Avelina G. Ramoso, et al. vs. General Credit Corp., et al.

[SEC-AC NO. 295. October 6, 1992.] AVELINA G. RAMOSO, ET AL. , petitioners , vs . GENERAL CREDIT CORP., ET AL. , respondents . D E C I S I O N Before the Commission en banc is an appeal from the decision of the hearing officer in SEC Case No. 2581 dated February 23, 1990, the dispositive portion of which is as follows, to wit: llcd "WHEREFORE, judgment is hereby rendered, as follows: 1. Declaring GCC, CCC Equity and the franchised companies Commercial Credit Corporation of North Manila, Commercial Credit Corporation of Cagayan Valley, Commercial Credit Corporation of Olongapo City and Commercial Credit Corporation of Quezon City as one corporation; 2. Declaring that the petitioning franchised companies are not liable for the payment of bad accounts assigned to, and discounted by GCC; 3. Declaring that individual petitioners who executed continuing guaranties to secure the obligations of the franchised companies to GCC arising from the discounting of accounts should not be held liable thereon; 4. Declaring that GCC is not liable to individual petitioners for the investments they made in the franchised companies; 5. Dismissing the petition, with respect to respondent Resource Finance Corporation, Generoso Villanueva and Leonardo Alejandrino." The antecedent facts are as follows. On March 11, 1957, Commercial Credit Corporation was registered with the Securities and Exchange Commission (SEC) with the principal purpose of engaging in the general financing and investment business. Commercial Credit Corporation (CCC) thereafter became known as the leading financing company in the sixties with an established goodwill that accompanied its success. CCC thereupon presented a proposal to several investors whereby franchised companies will be organized in the respective localities of the latter bearing the corporate name "Commercial Credit Corporation followed by the name of the city or municipality where its place of business is to be established such as Commercial Credit Corporation-North Manila, Commercial Credit Corporation-Cagayan Valley, Commercial Credit Corporation-Olongapo City and Commercial Credit Corporation-Quezon City. Due to the good business reputation of CCC prevailing at that time as well as the potential profits to be derived from the said CCC proposal, several prominent individuals decided to accept the franchising scheme initiated by CCC through the establishment of franchise companies in the aforementioned localities whereby majority of the shares of stock therein were held by the said individual investors with CCC as minority stockholder. Since the individual investors were not familiar with the intricacies of the financing business, management contracts were executed between each franchise company and CCC with the following salient features. First, the financing business of the franchise companies shall be managed by CCC through resident managers subject to the supervision of the former's Board of Directors. Second, a management fee of ten percent (10%) of net profit before taxes shall be payable to CCC. Third, all expenses shall be borne by the respective franchise companies except the salary of the resident managers and the cost of credit investigation which will be defrayed by CCC from the management fee. Finally it was agreed that CCC shall set the prime rates for the discounting or rediscounting of receivables as well as the interest rates and policies for borrowings from private parties. In 1974, CCC decided to obtain a quasi-banking license from the Central Bank of the Philippines. However, the DOSRI regulations of the Central Bank which restricted lendings of financial institutions prompted CCC to divest itself of its shareholdings in the franchised companies. At this juncture, CCC Equity was incorporated to take over the management of the various franchise companies under new management contracts. As a licensed quasi-banking institution, CCC continued to provide a discounting line for the accounts receivables of the franchise companies through CCC Equity. CCC thereafter changed its corporate name to General Credit Corporation (GCC). The initial operations of the franchise companies proved satisfactory until sometime in 1981 when adverse media reports revealed certain anomalies on the part of GCC in operating the said franchise companies. After scrutinizing the state of affairs of the franchise companies, particularly the financial conditions thereof, the individual investors allegedly discovered dissipation of assets and resources belonging to the franchise companies through anomalous and fraudulent practices perpetuated by GCC in the form of transfers and/or assignments of GCC's uncollectible notes or accounts to the franchise companies, utilization of spurious commercial papers to generate paper revenues, fraudulent releases of in connivance with the debtors of said franchise companies and releases of unauthorized loans. In addition, GCC allegedly divested itself of its assets and resources through a questionable receivables offsetting arrangement with one of its creditors, Resource and Finance Corporation. On February 27, 1984, Avelina G. Ramoso, Renato B. Salvatierra, Benefrido M. Cruz, Leticia L. Medina, Pelagio Pascual, Domingo P. Santiago, Amado S. Veloira, Concepcion F. Blaylock, Commercial Credit Corporation of North Manila, Commercial Credit Corporation of Cagayan Valley, Commercial Credit of Olongapo City and Commercial Credit Corporation of Quezon City (herein petitioners) filed a petition against GCC, CCC Equity, Resource and Finance Corporation, Generoso G. Villanueva and Leonardo B. Alejandro (herein respondents) praying, inter alia, that