Intra-corporate controversy: relationship test and nature of the controversy test.
“x x x.
This is a Petition for Review on Certiorari[1] filed by Bank of the Philippine Islands (BPI)[2] assailing the July 27, 2015 Decision[3] and March 4, 2016 Resolution[4] of the Court of Appeals (CA) in CA-G.R. SP No. 129574. The CA affirmed the Orders dated August 10, 2012[5] and January 14, 2013[6] rendered by the Regional Trial Court, Las Piñas City, Branch 197 (RTC), in Civil Case No. LP-05-0212 which refused to apply the Interim Rules of Procedure for Intra-Corporate Controversies (Interim Rules) and denied the Request for Admission applied for by the petitioner.
X x x.
The Interim Rules of Procedure for Intra-Corporate Controversies under R.A. No. 8799 applies to the proceedings in the RTC.
The Court notes that the petitioner does not challenge the jurisdiction of the RTC in hearing the complaint filed by the respondents. The controversy lies in whether the trial court correctly applied the Interim Rules on Intra-Corporate Controversies in its proceedings below.
The Interim Rules traces its roots from Section 5.2 of R.A. No. 8799 which transferred all cases under Sec. 5 of P.D. No. 902-A from the Securities and Exchange Commission (SEC) to the courts of general jurisdiction or the appropriate RTC. Under Sec. 5 of P.D. No. 902-A, the following cases were transferred to the RTC:
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 of the stockholder, partners, members of associations or organizations 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 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;
c) Controversies in the election or appointments of directors, trustees, officers or managers of such corporations, partnerships or associations. (emphasis supplied)
In compliance, the Court approved the Interim Rules on March 13, 2001 and took effect on April 1, 2001.[36] Section 1(a), Rule 1 of the Interim Rules restates the cases enumerated under Sec. 5 of P.D. No. 902-A with the addition of derivative suits[37] and inspection of corporate books.[38]
In the assailed Decision, the CA observed that based on the impleaded parties, allegations, and the reliefs prayed for, the complaint concerned the recovery of assets of the dissolved TGICI. It concluded that because of the fraudulent dissipation of TGICI assets caused by the officers, the matter had become an intra-corporate dispute under Sec. 5(a) of P.D. No. 902-A.[39]
Indeed, the respondents initiated their action under the Interim Rules as shown on the face of the complaint which reads: "For: Devices or Schemes Amounting to Fraud and Misrepresentation Detrimental to the Interest of the Public Under PD No. 902-A and the Interim Rules of Procedure Governing Intra-Corporate Controversies under R.A. 8799 with Declaration of Nullity of Contracts and Specific Performance with Prayer for the Issuance of a Writ of Preliminary Injunction."[40] But since courts cannot rely on the caption of the complaint alone, and if the complainant wishes to invoke the court's special commercial jurisdiction, the complaint must show on its face what the claimed fraudulent corporate acts[41] are which require the application of the Interim Rules. We expounded on this requirement in Guy v. Guy[42] as follows:
x x x. In Reyes, we pronounced that "in cases governed by the Interim Rules of Procedure on Intra-Corporate Controversies a bill of particulars is a prohibited pleading. It is essential, therefore, for the complaint to show on its face what are claimed to be the fraudulent corporate acts if the complainant wishes to invoke the court's special commercial jurisdiction." This is because fraud in intra-corporate controversies must be based on "devices and schemes employed by, or any act of, the board of directors, business associates, officers or partners, amounting to fraud or misrepresentation which may be detrimental to the interest of the public and/or of the stockholders, partners, or members of any corporation, partnership, or association," as stated under Rule 1, Section 1(a) (1) of the Interim Rules. The act of fraud or misrepresentation complained of becomes a criterion in determining whether the complaint on its face has merits, or within the jurisdiction of special commercial court, or merely a nuisance suit. (emphasis supplied)
We perused the subject complaint and were convinced that it contained specific allegations of corporate layering, improper matched orders and other manipulative devices or schemes resorted to by the corporate officers in defrauding the stockholders and investors of TGICI.[43] Evidently, these averments meet the standard of specificity required by Section 5(a) of P.D. No. 902-A and Section 1(a)(1), Rule 1 of the Interim Rules.
