the level of ABS-CBN, Sky Vision, Benpres, Meralco and other Lopez companies had and have received a lot more than the regular rank and file employees. All these retired executives and records can be summoned for verification. DHSCTI

29.3 The circumstances of the retirement of the Defendant are not those for a simple and ordinary rank and file employee. Mr. Lopez, III admitted that he and the Defendant have had problems which accumulated through time and that they chose to part ways in a manner that was dignified for both of them. Treating the Defendant as a rank and file employee is hardly dignified not just to the Defendant but also to the Lopezes whose existing executives serving them will draw lessons from the Defendant's experience.

 

29.4 These circumstances hardly reflect a simple retirement. The Defendant, who is known in the local and international media community, is hardly considered a rank and file employee. Defendant was a stockholder of the Corporation and a duly-elected member of the Board of Directors. Certain government officials can attest to the sensitivity of issues and matters the Defendant had represented for the Lopezes that are hardly issues handled by a simple rank and file employee. Respectable individuals in government and industry are willing to testify to this regard. . . . 23 (Emphasis and italics supplied).

At the heart of petitioner's counterclaim is his alleged forced retirement which is also the basis of his claim for, among other things, unpaid salaries, unpaid incentives, reasonable return on the stock ownership plan, and other benefits from a subsidiary company of the respondent.

Section 5(c) of P.D. 902-A (as amended by R.A. 8799, the Securities Regulation Code) applies to a corporate officer's dismissal. For a corporate officer's dismissal is always a corporate act and/or an intra-corporate controversy and that its nature is not altered by the reason or wisdom which the Board of Directors may have in taking such action. 24

With regard to petitioner's claim for unpaid salaries, unpaid share in net income, reasonable return on the stock ownership plan and other benefits for services rendered to Sky Vision, jurisdiction thereon pertains to the Securities Exchange Commission even if the complaint by a corporate officer includes money claims since such claims are actually part of the prerequisite of his position and, therefore, interlinked with his relations with the corporation. 25 The question of remuneration involving a person who is not a mere employee but a stockholder and officer of the corporation is not a simple labor problem but a matter that comes within the area of corporate affairs and management, and is in fact a corporate controversy in contemplation of the Corporation Code. 26

While petitioner's counterclaims were filed on December 1, 1998, the second challenged order of the trial court denying respondent's motion for reconsideration of the denial of its motion to dismiss was issued on October 9, 2000 at which time P.D. 902-A had been amended

by R.A. 8799 (approved on July 19, 2000) which mandated the transfer of jurisdiction over intra-corporate controversies, subject of the counterclaims, to RTCs.

But even if the subject matter of the counterclaims is now cognizable by RTCs, the filing thereof against respondent is improper, it not being the real party-in-interest, for it is petitioner's employer Sky Vision, respondent's subsidiary.

It cannot be gainsaid that a subsidiary has an independent and separate juridical personality, distinct from that of its parent company, hence, any claim or suit against the latter does not bind the former and vice versa.

Petitioner argues nevertheless that jurisdiction over the subsidiary is justified by piercing the veil of corporate fiction. Piercing the veil of corporate fiction is warranted, however, only in cases when the separate legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, such that in the case of two corporations, the law will regard the corporations as merged into one. 27 The rationale behind piercing a corporation's identity is to remove the barrier between the corporation from the persons comprising it to thwart the fraudulent and illegal schemes of those who use the corporate personality as a shield for undertaking certain proscribed activities. 28

In applying the doctrine of piercing the veil of corporate fiction, the following requisites must be established: (1) control, not merely majority or complete stock control; (2) such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest acts in contravention of plaintiff's legal rights; and (3) the aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of. 29

Nowhere, however, in the pleadings and other records of the case can it be gathered that respondent has complete control over Sky Vision, not only of finances but of policy and business practice in respect to the transaction attacked, so that Sky Vision had at the time of the transaction no separate mind, will or existence of its own. The existence of interlocking directors, corporate officers and shareholders is not enough justification to pierce the veil of corporate fiction in the absence of fraud or other public policy considerations.

This Court is thus not convinced that the real party-in-interest with regard to the counterclaim for damages arising from the alleged tortuous manner by which petitioner was forced to retire as General Manager of Sky Vision is respondent.

Petitioner muddles the issues by arguing that respondent fraudulently took advantage of the control over the matter of compensation and benefits of an employee of Sky Vision to deceive petitioner into signing the loan agreement on the misleading assurance that it was merely for the purpose of documenting the reward to him of ten million pesos. This argument does not persuade. Petitioner, being a lawyer, is presumed to know the legal and binding effects of loan agreements. DIHETS

It bears emphasis that Sky Vision's involvement in the transaction subject of the case sprang only after a proposal was apparently proffered by petitioner that his retirement benefits from Sky Vision be used in partial payment of his loan from respondent as gathered from the July 15, 1998 letter 30 of Rommel Duran, Vice-President and General Manager of respondent, to petitioner reading:

Dear Mr. Velarde:

As requested, we have made computations on the outstanding amount of your loan with Lopez, Inc. should your retirement benefits from Sky Vision Corporation/Central CATV, Inc. ("Sky/Central") be applied to the partial payment of your loan. Please note that in order to effect the application of your retirement benefits to the partial payment of your

loan, you will need to give Sky/Central written instructions on the same in the soonest possible time.

As you will see in the attached computation, the amount of P4,077,077.13 will be applied to the payment of your loan to retroact on January 1, 1998. The amount of P422,922.87, representing unliquidated advances made by Sky/Central to you (see attached listing), has been deducted from your retirement pay of P4.5 million. Should you be able to liquidate the advances as requested by Sky/Central, the said amount will be applied to the partial payment of your loan and we shall adjust the amount of principal and interest due from you accordingly. After the application of the amount of P4,077,077.13 to the partial payment of your loan, the amount of P7,585,912.86 will be immediately due and demandable. The amount of P7,585,912.86 represents the outstanding principal and interest due as of July 15, 1998.

Without the application of your retirement benefits to the partial payment of your loan, the amount of P11,850,000.00 is due as of July 15, 1998. We reiterate our demand for full payment of your outstanding obligation immediately. (Emphasis supplied)

As for the trial court's ruling that the agreement to set-off is an amendment of the loan agreement resulting to an identity of interest between respondent and Sky Vision and, therefore, sufficient to pierce the veil of corporate fiction, it is untenable. The abovequoted letter is clear that, to effect a set-off, it is a condition sine qua non that the approval thereof by "Sky/Central" must be obtained, and that petitioner liquidate his advances from Sky Vision. These conditions hardly manifest that respondent possessed that degree of control over Sky Vision as to make the latter its mere instrumentality, agency or adjunct.

WHEREFORE, the instant petition for review on certiorari is hereby DENIED.

SO ORDERED.

Vitug, Sandoval-Gutierrez and Corona, JJ ., concur.

||| (Velarde v. Lopez, Inc., G.R. No. 153886, January 14, 2004)

THIRD DIVISION

[G.R. No. 158941. February 11, 2008.]

TIMESHARE REALTY CORPORATION, petitioner, vs. CESAR LAO and CYNTHIA V. CORTEZ, respondents.

D E C I S I O N

AUSTRIA-MARTINEZ, J p:

Before this Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, assailing the October 30, 2002 Resolution 1 of the Court of Appeals (CA), which denied due course to the appeal of Timeshare Realty Corporation (petitioner) from the March 25, 2002 Decision 2 of the Securities and Exchange Commission (SEC) in SEC Case No. 01-99-6199; and the July 4, 2003 CA Resolution, 3 which denied petitioner's Motion for Reconsideration.

As found by the SEC, 4 the antecedent facts are as follows:

On October 6, 1996, herein petitioner sold to Ceasar M. Lao and Cynthia V. Cortez (respondents), one timeshare of Laguna de Boracay for US$7,500.00 under Contract No. 135000998 payable in eight months and fully paid by the respondents.

Sometime in February 1998, the SEC issued a resolution to the effect that petitioner was without authority to sell securities, like timeshares, prior to February 11, 1998. It further stated in the resolution/order that the Registration Statement of petitioner became effective only on February 11, 1998. It also held that the 30 days within which a purchaser may exercise the option to unilaterally rescind the purchase agreement and receive the refund of money paid applies to all purchase agreements entered into by petitioner prior to the effectivity of the Registration Statement.

Petitioner sought a reconsideration of the aforesaid order but the SEC denied the same in a letter dated March 9, 1998.

On March 30, 1998, respondents wrote petitioner demanding their right and option to cancel their Contract, as it appears that Laguna de Boracay is selling said shares without license or authority from the SEC. For failure to get an answer to the said letter, respondents this time, through counsel, reiterated their demand through another letter dated June 29, 1998. But despite repeated demands, petitioner failed and refused to refund or pay respondents. 5

Respondents directly filed with SEC En Banc 6 a Complaint 7 against petitioner and the Members of its Board of Directors — Julius S. Strachan, Angel G. Vivar, Jr. and Cecilia R. Palma — for violation of Section 4 of Batas Pambansa Bilang (B.P. Blg.) 178. 8 Petitioner filed an Answer 9 to the Complaint but the SEC En Banc, in an Order 10 dated April 25, 2000, expunged the Answer from the records due to tardiness.

On March 25, 2002, the SEC En Banc rendered a Decision in favor of respondents, ordering petitioner, together with Julius S. Strachan, Angel G. Vivar, Jr., and Cecilia R. Palma, to pay respondents the amount of US$7,500.00. 11

Petitioner filed a Motion for Reconsideration 12 which the SEC En Banc denied in an Order 13 dated June 24, 2002.

Petitioner received a copy of the June 24, 2002 SEC En Banc Order on July 4, 2002 14 and had 15 days or until July 19, 2002 within which to appeal. However, on July 10, 2002, petitioner sought from the CA an extension of 30 days, counted from July 19, 2002, or until August 19, 2002, within which to appeal. 15 The CA partly granted the motion in an Order dated July 24, 2002, to wit:

As prayed for, but conditioned on the timeliness of its filing, the Motion for Extension to File Petition for Review dated 09 July 2002 and filed before this Court on 10 July 2002 is GRANTED and petitioners are given a non-extendible period of fifteen (15) days from 10 July 2002 or until 25 July 2002 within which to file the desired petition, otherwise, the above-entitled case will be dismissed. (Emphasis supplied.) 16

Petitioner purportedly received the July 24, 2002 CA Order on July 29, 2002, 17 but filed a Petition for Review with the CA on August 19, 2002. 18

In the assailed October 30, 2002 Resolution, the CA dismissed the Petition for Review, thus:

Under Section 4, Rule 43 of the 1997 Revised Rules of Civil Procedure, petitioners shall not be given an extension longer than fifteen (15) days from the expiration of the reglementary period, except for the most compelling reason.

Thus, on 24 July 2002, in the absence of a compelling reason that justifies the granting of a longer period of extension, this Court issued a resolution wherein petitioners were given an extension of ONLY fifteen days from 10 July 2002 or until 25 July 2002 within which to file the petition for review, otherwise, the above entitled case will be dismissed.

However, records show that petitioners filed their petition for review only on 19 August 2002, which is twenty-five (25) days beyond the allowed 15-day extended period granted by this Court.

WHEREFORE, the appeal from the decision of the Securities and Exchange Commission (SEC) Case No. 01-99-6199 is hereby DISMISSED for failure of the petitioners to file their Petition for Review under the 15-day period granted by this Court as provided by Rule 43, Section 4 of the 1997 Revised Rules of Civil Procedure.

SO ORDERED. 19

and denied petitioner's Motion for Reconsideration in the assailed Resolution dated July 4, 2003. 20

Petitioner filed the present petition, urging us to look beyond the procedural lapse in its appeal, and resolve the following substantive issues:

Whether or not the eventual approval or issuance of license has retroactive effect and therefore ratifies all earlier transactions;

Whether or not a party in a contract could withdraw or rescind unilaterally without valid reason. 21

We deny the petition.

A judgment must become final at the time appointed by law 22 — this is a fundamental principle upon which rests the efficacy of our courts whose processes and decrees command obedience only when these are perceived to have some degree of permanence and predictability. Thus, an appeal from such judgment, not being a natural right but a mere statutory privilege, must be perfected according to the mode and within the period prescribed by the law and the rules; otherwise, the appeal is forever barred, and the judgment becomes binding. 23

Section 70 of Republic Act No. 8799 24 which was enacted on July 19, 2000, is the law which governs petitioner's appeal from the orders of the SEC En Banc. It prescribes that such appeal be taken to the CA "by petition for review in accordance with the pertinent provisions of the Rules of Court," specifically Rule 43. 25

Section 4 of Rule 43 is restrictive in its treatment of the period within which a petition may be filed:

Section 4. Period of appeal. — The appeal shall be taken within fifteen (15) days from notice of the award, judgment, final order or resolution, or from the date of its last publication, if publication is required by law for its effectivity, or of the denial of petitioner's motion for new trial or reconsideration duly filed in accordance with the governing law of the court or agency a quo. Only one (1)

motion for reconsideration shall be allowed. Upon proper motion and the payment of the full amount of the docket fee before the expiration of the reglementary period, the Court of Appeals may grant an additional period of fifteen (15) days only within which to file the petition for review. No further extension shall be granted except for the most compelling reason and in no case to exceed fifteen (15) days. (Emphasis supplied.)

Petitioner's Motion for Extension of Time to File Petition for Review flouted the foregoing restriction: it sought, not a 15-day, but a 30-day extension of the appeal period; 26 and it did not even bother to cite a compelling reason for such extension, other than its counsel's caseload which, as we have repeatedly ruled, hardly qualifies as an imperative cause for moderation of the rules. 27

Its motion for extension being inherently flawed, petitioner should not have presumed that the CA would fully grant the same. 28 Instead, it should have exercised due diligence by filing the proper petition within the allowable period, 29 or at the very least, ascertaining from the CA whether its motion for extension had been acted upon. 30 As it were, petitioner's counsel left the country, unmindful of the possibility that his client's period to appeal was about to lapse — as it indeed lapsed on July 25, 1999, after the CA allowed them a 15-day extension only, in view of the restriction under Section 4, Rule 43. Thus, petitioner has only itself to blame that the Petition for Review it filed on August 19, 1999 was late by 25 days. The CA cannot be faulted for dismissing it.

The Court notes that the CA reckoned the 15-day extension it granted to petitioner from July 10, 1999, the date petitioner filed its Motion for Extension, rather than from July 19, 1999, the date of expiration of petitioner's original period to appeal. While such computation of the CA appears to be erroneous, petitioner did not question it in the present petition. But even if we do reckon the 15-day extension period from July 19, 1999, the same would have ended on August 3, 1999, making petitioner's appeal still inexcusably tardy by 16 days. Either way we reckon it, therefore, petitioner's appeal was not perfected within the period prescribed under Rule 43.

Nevertheless, the Court opts to resolve the substantive issues raised by petitioner in its appeal so as to determine the lawful rights of the parties and put an end to the litigation.

Petitioner claims that at the time it entered into a timeshare purchase agreement with respondents on October 6, 1996, it already possessed the requisite license and marketing agreement to engage in such transactions, 31 as evidenced by its registration with the SEC as a corporation. 32 Petitioner argues that when it was registered and authorized by the SEC as broker of securities 33 — such as the Laguna de Boracay timeshares — this had the effect of ratifying its October 6, 1996 purchase agreement with respondents, and removing any cause for the latter to rescind it.

 

The Court is not persuaded.

As cited by the SEC En Banc in its March 25, 2002 Decision, as early as February 13, 1998, the SEC, through Director Linda A. Daoang, already rendered a ruling on the effectivity of the registration statement of petitioner, viz:

This has reference to your registration statement which was rendered effective 11 February 1998. The 30 days within which a purchaser may exercise the option to unilaterally rescind the purchase agreement and receive the refund of money paid, applies to all purchase agreements entered into by the registrant prior to the effectivity of the registration statement. The 30-day rescission period for contracts signed before the Registration Statement was rendered effective shall commence on 11 February 1998. The rescission period for contracts after 11 February 1998 shall commence on the date of purchase agreement. (Emphasis supplied.) 34

Petitioner sought a reconsideration of said ruling but the same was denied by Director Daoang in an Order dated March 9, 1998. 35 However, petitioner did not resort to any other administrative remedy against said ruling, such as by questioning the same before the SEC En Banc. Having failed to exhaust the administrative remedies available to it, petitioner is already bound by said ruling and can no longer question the same through a direct and belated recourse to us. 36

Finally, the provisions of B.P. Blg. 178 do not support the contention of petitioner that its mere registration as a corporation already authorizes it to deal with unregistered timeshares. Corporate registration is just one of several requirements before it may deal with timeshares:

Section 8. Procedure for registration. — (a) All securities required to be registered under subsection (a) of Section four of this Act shall be registered through the filing by the issuer or by any dealer or underwriter interested in the sale thereof, in the office of the Commission, of a sworn registration statement with respect to such securities, containing or having attached thereto, the following:

xxx xxx xxx

(36) Unless previously filed and registered with the Commission and brought up to date:

(a) A copy of its articles of incorporation with all amendments thereof and its existing by-laws or instruments corresponding thereto, whatever the name, if the issuer be a corporation.

Prior to fulfillment of all the other requirements of Section 8, petitioner is  absolutely proscribed under Section 4 from dealing with unregistered timeshares, thus:

Section 4. Requirement of registration of securities. — (a) No securities, except of a class exempt under any of the provisions of Section five hereof or unless sold in any transaction exempt under any of the provisions of Section six hereof, shall be sold or offered for sale or distribution to the public within the Philippines unless such securities shall have been registered and permitted to be sold as hereinafter provided. (Emphasis supplied.)

WHEREFORE, the petition is DENIED for lack of merit.

Costs against petitioner.

SO ORDERED.

Ynares-Santiago, Corona, * Nachura and Reyes, JJ., concur.

||| (Timeshare Realty Corp. v. Lao, G.R. No. 158941, February 11, 2008)

THIRD DIVISION

[G.R. No. 138949. June 6, 2001.]

UNION BANK OF THE PHILIPPINES, petitioner, vs. SECURITIES AND EXCHANGE COMMISSION, respondent.

Macalino and Associates for petitioner.

The Solicitor General for respondent.

SYNOPSIS

Petitioner Union Bank of the Philippines was required by the respondent Securities and Exchange Commission (SEC) to submit a Proxy/Information Statement in connection with its annual meeting held on May 23, 1997 in compliance with respondent Commission's Full Material Disclosure Rule under the Revised Securities Act (RSA) Implementing Rules 11(a)-1, 34(a)-1 and 34(c)-1 which require the submission of certain reports to ensure full, fair and accurate disclosure of information for the protection of the investing public. Petitioner did not comply, arguing that it is not covered by the said regulations, so the SEC imposed a fine on petitioner in the amount of P91,000.00 for failure to file SEC Form 11-A which excludes the fine accruing after the cut-off date until the final submission of the report. An additional amount of P50,000.00 was also imposed for violation of RSA Rule 34(a)-1 or Rule 34(c)(1). Petitioner sought reconsideration, but was denied by respondent Commission in an order dated April 14, 1998. Petitioner then elevated its case to the Court of Appeals which affirmed, the questioned Order. Hence, the present petition. Petitioner argued that since its securities are exempt from the registration requirements under Section 5(a)(3) of the Revised Securities Act, it follows that they are also exempt from the coverage of Rules 11 (a)-1, 34(a)-1 and 34(c)-1 of the RSA Implementing rules.

The Supreme Court denied the petition. According to the Court, while Section 5(a)(3) of the Revised Securities Act exempts from registration the securities issued by banking or financial institutions mentioned in the law, nowhere does it state or even imply that petitioner, as a listed corporation, is exempt from complying with the reports required by the assailed RSA Implementing Rules. The Court emphasized that petitioner is a commercial banking corporation listed in the stock exchange, and, therefore, it must adhere not only to banking and other allied special laws, but also to the rules promulgated by respondent SEC, the government entity tasked not only with the enforcement of the Revised Securities Act, but also with the supervision of all corporations, partnerships or associations which are grantees of government-issued primary franchises and/or licenses or permits to operate in the Philippines.

SYLLABUS

1. COMMERCIAL LAW; REVISED SECURITIES ACT; EXEMPT SECURITIES; COVERAGE. — Because its securities are exempt from the registration requirements under Section 5(a)(3) of the Revised Securities Act, petitioner argues that it is not covered by RSA Implementing Rule 11(a)-1, which requires the filing of annual, quarterly, current predecessor and successor

reports; Rule 34(a)-1, which mandates the filing of proxy statements and forms of proxy; and Rule 34(c)-1, which obligates the submission of information statements. We do not agree. Section 5(a)(3) of the said Act reads: "Sec. 5. Exempt Securities. (a) Except as expressly provided, the requirement of registration under subsection (a) of Section four of this Act shall not apply to any of the following classes of securities: . . . (3) Any security issued or guaranteed by any banking institution authorized to do business in the Philippines, the business of which is substantially confined to banking, or a financial institution licensed to engage in quasi-banking, and is supervised by the Central Bank." This provision exempts from registration the securities issued by banking or financial institutions mentioned in the law. Nowhere does it state or even imply that petitioner, as a listedcorporation, is exempt from complying with the reports required by the assailed RSA Implementing Rules.

