Insigne vs. Abra Valley Colleges, Inc.

A stock certificate is not a condition sine qua non to proving stock ownership; it is merely prima facie evidence of shareholding, and ownership may be established through other competent evidence. The dismissal of an action under Section 3, Rule 17 is warranted only for a willful violation of an order of consequence to the action.

Pedro Borgoña was the founder, president, and majority stockholder of Abra Valley Colleges, Inc., a stock corporation. Petitioners Grace Borgoña Insigne, Diosdado Borgoña, Osbourne Borgoña, Imelda Borgoña Rivera, and Aristotle Borgoña are his children by his second wife, Teresita Valeros, while respondent Francis Borgoña is his son by his first wife, Humvelina Avila. After Pedro’s death, Francis succeeded him as president of Abra Valley. The dispute concerns rights that the Corporation Code grants to stockholders, particularly inspection of corporate books and records under Section 74, the right to financial statements under Section 75, and the holding of regular or special meetings under Section 50.

Pedro Borgoña was the founder, president, and majority stockholder of Abra Valley Colleges, Inc., a stock corporation. Petitioners Grace Borgoña Insigne, Diosdado Borgoña, Osbourne Borgoña, Imelda Borgoña Rivera, and Aristotle Borgoña are full-blood siblings and the children of Pedro by his second wife, Teresita Valeros. Respondent Francis Borgoña is their older half-blood brother, being Pedro’s son by his first wife, Humvelina Avila. After Pedro’s death, Francis succeeded him as president of Abra Valley.

Petitioners claimed that they were bona fide stockholders of Abra Valley. According to them, they acquired shares in two ways: by subscribing to 36 shares each from Abra Valley’s authorized and unissued capital stock, and by purchasing the shareholdings of existing stockholders as shown by the original holders’ indorsement on the stock certificates. In their amended complaint, they attached copies of stock certificates indorsed in their favor on the dorsal portion by the original holders. On April 7, 2010, they submitted a Compliance and Manifestation attaching, among others: a certification dated April 3, 2001 issued by Abra Valley’s corporate secretary, Jocelyn Bernal, stating that as per the Records of the Stock and Transfer Book, Grace had 110 shares, Aristotle and Imelda had 30 shares each, Diosdado had 15 shares, and Osbourne had 10 shares; a SEC-certified copy of the issuance of part of authorized and unissued capital stock showing a February 1, 1982 resolution of the Board of Trustees making a private offering to certain persons including petitioners; official receipts dated August 8, 1986 showing that each petitioner paid for 36 shares; a SEC-certified letter dated June 17, 1987 from President Pedro Borgoña to the SEC informing it that Abra Valley issued 324 shares of authorized and unissued capital stock to certain offerees including petitioners; a SEC-certified secretary’s certificate dated June 17, 1987 stating that the February 1, 1982 resolution confirmed and ratified the issuance of 324 shares to petitioners, who subscribed and fully paid; a SEC-certified General Information Sheet showing that in 1989 Grace, Diosdado, Imelda, and Aristotle, together with Pedro, were members of the Board; and SEC-certified minutes of the January 29, 1989 annual meeting showing that petitioners attended as stockholders and that some were elected to the 1989 Board.

Abra Valley and Francis denied that petitioners were stockholders. In their answers, they alleged that the stock certificates remained in the names of the original owners, that any transfers had not been recorded or registered with the corporation, and that petitioners had to present stock certificates already in their names to avail themselves of stockholder rights. They filed a Motion for Preliminary Hearing of Special and Affirmative Defenses. At the hearing on March 8, 2010, the RTC ordered petitioners to present the stock certificates issued by Abra Valley under their names. Petitioners did not produce such certificates; instead, they submitted the Compliance and Manifestation and moved for production and inspection of Abra Valley’s Stock and Transfer Book. The RTC did not act on that motion.

The RTC dismissed Special Civil Action Case No. 2070 on June 28, 2010 under Section 3, Rule 17 of the Rules of Court. It found that the documents petitioners submitted were not stock certificates and were not updated, and that in a derivative suit a stockholder must own a stock certificate at the time of the suit. The Court of Appeals affirmed, concluding that petitioners failed to discharge their burden of proving stock ownership because they did not produce their stock certificates.

