SEC vs. AZ 17/31 Realty, Inc.

The inclusion of a deceased person as an incorporator does not constitute fraud in procuring a certificate of registration under the Corporation Code where the corporation still meets the minimum number of qualified incorporators and the minimum paid-up capital requirement without the deceased's subscription; the proper remedy is to order the corporation to amend its Articles of Incorporation, not to revoke its certificate of registration.

AZ 17/31 Realty, Inc. is a close corporation incorporated on April 23, 2008, primarily engaged in real estate acquisition, development, and investment. Its incorporators were members of the de Zuzuarregui family, including Pacita Javier, the mother of Antonio de Zuzuarregui, Jr. and Enrique de Zuzuarregui. Pacita had died on August 17, 2004 — three and a half years before the corporation's incorporation. Azucena Locsin-Garcia, a long-standing adversary of the Zuzuarregui family who had been convicted of falsification of public documents in connection with a land dispute, filed a letter-complaint with the SEC seeking revocation of the corporation's registration on the ground that Pacita was already deceased at the time of incorporation.

AZ 17/31 Realty, Inc. was incorporated on April 23, 2008 as a close corporation with the primary purpose of acquiring, owning, developing, and disposing of real estate. Its seven incorporators were all members of the de Zuzuarregui family: Antonio de Zuzuarregui, Jr., Enrique de Zuzuarregui, Pacita Javier, Antonette S. Rosca, Anthony de Zuzuarregui, Antoinette de Zuzuarregui, and Maria Edna de Zuzuarregui. Enrique and Antonio, Jr. were Pacita's children, while the others were Antonio, Jr.'s children or his common-law wife. Antonio, Jr. was the majority shareholder, holding 86% of the shares, and his subscription alone accounted for ₱18,682,000.00 — well above the 25% minimum paid-up capital requirement reckoned from the corporation's ₱22,000,000.00 authorized capital stock.

Pacita Javier had died on August 17, 2004, at the age of ninety, due to cardiopulmonary arrest — three and a half years before the corporation's incorporation. Her death certificate listed Enrique as the informant. Nevertheless, Pacita's name appeared in the Articles of Incorporation as an incorporator, with a Tax Identification Number indicated as proof of identity, and her signature was affixed to the document. She was also listed as having subscribed to 1,437 shares worth ₱1,437,000.00, fully paid.

On January 9, 2016, Azucena Locsin-Garcia sent a letter to the SEC's Compliance and Enforcement Department seeking revocation of AZ 17/31 Realty, Inc.'s certificate of registration on the ground that Pacita was already deceased at the time of incorporation. Locsin-Garcia had been embroiled in a decades-long dispute with the Zuzuarregui family over a parcel of land; she had been convicted of three counts of falsification of public documents in connection with a fake title she obtained over property belonging to the Zuzuarreguis, and AZ 17/31 Realty, Inc. had filed a quieting of title case against her. The SEC-CRMD verified with the National Statistics Office and confirmed Pacita's death. AZ 17/31 Realty, Inc. moved for dismissal, arguing that Locsin-Garcia was not a real party in interest and that the complaint lacked a certificate of non-forum shopping. On the merits, the corporation contended that Pacita's inclusion was a mere surplusage, as the minimum five-incorporator requirement was met even without her, and that the signature of a deceased person was not required to satisfy incorporation requirements.

The SEC-CRMD revoked the certificate of registration on May 30, 2016, finding that Pacita's death extinguished her capacity to enter into contractual relations and that the corporation had deceived the SEC and the investing public by misrepresenting her legal capacity. The SEC-En Banc affirmed on August 10, 2017. The Court of Appeals reversed on April 24, 2018, holding that the inclusion of a deceased person's name did not amount to fraud in procuring the certificate of registration. The SEC and Locsin-Garcia separately elevated the matter to the Supreme Court.

• SEC's Capacity to Sue: The SEC, through the Office of the Solicitor General, sought reinstatement of its En Banc decision revoking AZ 17/31 Realty, Inc.'s certificate of registration, arguing that the falsification and misrepresentation of material facts in the AOI — including the inclusion of a deceased incorporator — amount to fraud under PD 902-A and SEC Regulation No. 359.
• Fraud in Procurement of Registration: The SEC argued that the following were indicative of fraud: (1) falsification of Pacita's signature in the AOI; (2) submission of the notarized falsified AOI and By-Laws; and (3) misrepresentation of Pacita's death and legal capacity to enter into business and contractual relations.
• Locsin-Garcia's Revocation Claim: Locsin-Garcia reiterated that AZ 17/31 Realty, Inc. made it appear that Pacita was alive, able to sign the AOI, act as initial director, and attest under oath that Anthony was elected treasurer, when she had been dead for three and a half years prior to incorporation. She maintained that the AOI is not an ordinary contract as it binds the corporation to the State, and that compliance with reportorial requirements and payment of taxes do not exculpate the corporation from fraud.