2. ID.; ID.; ID.; COMMERCIAL BANKING CORPORATION LISTED IN THE STOCK EXCHANGE; MUST ADHERE NOT ONLY TO BANKING AND OTHER ALLIED SPECIAL LAWS, BUT ALSO TO THE RULES PROMULGATED BY SECURITIES AND EXCHANGE COMMISSION. — Worth repeating is the CA's disquisition on the matter, which we quote: "However, the exemption from the registration requirement enjoyed by petitioner does not necessarily connote that [it is] exempted from the other reportorial requirements. Having confined the exemption enjoyed by petitioner merely to the initial requirement of registration of securities for public offering, and not [to] the subsequent filing of various periodic reports, respondent Commission, as the regulatory agency, is able to exercise its power of supervision and control over corporations and over the securities market as a whole. Otherwise, the objectives of the 'Full Material Disclosure' policy would be defeated since petitioner corporation and its dealings would be totally beyond the reach of respondent Commission and the investing public." It must be emphasized that petitioner is a commercial banking corporation listed in the stock exchange. Thus, it must adhere not only to banking and other allied special laws, but also to the rules promulgated by Respondent SEC, the government entity tasked not only with the enforcement of the Revised Securities Act, but also with the supervision of all corporations, partnerships or associations which are grantees of government-issued primary franchises and/or licenses or permits to operate in the Philippines. RSA Rules 11(a)-1, 34(a)-1 and 34(c)-1 require the submission of certain reports to ensure full, fair and accurate disclosure of information for the protection of the investing public. These Rules were issued by respondent pursuant to the authority conferred upon it by Section 3 of the RSA. The said Rules do not amend Section 5(a)(3) of the Revised Securities Act, because they do not revoke or amend the exemption from registration of the securities enumerated thereunder. They are reasonable regulations imposed upon petitioner as a banking corporation trading its securities in the stock market.

3. ID.; ID.; ID.; ID.; REASON THEREFOR. — That petitioner is under the supervision of the Bangko Sentral ng Pilipinas (BSP) and the Philippine Stock Exchange (PSE) does not exempt it from complying with the continuing disclosure requirements embodied in the assailed Rules. Petitioner, as a bank, is primarily subject to the control of the BSP; and as a corporation trading its securities in the stock market, it is under the supervision of the SEC. It must be pointed out that even the PSE is under the control and supervision of respondent. There is no over-supervision here. Each regulating authority operates within the sphere of its powers. That stringent requirements are imposed is understandable, considering the paramount importance given to the interests of the investing public. Otherwise stated, the mere fact that in regard to its banking functions, petitioner is already subject to the supervision of the BSP does not exempt the former from reasonable disclosure regulations issued by the SEC. These regulations are meant to assure full, fair and accurate disclosure of information for the protection of investors in the stock market. Imposing such regulations is a function within the jurisdiction of the SEC. Since petitioner opted to trade its shares in the exchange, then it must abide by the reasonable rules imposed by the SEC.

4. ID.; ID.; ID.; ADMINISTRATIVE SANCTIONS IN CASE OF VIOLATION OF THE ACT. — It bears stressing that the fine imposed upon petitioner is sanctioned by Section 46(b) of the RSA, which reads as follows: "Sec. 46. Administrative sanctions. If, after proper notice and hearing, the Commission finds that there is a violation of this Act, its rules, or its orders or that any registrant has, in a registration statement and its supporting papers and other reports required by law or rules to be filed with the Commission, made any untrue statement of a material fact, or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading, or refused to permit any lawful examination into its affairs, it shall, in its discretion, impose any or all of the following sanctions: . . . (b) A fine of no less than two hundred (P200.00) pesos nor more than fifty thousand (P50,000.00) pesos plus not more than five hundred (P500.00) pesos for each day of continuing violation." Petitioner complied with RSA Rule 11(a)-1 on April 30, 1998. To date, it still has not complied with either RSA Rule 34(a)-1 or Rule 34(c)-1. That there was a failure to submit the required reports on time is evident in the present case. Thus, respondent was justified in imposing a fine upon it.

D E C I S I O N

PANGANIBAN, J p:

The mere fact that petitioner, in regard to its banking functions, is already subject to the supervision of the Bangko Sentral ng Pilipinas does not exempt the former from reasonable disclosure regulations issued by the Securities and Exchange Commission (SEC). These regulations — imposed on petitioner as a banking institution listed in the stock market — are meant to assure full, fair and accurate information for the protection of investors. Imposing such regulations is a function within the jurisdiction of the SEC.

The Case

Before us is a Petition for Review on Certiorari 1 under Rule 45 of the Rules of Court, challenging the November 16, 1998 Decision 2 of the Court of Appeals (CA) in CA-GR SP No. 48002. The dispositive portion of the assailed Decision reads as follows:

"GIVEN THE FOREGOING, the assailed Orders dated November 5, 1997 and April 14, 1998 are hereby AFFIRMED, with the MODIFICATION that petitioner is assessed a single fine of FIFTY THOUSAND (P50,000.00) PESOS plus FIVE HUNDRED (P500.00) PESOS beginning July 21, 1997, for each day of continuing violation." 3

Likewise assailed is the May 31, 1999 CA Resolution, 4 which denied petitioner's Motion for Reconsideration.

 

The Facts

The court a quo summarized the antecedents of the case as follows:

"Records show that on April 4, 1997, petitioner, through its General Counsel and Corporate Secretary, sought the opinion of Chairman Perfecto Yasay, Jr. of respondent Commission as to the applicability and coverage of the Full Material Disclosure Rule on banks, contending that said rules, in effect, amend Section 5 (a) (3) of the Revised Securities Act

which exempts securities issued or guaranteed by banking institutions from the registration requirement provided by Section 4 of the same Act. (Annex "C", p. 20,Rollo).

"In reply thereto, Chairman Yasay, in a letter dated April 8, 1997, informed petitioner that while the requirements of registration do not apply to securities of banks which are exempt under Section 5(a) (3) of the Revised Securities Act, however, banks with a class of securities listed for trading on the Philippine Stock Exchange, Inc. are covered by certain Revised Securities Act Rules governing the filing of various reports with respondent Commission, i.e., (1) Rule 11(a)-1 requiring the filing of Annual, Quarterly, Current, Predecessor and Successor Reports; (2) Rule 34-(a)-1 requiring submission of Proxy Statements; and (3) Rule 34-(c)-1 requiring submission of Information Statements, among others. (Annex D, P, U, Rollo).

"Not satisfied, petitioner, per letter dated April 30, 1997, informed Chairman Yasay that they will refer the matter to the Philippine Stock Exchange for clarification. (Annex E, p. 22,Rollo)

"On May 9, 1997, respondent Commission, through its Money Market Operations Department Director, wrote petitioner, reiterating its previous position that petitioner is not exempt from the filing of certain reports. The letter further stated that the Revised Securities Act Rule 11 (a) requires the submission of reports necessary for full, fair and accurate disclosure to the investing public, and not the registration of its shares. (Annex F, p. 23, Rollo).

"On July 17, 1997, respondent Commission wrote petitioner, enjoining the latter to show cause why it should not be penalized for its failure to submit a Proxy/Information Statement in connection with its annual meeting held on May 23, 1997, in violation of respondent Commission's 'Full Material Disclosure Rule.' (Annex 6, p. 24, Rollo).

"Failing to respond to the aforesaid communication, petitioner was given a '2nd Show Cause with Assessment' by respondent Commission on July 21, 1997. Petitioner was then assessed a fine of P50,000.00 plus P500.00 for every day that the report [was] not filed, or a total of P91,000.00 as of July 21, 1997. Petitioner was likewise advised by respondent Commission to submit the required reports and settle the assessment, or submit the case to a formal hearing. (Annex H, p. 25, Rollo).

"On August 18, 1997, petitioner wrote respondent Commission disputing the assessment. (Annex I, pp. 26-27, Rollo).

"Thus, on November 5, 1997, respondent issued the assailed Order, the dispositive portion of which provides:

"In view of the foregoing, the appeal filed by the Union Bank of the Philippines is hereby denied. The penalty imposed in the amount of P91,000.00 as of July 21, 1997, for failure to file SEC Form 11-A excludes the fine accruing after the cut-off date until the final submission of the report. Further, the amount of P50,000.00 shall be collected for the violation of RSA Rule 34(a)-1 or Rule 34 (c)(1)." (p. 17, Rollo).

"Petitioner sought a reconsideration thereof which was denied by respondent Commission per assailed Order dated April 14, 1998, the dispositive portion of which reads:

"There being no new matters raised in the motion for reconsideration to overcome the denial of the Appeal by the Commission En Banc in its Order of November 5, 1997, and considering that the reasons advanced are [a] mere rehash of its defenses duly addressed in the Appeal, the Motion for Reconsideration is hereby, DENIED. (p. 19,Rollo)." 5

Petitioner then elevated its case to the Court of Appeals which, as already stated, affirmed the questioned Orders.

The CA Ruling

In its well-written 10-page Decision, the Court of Appeals cited the expertise of Respondent SEC on matters within the ambit of the latter's mandate, as follows: HcACST

"To begin with, it is already well-settled that the construction given to a statute by an administrative agency charged with the interpretation and application of that statute is entitled to great respect and should be accorded great weight by the courts, unless such construction is clearly shown to be in sharp conflict with the governing statute or the Constitution and other laws. (Nestle Philippines, Inc. v. Court of Appeals, 203 SCRA 504 [1991], at page 510) The rationale for this rule relates not only to the emergence of the multifarious needs of a modern or modernizing society and the establishment of diverse administrative agencies for addressing and satisfying those needs; it also relates to accumulation of experience and growth of specialized capabilities by the administrative agency charged with implementing a particular statute. (Nestle Philippines, Inc. v. Court of Appeals, ibid., at pp. 510-511)

"In this regard, the Supreme Court, in Philippine Stock Exchange v. Securities and Exchange Commission, et al., G.R. No. 125469, October 27, 1998, already upheld the power of respondent Securities and Exchange Commission to promulgate rules and regulations, as it may consider appropriate, for the enforcement of the Revised Securities Act and other pertinent laws. Thus, pursuant to their regulatory authority, respondent Securities and Exchange Commission adopted the policy of 'full material disclosure' where all companies, listed or applying for listing, are required to divulge truthfully and accurately, all material information about themselves and the securities they sell, for the protection of the investing public, and under pain of administrative, criminal and civil sanctions. While the employment of the 'full material disclosure' policy is sanctioned and recognized by the laws, nonetheless, the Revised Securities Act sets substantial and procedural standards which a proposed issuer of securities must satisfy.

"Moreover and perhaps most importantly, the construction given by respondent Commission on the scope of application of the 'Full Material Disclosure' policy permits greater opportunity for respondent Commission to implement [its] statutory mandate of protecting the investing public by requiring public issuers of securities to inform the public of the true financial conditions and prospects of the corporation." 6

The court a quo stressed that Rules 11(a)-1, 34(a)-1, and 34(c)-1 were issued by respondent to implement the Revised Securities Act (RSA). They do not require the registration of petitioner's securities; thus, it cannot be said that the SEC amended Section 5(a)(3) of the said Act.

Hence, this Petition. 7

Issues

Petitioner submits for our resolution the following issues:

"A. Whether or not petitioner is required to comply with the respondent SEC's full disclosure rules.

"B. Whether or not the SEC's full disclosure rules [are] contrary to and effectively [amend] section 5(a)(3) of the Revised Securities Act.

"C. Whether or not Respondent Court of Appeals gravely erred in holding that petitioner violated three (3) Rules, namely: Rule 11(A)-1, Rule 34(A)-1 and Rule 34(C)-1 of the full disclosure rule.

"D. Whether or not Respondent Court of Appeals erred in affirming with modification the imposition of excessive fines in violation of the Philippine Constitution." 8

In the main, the Court will determine (1) the applicability of RSA Implementing Rules 11(a)-1, 34(a)-1 and 34(c)-1 to petitioner; and (2) the propriety of the fine imposed upon the latter.

The Court's Ruling

The Petition is not meritorious.

First Issue:Applicability of the Assailed RSA Implementing Rules

Because its securities are exempt from the registration requirements under Section 5(a)(3) of the Revised Securities Act, petitioner argues that it is not covered by RSA Implementing Rule 11(a)-1, which requires the filing of annual, quarterly, current predecessor and successor reports; Rule 34(a)-1 which mandates the filing of proxy statements and forms of proxy; and Rule 34(c)-1, which obligates the submission of information statements.

We do not agree. Section 5(a)(3) of the said Act reads:

"SECTION. 5. Exempt Securities. — (a) Except as expressly provided, the requirement of registration under subsection (a) of Section four of this Act shall not apply to any of the following classes of securities:

xxx xxx xxx

(3) Any security issued or guaranteed by any banking institution authorized to do business in the Philippines, the business of which is substantially confined to banking, or a financial institution licensed to engage in quasi-banking, and is supervised by the Central Bank."

This provision exempts from registration the securities issued by banking or financial institutions mentioned in the law. Nowhere does it state or even imply that petitioner, as a listed corporation, is exempt from complying with the reports required by the assailed RSA Implementing Rules. Worth repeating is the CA's disquisition on the matter, which we quote:

"However, the exemption from the registration requirement enjoyed by petitioner does not necessarily connote that [it is] exempted from the

other reportorial requirements. Having confined the exemption enjoyed by petitioner merely to the initial requirement of registration of securities for public offering, and not [to] the subsequent filing of various periodic reports, respondent Commission, as the regulatory agency, is able to exercise its power of supervision and control over corporations and over the securities market as a whole. Otherwise, the objectives of the 'Full Material Disclosure' policy would be defeated since petitioner corporation and its dealings would be totally beyond the reach of respondent Commission and the investing public." 9

 

It must be emphasized that petitioner is a commercial banking corporation 10 listed in the stock exchange. Thus, it must adhere not only to banking and other allied special laws, but also to the rules promulgated by Respondent SEC, the government entity tasked not only with the enforcement of the Revised Securities Act, 11 but also with the supervision of all corporations, partnerships or associations which are grantees of government-issued primary franchises and/or licenses or permits to operate in the Philippines. 12

RSA Rules 11(a)-1, 34(a)-1 and 34(c)-1 require the submission of certain reports to ensure full, fair and accurate disclosure of information for the protection of the investing public. These Rules were issued by respondent pursuant to the authority conferred upon it by Section 3 of the RSA. 13

The said Rules do not amend Section 5(a)(3) of the Revised Securities Act, because they do not revoke or amend the exemption from registration of the securities enumerated thereunder. They are reasonable regulations imposed upon petitioner as a banking corporation trading its securities in the stock market.

That petitioner is under the supervision of the Bangko Sentral ng Pilipinas (BSP) and the Philippine Stock Exchange (PSE) does not exempt it from complying with the continuing disclosure requirements embodied in the assailed Rules. Petitioner, as a bank, is primarily subject to the control of the BSP; and as a corporation trading its securities in the stock market, it is under the supervision of the SEC. It must be pointed out that even the PSE is under the control and supervision of respondent. 14 There is no over-supervision here. Each regulating authority operates within the sphere of its powers. That stringent requirements are imposed is understandable, considering the paramount importance given to the interests of the investing public.

Otherwise stated, the mere fact that in regard to its banking functions, petitioner is already subject to the supervision of the BSP does not exempt the former from reasonable disclosure regulations issued by the SEC. These regulations are meant to assure full, fair and accurate disclosure of information for the protection of investors in the stock market. Imposing such regulations is a function within the jurisdiction of the SEC. Since petitioner opted to trade its shares in the exchange, then it must abide by the reasonable rules imposed by the SEC.

Second Issue:Propriety of Fine Imposed

Contending that both respondent and the CA erred in imposing an excessive fine upon it, petitioner complains that it was not given an opportunity to be heard regarding the matter. aDHScI

It bears stressing that the fine imposed upon petitioner is sanctioned by Section 46(b) of the RSA, which reads as follows:

"SECTION 46. Administrative sanctions. — If, after proper notice and hearing, the Commission finds that there is a violation of this Act, its

rules, or its orders or that any registrant has, in a registration statement and its supporting papers and other reports required by law or rules to be filed with the Commission, made any untrue statement of a material fact, or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading, or refused to permit any lawful examination into its affairs, it shall, in its discretion, impose any or all of the following sanctions:

xxx xxx xxx

(b) A fine of no less than two hundred (P200.00) pesos nor more than fifty thousand (P50,000.00) pesos plus not more than five hundred (P500.00) pesos for each day of continuing violation."

Petitioner complied with RSA Rule 11(a)-1 on April 30, 1998. To date, it still has not complied with either RSA Rule 34(a)-1 or Rule 34(c)-1. That there was a failure to submit the required reports on time is evident in the present case. Thus. respondent was justified in imposing a fine upon it.

We reject the contention of petitioner that it was not heard on the matter of the fine imposed. The latter was assessed after the former had failed to respond to the SEC's first show-cause letter dated June 17, 1997. 15 In its August 18, 1997 letter, 16 petitioner sought before the SEC en banc the nullification of the fine. The matter was raised to the appellate court, which then considered it. Clearly then, petitioner satisfied the essence of due process — notice and opportunity to be heard. 17 That it received adverse rulings from both respondent and the CA does not mean that its right to be heard was discarded.

WHEREFORE, the Petition is hereby DENIED, and the assailed Decision of the Court of Appeals AFFIRMED. Costs against petitioner.

SO ORDERED.

Melo, Vitug, Gonzaga-Reyes and Sandoval-Gutierrez, JJ., concur.

||| (Union Bank of the Phil. v. Securities & Exchange Commission, G.R. No. 138949, June 06, 2001)

SECOND DIVISION

[G.R. No. 90707. February 1, 1993.]

ONAPAL PHILIPPINES COMMODITIES, INC., petitioner, vs. THE HONORABLE COURT OF APPEALS AND SUSAN CHUA, respondents.

Zosa & Quijano Law Offices for respondent.

SYLLABUS

1. CIVIL LAW; COMMODITY FUTURES CONTRACT; TRADING CONTRACTS FOR THE PURCHASE AND SALE OF COMMODITIES FOR FUTURE DELIVERY ARE IN THE NATURE OF GAMBLING WHERE THE PARTIES DO NOT INTEND AN ACTUAL DELIVERY; SUCH CONTRACTS ARE UNENFORCEABLE, ILLEGAL AND VOID. — Making contracts for the purchase and sale of commodities for future delivery, the parties not intending an actual delivery, contracts of the kind commonly called futures, are unenforceable. This is simple speculation, gambling or wagering on prices within a given time; it is not buying and selling and is illegal as against public policy. It appears that petitioner and private respondent did not intend, in the deals of purchasing and selling for future delivery, the actual or constructive delivery of the goods/community, despite the payment of the full price therefor. The contract between them falls under the definition of what is called "futures". The payments made under said contract were payments of difference in prices arising out of the rise or fall in the market price above or below the contract price thus making it purely gambling and declared null and void by law.

2. THE TRANSACTION UNDER THE TRADING CONTRACT IS IN THE NATURE OF A GAMBLING AGREEMENT AND FALLS UNDER ARTICLE 2018 OF THE NEW CIVIL CODE (NOT UNDER ARTICLE 1462) AND NEITHER UNDER THE Revised Securities Act NOR THE RULES AND REGULATIONS AND COMMODITY FUTURES TRADING LAID DOWN BY THE SEC. — The written trading contract in question is not illegal but the transaction between the petitioner and the private respondent purportedly to implement the contract is in the nature of a gambling agreement and falls within the ambit of Article 2018 of the New Civil Code, which is quoted hereunder: "If a contract which purports to be for the delivery of goods, securities or shares of stock is entered into with the intention that the difference between the price stipulated and the exchange or market price at the time of the pretended delivery shall be paid by the loser to the winner, the transaction is null and void. The loser may recover what he has paid." We draw the conclusion that no actual delivery of goods and commodity was intended and ever made by the parties. In the realities of the transaction, the parties merely speculated on the rise or fall in the price of the goods/commodity subject matter of the transaction. If private respondent's speculation was correct, she would be the winner and the petitioner, the loser, so petitioner would have to pay private respondent the "margin". But if private respondent was wrong in her speculation then she would emerge as the loser and the petitioner, the winner. The petitioner would keep the money or collect the difference from the private respondent. This is clearly a form of gambling provided for with unmistakeable certainty under Article 2018 abovestated. It should thus be governed by the New Civil Code and not by the Revised Securities Act nor the Rules and Regulations on Commodity Futures Trading laid down by the SEC. Article 1462 of the New Civil Code does not govern this case because the said provision contemplates a contract of sale of specific goods where one of the contracting parties binds himself to transfer the ownership of and deliver a determinate thing

and the other to pay therefore a price certain in money or its equivalent. The said article requires that there be delivery of goods, actual or constructive, to be applicable. In the transaction in question, there was no such delivery; neither was there any intention to deliver a determinate thing.