However, the petitioner remained unconvinced that the Interim Rules applies. It argued that the complaint does not involve an intra-corporate controversy as it failed to satisfy the relationship test and the nature of the controversy test. It ventured that since Cielo Azul has a separate and distinct personality, there can be no relationship between the corporation and the respondents as TGICI receiver and investors.
The contention is erroneous.
In determining whether a case is an intracorporate controversy, We resort to a combined application of the relationship test and the nature of the controversy test.[44]
Under the relationship test, the existence of any of the following relations makes the conflict intra-corporate: (1) between the corporation, partnership or association and the public; (2) between the corporation, partnership or association and the State insofar as its franchise, permit or license to operate is concerned; (3) between the corporation, partnership or association and its stockholders, partners, members or officers; and (4) among the stockholders, partners or associates themselves. For as long as any of these intra-corporate relationships exists between the parties, the controversy would be characterized as intra-corporate.[45]
Meanwhile, in the nature of controversy test, the controversy must not only be rooted in the existence of an intra-corporate relationship, but must as well pertain to the enforcement of the parties' correlative rights and obligations under the Corporation Code and the internal and intra-corporate regulatory rules of the corporation.[46]
The subject complaint specifically alleged that the corporate officers resorted to corporate layering by transferring funds accumulated through investments by the public to TGICI subsidiaries. Such allegation plainly established the relationship between the petitioner as the issuer of shares funneled to Cielo Azul, and herein respondents as court-appointed receiver and investors. Based on this relationship, respondents sought the lower court to pierce the corporate veil and declare Cielo Azul, JAMCOR Holdings, TMG Holdings, Jesus Tibayan and Gelacio as having one personality. Accordingly, We concur with the CA that petitioner cannot take refuge from the defense of being a third party. The CA fittingly explained:
It is also undisputed that there is a right of action vested upon the Receiver of the said holding corporation as well as the investors thereof over the wholly owned subsidiary. The latter is sued in due regard to the allegations on the singular identity of the holding corporation and the wholly owned subsidiary in this case. This right of action by interested parties in the holding corporation over the subsidiary transcends the individual juridical personalities of the said corporations as ruled by the Supreme Court in Gokongwei vs. Securities and Exchange Commission, wherein the right of the stockholder of the parent corporation to inspect the books of the wholly owned subsidiary was upheld. x x x
x x x x
Accordingly, the fact that Prudential Bank (now Petitioner Bank) and the vendees who seem to be third parties do not necessarily convert this action into an ordinary civil action where only the Rules of Court applies. There are sufficient allegations of anomalies in the sale of all the corporate assets (the 630,225 shares of stocks) of the subsidiaries to the vendees with the latter's knowledge and participation and also with the knowledge of Prudential Bank. Thus, the impleading of the vendees and Prudential Bank aside from the subsidiaries and the officers of the corporation is only consequential because of Prudential Bank's and the vendees' participation in violating the investors' rights. What matters is that there is a violation of the Corporation Code and defraudation of those interested therein, i.e., the investing public.
In Spouses Abejo vs. Dela Cruz, the Supreme Court clarified that when it affects the interests of the corporation, i.e., the enforcement of rights and obligations under the Corporation Code affecting the internal or intracorporate affairs of the said Corporation, the same is an Intracorporate dispute. xxx
x x x x
Indeed, in Rivilla vs. Intermediate Appellate Court, the Supreme Court citing Abejo, recognized the dispute as Intracorporate as when schemes were resorted to by officers of corporations to defraud investors. x x x[47] (citations omitted, emphasis supplied)
As a mere conduit in the alleged fraudulent investment scheme by TGICI, Tibayan and Elacio, Cielo Azul, with TMG Holdings and JAMCOR Holdings, cannot prevent the court-appointed receiver of TGICI from accessing its corporate books and records to recover the assets which have been purportedly dissipated through illegal stock trading. Verily, the nature of the dispute raised by the respondents in their complaint is intrinsically connected with the regulation of TGICI and its subsidiaries.
Considering that the present matter involves an intra-corporate dispute, the CA did not err in affirming the denial by the RTC of the petitioner's belated filing of Requests for Admissions based on Section 1, Rule 3[48] of the Interim Rules.