GCC/CCC Equity be placed under receivership, an order be issued directing respondents jointly and severally to pay petitioners as well as the placers and depositors of the franchise companies for the losses and damages sustained by them by reason of the aforementioned fraudulent schemes, and to revoke, annul and rescind the agreement between GCC and Resource and Finance Corporation. On June 6, 1984, all the respondents, except CCC Equity, filed a motion to dismiss upon the ground of lack of jurisdiction over the subject matter and nature of the suit and that the petitioners are not real parties in interest. The foregoing application for receivership and the motion to dismiss were subsequently denied by the hearing officer. On February 23, 1990, the hearing officer rendered a decision wherein ample reason was found to pierce the veil of corporate fiction between GCC and CCC Equity and as regards GCC and the franchise companies. As such, neither the franchise companies nor the individual petitioners on the basis of their continuing guaranties were held liable to GCC for the bad accounts incurred by the latter through the discounting process. It was likewise declared that GCC is not liable to the individual petitioners for losses and damages since the latter have assumed the risk attached to their respective investments in the franchise companies such that business reverses therein should be borne by said individual petitioners. Hence, this appeal. The issues to be resolved in this case are the following, to wit: 1. Whether or not the SEC has jurisdiction over the case at bar; 2. Whether or not piercing the veil of corporate fiction between GCC and CCC Equity and as regards GCC and the franchise companies is proper, and 3. Whether or not the hearing officer properly absolved the franchise companies and individual petitioners on the basis of their continuing guaranties for the bad accounts incurred by GCC through the discounting process. LibLex With respect to the first issue, respondents-appellants (except CCC Equity) claim that the instant case does not involve an intra-corporate relationship between the parties but rather a contractual relationship such that any controversy arising therefrom is cognizable by the regular courts and not the SEC. It is well-settled that jurisdiction is determined by the statute in force at the time of the commencement of the action. (People vs. Mariano, G.R. No. L-40527, June 30, 1976; Villamayor vs. Luciano, G.R. No. L-44886, January 31, 1979; Lee, et al. vs. Presiding Judge, G.R. No. L-68789, November 10, 1986). Section 5(b) of P.D. No. 902-A provides: "SECTION 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over corporations, partnerships and other forms of associations registered with it as expressly granted under existing laws and decrees, it shall have original and exclusive jurisdiction to hear and decide cases involving: xxx xxx xxx (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; xxx xxx xxx (Emphasis supplied) It is evident from the aforementioned provision of law and established jurisprudence that both intra-corporate relation and a cause of action arising from an intra-corporate matter must be present in order that an intra-corporate controversy may exist. An elementary rule in procedural law states that jurisdiction over the subject matter is determined by the allegations of the complaint irrespective of whether or not the plaintiff is entitled to recover upon all or some of the claims asserted therein (Caparros vs. Court of Appeals, G.R. No. L-56803, February 28, 1989). Accordingly, the allegations in the petition dated February 24, 1984 shall be considered in determining whether or not an intra-corporate controversy exists in this particular case. An intra-corporate relation exists among the different parties to the suit since it was alleged in the petition that "individual petitioners and GCC are stockholders of petitioning corporations". An intra-corporate matter likewise exists in the instant case as shown in the following pertinent allegations in the petition, to wit: "On separate and various times and occasion during the years 1966 to 1979, GCC, with intent to perpetuate a scheme or device aimed at defrauding the individual petitioners and the investing public at large, presented an ostensibly legitimate business proposal to the individual petitioners, to wit: a) Corporations would be organized and set up in the individual petitioners' respective localities, i.e., North Manila, Cagayan Valley, Olongapo City and Quezon City, with individual petitioners investing in the equity of these corporations together with GCC, at a ratio of 60-40, generally; b) The above-mentioned corporations would utilize the words "Commercial Credit Corporation" in their corporate name followed by the name of the city or municipality wherein their respective places of business were to be established or located; c) These corporations would then execute an exclusive management contract with GCC, giving the latter full control and management of the corporation's business and affairs; d) In return, GCC would provide the necessary management expertise, business opportunities, connections, facilities and fund support; e) In consideration for the arrangement, GCC would utilize the corporate and business facilities of the franchise holder, in addition to receiving fixed royalties for the use of its corporate name, business facilities and management. xxx xxx xxx Not having the experience and expertise in managing a finance company, individual petitioners were easily convinced by GCC, through its directors and officers, to entrust full control and management of the business and affairs of petitioning