3. THE TRANSACTION IS NOT WHAT THE PARTIES CALL IT BUT WHAT THE LAW DEFINES IT TO BE. — The transaction is not what the parties call it but what the law defines it to be.

D E C I S I O N

CAMPOS, JR., J p:

This is an appeal by way of a Petition for Certiorari under Rule 45 of the Rules of Court to annul and set aside the following actions of the Court of Appeals:

a) Decision ** in Case CA-G.R. CV No. 08924; and

b) Resolution *** denying a Motion for Reconsideration.

on the ground of grave abuse of discretion amounting to lack or excess of jurisdiction and further ground that the decision is contrary to law and evidence. The questioned decision upheld the trial court's findings that the Trading Contract 1 on "futures" is a specie of gambling and therefore null and void. Accordingly, the petitioner (as defendant in lower court) was ordered to refund to the private respondent (as plaintiff) the losses incurred in the trading transactions.

In support of the petition, the grounds alleged are:

1) Article 2018 of the New Civil Code is inapplicable to the factual milieu of the instant case considering that in a commodity futures transaction, the broker is not the direct participant and cannot be considered as winner or loser and the contract itself, from its very nature, cannot be considered as gambling.

2) A commodity futures contract, being a specie of securities, is valid and enforceable as its terms are governed by special laws, notably the Revised Securities Act and the Revised Rules and Regulations on Commodity Futures Trading issued by the Securities and Exchange Commission (SEC) and approved by the Monetary Board of the Central Bank; hence, the Civil Code is not the controlling piece of legislation.

From the records, We gather the following antecedent facts and proceedings. LexLib

The petitioner, ONAPAL Philippines Commodities, Inc. (petitioner), a duly organized and existing corporation, was licensed as commission merchant/broker by the SEC, to engage in commodity futures trading in Cebu City under Certificate of Registration No. CEB-182. On April 27, 1983, petitioner and private respondent concluded a "Trading Contract". Like all customers of the petitioner, private respondent was furnished regularly with "Commodities Daily Quotations" showing daily movements of prices of commodity futures traded and of market reports indicating the volume of trade in different futures exchanges in Hongkong, Tokyo and other centers. Every time a customer enters into a trading transaction with petitioner as broker, the trading order is communicated by telex to its principal, Frankwell Enterprises of Hongkong. If the transaction, either buying or selling commodity futures, is consummated by the principal, the petitioner issues a document known as "Confirmation of Contract and Balance Sheet" to the customer. An order of a customer of the petitioner is

supposed to be transmitted from Cebu to petitioner's office in Manila. From Manila, it should be forwarded to Hongkong and from there, transmitted to the Commodity Futures Exchange in Japan.

There were only two parties involved as far as the transactions covered by the Trading Contracts are concerned — the petitioner and the private respondent. We quote hereunder the respondent Court's detailed findings of the transactions between the parties:

"It appears from plaintiff's testimony that sometime in April of 1983, she was invited by defendant's Account Executive Elizabeth Diaz to invest in the commodity futures trading by depositing the amount of P500,000.00 (Exh. "A"): She was further told that the business is "profitable" and that she could withdraw her money anytime; she was furthermore instructed to go to the Onapal Office where she met the Manager, Mr. Ciam, and the Account Executive Elizabeth Diaz who told her that they would take care of how to trade business and her account. She was then made to sign the Trading Contract and other documents without making her aware/understand the risks involved; that at the time they let her sign "those papers" they were telling her that those papers were for "formality sake"; that when she was told later on that she made a profit of P20,480.00 in a span of three days in the first transaction, they told her that the business is "very profitable" (tsn, Francisco, March 14, 1985, p. 11).

On June 2, 1983, plaintiff was informed by Miss Diaz that she had to deposit an additional amount of P300,000.00 "to pay the difference" in prices, otherwise she will loss her original deposit of P500,000.00: Fearing the loss of her original deposit, plaintiff was constrained to deposit an additional amount of P300,000.00 (Exh. "B"): Since she was made to understand that she could withdraw her deposit/investment anytime, she not knowing how the business is operated/managed as she was not made to understand what the business was all about, she wanted to withdraw her investment; but Elizabeth Diaz, defendant's Account Executive, told her she could not get out because there are some accounts hanging on the transactions. cdphil

Plaintiff further testified that she understood the transaction of buying and selling as speculating in prices, and her paying the difference between gains and losses without actual delivery of the goods to be gambling, and she would like to withdraw from this kind of business, the risk of which she was not made aware of. Plaintiff further testified that she stopped trading in commodity futures in September, 1983 when she realized that she was engaged in gambling. She was able to get only P470,000.00 out her total deposit of P800,000.00. In order to recover her loss of P330,000.00, she filed this case and engaged the services of counsel for P40,000.00 and expects to incur expenses of litigation in the sum of P20,000.00." 2

A commodity futures contract is a specie of securities included in the broad definition of what constitutes securities under Section 2 of the Revised Securities Act. 3

"Sec. 2. . . . :

(a) Securities shall include bonds, . . ., commodity futures contracts, . . ."

The Revised Rules and Regulations on Commodity Futures Trading issued by the SEC and approved by the Monetary Board of the Central Bank defines such contracts as follows:

 

"Commodity Futures Contract" shall refer to an agreement to buy or sell a specified quantity and grade of a commodity at a future date at a price established at the floor of the exchange.

The petitioner is a duly licensed commodity futures broker as defined under the Revised Rules and Regulations on Commodity Futures Trading as follows:

"Futures Commission Merchant/Broker" shall refer to corporation or partnership, which must be registered and licensed as a Future Commission Merchant/Broker and is engaged in soliciting or in accepting orders for the purchase or sale of any commodity for future delivery on or subject to the rules of any contract market and that, in connection with such solicitation or acceptance of orders, accepts any money, securities or property (or extends credit in lieu thereof) to margin, guarantee or secure any trade or contract that results or may result therefrom."

At the time private respondent entered into the transaction with the petitioner, she signed a document denominated as "Trading Contract" in printed form as prepared by the petitioner represented by its Branch Manager, Albert Chiam, incorporating the Rules for Commodity Trading. A copy of said contract was furnished to the private respondent but the contents thereof were not explained to the former, beyond what was told her by the petitioner's Account Executive Elizabeth Diaz. Private respondent was also told that the petitioner's principal was Frankwell Enterprises with offices in Hongkong but the private respondent's money which was supposed to have been transmitted to Hongkong, was kept by petitioner in a separate account in a local bank.

Petitioner now contends that commodity futures trading is a legitimate business practiced in the United States, recognized by the SEC and permitted under the Civil Code, specifically Article 1462 thereof, quoted as follows:

"The goods which form the subject of a contract of sale may be either existing goods, owned or possessed by the seller, or goods to be manufactured, raised, or acquired by the seller after the perfection of the contract of sale, in this Title called "future goods"

There may be a contract of sale of goods, whose acquisition by the seller depends upon a contingency which may or may not happen." Cdpr

Petitioner further argues that the SEC, in the exercise of its powers, authorized the operation of commodity exchanges to supervise and regulate commodity futures trading. 4

The contract between the parties falls under the kind commonly called "futures". In the late 1880's, trading in futures become rampant in the purchase and sale of cotton and grain in the United States, giving rise to unregulated trading exchanges known as "bucket shops". These were common in Chicago and New York City where cotton from the South and grain from the Mid-west were constantly traded in. The name of the party to whom the seller was to make delivery when the future contract of sale was closed or from whom he was to receive delivery in case of purchase is not given in the memorandum (contract). The business dealings between the parties were terminated by the closing of the transaction of purchase and sale of commodities without directions of the buyer because his margins were exhausted. 5 Under the rules of the trading exchanges, weekly settlements were required if there was any difference in the prices of cotton between those obtaining at the time of the contract and at the date of delivery so that under the contract made by the purchaser, if the price of cotton had advanced, he would have received in cash from the seller each week the advance (increase) in price and if cotton prices declined, the purchaser had to make like payments to

the seller. In the terminology of the exchange, these payments are called "margins". 6 Either the seller or the buyer may elect to make or demand delivery of the cotton agreed to be sold and bought, but in general, it seems practically a uniform custom that settlements are made by payments and receipts of difference in prices at the time of delivery from that prevailing at the time of payment of the last weekly "margins". These settlements are made by "closing out" the contracts. 7 Where the broker represented the buyer in buying and selling cotton for future delivery with himself extending credit margins, and some of the transactions were closed at a profit while others at a loss, payments being made of the difference in prices arising out of their rise or fall above or below the contract price, and the facts showed that no actual delivery of cotton was contemplated, such contracts are of the kind commonly called "futures". 8 Making contracts for the purchase and sale of commodities for future delivery, the parties not intending an actual delivery, contracts of the kind commonly called futures, are unenforceable. 9

The term "futures" has grown out of those purely speculative transactions in which there are nominal contracts to sell for future delivery, but where in fact no delivery is intended or executed. The nominal seller does not have or expect to have a stock of merchandise he purports to sell nor does the nominal buyer expect to receive it or to pay for the price. Instead of that, a percentage or margin is paid, which is increased or diminished as the market rates go up and down, and accounted for to the buyer. This is simple speculation, gambling or wagering on prices within a given time; it is not buying and selling and is illegal as against public policy. 10

The facts as disclosed by the evidence on record show that private respondent made arrangements with Elizabeth Diaz, Account Executive of petitioner for her to see Mr. Albert Chiam, petitioner's Branch Manager. The contract signed by private respondent purports to be for the delivery of goods with the intention that the difference between the price stipulated and the exchange or market price at the time of the pretended delivery shall be paid by the loser to the winner. We quote with approval the following findings of the trial court as cited in the Court of Appeals decision:

"The evidence of the plaintiff tend to show that in her transactions with the defendant, the parties never intended to make or accept delivery of any particular commodity but the parties merely made a speculation on the rise or fall in the market of the contract price of the commodity, subject of the transaction, on the pretended date of delivery so that if the forecast was correct, one party would make a profit, but if the forecast was wrong, one party would lose money. Under this scheme, plaintiff was only able to recover P470,000.00 out of her original and "additional" deposit of P800,000.00 with the defendant.

The defendant admits that in all the transactions that it had with the plaintiff, there was (sic) no actual deliveries and that it has made no arrangements with the Central Bank for the remittance of its customers' money abroad but defendant contends in its defense that the mere fact that there were no actual deliveries made in the transactions which plaintiff had with the defendant, did not mean that no such actual deliveries were intended by the parties since paragraph 10 of the rules for commodity trading, attached to the trading contract which plaintiff signed before she traded with the defendant, amply provided for actual delivery of the commodity subject of the transaction.

The court has, therefore, to find out from all the facts and circumstances of this case, whether the parties really intended to make or accept deliveries of the commodities traded or whether the defendant merely

placed a provision for delivery in its rules for commodity futures trading so as to escape from being called a bucket shop. . . . prLL

xxx xxx xxx

. . . the court is convinced that the parties never really intended to make or accept delivery of any commodity being traded as, in fact, the unrebutted testimony of Mr. Go is to the effect that all the defendant's customers were mere speculators who merely forecast the rise or fall in the market of the commodity, subject of the transaction, below or above the contract price on the pretended date of delivery and, in fact, the defendant even discourages its customers from taking or accepting delivery of any commodity by making it hard, if not impossible, for them to make or accept delivery of any commodity. Proof of this is paragraph 10(d) of defendant's rules for commodity trading which provides that the customer shall apply for the necessary licenses and documents with the proper government agency for the importation and exportation of any particular commodity." 11

The trading contract signed by private respondent and Albert Chiam, representing petitioner, is a contract for the sale of products for future delivery, in which either seller or buyer may elect to make or demand delivery of goods agreed to be bought and sold, but where no such delivery is actually made. By delivery is meant the act by which the res or subject is placed in the actual or constructive possession or control of another. It may be actual as when physical possession is given to the vendee or his representative; or constructive which takes place without actual transfer of goods, but includes symbolic delivery or substituted delivery as when the evidence of title to the goods, the key to the warehouse or bill of lading/warehouse receipt is delivered. 12 As a contract in printed form, prepared by petitioner and served on private respondent, for the latter's signature, the trading contract bears all the indicia of a valid trading contract because it complies with the Rules and Regulations on Commodity Futures Trading as prescribed by the SEC. But when the transaction which was carried out to implement the written contract deviates from the true import of the agreement as when no such delivery, actual or constructive, of the commodity or goods is made, and final settlement is made by payment and receipt of only the difference in prices at the time of delivery from that prevailing at the time the sale is made, the dealings in futures become mere speculative contracts in which the parties merely gamble on the rise or fall in prices. A contract for the sale or purchase of goods/commodity to be delivered at future time, if entered into without the intention of having any goods/commodity pass from one party to another, but with an understanding that at the appointed time, the purchaser is merely to receive or pay the difference between the contract and the market prices, is a transaction which the law will not sanction, for being illegal. 13

 

The written trading contract in question is not illegal but the transaction between the petitioner and the private respondent purportedly to implement the contract is in the nature of a gambling agreement and falls within the ambit of Article 2018 of the New Civil Code, which is quoted hereunder:

"If a contract which purports to be for the delivery of goods, securities or shares of stock is entered into with the intention that the difference between the price stipulated and the exchange or market price at the time of the pretended delivery shall be paid by the loser to the winner, the transaction is null and void. The loser may recover what he has paid."

The facts clearly establish that the petitioner is a direct participant in the transaction, acting through its authorized agents. It received the customers' orders and private respondent's money. As per terms of the trading contract, customers' orders shall be directly transmitted by the petitioner as broker to its principal, Frankwell Enterprises Ltd. of Hongkong, being a registered member of the International Commodity Clearing House, which in turn must place the customers' orders with the Tokyo Exchange. There is no evidence that the orders and money were transmitted to its principal Frankwell Enterprises Ltd. in Hongkong nor were the orders forwarded to the Tokyo Exchange. We draw the conclusion that no actual delivery of goods and commodity was intended and ever made by the parties. In the realities of the transaction, the parties merely speculated on the rise or fall in the price of the goods/commodity subject matter of the transaction. If private respondent's speculation was correct, she would be the winner and the petitioner, the loser, so petitioner would have to pay private respondent the "margin". But if private respondent was wrong in her speculation then she would emerge as the loser and the petitioner, the winner. The petitioner would keep the money or collect the difference from the private respondent. This is clearly a form of gambling provided for with unmistakeable certainty under Article 2018 above stated. It should thus be governed by the New Civil Code and not by the Revised Securities Act nor the Rules and Regulations on Commodity Futures Trading laid down by the SEC. cdrep

Article 1462 of the New Civil Code does not govern this case because the said provision contemplates a contract of sale of specific goods where one of the contracting parties binds himself to transfer the ownership of and deliver a determinate thing and the other to pay therefore a price certain in money or its equivalent. 14 The said article requires that there be delivery of goods, actual or constructive, to be applicable. In the transaction in question, there was no such delivery; neither was there any intention to deliver a determinate thing.

The transaction is not what the parties call it but what the law defines it to be. 15

After considering all the evidence in this case, it appears that petitioner and private respondent did not intend, in the deals of purchasing and selling for future delivery, the actual or constructive delivery of the goods/community, despite the payment of the full price therefor. The contract between them falls under the definition of what is called "futures". The payments made under said contract were payments of difference in prices arising out of the rise or fall in the market price above or below the contract price thus making it purely gambling and declared null and void by law. 16

In England and America where contracts commonly called futures originated, such contracts were at first held valid and could be enforced by resort to courts. Later these contracts were held invalid for being speculative, and in some states in America, it was unlawful to make contracts commonly called "futures". Such contracts were found to be mere gambling or wagering agreements covered and protected by the rules and regulations of exchange in which they were transacted under devices which rendered it impossible for the courts to discover their true character. 17 The evil sought to be suppressed by legislation is the speculative dealings by means of such trading contracts, which degenerated into mere gambling in the future price of goods/commodities ostensibly but not actually, bought or sold. 18

Under Article 2018, the private respondent is entitled to refund from the petitioner what she paid. There is no evidence that the orders of private respondent were actually transmitted to the petitioner's principal in Hongkong and Tokyo. There was no arrangement made by petitioner with the Central Bank for the purpose of remitting the money of its customers abroad. The money which was supposed to be remitted to Frankwell Enterprises of Hongkong was kept by petitioner in a separate account in a local bank. Having received the money and orders of private respondent under the trading contract, petitioner has the burden of proving that said orders and money of private respondent had been transmitted. But petitioner failed to prove this point.

For reasons indicated and construed in the light of the applicable rules and under the plain language of the statute, We find no reversible error committed by the respondent Court that would justify the setting aside of the questioned decision and resolution. For lack of merit, the petition is DISMISSED and the judgment sought to be reversed is hereby AFFIRMED. With costs against petitioner.

SO ORDERED.

Narvasa, C . J ., Feliciano, Regalado and Nocon, JJ., concur.

||| (ONAPAL Philippines Commodities, Inc. v. Court of Appeals, G.R. No. 90707, February 01, 1993)

THIRD DIVISION

[G.R. No. 171815. August 7, 2007.]

CEMCO HOLDINGS, INC., petitioner, vs. NATIONAL LIFE INSURANCE COMPANY OF THE PHILIPPINES, INC., respondent.

D E C I S I O N

CHICO-NAZARIO, J p:

This Petition for Review under Rule 45 of the Rules of Court seeks to reverse and set aside the 24 October 2005 Decision 1 and the 6 March 2006 Resolution 2 of the Court of Appeals in CA-G.R. SP No. 88758 which affirmed the judgment 3 dated 14 February 2005 of the Securities and Exchange Commission (SEC) finding that the acquisition of petitioner Cemco Holdings, Inc. (Cemco) of the shares of stock of Bacnotan Consolidated Industries, Inc. (BCI) and Atlas Cement Corporation (ACC) in Union Cement Holdings Corporation (UCHC) was covered by the Mandatory Offer Rule under Section 19 of Republic Act No. 8799, otherwise known as The Securities Regulation Code. AaEDcS

The Facts

Union Cement Corporation (UCC), a publicly-listed company, has two principal stockholders — UCHC, a non-listed company, with shares amounting to 60.51%, and petitioner Cemco with 17.03%. Majority of UCHC's stocks were owned by BCI with 21.31% and ACC with 29.69%. Cemco, on the other hand, owned 9% of UCHC stocks.

In a disclosure letter dated 5 July 2004, BCI informed the Philippine Stock Exchange (PSE) that it and its subsidiary ACC had passed resolutions to sell to Cemco BCI's stocks in UCHC equivalent to 21.31% and ACC's stocks in UCHC equivalent to 29.69%.

In the PSE Circular for Brokers No. 3146-2004 dated 8 July 2004, it was stated that as a result of petitioner Cemco's acquisition of BCI and ACC's shares in UCHC, petitioner's total beneficial ownership, direct and indirect, in UCC has increased by 36% and amounted to at least 53% of the shares of UCC, to wit: 4

 Particulars Percentage

Existing shares of Cemco in UCHC 9%

Acquisition by Cemco of BCI's and ACC's shares in UCHC 51%

Total stocks of Cemco in UCHC 60%

Percentage of UCHC ownership in UCC 60%

Indirect ownership of Cemco in UCC 36%

Direct ownership of Cemco in UCC 17%

Total ownership of Cemco in UCC 53%

As a consequence of this disclosure, the PSE, in a letter to the SEC dated 15 July 2004, inquired as to whether the Tender Offer Rule under Rule 19 of the Implementing Rules ofThe

Securities Regulation Code is not applicable to the purchase by petitioner of the majority of shares of UCC.

In a letter dated 16 July 2004, Director Justina Callangan of the SEC's Corporate Finance Department responded to the query of the PSE that while it was the stance of the department that the tender offer rule was not applicable, the matter must still have to be confirmed by the SEC en banc. caHASI

Thereafter, in a subsequent letter dated 27 July 2004, Director Callangan confirmed that the SEC en banc had resolved that the Cemco transaction was not covered by the tender offer rule.

On 28 July 2004, feeling aggrieved by the transaction, respondent National Life Insurance Company of the Philippines, Inc., a minority stockholder of UCC, sent a letter to Cemco demanding the latter to comply with the rule on mandatory tender offer. Cemco, however, refused.

On 5 August 2004, a Share Purchase Agreement was executed by ACC and BCI, as sellers, and Cemco, as buyer.

On 12 August 2004, the transaction was consummated and closed.

On 19 August 2004, respondent National Life Insurance Company of the Philippines, Inc. filed a complaint with the SEC asking it to reverse its 27 July 2004 Resolution and to declare the purchase agreement of Cemco void and praying that the mandatory tender offer rule be applied to its UCC shares. Impleaded in the complaint were Cemco, UCC, UCHC, BCI and ACC, which were then required by the SEC to file their respective comment on the complaint. In their comments, they were uniform in arguing that the tender offer rule applied only to a direct acquisition of the shares of the listed company and did not extend to an indirect acquisition arising from the purchase of the shares of a holding company of the listed firm.