• Excessive Penalty: AZ 17/31 Realty, Inc. argued that the SEC hastily imposed the supreme penalty of revocation for the superfluous inclusion of Pacita's name, when the SEC could have instead given it the opportunity to amend its AOI to remove Pacita's name, citing Roy III vs. Herbosa where the Court gave non-compliant corporations time to cure defects.
• Surplusage of Deceased Incorporator: The corporation maintained that even without Pacita's name, the minimum number of incorporators would have been met, and her contribution was not necessary to meet the required minimum paid-in capital, as Antonio, Jr.'s contribution alone already exceeded the 25% requirement.
• Determination of Falsification: The corporation argued that whether the inclusion of Pacita's name constituted falsification was for the courts, not the SEC, to determine.
• Harassment Suit: AZ 17/31 Realty, Inc. characterized Locsin-Garcia's complaint as a harassment suit intended to gain leverage in the quieting of title case filed against her, noting her conviction for falsification and her decades-long feud with the Zuzuarregui family.
• Lesser Penalty Alternative: The corporation prayed that, assuming a mistake was committed, any of the lesser penalties of suspension and/or fine be imposed in lieu of revocation.

• Capacity to Sue of Quasi-Judicial Agency: Whether the SEC, as a quasi-judicial body, has the capacity to file a petition for review defending its dispositions against an appellate body which ruled against it.
• Jurisdiction: Which department of the SEC has jurisdiction over a complaint for revocation of certificate of registration.
• Fraud in Procurement of Registration: Whether the inclusion of a dead person as an incorporator is considered fraud in procuring a certificate of registration warranting revocation.

• Capacity to Sue of Quasi-Judicial Agency: No. The SEC's petition was expunged for lack of capacity to sue, a quasi-judicial agency not being a real party in interest that stands to be benefited or injured by the judgment.
• Jurisdiction: The SEC-CRMD properly assumed jurisdiction over Locsin-Garcia's letter-complaint pursuant to SEC Resolution No. 359, series of 2010, which authorizes the SEC-CRMD to revoke certificates of incorporation of registered corporations after due process.
• Fraud in Procurement of Registration: No. The inclusion of a deceased person as an incorporator does not constitute fraud in procuring a certificate of registration where the corporation still satisfies the minimum number of qualified incorporators and the minimum paid-up capital requirement without the deceased's subscription; the proper remedy is to order amendment of the AOI, not revocation.

• Capacity to Sue of Quasi-Judicial Agency: Under Section 2, Rule 3 of the 1997 Rules of Civil Procedure, a real party in interest is one who stands to be benefited or injured by the judgment. The SEC would not stand to be benefited or injured by the disposition of the case; its decision having been reviewed by the appellate court made it at most a nominal party. A decent regard for judicial hierarchy bars a quasi-judicial agency from suing against the adverse opinion of a higher court. This principle was established as early as Turqueza vs. Hernando (1980), where the Court reminded lower court judges and quasi-judicial agencies to refrain from active participation in appellate proceedings unless expressly directed. In Securities and Exchange Commission vs. Court of Appeals and Government Service Insurance System vs. Court of Appeals, the Court similarly expunged the SEC's petition for lack of legal capacity to sue, preserving the purity of judicial and quasi-judicial offices.

• Jurisdiction: SEC Resolution No. 359, series of 2010, expressly authorizes the SEC-CRMD to revoke, after complying with due process, certificates of incorporation of registered partnerships or corporations on enumerated grounds. The SEC-CRMD therefore properly took cognizance of Locsin-Garcia's letter-complaint. Regarding the defect of the complaint for lack of a certificate against forum shopping, the requirement is mandatory but not jurisdictional; jurisdiction over the subject matter is conferred by law. A liberal application was justified given the overriding interest of the investing public and the SEC's power under Section 3-9, Rule III of the 2006 SEC Rules of Procedure to accept complaints motu proprio in the interest of public service. Locsin-Garcia's status as a non-stockholder did not divest the SEC of jurisdiction, as a petition for revocation is an exercise of the SEC's regulatory power, not a private dispute.