corporations to GCC. To this end, management contracts were executed between GCC and each of petitioning corporations, vesting upon GCC "full authority and discretion in the administration and management" of the business and affairs of petitioning corporations, through a resident manager chosen and designated exclusively by GCC. xxx xxx xxx From the time GCC/CCC Equity started managing the business and affairs of petitioning corporations up to 1980, they had been rendering to individual petitioners financial reports showing apparently satisfactory results of business operations of petitioning corporations. It was only sometime in the early part of 1981 that the suspicions of individual petitioners were aroused when adverse media reports came out pointing to anomalies in the operations of GCC which led to an investigation conducted by the Securities and Exchange Commission on GCC's operations. Alarmed at this development, individual petitioners closely scrutinized the state of affairs of petitioning corporations in which they respectively have interests, particularly as to the financial conditions thereof. Much to their shock and dismay, they discovered that instead of providing support in terms of funding, opportunity and facilities, as agreed upon in the management contracts, GCC/CCC Equity had, through the years, been actually dissipating the assets and resources of petitioning corporations and incurring for the account of the latter, staggering amounts of liabilities to the investing public, for the sole and exclusive benefit of GCC/CCC Equity and to the extreme damage and prejudice of petitioners, and the investing public, through anomalous and fraudulent practices, devices and schemes. Individual petitioners found numerous cases of expertly camouflaged anomalous and fraudulent transactions such as transfers and/or assignment of GCC's uncollectible notes or accounts to petitioning corporations, utilization of spurious commercial papers to generate paper revenues, fraudulent releases of collaterals in connivance with debtors of petitioning corporations and releases of unauthorized loans, in flagrant violation of law, as well as rules and regulations of the Central Bank and of this Honorable Commission. As a direct result of the aforementioned illegal, anomalous and fraudulent transactions, perpetuated by GCC/CCC Equity, petitioning corporations are either facing near bankruptcy, or have actually collapsed, to the damage and prejudice of not only the petitioners, but also of the numerous persons who placed or deposited funds in petitioning corporations. In addition, individual petitioners have not only completely lost their investments in petitioning corporations, but are also being subjected to liabilities in their personal capacities . In view of all the foregoing, GCC/CCC Equity should be held liable and responsible for the losses and damages sustained by petitioners, and for the liabilities of petitioners to numerous placers and depositors of petitioning corporations." (Emphasis supplied) In sum, the bone of contention enunciated in the above-cited petition lies in the alleged fraud perpetuated by GCC in managing the franchise companies to the detriment of individual petitioners' interests therein. In the case of DMRC Enterprises vs. Este Del Sol Mountain Reserve, Inc. (G.R. No. L-57936 September 28, 1984), the Supreme Court held the following pronouncements: "Considering the announced policy of P.D. No. 902-A, the expanded jurisdiction of the respondent Securities and Exchange Commission under said decree extends only and exclusively to matters arising from contracts involving investments in private corporations , partnerships and associations. Jurisdiction overall other claims remains with the regular courts." (Emphasis supplied) Since the alleged fraudulent practices perpetuated by GCC as the managing corporation of the franchise companies, if proven, will ultimately affect the investments of individual petitioners therein, an intra-corporate controversy exists. Hence, the SEC has jurisdiction over the case at bar. With regard to the second issue of whether or not piercing the veil of corporate fiction between GCC and CCC Equity and as regards GCC and the franchise companies is proper, reference to established legal authorities and judicial precedents on the matter is necessary in order to arrive at a reasonable evaluation of the relationships between GCC and CCC Equity as well as GCC and the various franchise companies. LexLib As a general rule, a corporation is considered as a juridical entity separate and distinct from its stockholders and other corporations. An exception to the aforementioned rule is the doctrine of piercing the veil of corporate fiction which states that where the separate and distinct juridical personality of a corporation is used as a cloak or cover for illegality or fraud or to defeat public convenience, justify wrong, protect fraud or defend crime, the corporate fiction will be disregarded such that the corporate entity will be considered only as an association of individuals or, where there are two entities, they will be joined as one, the one being considered only as part or parcel of the other. (Cease vs. Court of Appeals, G.R. No. L-33172, October 18, 1979) In disregarding the separate juridical personality of corporations the courts have applied what is known as the instrumentality rule, briefly described as follows: "Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the 'instrumentality' may be disregarded. The control necessary to invoke the rule is not majority or even complete stock control but such domination of finances, policies and practices that the controlled corporation has, so to speak, no separate mind, will or existence of its own, and is but a conduit for its principal . It must be kept in mind that the control must be shown to have been exercised at the time the acts complained of took place. Moreover, the control and breach of duty must proximately cause the injury or unjust loss for which the complaint is made. The test may be stated as follows: In any given case, except express agency, estoppel, or direct tort, three elements must be proved: 1. Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; 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 and unjust act 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 . The absence of any one of these elements prevents piercing the corporate veil '. In applying the "instrumentality' or 'alter ego' doctrine, the courts are concerned with reality and not form, with how the corporation operated and the individual defendant's relationship to that operation." (Vol. 1; Fletcher Cyclopedia Corporations, p. 490) The application of the foregoing test under the instrumentality rule will inevitably determine the proprietary of piercing the veil of corporate fiction. GCC VIS-A-VIS CCC EQUITY In determining the propriety of piercing the veil of corporate fiction between GCC and CCC Equity, the factual background which led to the organization of CCC Equity must be considered. Prior to 1974, GCC was managing the financing activities of the franchise companies under respective management contracts. In 1974, the Central Bank of the Philippines issued a Certificate of Authority in favor of GCC to engage in quasi-banking functions. After 1974, GCC had divested its shareholdings in the various franchise companies and its management functions were taken over by CCC Equity under new management contracts. Based on the testimony of Mr. Wilfredo Labayen, former Vice-President of GCC and subsequently President of CCC Equity, GCC had to organize CCC Equity for the purpose of following up the franchise scheme it originally formulated and implemented; otherwise, the former would be violating the DOSRI regulation issued by the Central Bank if it continued said franchise scheme directly with the franchise companies. Upon its organization, CCC Equity invested approximately about EIGHT MILLION (P8,000,000.00) PESOS to ELEVEN MILLION (P11,000,000.00) PESOS in the equities of the various franchise companies with a capital of FIVE HUNDRED THOUSAND (P500,000.00) PESOS, CCC Equity had to borrow from GCC in order to invest the aforementioned amount in the equities of the franchise companies. The shareholdings of CCC Equity in the franchise companies were thereupon pledged to GCC to secure the said loan obligation. Despite partial and minimal payment made by CCC Equity to GCC, the latter merely demanded payment of the outstanding balance but never bothered to collect the same through court action. In the computation of Mr. Wilfredo Labayen's salary as President of CCC Equity, his length of service in both CCC Equity and GCC was taken into consideration. Finally, Labayen's bonuses were likewise based on the earnings of both GCC and CCC Equity. Applying the aforementioned test in determining whether or not the instrumentality rule may be invoked to pierce the veil of corporate fiction between GCC over CCC Equity it is clear that the first element of control by GCC over CCC Equity, has been reasonably established by the petitioners. This finding is supported by the fact that CCC Equity was organized for the purpose of maintaining the franchise companies. In taking over the management of the franchise companies, CCC Equity invested in the equities of said franchise companies by borrowing from GCC. Under ordinary circumstances, GCC would have sued CCC Equity for collection especially when the amount involved runs to about eight to eleven million pesos. However, no concrete steps were taken by GCC to recover full payment of the obligation of CCC Equity thereby indicative of the degree of control exercised by GCC over CCC Equity in order to indirectly continue the franchise scheme with the franchise companies. In addition, the fact that Labayen's salary and bonuses were computed on the basis of his length of service in and earnings respectively of GCC and CCC Equity likewise shows ample control of GCC over CCC Equity geared towards a common objective of sustaining the franchise scheme initially implemented by GCC. The second element cannot be appreciated in this case since CCC Equity was actually organized to conform with the DOSRI regulation of the Central Bank. With the said Central Bank regulation, GCC divested itself of its shareholdings in the franchise Companies and organized CCC Equity to take over its previous management functions. Hence, it is quite evident that the organization of CCC Equity by GCC was precisely meant to dodge off the restrictions imposed under the DOSRI regulation issued by the Central Bank. The third element is likewise not present in the case at bar. In order to justify piercing the veil of corporate fiction through the instrumentality rule, the control exercised by GCC over CCC Equity must not only be utilized in violation of the Central Bank DOSRI regulation but it should likewise be the proximate cause of the injury or unjust loss complained of by the petitioners. As stated in the petition, GCC through CCC Equity dissipated the assets and resources of the franchise companies by way of transfers and/or assignments of GCC's uncollectible notes or accounts to the franchise companies, utilization of spurious commercial papers to generate paper revenues, fraudulent releases of collaterals in connivance with debtors of the franchise companies and releases of unauthorized