In a Decision dated 14 February 2005, the SEC ruled in favor of the respondent by reversing and setting aside its 27 July 2004 Resolution and directed petitioner Cemco to make a tender offer for UCC shares to respondent and other holders of UCC shares similar to the class held by UCHC in accordance with Section 9 (E), Rule 19 of The Securities Regulation Code.

Petitioner filed a petition with the Court of Appeals challenging the SEC's jurisdiction to take cognizance of respondent's complaint and its authority to require Cemco to make a tender offer for UCC shares, and arguing that the tender offer rule does not apply, or that the SEC's re-interpretation of the rule could not be made to retroactively apply to Cemco's purchase of UCHC shares.

The Court of Appeals rendered a decision affirming the ruling of the SEC. It ruled that the SEC has jurisdiction to render the questioned decision and, in any event, Cemco was barred by estoppel from questioning the SEC's jurisdiction. It, likewise, held that the tender offer requirement under The Securities Regulation Code and its Implementing Rules applies to Cemco's purchase of UCHC stocks. The decretal portion of the said Decision reads:

IN VIEW OF THE FOREGOING, the assailed decision of the SEC is AFFIRMED, and the preliminary injunction issued by the Court LIFTED. 5 IHcSCA

Cemco filed a motion for reconsideration which was denied by the Court of Appeals.

Hence, the instant petition.

In its memorandum, petitioner Cemco raises the following issues:

I.

ASSUMING ARGUENDO THAT THE SEC HAS JURISDICTION OVER NATIONAL LIFE'S COMPLAINT AND THAT THE SEC'S RE-INTERPRETATION OF THE TENDER OFFER RULE IS CORRECT, WHETHER OR NOT THAT REINTERPRETATION CAN BE APPLIED RETROACTIVELY TO CEMCO'S PREJUDICE.

II.

WHETHER OR NOT THE SEC HAS JURISDICTION TO ADJUDICATE THE DISPUTE BETWEEN THE PARTIES A QUO OR TO RENDER JUDGMENT REQUIRING CEMCO TO MAKE A TENDER OFFER FOR UCC SHARES.

III.

WHETHER OR NOT CEMCO'S PURCHASE OF UCHC SHARES IS SUBJECT TO THE TENDER OFFER REQUIREMENT.

IV.

WHETHER OR NOT THE SEC DECISION, AS AFFIRMED BY THE CA DECISION, IS AN INCOMPLETE JUDGMENT WHICH PRODUCED NO EFFECT. 6

Simply stated, the following are the issues:

1. Whether or not the SEC has jurisdiction over respondent's complaint and to require Cemco to make a tender offer for respondent's UCC shares.

2. Whether or not the rule on mandatory tender offer applies to the indirect acquisition of shares in a listed company, in this case, the indirect acquisition by Cemco of 36% of UCC, a publicly-listed company, through its purchase of the shares in UCHC, a non-listed company.

3. Whether or not the questioned ruling of the SEC can be applied retroactively to Cemco's transaction which was consummated under the authority of the SEC's prior resolution.

On the first issue, petitioner Cemco contends that while the SEC can take cognizance of respondent's complaint on the alleged violation by petitioner Cemco of the mandatory tender offer requirement under Section 19 of Republic Act No. 8799, the same statute does not vest the SEC with jurisdiction to adjudicate and determine the rights and obligations of the parties since, under the same statute, the SEC's authority is purely administrative. Having been vested with purely administrative authority, the SEC can only impose administrative sanctions such as the imposition of administrative fines, the suspension or revocation of registrations with the SEC, and the like. Petitioner stresses that there is nothing in the statute which authorizes the SEC to issue orders granting affirmative reliefs. Since the SEC's order commanding it to make a tender offer is an affirmative relief fixing the respective rights and obligations of parties, such order is void. AHTICD

Petitioner further contends that in the absence of any specific grant of jurisdiction by Congress, the SEC cannot, by mere administrative regulation, confer on itself that jurisdiction.

Petitioner's stance fails to persuade.

In taking cognizance of respondent's complaint against petitioner and eventually rendering a judgment which ordered the latter to make a tender offer, the SEC was acting pursuant to

Rule 19 (13) of the Amended Implementing Rules and Regulations of The Securities Regulation Code, to wit:

13. Violation

If there shall be violation of this Rule by pursuing a purchase of equity shares of a public company at threshold amounts without the required tender offer, the Commission, upon complaint, may nullify the said acquisition and direct the holding of a tender offer. This shall be without prejudice to the imposition of other sanctions under the Code.

The foregoing rule emanates from the SEC's power and authority to regulate, investigate or supervise the activities of persons to ensure compliance with The Securities Regulation Code, more specifically the provision on mandatory tender offer under Section 19 thereof. 7

Another provision of the statute, which provides the basis of Rule 19 (13) of the Amended Implementing Rules and Regulations of The Securities Regulation Code, is Section 5.1 (n), viz:

[T]he Commission shall have, among others, the following powers and functions:

xxx xxx xxx

(n) Exercise such other powers as may be provided by law as well as those which may be implied from, or which are necessary or incidental to the carrying out of, the express powers granted the Commission to achieve the objectives and purposes of these laws.

The foregoing provision bestows upon the SEC the general adjudicative power which is implied from the express powers of the Commission or which is incidental to, or reasonably necessary to carry out, the performance of the administrative duties entrusted to it. As a regulatory agency, it has the incidental power to conduct hearings and render decisions fixing the rights and obligations of the parties. In fact, to deprive the SEC of this power would render the agency inutile, because it would become powerless to regulate and implement the law. As correctly held by the Court of Appeals: aTSEcA

 

We are nonetheless convinced that the SEC has the competence to render the particular decision it made in this case. A definite inference may be drawn from the provisions of the SRC that the SEC has the authority not only to investigate complaints of violations of the tender offer rule, but to adjudicate certain rights and obligations of the contending parties and grant appropriate reliefs in the exercise of its regulatory functions under the SRC. Section 5.1 of the SRC allows a general grant of adjudicative powers to the SEC which may be implied from or are necessary or incidental to the carrying out of its express powers to achieve the objectives and purposes of the SRC. We must bear in mind in interpreting the powers and functions of the SEC that the law has made the SEC primarily a regulatory body with the incidental power to conduct administrative hearings and make decisions. A regulatory body like the SEC may conduct hearings in the exercise of its regulatory powers, and if the case involves violations or conflicts in connection with the performance of its regulatory functions, it will have the duty and authority to resolve the dispute for the best interests of the public. 8

For sure, the SEC has the authority to promulgate rules and regulations, subject to the limitation that the same are consistent with the declared policy of the Code. Among them is the protection of the investors and the minimization, if not total elimination, of fraudulent and manipulative devises. Thus, Subsection 5.1 (g) of the law provides:

Prepare, approve, amend or repeal rules, regulations and orders, and issue opinions and provide guidance on and supervise compliance with such rules, regulations and orders.

Also, Section 72 of The Securities Regulation Code reads:

72.1.  . . . To effect the provisions and purposes of this Code, the Commission may issue, amend, and rescind such rules and regulations and orders necessary or appropriate, . . . .

72.2.  The Commission shall promulgate rules and regulations providing for reporting, disclosure and the prevention of fraudulent, deceptive or manipulative practices in connection with the purchase by an issuer, by tender offer or otherwise, of and equity security of a class issued by it that satisfies the requirements of Subsection 17.2. Such rules and regulations may require such issuer to provide holders of equity securities of such dates with such information relating to the reasons for such purchase, the source of funds, the number of shares to be purchased, the price to be paid for such securities, the method of purchase and such additional information as the Commission deems necessary or appropriate in the public interest or for the protection of investors, or which the Commission deems to be material to a determination by holders whether such security should be sold. SAHIaD

The power conferred upon the SEC to promulgate rules and regulations is a legislative recognition of the complexity and the constantly-fluctuating nature of the market and the impossibility of foreseeing all the possible contingencies that cannot be addressed in advance. As enunciated in Victorias Milling Co., Inc. v. Social Security Commission: 9

Rules and regulations when promulgated in pursuance of the procedure or authority conferred upon the administrative agency by law, partake of the nature of a statute, and compliance therewith may be enforced by a penal sanction provided in the law. This is so because statutes are usually couched in general terms, after expressing the policy, purposes, objectives, remedies and sanctions intended by the legislature. The details and the manner of carrying out the law are often times left to the administrative agency entrusted with its enforcement. In this sense, it has been said that rules and regulations are the product of a delegated power to create new or additional legal provisions that have the effect of law.

Moreover, petitioner is barred from questioning the jurisdiction of the SEC. It must be pointed out that petitioner had participated in all the proceedings before the SEC and had prayed for affirmative relief. In fact, petitioner defended the jurisdiction of the SEC in its Comment dated 15 September 2004, filed with the SEC wherein it asserted:

This Honorable Commission is a highly specialized body created for the purpose of administering, overseeing, and managing the corporate industry, share investment and securities market in the Philippines. By the very nature of its functions, it dedicated to the study and administration of the corporate and securities laws and has necessarily developed an expertise on the subject. Based on said functions, the

Honorable Commission is necessarily tasked to issue rulings with respect to matters involving corporate matters and share acquisitions. Verily when this Honorable Commission rendered the Ruling that " . . . the acquisition of Cemco Holdings of the majority shares of Union Cement Holdings, Inc., a substantial stockholder of a listed company, Union Cement Corporation, is not covered by the mandatory tender offer requirement of the SRC Rule 19," it was well within its powers and expertise to do so. Such ruling shall be respected, unless there has been an abuse or improvident exercise of authority. 10

Petitioner did not question the jurisdiction of the SEC when it rendered an opinion favorable to it, such as the 27 July 2004 Resolution, where the SEC opined that the Cemco transaction was not covered by the mandatory tender offer rule. It was only when the case was before the Court of Appeals and after the SEC rendered an unfavorable judgment against it that petitioner challenged the SEC's competence. As articulated in Ceroferr Realty Corporation v. Court of Appeals: 11 ESHAIC

While the lack of jurisdiction of a court may be raised at any stage of an action, nevertheless, the party raising such question may be estopped if he has actively taken part in the very proceedings which he questions and he only objects to the court's jurisdiction because the judgment or the order subsequently rendered is adverse to him.

On the second issue, petitioner asserts that the mandatory tender offer rule applies only to direct acquisition of shares in the public company.

This contention is not meritorious.

Tender offer is a publicly announced intention by a person acting alone or in concert with other persons to acquire equity securities of a public company. 12 A public company is defined as a corporation which is listed on an exchange, or a corporation with assets exceeding P50,000,000.00 and with 200 or more stockholders, at least 200 of them holding not less than 100 shares of such company. 13 Stated differently, a tender offer is an offer by the acquiring person to stockholders of a public company for them to tender their shares therein on the terms specified in the offer. 14 Tender offer is in place to protect minority shareholders against any scheme that dilutes the share value of their investments. It gives the minority shareholders the chance to exit the company under reasonable terms, giving them the opportunity to sell their shares at the same price as those of the majority shareholders. 15

Under Section 19 of Republic Act No. 8799, it is stated:

Tender Offers. 19.1. (a) Any person or group of persons acting in concert who intends to acquire at least fifteen percent (15%) of any class of any equity security of a listed corporation or of any class of any equity security of a corporation with assets of at least Fifty million pesos (P50,000,000.00) and having two hundred (200) or more stockholders with at least one hundred (100) shares each or who intends to acquire at least thirty percent (30%) of such equity over a period of twelve (12) months shall make a tender offer to stockholders by filing with the Commission a declaration to that effect; and furnish the issuer, a statement containing such of the information required in Section 17 of this Code as the Commission may prescribe. Such person or group of persons shall publish all requests or invitations for tender, or materials making a tender offer or requesting or inviting letters of such a security. Copies of any additional material soliciting or requesting such tender offers subsequent to the initial solicitation or request shall contain such information as the Commission may prescribe, and shall be filed with

the Commission and sent to the issuer not later than the time copies of such materials are first published or sent or given to security holders.

Under existing SEC Rules, 16 the 15% and 30% threshold acquisition of shares under the foregoing provision was increased to thirty-five percent (35%). It is further provided therein that mandatory tender offer is still applicable even if the acquisition is less than 35% when the purchase would result in ownership of over 51% of the total outstanding equity securities of the public company. 17 THaAEC

The SEC and the Court of Appeals ruled that the indirect acquisition by petitioner of 36% of UCC shares through the acquisition of the non-listed UCHC shares is covered by the mandatory tender offer rule.

This interpretation given by the SEC and the Court of Appeals must be sustained.

The rule in this jurisdiction is that the construction given to a statute by an administrative agency charged with the interpretation and application of that statute is entitled to great weight by the courts, unless such construction is clearly shown to be in sharp contrast with the governing law or statute. 18 The rationale for this rule relates not only to the emergence of the multifarious needs of a modern or modernizing society and the establishment of diverse administrative agencies for addressing and satisfying those needs; it also relates to accumulation of experience and growth of specialized capabilities by the administrative agency charged with implementing a particular statute. 19

 

The SEC and the Court of Appeals accurately pointed out that the coverage of the mandatory tender offer rule covers not only direct acquisition but also indirect acquisition or "any type of acquisition". This is clear from the discussions of the Bicameral Conference Committee on the Securities Act of 2000, on 17 July 2000.

SEN. S. OSMEÑA.

 Eto ang mangyayari diyan, eh. Somebody controls 67% of the Company. Of course, he will pay a premium for the first 67%. Control yan, eh. Eh, kawawa yung mga maiiwan, ang 33% because the value of the stock market could go down, could go down after that, because there will (p. 41) be no more market. Wala nang gustong bumenta. Wala nang . . . I mean maraming gustong bumenta, walang gustong bumili kung hindi yung majority owner. And they will not buy. They already have 67%. They already have control. And this protects the minority. And we have had a case in Cebu wherein Ayala A who already owned 40% of Ayala B made an offer for another 40% of Ayala B without offering the 20%. Kawawa naman yung nakahawak ngayon ng 20%. Ang baba ng share sa market. But we did not have a law protecting them at that time.

CHAIRMAN ROCO.

 So what is it that you want to achieve?

SEN. S. OSMEÑA.

 That if a certain group achieves a certain amount of ownership in a corporation, yeah, he is obligated to buy anybody who wants to sell.

CHAIRMAN ROCO.

 Pro-rata lang. (p. 42).

xxx xxx xxx

REP. TEODORO.

 As long as it reaches 30, ayan na. Any type of acquisition just as long as it will result in 30 . . . (p. 50) . . . reaches 30, ayan na. Any type of acquisition just as long as it will result in 30, general tender, pro-rata. 20 (Emphasis supplied.) cHSTEA

Petitioner counters that the legislator's reference to "any type of acquisition" during the deliberations on The Securities Regulation Code does not indicate that congress meant to include the "indirect" acquisition of shares of a public corporation to be covered by the tender offer rule. Petitioner also avers that it did not directly acquire the shares in UCC and the incidental benefit of having acquired the control of the said public company must not be taken against it.

These arguments are not convincing. The legislative intent of Section 19 of the Code is to regulate activities relating to acquisition of control of the listed company and for the purpose of protecting the minority stockholders of a listed corporation. Whatever may be the method by which control of a public company is obtained, either through the direct purchase of its stocks or through an indirect means, mandatory tender offer applies. As appropriately held by the Court of Appeals:

The petitioner posits that what it acquired were stocks of UCHC and not UCC. By happenstance, as a result of the transaction, it became an indirect owner of UCC. We are constrained, however, to construe ownership acquisition to mean both direct and indirect. What is decisive is the determination of the power of control. The legislative intent behind the tender offer rule makes clear that the type of activity intended to be regulated is the acquisition of control of the listed company through the purchase of shares. Control may [be] effected through a direct and indirect acquisition of stock, and when this takes place, irrespective of the means, a tender offer must occur. The bottomline of the law is to give the shareholder of the listed company the opportunity to decide whether or not to sell in connection with a transfer of control. . . . . 21

As to the third issue, petitioner stresses that the ruling on mandatory tender offer rule by the SEC and the Court of Appeals should not have retroactive effect or be made to apply to its purchase of the UCHC shares as it relied in good faith on the letter dated 27 July 2004 of the SEC which opined that the proposed acquisition of the UCHC shares was not covered by the mandatory offer rule.

The argument is not persuasive.

The action of the SEC on the PSE request for opinion on the Cemco transaction cannot be construed as passing merits or giving approval to the questioned transaction. As aptly pointed out by the respondent, the letter dated 27 July 2004 of the SEC was nothing but an approval of the draft letter prepared by Director Callanga. There was no public hearing where interested parties could have been heard. Hence, it was not issued upon a definite and concrete controversy affecting the legal relations of parties thereby making it a judgment conclusive on all the parties. Said letter was merely advisory. Jurisprudence has it that an advisory opinion of an agency may be stricken down if it deviates from the provision of the statute. 22 Since the letter dated 27 July 2004 runs counter to The Securities Regulation Code,

the same may be disregarded as what the SEC has done in its decision dated 14 February 2005. TEDaAc

Assuming arguendo that the letter dated 27 July 2004 constitutes a ruling, the same cannot be utilized to determine the rights of the parties. What is to be applied in the present case is the subsequent ruling of the SEC dated 14 February 2005 abandoning the opinion embodied in the letter dated 27 July 2004. In Serrano v. National Labor Relations Commission, 23 an argument was raised similar to the case under consideration. Private respondent therein argued that the new doctrine pronounced by the Court should only be applied prospectively. Said postulation was ignored by the Court when it ruled:

While a judicial interpretation becomes a part of the law as of the date that law was originally passed, this is subject to the qualification that when a doctrine of this Court is overruled and a different view is adopted, and more so when there is a reversal thereof, the new doctrine should be applied prospectively and should not apply to parties who relied on the old doctrine and acted in good faith. To hold otherwise would be to deprive the law of its quality of fairness and justice then, if there is no recognition of what had transpired prior to such adjudication.

It is apparent that private respondent misconceived the import of the ruling. The decision in Columbia Pictures does not mean that if a new rule is laid down in a case, it should not be applied in that case but that said rule should apply prospectively to cases arising afterwards. Private respondent's view of the principle of prospective application of new judicial doctrines would turn the judicial function into a mere academic exercise with the result that the doctrine laid down would be no more than a dictum and would deprive the holding in the case of any force.

Indeed, when the Court formulated the Wenphil doctrine, which we reversed in this case, the Court did not defer application of the rule laid down imposing a fine on the employer for failure to give notice in a case of dismissal for cause. To the contrary, the new rule was applied right then and there. . . . .

Lastly, petitioner alleges that the decision of the SEC dated 14 February 2005 is "incomplete and produces no effect".

This contention is baseless.

The decretal portion of the SEC decision states:

In view of the foregoing, the letter of the Commission, signed by Director Justina F. Callangan, dated July 27, 2004, addressed to the Philippine Stock Exchange is hereby REVERSED and SET ASIDE. Respondent Cemco is hereby directed to make a tender offer for UCC shares to complainant and other holders of UCC shares similar to the class held by respondent UCHC, at the highest price it paid for the beneficial ownership in respondent UCC, strictly in accordance with SRC Rule 19, Section 9 (E). 24

A reading of the above ruling of the SEC reveals that the same is complete. It orders the conduct of a mandatory tender offer pursuant to the procedure provided for under Rule 19 (E) of the Amended Implementing Rules and Regulations of The Securities Regulation Code for the highest price paid for the beneficial ownership of UCC shares. The price, on the basis of the SEC decision, is determinable. Moreover, the implementing rules and regulations

of the Code are sufficient to inform and guide the parties on how to proceed with the mandatory tender offer.

WHEREFORE, the Decision and Resolution of the Court of Appeals dated 24 October 2005 and 6 March 2006, respectively, affirming the Decision dated 14 February 2005 of the Securities and Exchange Commission En Banc, are hereby AFFIRMED. Costs against petitioner. ASICDH

SO ORDERED.

Ynares-Santiago, Austria-Martinez and Nachura, JJ., concur.

||| (Cemco Holdings, Inc. v. National Life Insurance Co. of the Philippines, Inc., G.R. No. 171815, August 07, 2007)

FIRST DIVISION

[G.R. No. 160016. February 27, 2006.]

ABACUS SECURITIES CORPORATION, petitioner, vs. RUBEN U. AMPIL, respondent.

D E C I S I O N

PANGANIBAN, C.J p:

Stock market transactions affect the general public and the national economy. The rise and fall of stock market indices reflect to a considerable degree the state of the economy. Trends in stock prices tend to herald changes in business conditions. Consequently, securities transactions are impressed with public interest, and are thus subject to public regulation. In particular, the laws and regulations requiring payment of traded shares within specified periods are meant to protect the economy from excessive stock market speculations, and are thus mandatory.

