In the Matter of the Revocation of the Certificate of Registration of Kennedy Review Center, Inc.

May 10, 2011 SEC CASE NO. 03-07-173 IN THE MATTER OF THE REVOCATION OF THE CERTIFICATE OF REGISTRATION OF KENNEDY REVIEW CENTER, INC. CECILIA SARMIENTO KENNEDY , petitioner . FOR : Revocation of Certificate of Incorporation DECISION Before the Commission is the petition for revocation of the certificate of registration of respondent Corporation, Kennedy Review Center, Inc. ("KRC," for brevity), 1 dated 01 March 2007, filed by Petitioner Cecilia Sarmiento Kennedy on 05 March 2007. The KRC, a non-stock and non-profit corporation, was incorporated, among others, "to provide learning and training institution, adequate and excellent enough to meet the emergent demand and the need to uplift, improve and advance the nursing profession in the country" 2 and specifically, "to prepare nursing graduates for the nursing licensure examinations here and abroad by providing them appropriate and comprehensive review classes." 3 Petitioner is among the incorporators of KRC and contributed substantially to the total capital (P108,000.00 out of the P200,000.00) of the KRC. 4 The original Board of Trustees consisted of Teodoro G. Sarmiento, Lerma S. Llorente and Darwin G. Sarmiento ("Sarmiento group," for brevity), who are incidentally Petitioner's siblings, Mr. Gerald B. Decano and Ms. Maribeth G. Bernardo. Petitioner claims that incorporators and officers Lerma S. Llorente and Darwin G. Sarmiento "were able to convince the petitioner, who is the owner/founder thereof, and who is the sole financier in putting up the school and making it operational, through insidious words and machinations, to invest a lot of money in it, and then take over the company through fraudulent maneuvers." 5 Petitioner also alleges that: "specifically, since petitioner did not have a lawyer then at the time, and not having reacquired her Filipino citizenship yet, they induced petitioner to put millions of pesos to run the business under the present set-up. Before petitioner could recover her investment, however, they paved the way for the takeover together with their brother Teodoro G. Sarmiento another incorporator." 6 Petitioner also alleges that the Sarmiento group "did not invest a single centavo in the company and merely wanted to defraud petitioner. These are all documented and receipted but the records are in their possession." 7 DHSaCA In addition, Petitioner alleges that the Corporation, "although incorporated as a non-stock, non-profit corporation, is actually operating as a stock corporation and contravenes the TESDA Endorsement dated 15 April 2005 . . .", 8 which provides that the agency has no objection to the incorporation of KRC provided "all matters concerning stock educational corporations" 9 are complied with. Petitioner claims that contrary to its nature and character as a non-stock, non-profit corporation, the KRC is engaging in ultra vires acts. Petitioner alleges that she 10 can attest to the facts surrounding the alleged violations of the corporation; however, "when the said siblings of petitioner took over the company, they held hostage all its corporate records." 11 Hence, petitioner does not have documents and other pieces of evidence to substantiate her allegations. Petitioner submits instead, the affidavit of Mr. Gerald B. Decano, 12 ("Decano," for brevity), the corporation's former Corporate Secretary as well as two letters: joint resignation letter 13 of Petitioner and Decano and supplemental letter of resignation. 14 Decano's affidavit puts forth the allegations that Petitioner's siblings deceived him and Petitioner into "putting up a non-stock/non-profit corporation so they could just outvote us and take over the business when it grows big"; 15 that the Sarmiento group "succeeded in conducting 'bogus' meetings" to oust him as Corporate Secretary in December 2006 and Petitioner, and "withdraw (sic) and appropriated for themselves the remaining funds of the corporation." 16 In addition, Decano likewise alleges: "the above said incorporators are appropriating the profits for their own advantage and benefit." 17 Moreover, the affiant averred that there is a Board Resolution "to the effect that she (Mrs. Kennedy) would have been paid of her investments, but what her siblings and fellow incorporators did was to steal the corporate books, financial records and school registration papers and then conduct bogus meetings paving the way for their take over." 18 Respondent KRC denied 19 the allegations of Petitioner. First, the KRC takes exception to Petitioner's claim that she was taken advantage of, alleging that Petitioner "has been extensively transacting business in the United States of America, securing investments from her friends and acquaintances, even before she returned to the Philippines. She cannot claim, therefore, that the other incorporators, who are her younger brothers and sister, took advantage of her." 20 The respondent Corporation likewise denies that the other members did not take over the corporation but "merely exercised their rights as members thereof to protect the Corporation from the petitioner's fraudulent and criminal acts of transferring corporate funds from the corporate accounts to her personal accounts." 