• Stock Ownership: Petitioners alleged in their amended complaint that they were bona fide stockholders of Abra Valley, having acquired shares by subscription to authorized and unissued capital stock and by purchase through indorsement of stock certificates by the original holders.
• Sufficiency of Submitted Records: Petitioners challenged the dismissal based on their failure to present stock certificates, submitting corporate records, official receipts, and SEC-certified documents to establish their shareholdings.
• Production of Stock and Transfer Book: Petitioners moved for production and inspection of Abra Valley’s Stock and Transfer Book to enable them to prove that their stock subscriptions and purchases were recorded, but the RTC did not act on the motion.

• Non-Stockholder Defense: Respondents alleged that petitioners were not stockholders of record of Abra Valley, that the stock certificates remained in the names of the original owners, and that any transfers had not been recorded or registered with the corporation.
• Necessity of Stock Certificates: Respondents maintained that to avail themselves of stockholder rights, petitioners had to present stock certificates already in their names, and that an assignee or indorsee’s right is limited to issuance of a stock certificate in his or her name after compliance with requirements.
• Registration in the Stock and Transfer Book: Respondents insisted that petitioners should establish that the indorsement of the stock certificates by the original holders was registered in their favor in Abra Valley’s Stock and Transfer Book.
• Affirmative Defense: Respondents filed a Motion for Preliminary Hearing of Special and Affirmative Defenses asserting that petitioners were not stockholders and had no cause of action.

• Dismissal for Noncompliance / Stock Ownership: Whether the RTC properly dismissed Special Civil Action Case No. 2070 under Section 3, Rule 17 of the Rules of Court on the ground of petitioners’ failure to comply with the March 8, 2010 order to produce stock certificates, or whether petitioners were bona fide stockholders of Abra Valley.
• Production of Stock and Transfer Book: Whether petitioners were entitled to demand the production of Abra Valley’s Stock and Transfer Book.

• Dismissal for Noncompliance / Stock Ownership: No. The dismissal was unwarranted. A stock certificate is merely prima facie evidence of shareholding and not the sine qua non of ownership; petitioners established their stock ownership through subscriptions, official receipts, SEC-certified corporate records, and respondents’ recognition and estoppel.
• Production of Stock and Transfer Book: Yes. Petitioners were entitled to demand production of the Stock and Transfer Book. Discovery rules are liberally construed, and respondents could not withhold the book while asserting that no entry existed; the book is not exclusive evidence of stock ownership.