X x x.”
“x x x.
This is a Petition for Review on Certiorari[1] filed by Bank of the Philippine Islands (BPI)[2] assailing the July 27, 2015 Decision[3] and March 4, 2016 Resolution[4] of the Court of Appeals (CA) in CA-G.R. SP No. 129574. The CA affirmed the Orders dated August 10, 2012[5] and January 14, 2013[6] rendered by the Regional Trial Court, Las Piñas City, Branch 197 (RTC), in Civil Case No. LP-05-0212 which refused to apply the Interim Rules of Procedure for Intra-Corporate Controversies (Interim Rules) and denied the Request for Admission applied for by the petitioner.
X x x.
The Interim Rules of Procedure for Intra-Corporate Controversies under R.A. No. 8799 applies to the proceedings in the RTC.
The Court notes that the petitioner does not challenge the jurisdiction of the RTC in hearing the complaint filed by the respondents. The controversy lies in whether the trial court correctly applied the Interim Rules on Intra-Corporate Controversies in its proceedings below.
The Interim Rules traces its roots from Section 5.2 of R.A. No. 8799 which transferred all cases under Sec. 5 of P.D. No. 902-A from the Securities and Exchange Commission (SEC) to the courts of general jurisdiction or the appropriate RTC. Under Sec. 5 of P.D. No. 902-A, the following cases were transferred to the RTC:
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 of the stockholder, partners, members of associations or organizations 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 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;
c) Controversies in the election or appointments of directors, trustees, officers or managers of such corporations, partnerships or associations. (emphasis supplied)
In compliance, the Court approved the Interim Rules on March 13, 2001 and took effect on April 1, 2001.[36] Section 1(a), Rule 1 of the Interim Rules restates the cases enumerated under Sec. 5 of P.D. No. 902-A with the addition of derivative suits[37] and inspection of corporate books.[38]
In the assailed Decision, the CA observed that based on the impleaded parties, allegations, and the reliefs prayed for, the complaint concerned the recovery of assets of the dissolved TGICI. It concluded that because of the fraudulent dissipation of TGICI assets caused by the officers, the matter had become an intra-corporate dispute under Sec. 5(a) of P.D. No. 902-A.[39]
Indeed, the respondents initiated their action under the Interim Rules as shown on the face of the complaint which reads: "For: Devices or Schemes Amounting to Fraud and Misrepresentation Detrimental to the Interest of the Public Under PD No. 902-A and the Interim Rules of Procedure Governing Intra-Corporate Controversies under R.A. 8799 with Declaration of Nullity of Contracts and Specific Performance with Prayer for the Issuance of a Writ of Preliminary Injunction."[40] But since courts cannot rely on the caption of the complaint alone, and if the complainant wishes to invoke the court's special commercial jurisdiction, the complaint must show on its face what the claimed fraudulent corporate acts[41] are which require the application of the Interim Rules. We expounded on this requirement in Guy v. Guy[42] as follows:
x x x. In Reyes, we pronounced that "in cases governed by the Interim Rules of Procedure on Intra-Corporate Controversies a bill of particulars is a prohibited pleading. It is essential, therefore, for the complaint to show on its face what are claimed to be the fraudulent corporate acts if the complainant wishes to invoke the court's special commercial jurisdiction." This is because fraud in intra-corporate controversies must be based on "devices and schemes employed by, or any act of, the board of directors, business associates, officers or partners, amounting to fraud or misrepresentation which may be detrimental to the interest of the public and/or of the stockholders, partners, or members of any corporation, partnership, or association," as stated under Rule 1, Section 1(a) (1) of the Interim Rules. The act of fraud or misrepresentation complained of becomes a criterion in determining whether the complaint on its face has merits, or within the jurisdiction of special commercial court, or merely a nuisance suit. (emphasis supplied)
We perused the subject complaint and were convinced that it contained specific allegations of corporate layering, improper matched orders and other manipulative devices or schemes resorted to by the corporate officers in defrauding the stockholders and investors of TGICI.[43] Evidently, these averments meet the standard of specificity required by Section 5(a) of P.D. No. 902-A and Section 1(a)(1), Rule 1 of the Interim Rules.