loans thereby resulting in the bankruptcy of the petitioning franchise corporation and damaging the individual petitioners who have invested therein. Based on the voluminous testimonial and documentary evidence adduced by the parties in this case, fraud on the part of GCC has not been adequately established by the petitioners. In the case of Del Rosario vs. National Labor Relations Commission, G.R. No. 85416 July 24, 1990 , the Supreme Court held: "But for the separate juridical personality of a corporation to be disregarded, the wrongdoing must be clearly and convincingly established . It cannot be presumed ." (Emphasis supplied) LLphil A perusal of the formal offer of exhibits presented by the petitioners would reveal that only the memorandum of Management Counselors, Inc., an affiliate of GCC and CCC Equity, to the franchise companies was offered to establish fraud on the part of GCC. According to the petitioners, this pierce of documentary evidence was adduced "to show that GCC and affiliates engaged in the illegal practice of having Truth in Lending Act Forms signed in blank, which goes against the very purpose of the law". Under Section 2 of R.A. No. 3765 , otherwise known as the Truth in Lending Act, the purpose of the law is to protect the citizen from lack of awareness of the true cost of credit to the user by assuring a full disclosure of such cost with a view of preventing the use of credit to the detriment of the national economy. At most, such practice may be deemed violative of the Truth in Lending Act requiring full disclosure of credit cost but the same does not necessarily establish with clarity a pattern wherein the control exercised by GCC over CCC Equity was used as a means to dissipate the assets and resources of the franchise companies thereby proximately causing the injury or investment losses of individual petitioners. In piercing the veil of corporate fiction between GCC and CCC Equity, the hearing officer in his decision considered the following testimonial evidence as sufficient to justify the same; to wit: "Records of the case disclose that GCC organized CCC Equity to take over the management of, and equity in, the franchised companies; it was admitted by Labayen, and by no less than the former President of GCC, that this had to be done because of the so called DOSRI regulations of the Central Bank which prohibited GCC from lending to the franchised companies. However, it is quite evident that CCC Equity was merely an alter ego of GCC; they had practically common stockholders ; the funds used by CCC Equity in acquiring shares of stock in the franchised companies were advanced by GCC, which GCC never collected; the GCC officer, Labayen, who was handling the franchise companies' affairs as Vice President for franchise continued to do so with just a change in title to President of CCC Equity. (T.S.N., July 23, 1984, pp. 40-60) Glaringly, in the computation of Labayen's compensation as President of CCC Equity, his length of service with GCC was considered; moreover his bonuses were made dependent on the earnings not only of CCC Equity, but likewise the earnings of GCC from the franchised companies (id.)." (Emphasis supplied) The foregoing findings of the hearing officer merely reveal the degree of control exercised by GCC over CCC Equity but the same likewise do not establish a case of fraud perpetuated by GCC through CCC Equity prejudicial to the interests of the individual petitioners. The fact that GCC and CCC Equity have practically common stockholders is of no moment to the issue of piercing the veil of corporate fiction, as shown in the following, to wit: " It is not enough that shareholders and officers or managers in the affiliated corporations are identical, and the mere fact that one owns all the stock of the other, or substantially all, is not enough to warrant disregard, in the absence of some fraudulent purpose ; nor is it enough that there was opportunity to exercise control. Where other factors are present such as grossly inadequate capitalization, the courts may disregard the corporate entity if its failure to do so would work a substantial injustice to a creditor or third party. Absent a finding of fraud or bad faith, a corporation is entitled to a presumption of separateness from its sister Corporation, despite common ownership and control ." (Vol. 1; Fletcher Cyclopedia Corporations, p. 495) The Supreme Court likewise held in the case of Del Rosario vs. National Labor Relations Commission that "substantial identity of the incorporators of the two corporations does not necessarily imply fraud". In the absence of fraud on the part of GCC and CCC Equity prejudicial to the interests of the individual petitioners, disregard of the separate juridical personalities of GCC and CCC Equity is not warranted in the case at bar. GCC VIS-A-VIS THE FRANCHISE COMPANIES (CCC-NORTH MANILA, CCC-CAGAYAN VALLEY, CCC-OLONGAPO CITY AND CCC-QUEZON CITY) The propriety of disregarding the separate juridical personalities of GCC and the franchise companies shall be determined on the basis of the applicability of the instrumentality rule. The first element of control is present in this case. Sufficient evidence has been adduced to prove GCC's control over the business policies and practices of the franchise companies, as shown in the following pertinent portions of the decision, to wit: "Testifying as an adverse witness, Wilfredo Labayen, who used to be a Vice President of GCC, admitted that it was GCC which laid down the basic policies in the operation of the franchised corporations (T.S.N., July 23, 1984, pp. 32-33); these policies were carried out by resident managers who were hired, employed and under the payroll