In the present case, respondent cannot escape payment of stocks validly traded by petitioner on his behalf. These transactions took place before both parties violated the trading law and rules. Hence, they fall outside the purview of the pari delicto rule.

The Case

Before the Court is a Petition for Review 1 under Rule 45 of the Rules of Court, challenging the March 21, 2003 Decision 2 and the September 19, 2003 Resolution 3 of the Court of Appeals (CA) in CA-G.R. CV No. 68273. The assailed Decision disposed as follows:

"UPON THE VIEW WE TAKE OF THIS CASE THUS, this appeal is hereby DISMISSED. With costs." 4

The CA denied reconsideration in its September 19, 2003 Resolution.

The Facts

The factual antecedents were summarized by the trial court (and reproduced by the CA in its assailed Decision) in this wise:

"Evidence adduced by the [petitioner] has established the fact that [petitioner] is engaged in business as a broker and dealer of securities of listed companies at the Philippine Stock Exchange Center.

"Sometime in April 1997, [respondent] opened a cash or regular account with [petitioner] for the purpose of buying and selling securities as evidenced by the Account Application Form. The parties' business relationship was governed by the terms and conditions [stated therein] . . . .

"Since April 10, 1997, [respondent] actively traded his account, and as a result of such trading activities, he accumulated an outstanding

obligation in favor of [petitioner] in the principal sum of P6,617,036.22 as of April 30, 1997. HSIADc

"Despite the lapse of the period within which to pay his account as well as sufficient time given by [petitioner] for [respondent] to comply with his proposal to settle his account, the latter failed to do so. Such that [petitioner] thereafter sold [respondent's] securities to set-off against his unsettled obligations.

"After the sale of [respondent's] securities and application of the proceeds thereof against his account, [respondent's] remaining unsettled obligation to [petitioner] was P3,364,313.56. [Petitioner] then referred the matter to its legal counsel for collection purposes.

"In a letter dated August 15, 1997, [petitioner] through counsel demanded that [respondent] settle his obligation plus the agreed penalty charges accruing thereon equivalent to the average 90-day Treasury Bill rate plus 2% per annum (200 basis points).

"In a letter dated August [26], 1997, [respondent] acknowledged receipt of [petitioner's] demand [letter] and admitted his unpaid obligation and at the same time request[ed] for 60 days to raise funds to pay the same, which was granted by [petitioner].

"Despite said demand and the lapse of said requested extension, [respondent] failed and/or refused to pay his accountabilities to [petitioner].

"For his defense, [respondent] claims that he was induced to trade in a stock security with [petitioner] because the latter allowed offset settlements wherein he is not obliged to pay the purchase price. Rather, it waits for the customer to sell. And if there is a loss, [petitioner] only requires the payment of the deficiency (i.e., the difference between the higher buying price and the lower selling price). In addition, it charges a commission for brokering the sale.

"However, if the customer sells and there is a profit, [petitioner] deducts the purchase price and delivers only the surplus — after charging its commission.

"[Respondent] further claims that all his trades with [petitioner] were not paid in full in cash at anytime after purchase or within the T+4 [4 days subsequent to trading] and none of these trades was cancelled by [petitioner] as required in Exhibit 'A-1'. Neither did [petitioner] apply with either the Philippine Stock Exchange or the SEC for an extension of time for the payment or settlement of his cash purchases. This was not brought to his attention by his broker and so with the requirement of collaterals in margin account. Thus, his trade under an offset transaction with [petitioner] is unlimited subject only to the discretion of the broker. . . . [Had petitioner] followed the provision under par. 8 of Exh. 'A-1' which stipulated the liquidation within the T+3 [3 days subsequent to trading], his net deficit would only be P1,601,369.59. [Respondent] however affirmed that this is not in accordance with RSA [Rule 25-1 par. C, which mandates that if you do not pay for the first] order, you cannot subsequently make any further order without depositing the cash price in full. So, if RSA Rule 25-1, par. C, was applied, he was limited only to the first transaction. That [petitioner] did not comply with the T+4

mandated in cash transaction. When [respondent] failed to comply with the T+3, [petitioner] did not require him to put up a deposit before it executed its subsequent orders. [Petitioner] did not likewise apply for extension of the T+4 rule. Because of the offset transaction, [respondent] was induced to [take a] risk which resulted [in] the filing of the instant suit against him [because of which] he suffered sleepless nights, lost appetite which if quantified in money, would amount to P500,000.00 moral damages and P100,000.00 exemplary damages." 5

In its Decision 6 dated June 26, 2000, the Regional Trial Court (RTC) of Makati City (Branch 57) held that petitioner violated Sections 23 and 25 of the Revised Securities Act (RSA) and Rule 25-1 of the Rules Implementing the Act (RSA Rules) when it failed to: 1) require the respondent to pay for his stock purchases within three (T+3) or four days (T+4) from trading; and 2) request from the appropriate authority an extension of time for the payment of respondent's cash purchases. The trial court noted that despite respondent's non-payment within the required period, petitioner did not cancel the purchases of respondent. Neither did it require him to deposit cash payments before it executed the buy and/or sell orders subsequent to the first unsettled transaction. According to the RTC, by allowing respondent to trade his account actively without cash, petitioner effectively induced him to purchase securities thereby incurring excessive credits. HSaIET

The trial court also found respondent to be equally at fault, by incurring excessive credits and waiting to see how his investments turned out before deciding to invoke the RSA. Thus, the RTC concluded that petitioner and respondent were in pari delicto and therefore without recourse against each other.

Ruling of the Court of Appeals

The CA upheld the lower court's finding that the parties were in pari delicto. It castigated petitioner for allowing respondent to keep on trading despite the latter's failure to pay his outstanding obligations. It explained that "the reason [behind petitioner's act] is elemental in its simplicity. And it is not exactly altruistic. Because whether [respondent's] trading transaction would result in a surplus or deficit, he would still be liable to pay [petitioner] its commission. [Petitioner's] cash register will keep on ringing to the sound of incoming money, no matter what happened to [respondent]." 7

The CA debunked petitioner's contention that the trial court lacked jurisdiction to determine violations of the RSA. The court a quo held that petitioner was estopped from raising the question, because it had actively and voluntarily participated in the assailed proceedings.

Hence, this Petition. 8

Issues

Petitioner submits the following issues for our consideration:

"I.

Whether or not the Court of Appeal's ruling that petitioner and respondent are in pari delicto which allegedly bars any recovery, is in accord with law and applicable jurisprudence considering that respondent was the first one who violated the terms of the Account Opening Form, [which was the] agreement between the parties.

"II.

Whether or not the Court of Appeal's ruling that the petitioner and respondent are in pari delicto is in accord with law and applicable

jurisprudence considering the Account Opening Form is a valid agreement.

"III.

Whether or not the Court of Appeal's ruling that petitioner cannot recover from respondent is in accord with law and applicable jurisprudence since the evidence and admission of respondent proves that he is liable to petitioner for his outstanding obligations arising from the stock trading through petitioner.

"IV.

Whether or not the Court of Appeal's ruling on petitioner's alleged violation of the Revised Securities Act [is] in accord with law and jurisprudence since the lower court has no jurisdiction over violations of the Revised Securities Act." 9

Briefly, the issues are (1) whether the pari delicto rule is applicable in the present case, and (2) whether the trial court had jurisdiction over the case.

The Court's Ruling

The Petition is partly meritorious.

Main Issue:Applicability of the

Pari Delicto   Principle

In the present controversy, the following pertinent facts are undisputed: (1) on April 8, 1997, respondent opened a cash account with petitioner for his transactions in securities;10 (2) respondent's purchases were consistently unpaid from April 10 to 30, 1997; 11 (3) respondent failed to pay in full, or even just his deficiency, 12 for the transactions on April 10 and 11, 1997; 13 (4) despite respondent's failure to cover his initial deficiency, petitioner subsequently purchased and sold securities for respondent's account on April 25 and 29; 14 (5) petitioner did not cancel or liquidate a substantial amount of respondent's stock transactions until May 6, 1997. 15

 

The provisions governing the above transactions are Sections 23 and 25 of the RSA 16 and Rule 25-1 of the RSA Rules, which state as follows:

"SEC. 23. Margin Requirements. —

xxx xxx xxx

(b) It shall be unlawful for any member of an exchange or any broker or dealer, directly or indirectly, to extend or maintain credit or arrange for the extension or maintenance of credit to or for any customer —

(1) On any security other than an exempted security, in contravention of the rules and regulations which the Commission shall prescribe under subsection (a) of this Section;TDCaSE

(2) Without collateral or on any collateral other than securities, except (i) to maintain a credit initially extended in conformity with the rules and regulations of the Commission and (ii) in cases where the extension or maintenance of credit is not for the purpose of purchasing or carrying

securities or of evading or circumventing the provisions of subparagraph (1) of this subsection.

xxx xxx xxx

"SEC. 25. Enforcement of margin requirements and restrictions on borrowings. — To prevent indirect violations of the margin requirements under Section 23 hereof, the broker or dealer shall require the customer in nonmargin transactions to pay the price of the security purchased for his account within such period as the Commission may prescribe, which shall in no case exceed three trading days; otherwise, the broker shall sell the security purchased starting on the next trading day but not beyond ten trading days following the last day for the customer to pay such purchase price, unless such sale cannot be effected within said period for justifiable reasons. The sale shall be without prejudice to the right of the broker or dealer to recover any deficiency from the customer. . . . ."

"RSA RULE 25-1

"Purchases and Sales in Cash Account

"(a) Purchases by a customer in a cash account shall be paid in full within three (3) business days after the trade date.

"(b) If full payment is not received within the required time period, the broker or dealer shall cancel or otherwise liquidate the transaction, or the unsettled portion thereof, starting on the next business day but not beyond ten (10) business days following the last day for the customer to pay, unless such sale cannot be effected within said period for justifiable reasons.

"(c) If a transaction is cancelled or otherwise liquidated as a result of non-payment by the customer, prior to any subsequent purchase during the next ninety (90) days, the customer shall be required to deposit sufficient funds in the account to cover each purchase transaction prior to execution.

xxx xxx xxx

"(f) Written application for an extension of the period of time required for payment under paragraph (a) be made by the broker or dealer to the Philippine Stock Exchange, in the case of a member of the Exchange, or to the Commission, in the case of a non-member of the Exchange. Applications for the extension must be based upon exceptional circumstances and must be filed and acted upon before the expiration of the original payment period or the expiration of any subsequent extension."

Section 23(b) above — the alleged violation of petitioner which provides the basis for respondent's defense — makes it unlawful for a broker to extend or maintain credit on any securities other than in conformity with the rules and regulations issued by Securities and Exchange Commission (SEC). Section 25 lays down the rules to prevent indirect violations of Section 23 by brokers or dealers. RSA Rule 25-1 prescribes in detail the regulations governing cash accounts.

The United States, from which our country's security policies are patterned, 17 abound with authorities explaining the main purpose of the above statute on margin 18requirements. This

purpose is to regulate the volume of credit flow, by way of speculative transactions, into the securities market and redirect resources into more productive uses. Specifically, the main objective of the law on margins is explained in this wise:

"The main purpose of these margin provisions . . . is not to increase the safety of security loans for lenders. Banks and brokers normally require sufficient collateral to make themselves safe without the help of law. Nor is the main purpose even protection of the small speculator by making it impossible for him to spread himself too thinly — although such a result will be achieved as a byproduct of the main purpose. DaTEIc

xxx xxx xxx

"The main purpose is to give a [g]overnment credit agency an effective method of reducing the aggregate amount of the nation's credit resources which can be directed by speculation into the stock market and out of other more desirable uses of commerce and industry . . . ." 19

A related purpose of the governmental regulation of margins is the stabilization of the economy. 20 Restrictions on margin percentages are imposed "in order to achieve the objectives of the government with due regard for the promotion of the economy and prevention of the use of excessive credit." 21

Otherwise stated, the margin requirements set out in the RSA are primarily intended to achieve a macroeconomic purpose — the protection of the overall economy from excessive speculation in securities. Their recognized secondary purpose is to protect small investors.

The law places the burden of compliance with margin requirements primarily upon the brokers and dealers. 22 Sections 23 and 25 and Rule 25-1, otherwise known as the "mandatory close-out rule," 23 clearly vest upon petitioner the obligation, not just the right, to cancel or otherwise liquidate a customer's order, if payment is not received within three days from the date of purchase. The word "shall" as opposed to the word "may," is imperative and operates to impose a duty, which may be legally enforced. For transactions subsequent to an unpaid order, the broker should require its customer to deposit funds into the account sufficient to cover each purchase transaction prior to its execution. These duties are imposed upon the broker to ensure faithful compliance with the margin requirements of the law, which forbids a broker from extending undue credit to a customer.

It will be noted that trading on credit (or "margin trading") allows investors to buy more securities than their cash position would normally allow. 24 Investors pay only a portion of the purchase price of the securities; their broker advances for them the balance of the purchase price and keeps the securities as collateral for the advance or loan. 25 Brokers take these securities/stocks to their bank and borrow the "balance" on it, since they have to pay in full for the traded stock. Hence, increasing margins 26 i.e., decreasing the amounts which brokers may lend for the speculative purchase and carrying of stocks is the most direct and effective method of discouraging an abnormal attraction of funds into the stock market and achieving a more balanced use of such resources.

". . . [T]he . . . primary concern is the efficacy of security credit controls in preventing speculative excesses that produce dangerously large and rapid securities price rises and accelerated declines in the prices of given securities issues and in the general price level of securities. Losses to a given investor resulting from price declines in thinly margined securities are not of serious significance from a regulatory point of view. When forced sales occur and put pressures on securities prices, however, they may cause other forced sales and the resultant

snowballing effect may in turn have a general adverse effect upon the entire market." 27

The nature of the stock brokerage business enables brokers, not the clients, to verify, at any time, the status of the client's account. 28 Brokers, therefore, are in the superior position to prevent the unlawful extension of credit. 29 Because of this awareness, the law imposes upon them the primary obligation to enforce the margin requirements.

Right is one thing; obligation is quite another. A right may not be exercised; it may even be waived. An obligation, however, must be performed; those who do not discharge it prudently must necessarily face the consequence of their dereliction or omission. 30

Respondent Liable for the First,But Not for the Subsequent Trades

Nonetheless, these margin requirements are applicable only to transactions entered into by the present parties subsequent to the initial trades of April 10 and 11, 1997. Thus, we hold that petitioner can still collect from respondent to the extent of the difference between the latter's outstanding obligation as of April 11, 1997 less the proceeds from the mandatory sell out of the shares pursuant to the RSA Rules. Petitioner's right to collect is justified under the general law on obligations and contracts. 31

Article 1236 (second paragraph) of the Civil Code, provides:

"Whoever pays for another may demand from the debtor what he has paid, except that if he paid without the knowledge or against the will of the debtor, he can recover only insofar as the payment has been beneficial to the debtor." (Emphasis supplied) CIDTcH

Since a brokerage relationship is essentially a contract for the employment of an agent, principles of contract law also govern the broker-principal relationship. 32

The right to collect cannot be denied to petitioner as the initial transactions were entered pursuant to the instructions of respondent. The obligation of respondent for stock transactions made and entered into on April 10 and 11, 1997 remains outstanding. These transactions were valid and the obligations incurred by respondent concerning his stock purchases on these dates subsist. At that time, there was no violation of the RSA yet. Petitioner's fault arose only when it failed to: 1) liquidate the transactions on the fourth day following the stock purchases, or on April 14 and 15, 1997; and 2) complete its liquidation no later than ten days thereafter, applying the proceeds thereof as payment for respondent's outstanding obligation. 33

 

Elucidating further, since the buyer was not able to pay for the transactions that took place on April 10 and 11, that is at T+4, the broker was duty-bound to advance the payment to the settlement banks without prejudice to the right of the broker to collect later from the client. 34

In securities trading, the brokers are essentially the counterparties to the stock transactions at the Exchange. 35 Since the principals of the broker are generally undisclosed, the broker is personally liable for the contracts thus made. 36 Hence, petitioner had to advance the payments for respondent's trades. Brokers have a right to be reimbursed for sums advanced by them with the express or implied authorization of the principal, 37 in this case, respondent.

It should be clear that Congress imposed the margin requirements to protect the general economy, not to give the customer a free ride at the expense of the broker. 38 Not to require

respondent to pay for his April 10 and 11 trades would put a premium on his circumvention of the laws and would enable him to enrich himself unjustly at the expense of petitioner.

In the present case, petitioner obviously failed to enforce the terms and conditions of its Agreement with respondent, specifically paragraph 8 thereof, purportedly acting on the plea 39 of respondent to give him time to raise funds therefor. These stipulations, in relation to paragraph 4, 40 constituted faithful compliance with the RSA. By failing to ensure respondent's payment of his first purchase transaction within the period prescribed by law, thereby allowing him to make subsequent purchases, petitioner effectively converted respondent's cash account into a credit account. However, extension or maintenance of credits on nonmargin transactions, are specifically prohibited under Section 23(b). Thus, petitioner was remiss in its duty and cannot be said to have come to court with "clean hands" insofar as it intended to collect on transactions subsequent to the initial trades of April 10 and 11, 1997.

Respondent Equally Guiltyfor Subsequent Trades

On the other hand, we find respondent equally guilty in entering into the transactions in violation of the RSA and RSA Rules. We are not prepared to accept his self-serving assertions of being an "innocent victim" in all the transactions. Clearly, he is not an unsophisticated, small investor merely prodded by petitioner to speculate on the market with the possibility of large profits with low — or no — capital outlay, as he pictures himself to be. Rather, he is an experienced and knowledgeable trader who is well versed in the securities market and who made his own investment decisions. In fact, in the Account Opening Form (AOF), he indicated that he had excellent knowledge of stock investments; had experience in stocks trading, considering that he had similar accounts with other firms. 41 Obviously, he knowingly speculated on the market, by taking advantage of the "no-cash-out" arrangement extended to him by petitioner.

We note that it was respondent who repeatedly asked for some time to pay his obligations for his stock transactions. Petitioner acceded to his requests. It is only when sued upon his indebtedness that respondent raised as a defense the invalidity of the transactions due to alleged violations of the RSA. It was respondent's privilege to gamble or speculate, as he apparently did so by asking for extensions of time and refraining from giving orders to his broker to sell, in the hope that the prices would rise. Sustaining his argument now would amount to relieving him of the risk and consequences of his own speculation and saddling them on the petitioner after the result was known to be unfavorable. 42 Such contention finds no legal or even moral justification and must necessarily be overruled. Respondent's conduct is precisely the behavior of an investor deplored by the law. DEcSaI

In the final analysis, both parties acted in violation of the law and did not come to court with clean hands with regard to transactions subsequent to the initial trades made on April 10 and 11, 1997. Thus, the peculiar facts of the present case bar the application of the  pari delicto rule — expressed in the maxims "Ex dolo malo non oritur action" and "In pari delicto potior est conditio defendentis" — to all the transactions entered into by the parties. The pari delecto rule refuses legal remedy to either party to an illegal agreement and leaves them where they were. 43 In this case, the pari delicto rule applies only to transactions entered into after the initial trades made on April 10 and 11, 1997.

Since the initial trades are valid and subsisting obligations, respondent is liable for them. Justice and good conscience require all persons to satisfy their debts. Ours are courts of both law and equity; they compel fair dealing; they do not abet clever attempts to escape just obligations. Ineludibly, this Court would not hesitate to grant relief in accordance with good faith and conscience.

Pursuant to RSA Rule 25-1, petitioner should have liquidated the transaction (sold the stocks) on the fourth day following the transaction (T+4) and completed its liquidation not later than ten days following the last day for the customer to pay (effectively T+14). Respondent's outstanding obligation is therefore to be determined by using the closing prices of the stocks purchased at T+14 as basis.

We consider the foregoing formula to be just and fair under the circumstances. When petitioner tolerated the subsequent purchases of respondent without performing its obligation to liquidate the first failed transaction, and without requiring respondent to deposit cash before embarking on trading stocks any further, petitioner, as the broker, violated the law at its own peril. Hence, it cannot now complain for failing to obtain the full amount of its claim for these latter transactions.

On the other hand, with respect to respondent's counterclaim for damages for having been allegedly induced by petitioner to generate additional purchases despite his outstanding obligations, we hold that he deserves no legal or equitable relief consistent with our foregoing finding that he was not an innocent investor as he presented himself to be.

Second Issue:Jurisdiction

It is axiomatic that the allegations in the complaint, not the defenses set up in the answer or in the motion to dismiss determine which court has jurisdiction over an action. 44Were we to be governed by the latter rule, the question of jurisdiction would depend almost entirely upon the defendant. 45

The instant controversy is an ordinary civil case seeking to enforce rights arising from the Agreement (AOF) between petitioner and respondent. It relates to acts committed by the parties in the course of their business relationship. The purpose of the suit is to collect respondent's alleged outstanding debt to petitioner for stock purchases.