21 Anent the allegation that the other members are holding the corporate records hostage, the KRC denied this, alleging: "the Corporation and its officers had to secure the documents in order to prevent the petitioner from covering up her fraudulent and criminal acts of siphoning, corporate funds from the corporate accounts to her personal accounts and using them for her personal benefit and to the detriment of the Corporation." 22 KRC asserts that it "has complied, and continues to comply, with the requirements of TESDA for the operation of an institution that caters to technical and vocational courses." 23 HEScID A preliminary conference was conducted on 13 June 2007, attended by the representatives of both parties, whereby the respondents were given fifteen (15) days to file an answer/comment to the Petition, while Petitioner was given five (5) days to file a reply to the comment from receipt thereof. 24 In her Manifestation/Comment (to Answer) dated 07 August 2007, Petitioner questioned the authority of Ricardo B. Ilanga, the President of the corporation, to file the Answer since he had "not shown his personality or authority by way of Board Resolution to file said Answer." 25 An Order dated 03 February 2011 set the case for clarificatory conference but Ms. Evangeline M. Daguio, School Director of the KRC School of Practical Nursing, Inc., refused to receive the Order. 26 At the clarificatory conference conducted on 16 February 2011, at 10:30 in the morning at the Office of the General Counsel, a representative of Petitioner appeared and orally manifested that the Petitioner is no longer interested in pursuing the instant case. An Order was issued on 16 February 2011 directing the Petitioner to submit the necessary pleading within five (5) days from receipt of the same. However, to date, Petitioner has not submitted the relevant pleading effectively withdrawing its petition. Issue The main issue in this case is whether or not revocation should prosper against the respondent corporation. Ruling We find no cogent reason to revoke the registration of the respondent corporation. The authority to revoke a corporation's charter is one that the Commission exercises with care and only does so based on proper grounds and with due notice and hearing. Presidential Decree ("PD") No. 902-A 27 provides: "In order to effectively exercise such jurisdiction, the Commission shall possess the following powers: xxx xxx xxx (i) To suspend, or revoke, after proper notice and hearing, the franchise or certificate of registration of corporations, partnerships or associations, upon any of the grounds provided by law, including the following: [1] Fraud in procuring its certificate of registration; EcIaTA [2] Serious misrepresentation as to what the corporation can do or is doing to the great prejudice of or damage to the general public; . . ." Similarly, the Securities Regulation Code 28 ("SRC") provides: "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 laws. Pursuant thereto the Commission shall have, among others, the following powers and functions: xxx xxx xxx (m) Suspend, or revoke, after proper notice and hearing the franchise or certificate of registration of corporations, partnerships or associations, upon any of the grounds provided by law . . ." 29 A reading of Petitioner's allegations will show that two grounds under PD 902-A are being invoked, as abovequoted, and involve fraud in the procurement of the certificate of registration and serious misrepresentation to the public. First, we will deal with the procedural issue raised by Petitioner that questions the lack of authority of Mr. Ricardo Ilonga, the alleged President of the Corporation, to file an Answer for failure to present a Board Resolution that establishes his authority to represent the Corporation. 30 A perusal of the Answer filed by Ricardo B. Ilonga shows that it was not verified, as required under the 2006 Rules of Procedure of the Commission ("Rules," for brevity). 31 The allegations made by Petitioner questioning the authority of Ricardo B. Ilonga were not addressed by the KRC despite the opportunity to do so whether through the appropriate pleading, or at the clarificatory conference held in February 2011. Regarding the issue of the authority of Mr. Ilonga, absent a Board resolution authorizing him to represent KRC, the Court held in the case of Citibank, N.A. vs. Hon. Segundino G. Chua, et al . (1993), 32 that a Board resolution was not necessary to appoint a representative of the petitioner corporation because the by-laws of the corporation already provided the necessary authority that allow its officers to execute a power of attorney to a designated bank officer. To that effect, the Court has stated: "Taking all the above provisions of law together, it is clear that corporate powers may be directly conferred upon corporate officers or agents by statute, the articles of incorporation, the by-laws or by resolution or other act of the board of directors. In addition, an officer who is not a director may also appoint other agents when so authorized by the by-laws or by the board of directors." 