• Dismissal for Noncompliance / Stock Ownership: The burden of proof was first addressed. In civil cases, the party asserting the affirmative of an issue bears the onus probandi. Respondents filed the Motion for Preliminary Hearing of Special and Affirmative Defenses alleging that petitioners were not stockholders and had no cause of action. That assertion, though negative in form, was an affirmative defense that would avoid the claim; thus, respondents bore the burden to establish that petitioners were not stockholders. The CA erred in laying the burden on petitioners. Even assuming petitioners bore the burden, they discharged it despite not producing stock certificates. A stock certificate is prima facie evidence that the holder is a shareholder, but possession of the certificate is not the sole determining factor of stock ownership. The certificate is merely the paper representative or tangible evidence of the stock and the interests therein; it is not stock itself and is not the legal equivalent of ownership. It expresses the contract between the corporation and the stockholder but is not essential to the existence of a share or the creation of the shareholder relation. Petitioners submitted official receipts of payment for their subscriptions, SEC-certified copies of the issuance of part of authorized and unissued capital stock, the June 17, 1987 letter, the June 17, 1987 secretary’s certificate, and the General Information Sheet. They also submitted the January 29, 1989 minutes showing that they attended the annual meeting as stockholders and that some were elected to the Board. Because Section 23 of the Corporation Code requires every director to hold at least one share, respondents would not have allowed petitioners to be elected as directors unless they believed them qualified; respondents did not thereafter assail their acts as directors. Under the doctrine of estoppel, respondents could no longer deny petitioners’ status as stockholders. The dismissal under Section 3, Rule 17 was therefore unwarranted and unreasonable. Although that rule empowers the trial court to dismiss for failure to comply with its order, the power is not to be wielded indiscriminately; it applies only when noncompliance constitutes a willful violation of an order of consequence to the action. Dismissal is a drastic sanction with the effect of an adjudication on the merits, and it would be grossly oppressive if based on noncompliance with a trivial order. Here, production of the stock certificates was rendered superfluous by petitioners’ submission of other competent evidence of their shareholdings.
• Production of Stock and Transfer Book: Respondents insisted that petitioners had to establish that the indorsement of the stock certificates by the original holders was registered in their favor in Abra Valley’s Stock and Transfer Book. The insistence was rejected. A person becomes a stockholder by acquiring a share through purchase or subscription. Petitioners acquired shares by subscribing to 36 shares each from authorized and unissued capital stock and by purchasing shareholdings of existing stockholders, as shown by the indorsement on the stock certificates. Under Section 63 of the Corporation Code, shares of stock are personal property and may be transferred by delivery of the certificate indorsed by the owner or authorized person; no transfer is valid, except as between the parties, until recorded in the corporation’s books. Ponce vs. Alsons Cement Corporation teaches that a transfer not recorded in the stock and transfer book is non-existent as far as the corporation is concerned, and the corporation looks only to its books to determine who its shareholders are. However, Lanuza vs. Court of Appeals holds that the stock and transfer book is not the exclusive evidence of matters that ordinarily are or should be written therein; parol evidence may be admitted to supply omissions, explain ambiguities, or contradict the records. Because the Stock and Transfer Book was not in petitioners’ possession or control, they could not be reasonably expected or compelled to prove that their subscriptions and purchases were recorded therein. This was precisely why they filed a Motion for Production/Inspection of Documents, but the RTC did not act on it. The CA erred in concurring with the RTC’s inaction on the ground that the Stock and Transfer Book may be examined only by a stockholder of record. The rules of discovery, including Section 1, Rule 27 of the Rules of Court, are to be accorded broad and liberal interpretation, as explained in Republic vs. Sandiganbayan. The RTC should have granted the motion to enable petitioners to obtain the fullest possible knowledge of the issues and facts. Doing so would not have prejudiced respondents, who would themselves be expected to produce the Stock and Transfer Book to substantiate their affirmative defense that petitioners were not stockholders of record. The absence of an entry in the Stock and Transfer Book was no justification for refusing to produce it; otherwise, the disputable presumption under Section 3(e), Rule 131 of the Rules of Court that evidence willfully suppressed would be adverse if produced could arise. The transfer of shares in favor of petitioners was made through indorsement by the original holders, presumably registered owners, coupled with delivery of the stock certificates, conforming to Section 63. Although Abra Valley did not yet recognize the purchases until surrender of the certificates to the corporate secretary for recording, the Stock and Transfer Book was still relevant and necessary to ascertain whether petitioners’ subscriptions to authorized and unissued capital stock had been duly registered. Finally, the April 3, 2001 certification issued by Abra Valley’s corporate secretary stating that petitioners were shareholders “as per Records of the Stock and Transfer Book” belied respondents’ claim that no entry or record had been made.