To be sure, the RSA and its Rules are to be read into the Agreement entered into between petitioner and respondent. Compliance with the terms of the AOF necessarily means compliance with the laws. Thus, to determine whether the parties fulfilled their obligations in the AOF, this Court had to pass upon their compliance with the RSA and its Rules. This, in no way, deprived the Securities and Exchange Commission (SEC) of its authority to determine willful violations of the RSA and impose appropriate sanctions therefor, as provided under Sections 45 and 46 of the Act.

Moreover, we uphold the SEC in its Opinion, thus:

"As to the issue of jurisdiction, it is settled that a party cannot invoke the jurisdiction of a court to secure affirmative relief against his opponent and after obtaining or failing to obtain such relief, repudiate or question that same jurisdiction. cHSIDa

"Indeed, after voluntarily submitting a cause and encountering an adverse decision on the merits, it is too late for petitioner to question the jurisdictional power of the court. It is not right for a party who has affirmed and invoked the jurisdiction of a court in a particular matter to secure an affirmative relief, to afterwards deny that same jurisdiction to escape a penalty." 46

WHEREFORE, the assailed Decision and Resolution of the Court of Appeals are hereby MODIFIED. Respondent is ordered to pay petitioner the difference between the former's outstanding obligation as of April 11, 1997 less the proceeds from the mandatory sell out of shares pursuant to the RSA Rules, with interest thereon at the legal rate until fully paid.

The RTC of Makati, Branch 57 is hereby directed to make a computation of respondent's outstanding obligation using the closing prices of the stocks at T+14 as basis — counted from April 11, 1997 and to issue the proper order for payment if warranted. It may hold trial and hear the parties to be able to make this determination.

No finding as to costs in this instance.

SO ORDERED.

Ynares-Santiago, Austria-Martinez, Callejo, Sr. and Chico-Nazario, JJ., concur.

||| (Abacus Securities Corp. v. Ampil, G.R. No. 160016, February 27, 2006)

SECOND DIVISION

[G.R. No. 191995. August 3, 2011.]

PHILIPPINE VETERANS BANK, petitioner, vs. JUSTINA CALLANGAN, in her capacity as Director of the Corporation Finance Department of the Securities and Exchange Commission and/or the SECURITIES AND EXCHANGE COMMISSION, respondent.

RESOLUTION

BRION, J p:

We resolve the motion for reconsideration 1 filed by petitioner Philippine Veterans Bank (the Bank) dated August 5, 2010, addressing our June 16, 2010 Resolution that denied the Bank's petition for review on certiorari.

Factual Antecedents

On March 17, 2004, respondent Justina F. Callangan, the Director of the Corporation Finance Department of the Securities and Exchange Commission (SEC), sent the Bank a letter, informing it that it qualifies as a "public company" under Section 17.2 of the Securities Regulation Code (SRC) in relation with Rule 3 (1) (m) of the Amended Implementing Rules and Regulations of the SRC. The Bank is thus required to comply with the reportorial requirements set forth in Section 17.1 of the SRC. 2

The Bank responded by explaining that it should not be considered a "public company" because it is a private company whose shares of stock are available only to a limited class or sector, i.e., to World War II veterans, and not to the general public. 3

In a letter dated April 20, 2004, Director Callangan rejected the Bank's explanation and assessed it a total penalty of One Million Nine Hundred Thirty-Seven Thousand Two Hundred Sixty-Two and 80/100 Pesos (P1,937,262.80) for failing to comply with the SRC reportorial requirements from 2001 to 2003. The Bank moved for the reconsideration of the assessment, but Director Callangan denied the motion in SEC-CFD Order No. 085, Series of 2005 dated July 26, 2005. 4 When the SEC En Banc also dismissed the Bank's appeal for lack of merit in its Order dated August 31, 2006, prompting the Bank to file a petition for review with the Court of Appeals (CA). 5 AaSTIH

On March 6, 2008, the CA dismissed the petition and affirmed the assailed SEC ruling, with the modification that the assessment of the penalty be recomputed from May 31, 2004. 6

The CA also denied the Bank's motion for reconsideration, 7 opening the way for the Bank's petition for review on certiorari filed with this Court. 8

On June 16, 2010, the Court denied the Bank's petition for failure to show any reversible error in the assailed CA decision and resolution. 9

The Motion for Reconsideration

The Bank reiterates that it is not a "public company" subject to the reportorial requirements under Section 17.1 of the SRC because its shares can be owned only by a specific group of

people, namely, World War II veterans and their widows, orphans and compulsory heirs, and is not open to the investing public in general. The Bank also asks the Court to take into consideration the financial impact to the cause of "veteranism"; compliance with the reportorial requirements under the SRC, if the Bank would be considered a "public company," would compel the Bank to spend approximately P40 million just to reproduce and mail the "Information Statement" to its 400,000 shareholders nationwide.

The Court's Ruling

We DENY the motion for reconsideration for lack of merit.

To determine whether the Bank is a "public company" burdened with the reportorial requirements ordered by the SEC, we look to Subsections 17.1 and 17.2 of the SRC, which provide:

Section 17.Periodic and Other Reports of Issuers. —

17.1.Every issuer satisfying the requirements in Subsection 17.2 hereof shall file with the Commission:

a)Within one hundred thirty-five (135) days, after the end of the issuer's fiscal year, or such other time as the Commission may prescribe, an annual report which shall include, among others, a balance sheet, profit and loss statement and statement of cash flows, for such last fiscal year, certified by an independent certified public accountant, and a management discussion and analysis of results of operations; and

b)Such other periodical reports for interim fiscal periods and current reports on significant developments of the issuer as the Commission may prescribe as necessary to keep current information on the operation of the business and financial condition of the issuer. CcHDSA

17.2.The reportorial requirements of Subsection 17.1 shall apply to the following:

xxx xxx xxx

c)An issuer with assets of at least Fifty million pesos (P50,000,000.00) or such other amount as the Commission shall prescribe, and having two hundred (200) or more holders each holding at least one hundred (100) shares of a class of its equity securities: Provided, however, That the obligation of such issuer to file reports shall be terminated ninety (90) days after notification to the Commission by the issuer that the number of its holders holding at least one hundred (100) shares is reduced to less than one hundred (100). (emphases supplied)

We also cite Rule 3 (1) (m) of the Amended Implementing Rules and Regulations of the SRC, which defines a "public company" as "any corporation with a class of equity securities listed on an Exchange or with assets in excess of Fifty Million Pesos (P50,000,000.00) and having two hundred (200) or more holders, at least two hundred (200) of which are holding at least one hundred (100) shares of a class of its equity securities."

From these provisions, it is clear that a "public company," as contemplated by the SRC, is not limited to a company whose shares of stock are publicly listed; even companies like the Bank, whose shares are offered only to a specific group of people, are considered a public company, provided they meet the requirements enumerated above.

The records establish, and the Bank does not dispute, that the Bank has assets exceeding P50,000,000.00 and has 395,998 shareholders. 10 It is thus considered a public company that must comply with the reportorial requirements set forth in Section 17.1 of the SRC.

The Bank also argues that even assuming it is considered a "public company" pursuant to Section 17 of the SRC, the Court should interpret the pertinent SRC provisions in such a way that no financial prejudice is done to the thousands of veterans who are stockholders of the Bank. Given that the legislature intended the SRC to apply only to publicly traded companies, the Court should exempt the Bank from complying with the reportorial requirements. ATICcS

On this point, the Bank is apparently referring to the obligation set forth in Subsections 17.5 and 17.6 of the SRC, which provide:

Section 17.5. Every issuer which has a class of equity securities satisfying any of the requirements in Subsection 17.2 shall furnish to each holder of such equity security an annual report in such form and containing such information as the Commission shall prescribe.

Section 17.6. Within such period as the Commission may prescribe preceding the annual meeting of the holders of any equity security of a class entitled to vote at such meeting, the issuer shall transmit to such holders an annual report in conformity with Subsection 17.5. (emphases supplied)

In making this argument, the Bank ignores the fact that the first and fundamental duty of the Court is to apply the law. 11 Construction and interpretation come only after a demonstration that the application of the law is impossible or inadequate unless interpretation is resorted to. 12 In this case, we see the law to be very clear and free from any doubt or ambiguity; thus, no room exists for construction or interpretation.

Additionally, and contrary to the Bank's claim, the Bank's obligation to provide its stockholders with copies of its annual report is actually for the benefit of the veterans-stockholders, as it gives these stockholders access to information on the Bank's financial status and operations, resulting in greater transparency on the part of the Bank. While compliance with this requirement will undoubtedly cost the Bank money, the benefit provided to the shareholders clearly outweighs the expense. For many stockholders, these annual reports are the only means of keeping in touch with the state of health of their investments; to them, these are invaluable and continuing links with the Bank that immeasurably contribute to the transparency in public companies that the law envisions. THIECD

WHEREFORE, premises considered, petitioner Philippine Veterans Bank's motion for reconsideration is hereby DENIED with finality.

SO ORDERED.

Carpio, Leonardo-de Castro, * Perez and Sereno, JJ., concur.

||| (Philippine Veterans Bank v. Callangan, G.R. No. 191995, August 03, 2011)

EN BANC

[G.R. No. 135808. October 6, 2008.]

SECURITIES AND EXCHANGE COMMISSION, petitioner, vs. INTERPORT RESOURCES CORPORATION, MANUEL S. RECTO, RENE S. VILLARICA, PELAGIO RICALDE, ANTONIO REINA, FRANCISCO ANONUEVO, JOSEPH SY and SANTIAGO TANCHAN, JR., respondents.

D E C I S I O N

CHICO-NAZARIO, J p:

This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, assailing the Decision, 1 dated 20 August 1998, rendered by the Court of Appeals in C.A.-G.R. SP No. 37036, enjoining petitioner Securities and Exchange Commission (SEC) from taking cognizance of or initiating any action against the respondent corporation Interport Resources Corporation (IRC) and members of its board of directors, respondents Manuel S. Recto, Rene S. Villarica, Pelagio Ricalde, Antonio Reina, Francisco Anonuevo, Joseph Sy and Santiago Tanchan, Jr., with respect to Sections 8, 30 and 36 of the Revised Securities Act. In the same Decision of the appellate court, all the proceedings taken against the respondents, including the assailed SEC Omnibus Orders of 25 January 1995 and 30 March 1995, were declared void. HDCAaS

The antecedent facts of the present case are as follows.

On 6 August 1994, the Board of Directors of IRC approved a Memorandum of Agreement with Ganda Holdings Berhad (GHB). Under the Memorandum of Agreement, IRC acquired 100% or the entire capital stock of Ganda Energy Holdings, Inc. (GEHI), 2 which would own and operate a 102 megawatt (MW) gas turbine power-generating barge. The agreement also stipulates that GEHI would assume a five-year power purchase contract with National Power Corporation. At that time, GEHI's power-generating barge was 97% complete and would go on-line by mid-September of 1994. In exchange, IRC will issue to GHB 55% of the expanded capital stock of IRC amounting to 40.88 billion shares which had a total par value of P488.44 million. 3

On the side, IRC would acquire 67% of the entire capital stock of Philippine Racing Club, Inc. (PRCI). PRCI owns 25.724 hectares of real estate property in Makati. Under the Agreement, GHB, a member of the Westmont Group of Companies in Malaysia, shall extend or arrange a loan required to pay for the proposed acquisition by IRC of PRCI. 4

IRC alleged that on 8 August 1994, a press release announcing the approval of the agreement was sent through facsimile transmission to the Philippine Stock Exchange and the SEC, but that the facsimile machine of the SEC could not receive it. Upon the advice of the SEC, the IRC sent the press release on the morning of 9 August 1994. 5

The SEC averred that it received reports that IRC failed to make timely public disclosures of its negotiations with GHB and that some of its directors, respondents herein, heavily traded IRC shares utilizing this material insider information. On 16 August 1994, the SEC Chairman issued a directive requiring IRC to submit to the SEC a copy of its aforesaid Memorandum of Agreement with GHB. The SEC Chairman further directed all principal officers of IRC to

appear at a hearing before the Brokers and Exchanges Department (BED) of the SEC to explain IRC's failure to immediately disclose the information as required by the Rules on Disclosure of Material Facts. 6

In compliance with the SEC Chairman's directive, the IRC sent a letter dated 16 August 1994 to the SEC, attaching thereto copies of the Memorandum of Agreement. Its directors, Manuel Recto, Rene Villarica and Pelagio Ricalde, also appeared before the SEC on 22 August 1994 to explain IRC's alleged failure to immediately disclose material information as required under the Rules on Disclosure of Material Facts. 7 SCaIcA

On 19 September 1994, the SEC Chairman issued an Order finding that IRC violated the Rules on Disclosure of Material Facts, in connection with the Old Securities Act of 1936, when it failed to make timely disclosure of its negotiations with GHB. In addition, the SEC pronounced that some of the officers and directors of IRC entered into transactions involving IRC shares in violation of Section 30, in relation to Section 36, of the Revised Securities Act. 8

Respondents filed an Omnibus Motion, dated 21 September 1994, which was superseded by an Amended Omnibus Motion, filed on 18 October 1994, alleging that the SEC had no authority to investigate the subject matter, since under Section 8 of Presidential Decree No. 902-A, 9 as amended by Presidential Decree No. 1758, jurisdiction was conferred upon the Prosecution and Enforcement Department (PED) of the SEC. Respondents also claimed that the SEC violated their right to due process when it ordered that the respondents appear before the SEC and "show cause why no administrative, civil or criminal sanctions should be imposed on them", and, thus, shifted the burden of proof to the respondents. Lastly, they sought to have their cases tried jointly given the identical factual situations surrounding the alleged violation committed by the respondents. 10

Respondents also filed a Motion for Continuance of Proceedings on 24 October 1994, wherein they moved for discontinuance of the investigations and the proceedings before the SEC until the undue publicity had abated and the investigating officials had become reasonably free from prejudice and public pressure. 11

No formal hearings were conducted in connection with the aforementioned motions, but on 25 January 1995, the SEC issued an Omnibus Order which thus disposed of the same in this wise: 12

WHEREFORE, premised on the foregoing considerations, the Commission resolves and hereby rules:

1.To create a special investigating panel to hear and decide the instant case in accordance with the Rules of Practice and Procedure Before the Prosecution and Enforcement Department (PED), Securities and Exchange Commission, to be composed of Attys. James K. Abugan, Medardo Devera (Prosecution and Enforcement Department), and Jose Aquino (Brokers and Exchanges Department), which is hereby directed to expeditiously resolve the case by conducting continuous hearings, if possible. EIcTAD

2.To recall the show cause orders dated September 19, 1994 requiring the respondents to appear and show cause why no administrative, civil or criminal sanctions should be imposed on them.

3.To deny the Motion for Continuance for lack of merit.

Respondents filed an Omnibus Motion for Partial Reconsideration, 13 questioning the creation of the special investigating panel to hear the case and the denial of the Motion for Continuance. The SEC denied reconsideration in its Omnibus Order dated 30 March 1995. 14

The respondents filed a petition before the Court of Appeals docketed as C.A.-G.R. SP No. 37036, questioning the Omnibus Orders dated 25 January 1995 and 30 March 1995. 15During the proceedings before the Court of Appeals, respondents filed a Supplemental Motion 16 dated 16 May 1995, wherein they prayed for the issuance of a writ of preliminary injunction enjoining the SEC and its agents from investigating and proceeding with the hearing of the case against respondents herein. On 5 May 1995, the Court of Appeals granted their motion and issued a writ of preliminary injunction, which effectively enjoined the SEC from filing any criminal, civil or administrative case against the respondents herein. 17

On 23 October 1995, the SEC filed a Motion for Leave to Quash SEC Omnibus Orders so that the case may be investigated by the PED in accordance with the SEC Rules andPresidential Decree No. 902-A, and not by the special body whose creation the SEC had earlier ordered. 18 EaTCSA

The Court of Appeals promulgated a Decision 19 on 20 August 1998. It determined that there were no implementing rules and regulations regarding disclosure, insider trading, or any of the provisions of the Revised Securities Acts which the respondents allegedly violated. The Court of Appeals likewise noted that it found no statutory authority for the SEC to initiate and file any suit for civil liability under Sections 8, 30 and 36 of the Revised Securities Act. Thus, it ruled that no civil, criminal or administrative proceedings may possibly be held against the respondents without violating their rights to due process and equal protection. It further resolved that absent any implementing rules, the SEC cannot be allowed to quash the assailed Omnibus Orders for the sole purpose of re-filing the same case against the respondents. 20

The Court of Appeals further decided that the Rules of Practice and Procedure Before the PED, which took effect on 14 April 1990, did not comply with the statutory requirements contained in the Administrative Code of 1997. Section 8, Rule V of the Rules of Practice and Procedure Before the PED affords a party the right to be present but without the right to cross-examine witnesses presented against him, in violation of Section 12 (3), Chapter 3, Book VII of the Administrative Code. 21

In the dispositive portion of its Decision, dated 20 August 1998, the Court of Appeals ruled that: 22

WHEREFORE, [herein petitioner SEC's] Motion for Leave to Quash SEC Omnibus Orders is hereby DENIED. The petition for certiorari, prohibition and mandamus is GRANTED. Consequently, all proceedings taken against [herein respondents] in this case, including the Omnibus Orders of January 25, 1995 and March 30, 1995 are declared null and void.The writ of preliminary injunction is hereby made permanent and, accordingly, [SEC] is hereby prohibited from taking cognizance or initiating any action, be they civil, criminal, or administrative against [respondents] with respect to Sections 8 (Procedure for Registration), 30 (Insider's duty to disclose when trading) and 36 (Directors, Officers and Principal Stockholders) in relation to Sections 46 (Administrative sanctions) 56 (Penalties) 44 (Liabilities of Controlling persons) and 45 (Investigations, injunctions and prosecution of offenses) of the Revised Securities Act and Section 144 (Violations of the Code) of the Corporation Code. (Emphasis provided.) DSHcTC

 

The SEC filed a Motion for Reconsideration, which the Court of Appeals denied in a Resolution 23 issued on 30 September 1998.

Hence, the present petition, which relies on the following grounds: 24

I

THE COURT OF APPEALS ERRED WHEN IT DENIED PETITIONER'S MOTION FOR LEAVE TO QUASH THE ASSAILED SEC OMNIBUS ORDERS DATED JANUARY 25 AND MARCH 30, 1995.

II

THE COURT OF APPEALS ERRED WHEN IT RULED THAT THERE IS NO STATUTORY AUTHORITY WHATSOEVER FOR PETITIONER SEC TO INITIATE AND FILE ANY SUIT BE THEY CIVIL, CRIMINAL OR ADMINISTRATIVE AGAINST RESPONDENT CORPORATION AND ITS DIRECTORS WITH RESPECT TO SECTION 30 (INSIDER'S DUTY TO DISCLOSED [sic] WHEN TRADING) AND 36 (DIRECTORS OFFICERS AND PRINCIPAL STOCKHOLDERS) OF THE Revised Securities Act; AND

III

THE COURT OF APPEALS ERRED WHEN IT RULED THAT RULES OF PRACTICE AND PROSECUTION BEFORE THE PED AND THE SICD RULES OF PROCEDURE ON ADMINISTRATIVE ACTIONS/PROCEEDINGS 25 ARE INVALID AS THEY FAIL TO COMPLY WITH THE STATUTORY REQUIREMENTS CONTAINED IN THE ADMINISTRATIVE CODE OF 1987.

The petition is impressed with merit.

Before discussing the merits of this case, it should be noted that while this case was pending in this Court, Republic Act No. 8799, otherwise known as The Securities Regulation Code, took effect on 8 August 2000. Section 8 of Presidential Decree No. 902-A, as amended, which created the PED, was already repealed as provided for in Section 76 of The Securities Regulation Code: cSIADH

SEC. 76.Repealing Clause. — The Revised Securities Act (Batas Pambansa Blg. 178), as amended, in its entirety, and Sections 2, 4 and 8 of Presidential Decree 902-A, as amended, are hereby repealed. All other laws, orders, rules and regulations, or parts thereof, inconsistent with any provision of this Code are hereby repealed or modified accordingly.

Thus, under the new law, the PED has been abolished, and The Securities Regulation Code has taken the place of the Revised Securities Act.

The Court now proceeds with a discussion of the present case.

I.Sections 8, 30 and 36 of the RevisedSecurities Act do not require theenactment of implementing rules tomake them binding and effective.

The Court of Appeals ruled that absent any implementing rules for Sections 8, 30 and 36 of the Revised Securities Act, no civil, criminal or administrative actions can possibly be had against the respondents without violating their right to due process and equal protection, citing as its basis the case Yick Wo v. Hopkins. 26 This is untenable.