33 However, no such provision can be found in the corporation's by-laws conferring such authority upon the President of the corporation, hence a Board resolution is necessary. DASCIc Anent the lack of verification, the Supreme Court has held that: "the requirement regarding verification of a pleading is formal, not jurisdictional ( Uy v. LandBank , G.R. No. 136100, July 24, 2000). Such requirement is simply a condition affecting the form of the pleading, non-compliance with which does not necessarily render the pleading fatally defective. Verification is simply intended to secure an assurance that the allegations in the pleading are true and correct and not the product of the imagination or a matter of speculation, and that the pleading is filed in good faith. The court may order the correction of the pleading if verification is lacking or act on the pleading although it is not verified, if the attending circumstances are such that strict compliance with the rules may be dispensed with in order that the ends of justice may thereby be served." 34 While there are some formal defects in the pleading filed by respondent KRC: "It bears stressing that the rules of procedure are merely tools designed to facilitate the attainment of justice. They were conceived and promulgated to effectively aid the court in the dispensation of justice. Courts are not slaves to or robots of technical rules, shorn of judicial discretion. In rendering justice, courts have always been, as they ought to be, conscientiously guided by the norm that, on the balance, technicalities take a backseat against substantive rights, and not the other way around. Thus, if the application of the Rules would tend to frustrate rather than promote justice, it is always within the power of the Court to suspend the Rules, or except a particular case from its operation." 35 Thus, the Answer filed by Mr. Ilonga for the corporation shall be allowed for the purpose of resolving the issues presented in the instant petition. Second, Petitioner claims that the respondents fraudulently took advantage of her naivete to invest millions of pesos in a corporation, only for them to engineer a takeover of the Board of Directors that ousted her. Other than the allegations in the pleadings and the affidavit of Gerald B. Decano, Petitioner did not submit evidence to buttress these claims. Likewise, Decano did not state in his affidavit the specific acts that would demonstrate the manner or the circumstances by which the Sarmiento siblings allegedly stole the corporate records of the corporation. More importantly, the rights and obligations of the stockholders and the corporation with respect to the access to records of the corporation under Section 74 of the Corporation Code 36 ("Code," for brevity) are clear, which provides: " The records of all business transactions of the corporation and the minutes of any meetings shall be open to inspection by any director, trustee, stockholder or member of the corporation at reasonable hours on business days and he may demand, in writing, for a copy of excerpts from said records or minutes, at his expense. Any officer or agent of the corporation who shall refuse to allow any director, trustees, stockholder or member of the corporation to examine and copy excerpts from its records or minutes, in accordance with the provisions of this Code, shall be liable to such director, trustee, stockholder or member for damages, and in addition, shall be guilty of an offense which shall be punishable under Section 144 of this Code: Provided, That if such refusal is made pursuant to a resolution or order of the board of directors or trustees, the liability under this section for such action shall be imposed upon the directors or trustees who voted for such refusal: and Provided, further, That it shall be a defense to any action under this section that the person demanding to examine and copy excerpts from the corporation's records and minutes has improperly used any information secured through any prior examination of the records or minutes of such corporation or of any other corporation, or was not acting in good faith or for a legitimate purpose in making his demand. " (emphasis supplied) CHDTEA Petitioner did not allege that she made an inspection or examination of the corporation's records or submit any document showing that she