• Stock certificate not sine qua non to stock ownership — A stock certificate is merely prima facie evidence that the holder is a shareholder; it is the paper representative or tangible evidence of the stock and the interests therein, not stock itself, and is not the legal equivalent of ownership. Ownership may be established through other competent evidence. This principle was applied by holding that petitioners proved their shareholding through official receipts, SEC-certified corporate records, and minutes despite not producing stock certificates in their names.
• Burden of proof on affirmative defense — In civil cases, the party asserting the affirmative of an issue bears the burden of proof; an affirmative defense is not a denial of an essential ingredient of the plaintiff’s cause of action but an avoidance of the claim. This principle was applied by holding that respondents, who filed the Motion for Preliminary Hearing of Special and Affirmative Defenses alleging petitioners were not stockholders, bore the burden to prove that negative assertion, and the CA erred in placing the burden on petitioners.
• Estoppel — Based on public policy, fair dealing, good faith, and justice, estoppel forbids a person from speaking against his own act, representation, or commitment to the injury of another who reasonably relied thereon. This principle was applied by holding that respondents could not deny petitioners’ stockholder status after allowing them to be elected as directors, which under Section 23 of the Corporation Code required stock ownership, and after not assailing their acts as directors.
• Dismissal under Section 3, Rule 17 — The power to dismiss a complaint for failure to comply with a court order is not to be wielded indiscriminately; dismissal is proper only when noncompliance constitutes a willful violation of an order of consequence to the action. Dismissal has the effect of an adjudication on the merits and may be grossly oppressive if based on noncompliance with a trivial order. This principle was applied by reversing the dismissal because production of stock certificates was superfluous given petitioners’ other evidence.
• Stock and Transfer Book not exclusive evidence — A stock and transfer book, like other corporate books and records, is not a public record and is not exclusive evidence of the matters that ordinarily are or should be written therein; it is prima facie evidence only and may be impeached or contradicted by other competent evidence, with parol evidence admissible to supply omissions, explain ambiguities, or contradict the records. This principle was applied by holding that petitioners could not be required to prove registration in a book not in their possession and that the RTC should have allowed its production.
• Liberal construction of discovery rules — The rules of discovery, including Section 1, Rule 27 of the Rules of Court, are to be accorded broad and liberal interpretation; mutual knowledge of all relevant facts is essential to proper litigation. This principle was applied by holding that the RTC should have granted petitioners’ Motion for Production/Inspection of Documents for the Stock and Transfer Book.
• Section 63 transfer of shares — Shares of stock are personal property transferable by delivery of the certificate indorsed by the owner or authorized person; no transfer is valid, except as between the parties, until recorded in the corporation’s books. This principle was applied by recognizing petitioners’ purchases through indorsement and delivery, while noting that recording is required for the corporation to recognize the transferee as a stockholder.
• Presumption from willful suppression of evidence — Under Section 3(e), Rule 131 of the Rules of Court, a disputable presumption arises that evidence willfully suppressed would be adverse if produced. This principle was applied by stating that respondents’ refusal to produce the Stock and Transfer Book despite asserting no entry existed could give rise to this presumption.

• "A stock certificate is prima facie evidence that the holder is a shareholder of the corporation, but the possession of the certificate is not the sole determining factor of one’s stock ownership." — This is the central formulation rejecting the RTC and CA premise that non-production of stock certificates defeated petitioners’ claim of stock ownership.
• "The certificate is not stock in the corporation but is merely evidence of the holder's interest and status in the corporation, his ownership of the share represented thereby, but is not in law the equivalent of such ownership." — Quoted from Tan vs. Securities and Exchange Commission, this passage defines the nature of a stock certificate and supports the ruling that ownership may be proved by other evidence.
• "Although Section 3, Rule 17 of the Rules of Court expressly empowers the trial court to dismiss the complaint motu proprio or upon motion of the defendant if, for no justifiable cause, the plaintiff fails to comply with any order of the court, the power to dismiss is not to wielded indiscriminately, but only when the non-compliance constitutes a willful violation of an order of consequence to the action." — This states the standard for dismissal for noncompliance and explains why the RTC’s dismissal was improper.
• "A stock and transfer book, like other corporate books and records, is not in any sense a public record, and thus is not exclusive evidence of the matters and things which ordinarily are or should be written therein." — Quoted from Lanuza vs. Court of Appeals, this passage supports the holding that petitioners were not required to rely solely on the Stock and Transfer Book and that its production should have been allowed.