In the absence of any constitutional or statutory infirmity, which may concern Sections 30 and 36 of the Revised Securities Act, this Court upholds these provisions as legal and binding. It is well settled that every law has in its favor the presumption of validity. Unless and until a specific provision of the law is declared invalid and unconstitutional, the same is valid and

binding for all intents and purposes. 27 The mere absence of implementing rules cannot effectively invalidate provisions of law, where a reasonable construction that will support the law may be given. In People v. Rosenthal, 28 this Court ruled that:

In this connection we cannot pretermit reference to the rule that "legislation should not be held invalid on the ground of uncertainty if susceptible of any reasonable construction that will support and give it effect. An Act will not be declared inoperative and ineffectual on the ground that it furnishes no adequate means to secure the purpose for which it is passed, if men of common sense and reason can devise and provide the means, and all the instrumentalities necessary for its execution are within the reach of those intrusted therewith." (25 R.C.L., pp. 810, 811) HDTSIE

In Garcia v. Executive Secretary, 29 the Court underlined the importance of the presumption of validity of laws and the careful consideration with which the judiciary strikes down as invalid acts of the legislature:

The policy of the courts is to avoid ruling on constitutional questions and to presume that the acts of the political departments are valid in the absence of a clear and unmistakable showing to the contrary. To doubt is to sustain. This presumption is based on the doctrine of separation of powers which enjoins upon each department a becoming respect for the acts of the other departments. The theory is that as the joint act of Congress and the President of the Philippines, a law has been carefully studied and determined to be in accordance with the fundamental law before it was finally enacted.

The necessity for vesting administrative authorities with power to make rules and regulations is based on the impracticability of lawmakers' providing general regulations for various and varying details of management. 30 To rule that the absence of implementing rules can render ineffective an act of Congress, such as the Revised Securities Act, would empower the administrative bodies to defeat the legislative will by delaying the implementing rules. To assert that a law is less than a law, because it is made to depend on a future event or act, is to rob the Legislature of the power to act wisely for the public welfare whenever a law is passed relating to a state of affairs not yet developed, or to things future and impossible to fully know. 31 It is well established that administrative authorities have the power to promulgate rules and regulations to implement a given statute and to effectuate its policies, provided such rules and regulations conform to the terms and standards prescribed by the statute as well as purport to carry into effect its general policies. Nevertheless, it is undisputable that the rules and regulations cannot assert for themselves a more extensive prerogative or deviate from the mandate of the statute. 32Moreover, where the statute contains sufficient standards and an unmistakable intent, as in the case of Sections 30 and 36 of the Revised Securities Act, there should be no impediment to its implementation. cHSIDa

The reliance placed by the Court of Appeals in Yick Wo v. Hopkins 33 shows a glaring error. In the cited case, this Court found unconstitutional an ordinance which gave the board of supervisors authority to refuse permission to carry on laundries located in buildings that were not made of brick and stone, because it violated the equal protection clause and was highly discriminatory and hostile to Chinese residents and not because the standards provided therein were vague or ambiguous.

This Court does not discern any vagueness or ambiguity in Sections 30 and 36 of the   Revised Securities Act , such that the acts proscribed and/or required would not be understood by a person of ordinary intelligence.

Section 30 of the   Revised Securities Act

Section 30 of the Revised Securities Act reads:

Sec. 30.Insider's duty to disclose when trading. — (a) It shall be unlawful for an insider to sell or buy a security of the issuer, if he knows a fact of special significance with respect to the issuer or the security that is not generally available, unless (1) the insider proves that the fact is generally available or (2) if the other party to the transaction (or his agent) is identified, (a) the insider proves that the other party knows it, or (b) that other party in fact knows it from the insider or otherwise.

(b)"Insider" means (1) the issuer, (2) a director or officer of, or a person controlling, controlled by, or under common control with, the issuer, (3) a person whose relationship or former relationship to the issuer gives or gave him access to a fact of special significance about the issuer or the security that is not generally available, or (4) a person who learns such a fact from any of the foregoing insiders as defined in this subsection, with knowledge that the person from whom he learns the fact is such an insider.

(c)A fact is "of special significance" if (a) in addition to being material it would be likely, on being made generally available, to affect the market price of a security to a significant extent, or (b) a reasonable person would consider it especially important under the circumstances in determining his course of action in the light of such factors as the degree of its specificity, the extent of its difference from information generally available previously, and its nature and reliability.

(d)This section shall apply to an insider as defined in subsection (b) (3) hereof only to the extent that he knows of a fact of special significance by virtue of his being an insider.

The provision explains in simple terms that the insider's misuse of nonpublic and undisclosed information is the gravamen of illegal conduct. The intent of the law is the protection of investors against fraud, committed when an insider, using secret information, takes advantage of an uninformed investor. Insiders are obligated to disclose material information to the other party or abstain from trading the shares of his corporation. This duty to disclose or abstain is based on two factors: first, the existence of a relationship giving access, directly or indirectly, to information intended to be available only for a corporate purpose and not for the personal benefit of anyone; and second, the inherent unfairness involved when a party takes advantage of such information knowing it is unavailable to those with whom he is dealing. 34 CSEHcT

In the United States (U.S.), the obligation to disclose or abstain has been traditionally imposed on corporate "insiders", particularly officers, directors, or controlling stockholders, but that definition has since been expanded. 35 The term "insiders" now includes persons whose relationship or former relationship to the issuer gives or gave them access to a fact of special significance about the issuer or the security that is not generally available, and one who learns such a fact from an insider knowing that the person from whom he learns the fact is such an insider. Insiders have the duty to disclose material facts which are known to them by virtue of their position but which are not known to persons with whom they deal and which, if known, would affect their investment judgment. In some cases, however, there may be valid corporate reasons for the nondisclosure of material information. Where such reasons exist, an issuer's decision not to make any public disclosures is not ordinarily considered as a violation of insider trading. At the same time, the undisclosed information should not be improperly used for non-corporate purposes, particularly to disadvantage other persons with

whom an insider might transact, and therefore the insider must abstain from entering into transactions involving such securities. 36

 

Respondents further aver that under Section 30 of the Revised Securities Act, the SEC still needed to define the following terms: "material fact", "reasonable person", "nature and reliability" and "generally available". 37 In determining whether or not these terms are vague, these terms must be evaluated in the context of Section 30 of the Revised Securities Act. To fully understand how the terms were used in the aforementioned provision, a discussion of what the law recognizes as a fact of special significance is required, since the duty to disclose such fact or to abstain from any transaction is imposed on the insider only in connection with a fact of special significance.

Under the law, what is required to be disclosed is a fact of "special significance" which may be (a) a material fact which would be likely, on being made generally available, to affect the market price of a security to a significant extent, or (b) one which a reasonable person would consider especially important in determining his course of action with regard to the shares of stock. TCDHaE

(a)Material Fact — The concept of a "material fact" is not a new one. As early as 1973, the Rules Requiring Disclosure of Material Facts by Corporations Whose Securities Are Listed In Any Stock Exchange or Registered/Licensed Under the Securities Act, issued by the SEC on 29 January 1973, explained that "[a] fact is material if it induces or tends to induce or otherwise affect the sale or purchase of its securities." Thus, Section 30 of the Revised Securities Act provides that if a fact affects the sale or purchase of securities, as well as its price, then the insider would be required to disclose such information to the other party to the transaction involving the securities. This is the first definition given to a "fact of special significance".

(b.1)Reasonable Person — The second definition given to a fact of special significance involves the judgment of a "reasonable person". Contrary to the allegations of the respondents, a "reasonable person" is not a problematic legal concept that needs to be clarified for the purpose of giving effect to a statute; rather, it is the standard on which most of our legal doctrines stand. The doctrine on negligence uses the discretion of the "reasonable man" as the standard. 38 A purchaser in good faith must also take into account facts which put a "reasonable man" on his guard. 39 In addition, it is the belief of the reasonable and prudent man that an offense was committed that sets the criteria for probable cause for a warrant of arrest. 40 This Court, in such cases, differentiated the reasonable and prudent man from "a person with training in the law such as a prosecutor or a judge", and identified him as "the average man on the street", who weighs facts and circumstances without resorting to the calibrations of our technical rules of evidence of which his knowledge is nil. Rather, he relies on the calculus of common sense of which all reasonable men have in abundance. 41 In the same vein, the U.S. Supreme Court similarly determined its standards by the actual significance in the deliberations of a "reasonable investor", when it ruled in TSC Industries, Inc. v. Northway, Inc., 42 that the determination of materiality "requires delicate assessments of the inferences a 'reasonable shareholder' would draw from a given set of facts and the significance of those inferences to him." EcTDCI

(b.2)Nature and Reliability — The factors affecting the second definition of a "fact of special significance", which is of such importance that it is expected to affect the judgment of a reasonable man, were substantially lifted from a test of materiality pronounced in the case In the Matter of Investors Management Co., Inc.: 43

Among the factors to be considered in determining whether information is material under this test are the degree of its specificity, the extent to which it differs from information previously publicly disseminated, and

its reliability in light of its nature and source and the circumstances under which it was received.

It can be deduced from the foregoing that the "nature and reliability" of a significant fact in determining the course of action a reasonable person takes regarding securities must be clearly viewed in connection with the particular circumstances of a case. To enumerate all circumstances that would render the "nature and reliability" of a fact to be of special significance is close to impossible. Nevertheless, the proper adjudicative body would undoubtedly be able to determine if facts of a certain "nature and reliability" can influence a reasonable person's decision to retain, sell or buy securities, and thereafter explain and justify its factual findings in its decision.

(c)Materiality Concept — A discussion of the "materiality concept" would be relevant to both a material fact which would affect the market price of a security to a significant extent and/or a fact which a reasonable person would consider in determining his or her cause of action with regard to the shares of stock. Significantly, what is referred to in our laws as a fact of special significance is referred to in the U.S. as the "materiality concept" and the latter is similarly not provided with a precise definition. In Basic v. Levinson,44 the U.S. Supreme Court cautioned against confining materiality to a rigid formula, stating thus:

A bright-line rule indeed is easier to follow than a standard that requires the exercise of judgment in the light of all the circumstances. But ease of application alone is not an excuse for ignoring the purposes of the Securities Act and Congress' policy decisions. Any approach that designates a single fact or occurrence as always determinative of an inherently fact-specific finding such as materiality, must necessarily be overinclusive or underinclusive. DIEACH

Moreover, materiality "will depend at any given time upon a balancing of both the indicated probability that the event will occur and the anticipated magnitude of the event in light of the totality of the company activity." 45 In drafting the Securities Act of 1934, the U.S. Congress put emphasis on the limitations to the definition of materiality:

Although the Committee believes that ideally it would be desirable to have absolute certainty in the application of the materiality concept, it is its view that such a goal is illusory and unrealistic. The materiality concept is judgmental in nature and it is not possible to translate this into a numerical formula. The Committee's advice to the [SEC] is to avoid this quest for certainty and to continue consideration of materiality on a case-by-case basis as disclosure problems are identified. House Committee on Interstate and Foreign Commerce, Report of the Advisory Committee on Corporate Disclosure to the Securities and Exchange Commission, 95th Cong., 1st Sess., 327 (Comm.Print 1977). (Emphasis provided.) 46

(d)Generally Available — Section 30 of the Revised Securities Act allows the insider the defense that in a transaction of securities, where the insider is in possession of facts of special significance, such information is "generally available" to the public. Whether information found in a newspaper, a specialized magazine, or any cyberspace media be sufficient for the term "generally available" is a matter which may be adjudged given the particular circumstances of the case. The standards cannot remain at a standstill. A medium, which is widely used today was, at some previous point in time, inaccessible to most. Furthermore, it would be difficult to approximate how the rules may be applied to the instant case, where investigation has not even been started. Respondents failed to allege that the negotiations of their agreement with GHB were made known to the public through any form of media for there to be a proper appreciation of the issue presented.

Section 36 (a) of the   Revised Securities Act

As regards Section 36 (a) of the Revised Securities Act, respondents claim that the term "beneficial ownership" is vague and that it requires implementing rules to give effect to the law. Section 36 (a) of the Revised Securities Act is a straightforward provision that imposes upon (1) a beneficial owner of more than ten percent of any class of any equity security or (2) a director or any officer of the issuer of such security, the obligation to submit a statement indicating his or her ownership of the issuer's securities and such changes in his or her ownership thereof. The said provision reads: EICSDT

Sec. 36.Directors, officers and principal stockholders. — (a) Every person who is directly or indirectly the beneficial owner of more than ten per centum of any [class] of any equity security which is registered pursuant to this Act, or who is [a] director or an officer of the issuer of such security, shall file, at the time of the registration of such security on a securities exchange or by the effective date of a registration statement or within ten days after he becomes such a beneficial owner, director or officer, a statement with the Commission and, if such security is registered on a securities exchange, also with the exchange, of the amount of all equity securities of such issuer of which he is the beneficial owner, and within ten days after the close of each calendar month thereafter, if there has been a change in such ownership during such month, shall file with the Commission, and if such security is registered on a securities exchange, shall also file with the exchange, a statement indicating his ownership at the close of the calendar month and such changes in his ownership as have occurred during such calendar month. (Emphasis provided.)

Section 36 (a) refers to the "beneficial owner". Beneficial owner has been defined in the following manner:

[F]irst, to indicate the interest of a beneficiary in trust property (also called "equitable ownership"); and second, to refer to the power of a corporate shareholder to buy or sell the shares, though the shareholder is not registered in the corporation's books as the owner. Usually, beneficial ownership is distinguished from naked ownership, which is the enjoyment of all the benefits and privileges of ownership, as against possession of the bare title to property. 47

 

Even assuming that the term "beneficial ownership" was vague, it would not affect respondents' case, where the respondents are directors and/or officers of the corporation, who are specifically required to comply with the reportorial requirements under Section 36 (a) of the Revised Securities Act. The validity of a statute may be contested only by one who will sustain a direct injury as a result of its enforcement. 48 IaEHSD

Sections 30 and 36 of the Revised Securities Act were enacted to promote full disclosure in the securities market and prevent unscrupulous individuals, who by their positions obtain non-public information, from taking advantage of an uninformed public. No individual would invest in a market which can be manipulated by a limited number of corporate insiders. Such reaction would stifle, if not stunt, the growth of the securities market. To avert the occurrence of such an event, Section 30 of the Revised Securities Actprevented the unfair use of non-public information in securities transactions, while Section 36 allowed the SEC to monitor the transactions entered into by corporate officers and directors as regards the securities of their companies.

In the case In the Matter of Investor's Management Co., 49 it was cautioned that "the broad language of the anti-fraud provisions", which include the provisions on insider trading, should not be "circumscribed by fine distinctions and rigid classifications." The ambit of anti-fraud provisions is necessarily broad so as to embrace the infinite variety of deceptive conduct. 50

In Tatad v. Secretary of Department of Energy, 51 this Court brushed aside a contention, similar to that made by the respondents in this case, that certain words or phrases used in a statute do not set determinate standards, declaring that:

Petitioners contend that the words "as far as practicable", "declining" and "stable" should have been defined in R.A. No. 8180 as they do not set determinate and determinable standards. This stubborn submission deserves scant consideration. The dictionary meanings of these words are well settled and cannot confuse men of reasonable intelligence. . . . . The fear of petitioners that these words will result in the exercise of executive discretion that will run riot is thus groundless. To be sure, the Court has sustained the validity of similar, if not more general standards in other cases.

Among the words or phrases that this Court upheld as valid standards were "simplicity and dignity", 52 "public interest", 53 and "interests of law and order". 54

The Revised Securities Act was approved on 23 February 1982. The fact that the Full Disclosure Rules were promulgated by the SEC only on 24 July 1996 does not render ineffective in the meantime Section 36 of the Revised Securities Act. It is already unequivocal that the Revised Securities Act requires full disclosure and the Full Disclosure Rules were issued to make the enforcement of the law more consistent, efficient and effective. It is equally reasonable to state that the disclosure forms later provided by the SEC, do not, in any way imply that no compliance was required before the forms were provided. The effectivity of a statute which imposes reportorial requirements cannot be suspended by the issuance of specified forms, especially where compliance therewith may be made even without such forms. The forms merely made more efficient the processing of requirements already identified by the statute. cEAIHa

For the same reason, the Court of Appeals made an evident mistake when it ruled that no civil, criminal or administrative actions can possibly be had against the respondents in connection with Sections 8, 30 and 36 of the Revised Securities Act due to the absence of implementing rules. These provisions are sufficiently clear and complete by themselves. Their requirements are specifically set out, and the acts which are enjoined are determinable. In particular, Section 8 55 of the Revised Securities Act is a straightforward enumeration of the procedure for the registration of securities and the particular matters which need to be reported in the registration statement thereof. The Decision, dated 20 August 1998, provides no valid reason to exempt the respondent IRC from such requirements. The lack of implementing rules cannot suspend the effectivity of these provisions. Thus, this Court cannot find any cogent reason to prevent the SEC from exercising its authority to investigate respondents for violation of Section 8 of the Revised Securities Act.

II.The right to cross-examination is notabsolute and cannot be demandedduring investigative proceedingsbefore the PED.

In its assailed Decision dated 20 August 1998, the Court of Appeals pronounced that the PED Rules of Practice and Procedure was invalid since Section 8, Rule V 56 thereof failed to provide for the parties' right to cross-examination, in violation of the Administrative Code of 1987 particularly Section 12 (3), Chapter 3, Book VII thereof. This ruling is incorrect.

Firstly, Section 4, Rule I of the PED Rules of Practice and Procedure, categorically stated that the proceedings before the PED are summary in nature:

Section 4.Nature of Proceedings. — Subject to the requirements of due process, proceedings before the "PED" shall be summary in nature not necessarily adhering to or following the technical rules of evidence obtaining in the courts of law. The Rules of Court may apply in said proceedings in suppletory character whenever practicable. DSEaHT

Rule V of the PED Rules of Practice and Procedure further specified that:

Section 5.Submission of Documents. — During the preliminary conference/hearing, or immediately thereafter, the Hearing Officer may require the parties to simultaneously submit their respective verified position papers accompanied by all supporting documents and the affidavits of their witnesses, if any which shall take the place of their direct testimony. The parties shall furnish each other with copies of the position papers together with the supporting affidavits and documents submitted by them.

Section 6.Determination of necessity of hearing. — Immediately after the submission by the parties of their position papers and supporting documents, the Hearing Officer shall determine whether there is a need for a formal hearing. At this stage, he may, in his discretion, and for the purpose of making such determination, elicit pertinent facts or information, including documentary evidence, if any, from any party or witness to complete, as far as possible, the facts of the case. Facts or information so elicited may serve as basis for his clarification or simplifications of the issues in the case. Admissions and stipulation of facts to abbreviate the proceedings shall be encouraged.

Section 7.Disposition of Case. — If the Hearing Officer finds no necessity of further hearing after the parties have submitted their position papers and supporting documents, he shall so inform the parties stating the reasons therefor and shall ask them to acknowledge the fact that they were so informed by signing the minutes of the hearing and the case shall be deemed submitted for resolution.

As such, the PED Rules provided that the Hearing Officer may require the parties to submit their respective verified position papers, together with all supporting documents and affidavits of witnesses. A formal hearing was not mandatory; it was within the discretion of the Hearing Officer to determine whether there was a need for a formal hearing. Since, according to the foregoing rules, the holding of a hearing before the PED is discretionary, then the right to cross-examination could not have been demanded by either party.

Secondly, it must be pointed out that Chapter 3, Book VII of the Administrative Code, entitled "Adjudication", does not affect the investigatory functions of the agencies. The law creating the PED, Section 8 of Presidential Decree No. 902-A, as amended, defines the authority granted to the PED, thus: caIDSH

SEC. 8.The Prosecution and Enforcement Department shall have, subject to the Commission's control and supervision, the exclusive authority to investigate, on complaint ormotu proprio, any act or omission of the Board of Directors/Trustees of corporations, or of partnerships, or of other associations, or of their stockholders, officers or partners, including any fraudulent devices, schemes or representations, in

violation of any law or rules and regulations administered and enforced by the Commission; to file and prosecute in accordance with law and rules and regulations issued by the Commission and in appropriate cases, the corresponding criminal or civil case before the Commission or the proper court or body upon prima facie finding of violation of any laws or rules and regulations administered and enforced by the Commission; and to perform such other powers and functions as may be provided by law or duly delegated to it by the Commission. (Emphasis provided.)

The law creating PED empowers it to investigate violations of the rules and regulations promulgated by the SEC and to file and prosecute such cases. It fails to mention any adjudicatory functions insofar as the PED is concerned. Thus, the PED Rules of Practice and Procedure need not comply with the provisions of the Administrative Code on adjudication, particularly Section 12 (3), Chapter 3, Book VII.

In Cariño v. Commission on Human Rights, 57 this Court sets out the distinction between investigative and adjudicative functions, thus:

"Investigate", commonly understood, means to examine, explore, inquire or delve or probe into, research on, study. The dictionary definition of "investigate" is "to observe or study closely; inquire into systematically: "to search or inquire into" xx to subject to an official probe xx: to conduct an official inquiry." The purpose of an investigation, of course is to discover, to find out, to learn, obtain information. Nowhere included or intimated is the notion of settling, deciding or resolving a controversy involved in the facts inquired into by application of the law to the facts established by the inquiry.