made such written demand upon the KRC to furnish her relevant records of the KRC, and that the KRC refused her request. Likewise, KRC's defense that it is allegedly keeping the books and records of the corporation secure from Petitioner's acts of "covering up" her alleged "fraudulent and criminal acts," is untenable. This is in view of the obligation of KRC to make its corporate records available and accessible to its stockholders. Thus, neither Petitioner nor respondent KRC properly observed the procedural requirements as provided under Section 74. At any rate, the cause of action of a stockholder arising from any refusal to grant his or her request for inspection of corporate books is an intra-corporate controversy 37 cognizable by the Regional Trial Court. Third, Petitioner's allegation that KRC is operating as a stock corporation contrary to its corporate charter as a non-stock corporation is likewise unsubstantiated. Petitioner only attached a copy of the TESDA Endorsement 38 issued to the respondent Corporation and quotes a portion of the Endorsement stating that the TESDA interposes no objection to the registration of Corporation its Articles of Incorporation and By-Laws, "provided that matters concerning stock educational corporations are complied with." 39 As per KRC's Articles of Incorporation: ". . . no part of the income which the association may obtain as an incident to its operation shall be distributed as dividends to its members, trustees or officers subject to the provisions of the Corporation Code on dissolution. Any profit obtained by the association as a result of its operation, whenever necessary or proper shall be used for the furtherance of the purposes enumerated in Article II . . ." 40 An ultra vires act is "one committed outside the object for which a corporation is created as defined by the law of its organization and, therefore, beyond the powers conferred upon it by law." 41 The term has also been used to refer to "acts done by the directors (or trustees) or other officers of a corporation in excess of the powers conferred upon them by the stockholders (or members) . . ." 42 Petitioner merely alleged that the Sarmiento group, et al. "in operating a non-stock/non-profit corporation as a stock corporation, which are smacks of 'ultra-vires' (sic) acts, warrant the revocation of the certificate of registration of the Kennedy Review Center." 43 Petitioner's allegation does not ipso facto convert KRC, a non-stock corporation, into a stock corporation, more so by mere allegation of ultra vires acts allegedly committed by its officers and/or directors. 44 It is clear that the nature of a non-stock corporation as defined by Section 87 of the Code, is that no part of its income is distributed as dividends to its members, trustees, or officers, nor is it allowed by the law to engage in business activity primarily for profit. 45 In fact: "The corporation is allowed by law the use of such profits solely for the furtherance of the purpose or purposes for which the corporation was organized, and to those that are necessary and incidental thereto." 46 Moreover, "what is determinative of whether a corporation is engaged in business is the object or purpose as stated in its articles of incorporation and by-laws." 47 TECIaH Among other reasons, the KRC was established to act as a learning and training institution for nurses, and to prepare nurses for local and foreign licensure exams. Presumably, the KRC derives income from the conduct of its activities, since it offers review classes for aspiring nurses. Profit per se is not prohibited as an incident to a corporation's operations and when it is derived from the furtherance of the corporation's purpose. As an incident to its purpose, such profits derived from these activities should only go to the corporation and not to its members/directors or officers through distribution of dividends. In the instant case, Petitioner failed to establish that the income of the corporation is being distributed to the stockholders/members/officers through the issuance of dividends. However, even if Petitioner's allegations are subsequently proven and the directors/officers of the KRC are found to have misappropriated the profits of the corporation for themselves, they can be held liable for their actions under the Code. 48 In any case, to warrant revocation of corporate registration, Petitioner should demonstrate that there was fraud in the procurement of KRC's corporate registration or that the KRC engaged in serious misrepresentation as to what the corporation can do or is doing to the great prejudice of or damage to the general public. 