However, the petitioner remained unconvinced that the Interim Rules applies. It argued that the complaint does not involve an intra-corporate controversy as it failed to satisfy the relationship test and the nature of the controversy test. It ventured that since Cielo Azul has a separate and distinct personality, there can be no relationship between the corporation and the respondents as TGICI receiver and investors.
The contention is erroneous.
In determining whether a case is an intracorporate controversy, We resort to a combined application of the relationship test and the nature of the controversy test.[44]
Under the relationship test, the existence of any of the following relations makes the conflict intra-corporate: (1) between the corporation, partnership or association and the public; (2) between the corporation, partnership or association and the State insofar as its franchise, permit or license to operate is concerned; (3) between the corporation, partnership or association and its stockholders, partners, members or officers; and (4) among the stockholders, partners or associates themselves. For as long as any of these intra-corporate relationships exists between the parties, the controversy would be characterized as intra-corporate.[45]
Meanwhile, in the nature of controversy test, the controversy must not only be rooted in the existence of an intra-corporate relationship, but must as well pertain to the enforcement of the parties' correlative rights and obligations under the Corporation Code and the internal and intra-corporate regulatory rules of the corporation.[46]
The subject complaint specifically alleged that the corporate officers resorted to corporate layering by transferring funds accumulated through investments by the public to TGICI subsidiaries. Such allegation plainly established the relationship between the petitioner as the issuer of shares funneled to Cielo Azul, and herein respondents as court-appointed receiver and investors. Based on this relationship, respondents sought the lower court to pierce the corporate veil and declare Cielo Azul, JAMCOR Holdings, TMG Holdings, Jesus Tibayan and Gelacio as having one personality. Accordingly, We concur with the CA that petitioner cannot take refuge from the defense of being a third party. The CA fittingly explained:
It is also undisputed that there is a right of action vested upon the Receiver of the said holding corporation as well as the investors thereof over the wholly owned subsidiary. The latter is sued in due regard to the allegations on the singular identity of the holding corporation and the wholly owned subsidiary in this case. This right of action by interested parties in the holding corporation over the subsidiary transcends the individual juridical personalities of the said corporations as ruled by the Supreme Court in Gokongwei vs. Securities and Exchange Commission, wherein the right of the stockholder of the parent corporation to inspect the books of the wholly owned subsidiary was upheld. x x x
x x x x
Accordingly, the fact that Prudential Bank (now Petitioner Bank) and the vendees who seem to be third parties do not necessarily convert this action into an ordinary civil action where only the Rules of Court applies. There are sufficient allegations of anomalies in the sale of all the corporate assets (the 630,225 shares of stocks) of the subsidiaries to the vendees with the latter's knowledge and participation and also with the knowledge of Prudential Bank. Thus, the impleading of the vendees and Prudential Bank aside from the subsidiaries and the officers of the corporation is only consequential because of Prudential Bank's and the vendees' participation in violating the investors' rights. What matters is that there is a violation of the Corporation Code and defraudation of those interested therein, i.e., the investing public.
In Spouses Abejo vs. Dela Cruz, the Supreme Court clarified that when it affects the interests of the corporation, i.e., the enforcement of rights and obligations under the Corporation Code affecting the internal or intracorporate affairs of the said Corporation, the same is an Intracorporate dispute. xxx
x x x x
Indeed, in Rivilla vs. Intermediate Appellate Court, the Supreme Court citing Abejo, recognized the dispute as Intracorporate as when schemes were resorted to by officers of corporations to defraud investors. x x x[47] (citations omitted, emphasis supplied)
As a mere conduit in the alleged fraudulent investment scheme by TGICI, Tibayan and Elacio, Cielo Azul, with TMG Holdings and JAMCOR Holdings, cannot prevent the court-appointed receiver of TGICI from accessing its corporate books and records to recover the assets which have been purportedly dissipated through illegal stock trading. Verily, the nature of the dispute raised by the respondents in their complaint is intrinsically connected with the regulation of TGICI and its subsidiaries.
Considering that the present matter involves an intra-corporate dispute, the CA did not err in affirming the denial by the RTC of the petitioner's belated filing of Requests for Admissions based on Section 1, Rule 3[48] of the Interim Rules.
X x x.”