of GCC and whom the latter assigned to each of the franchised companies. While the role of the resident manager was supposed to be merely recommendatory to the Board of Directors of the franchised companies, his recommendations were generally followed; moreover, at the Board level, the representative or nominee of GCC therein, being considered as a 'technical man', was normally followed (id., 37-39). As another indication of the wide latitude of authority exercised by the resident managers, they were made signatories of checks of the franchised companies (Exhibit "MM"). The degree of control that GCC had over the franchised companies was evident from communications, mostly in the form of memoranda, sent by GCC (and later on CCC Equity) to the franchised companies, in terms of personnel hiring and other actions (Exhibits "EE", "FF", "JJ", "KK", and "NN"), as well as with respect to the main financing activities of the franchised companies (Exhibit "LL"). xxx xxx xxx Significantly, GCC never made secret its control over the franchised companies; on the contrary, for public consumption in newspaper publication, brochures and the like, the franchised companies were interchangeably referred to by GCC as its 'branches' or 'affiliates' part of the big 'GCC family' (Exhibits "N", "O", "S", "W", "BB", "CC" and "DD"). In addition to such various circumstances, the annual report of GCC included some highlights of the franchise corporation as duly reflected with consolidated financial statement. (T.S.N., July 23, 1984, pp. 45-46)" The second element required for the application of the instrumentality rule is not present in this case. Upon close scrutiny of the various testamentary and documentary evidence presented during trial, it may be observed that petitioners' claim of dissipation of assets and resources belonging to the franchise companies has not been reasonably supported by said evidence at hand with the Commission. In fact, the disputed decision of the hearing officer dealt mainly with the aspect of control exercised by GCC over the franchise companies without a concrete finding of fraud on the part of the former to the prejudice of individual petitioners' interests. As previously discussed, mere control on the part of GCC through CCC Equity over the operations and business policies of the franchise companies does not necessarily warrant piercing the veil of corporate fiction without proof of fraud. In order to determine whether or not the control exercised by GCC through CCC Equity over the franchise companies was used to commit fraud or wrong to violate a statutory or other positive legal duty or dishonesty, and unjust act in contravention of petitioners' legal rights, the circumstances that caused the bankruptcy of the franchise companies must be taken into consideration. There seems to be an evidentiary vacuum to support a finding of fraud or mismanagement on the part of GCC over the affairs of the franchise companies, which may have led to the bankruptcy of the latter. Based on the testimony of Generoso Villanueva, President of CCC (now GCC) from 1969 to 1983, CCC underwent a rehabilitation program sometime in 1983. According to Atty. Villanueva, the Dewey Dee scandal in the 1980's caused a turmoil in the financial circles wherein everybody lost confidence in financing companies including GCC. Due to the liquidity problem caused by the said Dewey Dee scandal which this Commission can take judicial notice of, GCC decided to cut-off fund support to the franchise companies which consequently led to the bankruptcy of the latter. There being no convincing proof of fraud or mismanagement on the part of GCC over the operations of the franchise companies, the second element required for the application of the instrumentality rule cannot be invoked to pierce the veil of corporate fiction between GCC and the franchise companies. LibLex Considering the absence of fraud or mismanagement in the control exercised by GCC over the franchise companies, the third element under the instrumentality rule cannot likewise be applied to the case at bar. Therefore, the hearing officer erred in piercing the veil of corporate fiction between GCC and CCC Equity and as regards GCC and the franchise companies. With respect to the third issue of whether or not the hearing officer properly absolved the franchise companies and individual petitioners on the basis of their continuing guaranties for the bad accounts incurred by GCC through the discounting process, it is important to determine if the SEC has jurisdiction to resolve this matter. As previously stated, the settled rule is that jurisdiction is determined by the allegations of the complaint or petition. A close perusal of the petition filed in SEC Case No. 2581 would reveal that the allegations therein dealt solely with the fraudulent control on the part of GCC through CCC Equity over the franchise companies in order to dissipate the assets and resources of the latter to the damage and prejudice of the individual petitioners. In other words, the fraud referred to in the petition applies to the management and control of GCC through CCC Equity over the franchise companies rather than the bad accounts incurred by GCC through the discounting process. It may be observed that a remote reference to the liabilities of the franchise companies and individual petitioners for said bad accounts is contained in paragraph 14 of the petition; to wit: "As a direct result of the aforementioned illegal, anomalous and fraudulent transactions perpetuated by GCC/CCC Equity, petitioning corporations are either facing near bankruptcy, or have actually collapsed, to the damage and prejudice of not only the petitioners, but