49 Petitioner did not specify, much less show, that the corporation is engaging in serious misrepresentation that is causing damage to the general public. In fact, an examination of Petitioner's allegations will show that the allegations of a "takeover" of the board, the alleged "hostage" of the corporate records of KRC or even the purported "misappropriation" of the profits of the corporation are intra-corporate in nature. As held by the Court: "It is elementary in procedural law that bare allegations do not constitute evidence adequate to support a conclusion. It is basic in the rule of evidence that he who alleges a fact bears the burden of proving it by the quantum of proof required. Bare allegations, unsubstantiated by evidence, are not equivalent to proof . . ." 50 It bears stressing that in proceedings before administrative agencies in the exercise of their quasi-judicial powers, the quantum of evidence required is substantial evidence or "such amount of relevant evidence which a reasonable mind might accept as adequate to justify a conclusion." 51 In the instant case, Petitioner failed to meet the quantum of evidence required to support her allegations of fraud and misrepresentation justifying the revocation of KRC's registration. WHEREFORE, premises considered, the Petition for Revocation is hereby DISMISSED for lack of merit. Let the Company Registration and Monitoring Department be furnished with a copy of this DECISION for its information. SO ORDERED. Mandaluyong City, May 10, 2011. ACTISD (SGD.) TERESITA J. HERBOSA Chairperson (SGD.) MA. JUANITA E. CUETO Commissioner (SGD.) RAUL J. PALABRICA Commissioner (SGD.) MANUEL HUBERTO B. GAITE Commissioner (SGD.) ELADIO M. JALA Commissioner Footnotes 1. SEC Reg. No. CN200506232. 2. Articles of Incorporation, Second Article, par. 1. 3. Ibid. , par. 5. 4. Articles of Incorporation. 5. Petition, par. 3.1, p. 2. 6. Ibid. , par. 3.2. 7. Ibid. 8. Ibid. , par. 4. 9. Ibid. 10. Ibid. , par. 6. 11. Ibid. , par. 6.1. 12. Petition, Annex "F". 13. Ibid. 14. Petition, Annexes "D". 15. Affidavit, Par. 4.1. 16. Ibid. , par. 5. 17. Ibid. , par. 6.1. 18. Ibid. , par. 7. 19. Answer dated 30 July 2007. 20. Ibid. , par. 6, p. 2. 21. Ibid. , par. 5. 22. Ibid. , par. 12. 23. Ibid. , par. 8. 24. Minutes of the proceedings dated 13 June 2007 at the Office of the General Counsel. 25. Manifestation/Comment to Answer, par. 2, p. 1. 26. Affidavit of service of Jaime Rodil dated 08 February 2011. 27. Promulgated on 11 March 1976. 28. Republic Act No. 8799 (2000). 29. Ibid. , Section 5. 30. Manifestation/Comment (to Answer) dated 07 August 2007. 31. 2006 Rules of Procedure, Rule III, Section 3-4. 32. Citibank, N.A. vs. Court of Appeals, et al. , G.R. No. 102300, March 17, 1993. 33. Ibid. 34. Shipside, Inc. vs. Court of Appeals , G.R. No. 143377, February 20, 2001. 35. Santiago Cua, et al. vs. Miguel Ocampo Tan, et al. , G.R. No. 181455-56 and G.R. No. 182008, December 4, 2009. 36. Batas Pambansa Blg. 68 (1980). 37. Presidential Decree 902-A. 38. Petition, Annex "B." 39. Ibid. , par. 4 as quoted in Annex "B." 40. Eighth Article. 41. Republic vs. Acoje Mining Co., Inc. , G.R. No. L-18062, February 28, 1963 (citing 19 C.J.S., Section 965, p. 419). 42. Hector de Leon, The Corporation C od e of the Philippines Annotated, (Rex Bookstore: 2002), p. 434. 43. Petition, par. 6, p. 4. 44. In addition: "While an existing 'stock corporation' may be converted into a 'non-stock corporation' by mere amendment of its articles of incorporation, conversion from non-stock to stock corporation is not legally feasible. . . . Until the corporation is dissolved and unless it is so provided in the articles of incorporation or by-laws, the members are not entitled to any beneficial or vested interest over the assets of a non-stock corporation. In other words, a non-stock, non-profit corporation only holds its funds in trust for the carrying out of the objectives and purposes expressed in its charter or articles of incorporation. The conversion of an existing "non-stock non-profit" corporation into a "stock corporation" without dissolving it first would be tantamount to distribution of its assets or income to its members inasmuch as after its conversion, the assets of the non-stock corporation would now be treated as payment to the subscriptions of the members who will now become the stockholders of the stock corporation. Moreover, the scheme might defraud the public who may have contributed donations, gifts or grants to the non-stock, non-profit corporation to enable it to carry out the purposes for which it is organized since after its conversion the donated assets will now be considered as part of the capital of the stock corporation to the benefit of the stockholders. (SEC Opinion letter dated 10 December 1092 addressed to Mr. Efren Valiente) 45. Ibid. , p. 675. 46. SEC OGC Opinion No. 29-06. 47. De Leon, supra , p. 676. 48. Section 31, Corporation Code. 49. PD 902-A, supra. 50. Filipinas Port Services, Inc., et al. vs. Victoriano S. Go, et al. , G.R. No. 161886, March 16, 2007. 51. Travelaire & Tours Corp. and/or Christine B. Ojeda vs. National Labor Relations Commission and Nenita I. Medelyn , G.R. No. 131523, August 20, 1998.