• Lao vs. Lao, G.R. No. 170585, October 6, 2008, 567 SCRA 558, 570 — Cited for the rule that a stock certificate is prima facie evidence that the holder is a shareholder of the corporation.
• Tan vs. Securities and Exchange Commission, G.R. No. 95696, March 3, 1992, 206 SCRA 740, 749-750 — Cited for the rule that a stock certificate is not stock itself and is not the legal equivalent of ownership.
• Bank of the Philippine Islands vs. Royeca, G.R. No. 176664, July 21, 2008, 559 SCRA 207, 215 — Cited for the rule that the party asserting an affirmative defense bears the burden of proof.
• Megan Sugar Corporation vs. Regional Trial Court of Iloilo, Branch 68, Dumangas, Iloilo, G.R. No. 170352, June 1, 2011, 650 SCRA 100, 110 — Cited for the doctrine of estoppel and its equitable basis.
• Ponce vs. Alsons Cement Corporation, G.R. No. 139802, December 10, 2002, 393 SCRA 602, 612 — Cited for the rule that a transfer of shares not recorded in the stock and transfer book is non-existent as far as the corporation is concerned and that the corporation looks only to its books to determine its shareholders.
• Lanuza vs. Court of Appeals, G.R. No. 131394, March 28, 2005, 454 SCRA 54, 67 — Cited for the rule that the stock and transfer book is not exclusive evidence and that parol evidence may be admitted to supply omissions, explain ambiguities, or contradict the records.
• Republic vs. Sandiganbayan, G.R. No. 90478, November 21, 1991, 204 SCRA 213, 224 — Cited for the broad and liberal treatment of discovery rules and the rejection of the “fishing expedition” objection.
• Security Bank Corporation vs. Court of Appeals, G.R. No. 135874, January 25, 2000, 323 SCRA 330, 333 — Cited for the liberal interpretation of the rules on production or inspection of documents.
• Rural Bank of Salinas, Inc. vs. Court of Appeals, G.R. No. 96674, June 26, 1992, 210 SCRA 510, 516 — Cited in relation to the surrender of stock certificates to the corporate secretary for recording of transfers.

• Section 50, Corporation Code (Batas Pambansa Blg. 68) — Requires regular meetings of stockholders to be held annually and written notice to all stockholders of record. Petitioners’ cause of action included the immediate holding of the annual stockholders’ meeting; whether they could demand it was held to be a matter to be tried by the RTC.
• Section 74, Corporation Code — Provides that corporate records and minutes of meetings are open to inspection by any director, trustee, stockholder, or member at reasonable hours on business days. Petitioners sought inspection; their stockholder status was the threshold issue.
• Section 75, Corporation Code — Requires the corporation to furnish its most recent financial statement to any stockholder or member within ten days from written request. Petitioners sought financial statements; the merits were for the RTC after resolution of stockholder status.
• Section 63, Corporation Code — Provides that shares of stock are personal property transferable by delivery of the certificate indorsed by the owner or authorized person, and that no transfer is valid, except as between the parties, until recorded in the corporation’s books. Applied to petitioners’ purchases through indorsement and delivery.
• Section 23, Corporation Code — Requires every director to be a holder of at least one share of capital stock of the corporation. Applied to support estoppel: respondents allowed petitioners to be elected as directors, implying recognition of their stock ownership.
• Section 3, Rule 17, Rules of Court — Provides for dismissal due to fault of plaintiff for failure to comply with the Rules or any order of the court, with the dismissal having the effect of an adjudication on the merits unless otherwise declared. The RTC invoked it; the Supreme Court held the power to dismiss is limited to willful violation of an order of consequence.
• Section 1, Rule 27, Rules of Court — Provides for a motion for production or inspection of designated documents, papers, books, and tangible things not privileged and material to the action. It should be accorded broad and liberal interpretation, and the RTC should have granted petitioners’ motion for the Stock and Transfer Book.
• Section 3(e), Rule 131, Rules of Court — Establishes the disputable presumption that evidence willfully suppressed would be adverse if produced. This presumption could arise against respondents for refusing to produce the Stock and Transfer Book.
• Section 4, Rule 7, Interim Rules of Procedure Governing Intra-Corporate Controversies — Requires the defendant to file an answer within ten days from service of summons and complaint. Cited in the procedural history as the basis for the RTC’s initial judgment in favor of petitioners.

Teresita J. Leonardo-De Castro (Acting Chairperson), Diosdado M. Peralta, Jose Portugal Perez, and Estela M. Perlas-Bernabe.