also of the numerous persons who placed or deposited funds in petitioning corporations. In addition, individual petitioners have not only completely lost their investments in petitioning corporations but are also being subjected to liabilities in their personal capacities ." (Emphasis supplied) Such reference to said liabilities of the franchise companies and individual petitioners under various discounting agreements entered into between GCC and said franchise companies as well as guaranteed by individual petitioners however cannot be considered as an issue in this case for want of allegations constituting ultimate facts to support the same. Surprisingly, the hearing officer made the following categorical finding on the liabilities of the franchise companies and individual petitioners to GCC for the aforementioned bad accounts incurred by the latter through the discounting process; to wit: "As a consequence, we have to disregard as well the purported liabilities to GCC supposedly incurred by the franchised companies through the discounting process. Justice and equity dictate this; since it was GCC which was controlling the financing operations of the franchised companies, it would be quite iniquitous for it to pass on the burden of losses on bad accounts to the latter. And with greater reason, individual petitioners who executed continuing guaranties could not be held responsible for these bad accounts; it is a basic rule of law that a guaranty is only secondary or collateral to the principal obligation. (38 Am Jur 1054)" Nevertheless, the proprietary of such a finding by the hearing officer must be discussed in view of the applicable provisions of P.D. No. 902-A and established jurisprudence on the matter. Section 5, of P.D. No. 902-A provides: "SECTION 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over corporations, partnerships and other forms of associations registered with it as expressly granted under existing laws and decrees, it shall have original and exclusive jurisdiction to hear and decide cases involving: 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 stockholders, 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; xxx xxx xxx" (Emphasis supplied) In the case of Baez vs. Dimensional Construction Trade and Development Corporation, G.R. No. L-62648, November 22, 1985 , the Supreme Court held that an allegation of any device or scheme amounting to fraud and misrepresentation is vital for the SEC to acquire jurisdiction over a case under Section 5(a) of P.D. No. 902-A, as shown in the following: "The recitals of the complaint in Civil Case No. 3569 disclose that plaintiff's cause of action is merely for the collection of the various sums of money that have already become payable to petitioners due to the promissory notes executed by defendant corporation which have already matured. There is no allegation or any mention whatsoever in plaintiff's complaint that a device or scheme was resorted to by private respondent corporation amounting to fraud and misrepresentation . It is, therefore, difficult to consider that petitioners' case falls within the jurisdiction of the Securities and Exchange Commission pursuant to P . D . 902-A ." (Emphasis supplied) In the case at bar, petitioners have alleged fraud in the control by GCC through CCC Equity over the operations of the franchise companies thereby resulting in the near bankruptcy or actual collapse of the latter. As such, petitioners are praying for a judgment ordering respondents to pay for the losses and damages sustained by reason of such fraudulent scheme. It is clear that the allegation of fraud in the management and control exercised by GCC through CCC Equity over the franchise companies vests jurisdiction upon the SEC to hear and decide this particular issue pursuant to the provisions of Section 5(a) of P.D. No. 902-A. However, the SEC has not acquired jurisdiction over the case insofar as the liabilities of the franchise companies and individual petitioners for the bad accounts incurred by GCC through the discounting process since there is no allegation of fraud and misrepresentation in the implementation of the various discounting agreements executed by the parties. Hence, the findings of the hearing officer in relation to the purported liabilities of the franchise companies and individual petitioners under their respective discounting agreements with GCC are deemed in excess of the SEC's jurisdiction pursuant to Section 5(a) of P.D. No. 902-A. LLphil In the early case of Union Glass and Container Corporation vs. Securities and Exchange Commission, G.R. No. 64013, November 28, 1983 , the Supreme Court had the occasion to explain what constitutes an intra-corporate controversy under Section 5(b) of P.D. No. 902-A; to wit: "Otherwise stated, in order that the SEC can take cognizance of a case, the controversy must pertain to any of the following relationships: (a) between the corporation, partnership or association and the public; (b) between the corporation, partnership or association and its stockholders, partners, members or officers; (c) between the corporation, partnership or association and the state in so far as its franchise, permit or license to operate is concerned; and (d) among the stockholders, partners or associates themselves ." (Emphasis supplied) The rule laid down in this case was subsequently clarified in the recent case of Viray vs. Court of Appeals, G.R. No. 92481, promulgated on November 9, 1990 wherein the Supreme Court held that the establishment of an intra-corporate relationship does not necessarily imply the existence of an intra-corporate controversy; to wit: "The establishment of any of the relationships mentioned in Union