 

The legal meaning of "investigate" is essentially the same: "(t)o follow up step by step by patient inquiry or observation. To trace or track; to search into; to examine and inquire into with care and accuracy; to find out by careful inquisition; examination; the taking of evidence; a legal inquiry"; "to inquire; to make an investigation", "investigation" being in turn described as "(a)n administrative function, the exercise of which ordinarily does not require a hearing. 2 Am J2d Adm L Sec. 257; xx an inquiry, judicial or otherwise, for the discovery and collection of facts concerning a certain matter or matters."

"Adjudicate", commonly or popularly understood, means to adjudge, arbitrate, judge, decide, determine, resolve, rule on, settle. The dictionary defines the term as "to settle finally (the rights and duties of parties to a court case) on the merits of issues raised: xx to pass judgment on: settle judicially: xx act as judge." And "adjudge" means "to decide or rule upon as a judge or with judicial or quasi-judicial powers: xx to award or grant judicially in a case of controversy . . . ."

In a legal sense, "adjudicate" means: "To settle in the exercise of judicial authority. To determine finally. Synonymous with adjudge in its strictest sense"; and "adjudge" means: "To pass on judicially, to decide, settle, or decree, or to sentence or condemn. . . . Implies a judicial determination of a fact, and the entry of a judgment."

There is no merit to the respondent's averment that the sections under Chapter 3, Book VII of the Administrative Code, do not distinguish between investigative and adjudicatory functions. Chapter 3, Book VII of the Administrative Code, is unequivocally entitled "Adjudication".

Respondents insist that the PED performs adjudicative functions, as enumerated under Section 1 (h) and (j), Rule II; and Section 2 (4), Rule VII of the PED Rules of Practice and Procedure:

Section 1.Authority of the Prosecution and Enforcement Department. — Pursuant to Presidential Decree No. 902-A, as amended by Presidential Decree No. 1758, the Prosecution and Enforcement Department is primarily charged with the following:

xxx xxx xxx

(h)Suspends or revokes, after proper notice and hearing in accordance with these Rules, the franchise or certificate of registration of corporations, partnerships or associations, upon any of the following grounds:

1.Fraud in procuring its certificate of registration;

2.Serious misrepresentation as to what the corporation can do or is doing to the great prejudice of or damage to the general public; TAaEIc

3.Refusal to comply or defiance of any lawful order of the Commission restraining commission of acts which would amount to a grave violation of its franchise;

xxx xxx xxx

(j)Imposes charges, fines and fees, which by law, it is authorized to collect;

xxx xxx xxx

Section 2.Powers of the Hearing Officer. — The Hearing Officer shall have the following powers:

xxx xxx xxx

4.To cite and/or declare any person in direct or indirect contempt in accordance with pertinent provisions of the Rules of Court. ACaTIc

Even assuming that these are adjudicative functions, the PED, in the instant case, exercised its investigative powers; thus, respondents do not have the requisite standing to assail the validity of the rules on adjudication. A valid source of a statute or a rule can only be contested by one who will sustain a direct injury as a result of its enforcement. 58 In the instant case, respondents are only being investigated by the PED for their alleged failure to disclose their negotiations with GHB and the transactions entered into by its directors involving IRC shares. The respondents have not shown themselves to be under any imminent danger of sustaining any personal injury attributable to the exercise of adjudicative functions by the SEC. They are not being or about to be subjected by the PED to charges, fees or fines; to citations for contempt; or to the cancellation of their certificate of registration under Section 1 (h), Rule II of the PED Rules of Practice and Procedure.

To repeat, the only powers which the PED was likely to exercise over the respondents were investigative in nature, to wit:

Section 1.Authority of the Prosecution and Enforcement Department. — Pursuant to Presidential Decree No. 902-A, as amended by Presidential Decree No. 1758, the Prosecution and Enforcement Department is primarily charged with the following:

xxx xxx xxx

b.Initiates proper investigation of corporations and partnerships or persons, their books, records and other properties and assets, involving their business transactions, in coordination with the operating department involved;

xxx xxx xxx

e.Files and prosecutes civil or criminal cases before the Commission and other courts of justice involving violations of laws and decrees enforced by the Commission and the rules and regulations promulgated thereunder; caAICE

f.Prosecutes erring directors, officers and stockholders of corporations and partnerships, commercial paper issuers or persons in accordance with the pertinent rules on procedures;

The authority granted to the PED under Section 1 (b), (e), and (f), Rule II of the PED Rules of Practice and Procedure, need not comply with Section 12, Chapter 3, Rule VII of the Administrative Code, which affects only the adjudicatory functions of administrative bodies. Thus, the PED would still be able to investigate the respondents under its rules for their alleged failure to disclose their negotiations with GHB and the transactions entered into by its directors involving IRC shares.

This is not to say that administrative bodies performing adjudicative functions are required to strictly comply with the requirements of Chapter 3, Rule VII of the Administrative Code, particularly, the right to cross-examination. It should be noted that under Section 2.2 of Executive Order No. 26, issued on 7 October 1992, abbreviated proceedings are prescribed in the disposition of administrative cases:

2.Abbreviation of Proceedings. All administrative agencies are hereby directed to adopt and include in their respective Rules of Procedure the following provisions:

xxx xxx xxx

2.2Rules adopting, unless otherwise provided by special laws and without prejudice to Section 12, Chapter 3, Book VII of the Administrative Code of 1987, the mandatory use of affidavits in lieu of direct testimonies and the preferred use of depositions whenever practicable and convenient.

As a consequence, in proceedings before administrative or quasi-judicial bodies, such as the National Labor Relations Commission and the Philippine Overseas Employment Agency, created under laws which authorize summary proceedings, decisions may be reached on the basis of position papers or other documentary evidence only. They are not bound by technical rules of procedure and evidence. 59 In fact, the hearings before such agencies do not connote full adversarial proceedings. 60 Thus, it is not necessary for the rules to require affiants to appear and testify and to be cross-examined by the counsel of the adverse party. To require otherwise would negate the summary nature of the administrative or quasi-judicial proceedings. 61 In Atlas Consolidated Mining and Development Corporation v. Factoran, Jr., 62 this Court stated that: ASTcEa

[I]t is sufficient that administrative findings of fact are supported by evidence, or negatively stated, it is sufficient that findings of fact are not shown to be unsupported by evidence. Substantial evidence is all that is needed to support an administrative finding of fact, and substantial evidence is "such relevant evidence as a reasonable mind might accept as adequate to support a conclusion."

In order to comply with the requirements of due process, what is required, among other things, is that every litigant be given reasonable opportunity to appear and defend his right and to introduce relevant evidence in his favor. 63

III.The Securities Regulations Code didnot repeal Sections 8, 30 and 36 ofthe Revised Securities Act since saidprovisions were reenacted in the newlaw.

The Securities Regulations Code absolutely repealed the Revised Securities Act. While the absolute repeal of a law generally deprives a court of its authority to penalize the person charged with the violation of the old law prior to its appeal, an exception to this rule comes about when the repealing law punishes the act previously penalized under the old law. The Court, in Benedicto v. Court of Appeals, sets down the rules in such instances: 64 IaDcTC

As a rule, an absolute repeal of a penal law has the effect of depriving the court of its authority to punish a person charged with violation of the old law prior to its repeal. This is because an unqualified repeal of a penal law constitutes a legislative act of rendering legal what had been previously declared as illegal, such that the offense no longer exists and it is as if the person who committed it never did so. There are, however, exceptions to the rule. One is the inclusion of a saving clause in the repealing statute that provides that the repeal shall have no effect on pending actions. Another exception is where the repealing act reenacts the former statute and punishes the act previously penalized under the old law. In such instance, the act committed before the reenactment continues to be an offense in the statute books and pending cases are not affected, regardless of whether the new penalty to be imposed is more favorable to the accused. (Emphasis provided.)

In the present case, a criminal case may still be filed against the respondents despite the repeal, since Sections 8, 65 12, 66 26, 67 27 68 and 23 69 of the Securities Regulations Code impose duties that are substantially similar to Sections 8, 30 and 36 of the repealed Revised Securities Act.

 

Section 8 of the Revised Securities Act, which previously provided for the registration of securities and the information that needs to be included in the registration statements, was expanded under Section 12, in connection with Section 8 of the Securities Regulations Code. Further details of the information required to be disclosed by the registrant are explained in the Amended Implementing Rules and Regulations of the Securities Regulations Code, issued on 30 December 2003, particularly Sections 8 and 12 thereof.

Section 30 of the Revised Securities Act has been reenacted as Section 27 of the Securities Regulations Code, still penalizing an insider's misuse of material and non-public information about the issuer, for the purpose of protecting public investors. Section 26 of the Securities Regulations Code even widens the coverage of punishable acts, which intend to defraud public investors through various devices, misinformation and omissions.

Section 23 of the Securities Regulations Code was practically lifted from Section 36 (a) of the Revised Securities Act. Both provisions impose upon (1) a beneficial owner of more than ten percent of any class of any equity security or (2) a director or any officer of the issuer of such security, the obligation to submit a statement indicating his or her ownership of the issuer's securities and such changes in his or her ownership thereof. HDATCc

Clearly, the legislature had not intended to deprive the courts of their authority to punish a person charged with violation of the old law that was repealed; in this case, theRevised Securities Act.

IV.The SEC retained the jurisdiction toinvestigate violations of the RevisedSecurities Act, reenacted in theSecurities Regulations Code, despitethe abolition of the PED.

Section 53 of the Securities Regulations Code clearly provides that criminal complaints for violations of rules and regulations enforced or administered by the SEC shall be referred to the Department of Justice (DOJ) for preliminary investigation, while the SEC nevertheless retains limited investigatory powers. 70 Additionally, the SEC may still impose the appropriate administrative sanctions under Section 54 of the aforementioned law. 71

In Morato v. Court of Appeals, 72 the cases therein were still pending before the PED for investigation and the SEC for resolution when the Securities Regulations Code was enacted. The case before the SEC involved an intra-corporate dispute, while the subject matter of the other case investigated by the PED involved the schemes, devices, and violations of pertinent rules and laws of the company's board of directors. The enactment of the Securities Regulations Code did not result in the dismissal of the cases; rather, this Court ordered the transfer of one case to the proper regional trial court and the SEC to continue with the investigation of the other case.

The case at bar is comparable to the aforecited case. In this case, the SEC already commenced the investigative proceedings against respondents as early as 1994. Respondents were called to appear before the SEC and explain their failure to disclose pertinent information on 14 August 1994. Thereafter, the SEC Chairman, having already made initial findings that respondents failed to make timely disclosures of their negotiations with GHB, ordered a special investigating panel to hear the case. The investigative proceedings were interrupted only by the writ of preliminary injunction issued by the Court of Appeals, which became permanent by virtue of the Decision, dated 20 August 1998, in C.A.-G.R. SP No. 37036. During the pendency of this case, the Securities Regulations Code repealed the Revised Securities Act. As in Morato v. Court of Appeals, the repeal cannot deprive SEC of its jurisdiction to continue investigating the case; or the regional trial court, to hear any case which may later be filed against the respondents. AcDaEH

V.The instant case has not yet prescribed.

Respondents have taken the position that this case is moot and academic, since any criminal complaint that may be filed against them resulting from the SEC's investigation of this case has already prescribed. 73 They point out that the prescription period applicable to offenses punished under special laws, such as violations of the Revised Securities Act, is twelve years under Section 1 of Act No. 3326, as amended by Act No. 3585 and Act No. 3763, entitled "An Act to Establish Periods of Prescription for Violations Penalized by Special Acts and Municipal Ordinances and to Provide When Prescription Shall Begin to Act." 74 Since the offense was committed in 1994, they reasoned that prescription set in as early as 2006 and rendered this case moot. Such position, however, is incongruent with the factual circumstances of this case, as well as the applicable laws and jurisprudence.

It is an established doctrine that a preliminary investigation interrupts the prescription period. 75 A preliminary investigation is essentially a determination whether an offense has been committed, and whether there is probable cause for the accused to have committed an offense:

A preliminary investigation is merely inquisitorial, and it is often the only means of discovering the persons who may be reasonably charged with a crime, to enable the fiscal to prepare the complaint or information. It is not a trial of the case on the merits and has no purpose except that of determining whether a crime has been committed or whether there is probable cause to believe that the accused is guilty thereof. 76

Under Section 45 of the Revised Securities Act, which is entitled Investigations, Injunctions and Prosecution of Offenses, the Securities Exchange Commission (SEC) has the authority to "make such investigations as it deems necessary to determine whether any person has violated or is about to violate any provision of this Act XXX." After a finding that a person has violated the Revised Securities Act, the SEC may refer the case to the DOJ for preliminary investigation and prosecution. HTAIcD

While the SEC investigation serves the same purpose and entails substantially similar duties as the preliminary investigation conducted by the DOJ, this process cannot simply be disregarded. In Baviera v. Paglinawan, 77 this Court enunciated that a criminal complaint is first filed with the SEC, which determines the existence of probable cause, before a preliminary investigation can be commenced by the DOJ. In the aforecited case, the complaint filed directly with the DOJ was dismissed on the ground that it should have been filed first with the SEC. Similarly, the offense was a violation of the Securities Regulations Code, wherein the procedure for criminal prosecution was reproduced from Section 45 of the Revised Securities Act. 78 This Court affirmed the dismissal, which it explained thus:

The Court of Appeals held that under the above provision, a criminal complaint for violation of any law or rule administered by the SEC must first be filed with the latter. If the Commission finds that there is probable cause, then it should refer the case to the DOJ. Since petitioner failed to comply with the foregoing procedural requirement, the DOJ did not gravely abuse its discretion in dismissing his complaint in I.S. No. 2004-229.

A criminal charge for violation of The Securities Regulation Code is a specialized dispute. Hence, it must first be referred to an administrative agency of special competence, i.e., the SEC. Under the doctrine of primary jurisdiction, courts will not determine a controversy involving a question within the jurisdiction of the administrative tribunal, where the question demands the exercise of sound administrative discretion requiring the specialized knowledge and expertise of said administrative tribunal to determine technical and intricate matters of fact. The Securities Regulation Code is a special law. Its enforcement is particularly vested in the SEC. Hence, all complaints for any violation of the Code and its implementing rules and regulations should be filed with the SEC. Where the complaint is criminal in nature, the SEC shall indorse the complaint to the DOJ for preliminary investigation and prosecution as provided in Section 53.1 earlier quoted.

We thus agree with the Court of Appeals that petitioner committed a fatal procedural lapse when he filed his criminal complaint directly with

the DOJ. Verily, no grave abuse of discretion can be ascribed to the DOJ in dismissing petitioner's complaint. aIAHcE

The said case puts in perspective the nature of the investigation undertaken by the SEC, which is a requisite before a criminal case may be referred to the DOJ. The Court declared that it is imperative that the criminal prosecution be initiated before the SEC, the administrative agency with the special competence.

It should be noted that the SEC started investigative proceedings against the respondents as early as 1994. This investigation effectively interrupted the prescription period. However, said proceedings were disrupted by a preliminary injunction issued by the Court of Appeals on 5 May 1995, which effectively enjoined the SEC from filing any criminal, civil, or administrative case against the respondents herein. 79 Thereafter, on 20 August 1998, the appellate court issued the assailed Decision in C.A. G.R. SP. No. 37036 ordering that the writ of injunction be made permanent and prohibiting the SEC from taking cognizance of and initiating any action against herein respondents. The SEC was bound to comply with the aforementioned writ of preliminary injunction and writ of injunction issued by the Court of Appeals enjoining it from continuing with the investigation of respondents for 12 years. Any deviation by the SEC from the injunctive writs would be sufficient ground for contempt. Moreover, any step the SEC takes in defiance of such orders will be considered void for having been taken against an order issued by a court of competent jurisdiction.

 

An investigation of the case by any other administrative or judicial body would likewise be impossible pending the injunctive writs issued by the Court of Appeals. Given the ruling of this Court in Baviera v. Paglinawan, 80 the DOJ itself could not have taken cognizance of the case and conducted its preliminary investigation without a prior determination of probable cause by the SEC. Thus, even presuming that the DOJ was not enjoined by the Court of Appeals from conducting a preliminary investigation, any preliminary investigation conducted by the DOJ would have been a futile effort since the SEC had only started with its investigation when respondents themselves applied for and were granted an injunction by the Court of Appeals.

Moreover, the DOJ could not have conducted a preliminary investigation or filed a criminal case against the respondents during the time that issues on the effectivity of Sections 8, 30 and 36 of the Revised Securities Act and the PED Rules of Practice and Procedure were still pending before the Court of Appeals. After the Court of Appeals declared the aforementioned statutory and regulatory provisions invalid and, thus, no civil, criminal or administrative case may be filed against the respondents for violations thereof, the DOJ would have been at a loss, as there was no statutory provision which respondents could be accused of violating. DcCEHI

Accordingly, it is only after this Court corrects the erroneous ruling of the Court of Appeals in its Decision dated 20 August 1998 that either the SEC or DOJ may properly conduct any kind of investigation against the respondents for violations of Sections 8, 30 and 36 of the Revised Securities Act. Until then, the prescription period is deemed interrupted.

To reiterate, the SEC must first conduct its investigations and make a finding of probable cause in accordance with the doctrine pronounced in Baviera v. Paglinawan. 81 In this case, the DOJ was precluded from initiating a preliminary investigation since the SEC was halted by the Court of Appeals from continuing with its investigation. Such a situation leaves the prosecution of the case at a standstill, and neither the SEC nor the DOJ can conduct any investigation against the respondents, who, in the first place, sought the injunction to prevent their prosecution. All that the SEC could do in order to break the impasse was to have the Decision of the Court of Appeals overturned, as it had done at the earliest opportunity in this case. Therefore, the period during which the SEC was prevented from continuing with its investigation should not be counted against it. The law on the prescription period was never

intended to put the prosecuting bodies in an impossible bind in which the prosecution of a case would be placed way beyond their control; for even if they avail themselves of the proper remedy, they would still be barred from investigating and prosecuting the case.

Indubitably, the prescription period is interrupted by commencing the proceedings for the prosecution of the accused. In criminal cases, this is accomplished by initiating the preliminary investigation. The prosecution of offenses punishable under the Revised Securities Act and the Securities Regulations Code is initiated by the filing of a complaint with the SEC or by an investigation conducted by the SEC motu proprio. Only after a finding of probable cause is made by the SEC can the DOJ instigate a preliminary investigation. Thus, the investigation that was commenced by the SEC in 1995, soon after it discovered the questionable acts of the respondents, effectively interrupted the prescription period. Given the nature and purpose of the investigation conducted by the SEC, which is equivalent to the preliminary investigation conducted by the DOJ in criminal cases, such investigation would surely interrupt the prescription period. ECSHAD

VI.The Court of Appeals was justified indenying SEC's Motion for Leave toQuash SEC Omnibus Orders dated23 October 1995.

The SEC avers that the Court of Appeals erred when it denied its Motion for Leave to Quash SEC Omnibus Orders, dated 23 October 1995, in the light of its admission that the PED had the sole authority to investigate the present case. On this matter, this Court cannot agree with the SEC.

In the assailed decision, the Court of Appeals denied the SEC's Motion for Leave to Quash SEC Omnibus Orders, since it found other issues that were more important than whether or not the PED was the proper body to investigate the matter. Its refusal was premised on its earlier finding that no criminal, civil, or administrative case may be filed against the respondents under Sections 8, 30 and 36 of the Revised Securities Act, due to the absence of any implementing rules and regulations. Moreover, the validity of the PED Rules on Practice and Procedure was also raised as an issue. The Court of Appeals, thus, reasoned that if the quashal of the orders was granted, then it would be deprived of the opportunity to determine the validity of the aforementioned rules and statutory provisions. In addition, the SEC would merely pursue the same case without the Court of Appeals having determined whether or not it may do so in accordance with due process requirements. Absent a determination of whether the SEC may file a case against the respondents based on the assailed provisions of the Revised Securities Act, it would have been improper for the Court of Appeals to grant the SEC's Motion for Leave to Quash SEC Omnibus Orders.

IN ALL, this Court rules that no implementing rules were needed to render effective Sections 8, 30 and 36 of the Revised Securities Act; nor was the PED Rules of Practice and Procedure invalid, prior to the enactment of the Securities Regulations Code, for failure to provide parties with the right to cross-examine the witnesses presented against them. Thus, the respondents may be investigated by the appropriate authority under the proper rules of procedure of the Securities Regulations Code for violations of Sections 8, 30, and 36 of the Revised Securities Act. 82

IN VIEW OF THE FOREGOING, the instant Petition is GRANTED. This Court hereby REVERSES the assailed Decision of the Court of Appeals promulgated on 20 August 1998 in CA-G.R. SP No. 37036 and LIFTS the permanent injunction issued pursuant thereto. This Court further DECLARES that the investigation of the respondents for violations of Sections 8, 30 and 36 of the Revised Securities Act may be undertaken by the proper authorities in accordance with the Securities Regulations Code. No costs.

SO ORDERED.

||| (SEC v. Interport Resources Corp., G.R. No. 135808, October 06, 2008)