will not necessarily always confer jurisdiction over the dispute on the SEC to the exclusion of the regular courts. The statement made in the case of Philex Mining Corporation vs. Reyes (G.R. No. L-57707, November 19, 1982) that the rule admits of no exceptions or distinction is not that absolute. The better policy in determining which body has jurisdiction over a case would be to consider not only the status or relationship of the parties but also the nature of the question that is the subject of their controversy . It should be obvious that not every conflict between a corporation and its stockholders involves corporate matters that only the SEC can resolve in the exercise of its adjudicatory or quasi-judicial powers. If, for example, a person leases an apartment owned by a corporation of which he is a stockholder, there should be no question that a complaint for his ejectment for non-payment of rentals would still come under the jurisdiction of the regular courts and not of the SEC . By the same token, if one person injures another in a vehicular accident, the complaint for damages filed by the victim will not come under the jurisdiction of the SEC simply because of the happenstance that both parties are stockholders of the same corporation . A contrary interpretation would dissipate the powers of the regular courts and distort the meaning and intent of PD No. 902-A. It is true that the trend is toward vesting administrative bodies like the SEC with the power to adjudicate matters coming under their particular specialization to insure a more knowledgeable solution of the problems submitted to them. This would also relieve the regular courts of a substantial number of cases that would otherwise swell their already clogged dockets. But as expedient as this policy may be, it should not deprive the courts of justice of their power to decide ordinary cases in accordance with the general laws that do not require any particular expertise or training to interpret and apply . Otherwise, the creeping take-over by the administrative agencies of the judicial power vested in the courts would render the Judiciary virtually impotent in the discharge of the duties assigned to it by the Constitution." (Emphasis supplied) Consequently, both an intra-corporate relation and an intra-corporate matter must exist to constitute an intra-corporate controversy under Section 5(b) of P.D. No. 902-A. An insight into what determines an intra-corporate matter was clearly explained in the case of DMRC Enterprises vs. Este Del Sol Mountain Reserve, Inc. (G.R. No. L-57936 September 28, 1984) wherein the Supreme Court held that the jurisdiction of the SEC under Section 5(b) of P.D. No. 902-A "extends only and exclusively to matters arising from contracts involving investments in private corporations, partnerships and associations". There is no dispute with respect to the fact that GCC and subsequently CCC Equity as well as the individual petitioners are stockholders of the various petitioning franchise companies such that an intra-corporate relationship exists between the parties. On the other hand, petitioners' claim that the control exercised by GCC through CCC Equity over the franchise companies was tainted with fraud may be considered as an intra-corporate matter cognizable by the SEC since the same would ultimately involve the investments of individual petitioners in said franchise companies. Moreover, a complete determination of this particular issue would require the specialized knowledge and expertise of the SEC in the intricacies of corporate management and control. In contrast, the ruling of the hearing officer in relation to the liabilities of the franchise companies and individual petitioners for the bad accounts incurred by the GCC through the discounting process would necessary entail a prior interpretation of the discounting agreements entered into between GCC and the various franchise companies as well as the continuing guaranties executed to secure the same. A judgment on the aforementioned liabilities incurred through the discounting process must likewise involve a determination of the validity of the said discounting agreements and continuing guaranties in order to properly pass upon the enforcement or implementation of the same. It is crystal clear from the aforecited authorities and jurisprudence that there is no need to apply the specialized knowledge and skill of the SEC to interpret the said discounting agreements and continuing guaranties executed to secure the same because the regular courts possess the utmost competence to do so by merely applying the general principles laid down under civil law on contracts. Therefore, the ruling of the hearing officer regarding the said liabilities incurred through the discounting process is in excess of SEC's jurisdiction. WHEREFORE, the appealed decision of the hearing officer in SEC Case No. 2581 is hereby MODIFIED as follows: 1. Piercing the veil of corporate fiction among GCC, CCC Equity and the franchise companies Commercial Credit Corporation of North Manila, Commercial Credit Corporation of Cagayan Valley, Commercial Credit Corporation of Olongapo City and Commercial Credit Corporation of Quezon City is not proper for being without merit; and 2. The declaration that petitioning franchise corporations and individual petitioners are not liable for the payment of bad accounts assigned to, and discounted by GCC is SET ASIDE for being in excess of jurisdiction. SO ORDERED. (SGD.) ROSARIO N. LOPEZ Chairman (SGD.) RODOLFO L. SAMARISTA (SGD.) ARMANDO Z. GONZALES Associate Commissioner Associate Commissioner (SGD.) MERLE O. MANUEL (SGD.) FE ELOISA C. GLORIA Associate Commissioner Associate Commissioner