• Fraud in Procurement of Registration: The Court defined fraud in procuring a certificate of registration as contemplating two situations: (1) a company incorporated with the specific and dominant intention of pursuing a fraudulent business purpose — i.e., exploitation of the corporate form to the detriment of third parties; and (2) misrepresentations in the Articles of Incorporation to meet the minimum qualifications for incorporation, such as making it appear there were five incorporators when there were fewer, or falsely representing that the minimum paid-up capital had been subscribed and paid. Neither situation was present. AZ 17/31 Realty, Inc. was incorporated for a legitimate real estate business and was a close corporation that did not list its stocks or make public offerings. It had seven incorporators; even removing Pacita left six qualified incorporators, exceeding the minimum of five under Section 10 of BP Blg. 68. Pacita's monetary contribution was unnecessary to meet the minimum paid-up capital, as Antonio, Jr.'s subscription alone exceeded the 25% requirement. While SEC Resolution No. 359 enumerates "if any of the incorporators is already deceased at the time of incorporation" as a ground for revocation, the Court held this enumeration persuasive but not ripening to a doctrine of practical construction without judicial acquiescence. The inclusion of a deceased person may be the subject of a criminal case for fraud under the Revised Penal Code, but it does not equate to fraud contemplated under the Corporation Code for dissolution. Nonetheless, a deceased person has no juridical capacity under Articles 37 and 42 of the Civil Code and cannot be an incorporator under Sections 5, 10, and 14 of the Corporation Code. Rather than revoking the certificate of registration, the SEC should have ordered the corporation to amend its AOI pursuant to Section 103 in relation to Section 17 of BP Blg. 68, which requires the SEC to give incorporators a reasonable time to correct objectionable portions of the articles. A period of six months was deemed reasonable, with non-compliance meriting revocation under Section 144.

• Real Party in Interest — Quasi-Judicial Agencies — A quasi-judicial agency such as the SEC does not have the right to seek review of an appellate court decision reversing its rulings because it is not a real party in interest. It is at most a nominal party whose decision was the subject of review. A decent regard for judicial hierarchy bars it from suing against the adverse opinion of a higher court. This principle traces back to Turqueza vs. Hernando (1980) and was applied to the SEC in Securities and Exchange Commission vs. Court of Appeals and Government Service Insurance System vs. Court of Appeals.

• Fraud in Procuring Certificate of Registration — Two Situations — Fraud in procuring a certificate of registration contemplates two situations: (1) a company incorporated with the specific and dominant intention of pursuing a fraudulent business purpose, i.e., exploitation and taking undue advantage of the corporate form and process to the financial advantage of its controller and to the detriment of third parties; and (2) misrepresentations in the Articles of Incorporation to meet the minimum qualifications for incorporation, such as falsely representing the number of qualified incorporators or the amount of paid-up capital. The inclusion of a deceased person as an incorporator who was not needed to meet the minimum number of incorporators or the minimum paid-up capital does not fall under either situation.

• Certification Against Forum Shopping — Mandatory but Not Jurisdictional — The requirement of a certification against forum shopping is mandatory but not jurisdictional. Jurisdiction over the subject matter is conferred by law, not by the certificate. A liberal application may be justified where special circumstances or compelling reasons are present, particularly in quasi-judicial proceedings where the strict application of technical rules is relaxed.

• Juridical Capacity Extinguished by Death — Under Articles 37 and 42 of the Civil Code, juridical capacity — the fitness to be the subject of legal relations — is inherent in every natural person and is lost only through death. Civil personality is extinguished by death. A deceased person cannot be an incorporator, as an incorporator must be a natural person of legal age and a signatory to the AOI under Sections 5, 10, and 14 of the Corporation Code.

• Amendment Over Revocation — Where a defect in the Articles of Incorporation is curable, the SEC should order amendment rather than outright revocation. Section 17 of BP Blg. 68 requires the SEC to give incorporators a reasonable time within which to correct or modify objectionable portions of the articles before rejecting or disapproving them. Non-compliance with an order to amend may thereafter merit revocation under Section 144.

• "For the Court, fraud in procuring a certificate of registration contemplates two (2) situations: 1.) A company was incorporated with the specific and dominant intention of pursuing a fraudulent business purpose; and 2. Misrepresentations in the Articles of Incorporation to meet the minimum qualifications for incorporation." — This passage articulates the Court's canonical formulation of what constitutes fraud in procuring a certificate of registration, establishing the two-pronged test that governs revocation proceedings.

• "While Pacita's inclusion as an incorporator may be the subject of a criminal case for fraud under the Revised Penal Code, it does not equate to fraud contemplated under the Corporation Code for dissolution of a corporation." — This distinction between criminal fraud and corporate dissolution grounds is the ratio decidendi of the substantive ruling, clarifying that not every falsification warrants the corporate death penalty.

• "Quasi-judicial agencies like the SEC, however, do not have the right to seek the review of an appellate court decision reversing any of its rulings because it is not a real party in interest." — This pronouncement establishes the procedural bar against quasi-judicial agencies appealing adverse appellate rulings, reinforcing judicial hierarchy and the nominal-party status of such agencies.

• "Instead of hastily ordering the dissolution of AZ 17/31 Realty, Inc., the SEC should have ordered it to amend its AOI pursuant to Section 103 of BP Blg. 68 in relation to Section 17 of the same law." — This passage defines the corrective-remedy principle: curable defects in incorporation documents should be addressed through amendment with a reasonable compliance period, not through the extreme penalty of revocation.

• Turqueza vs. Hernando, 186 Phil. 333 (1980) — Established the principle that lower court judges and quasi-judicial agencies should refrain from active participation in appellate proceedings where their dispositions are under attack, serving as the doctrinal basis for expunging the SEC's petition.
• Securities and Exchange Commission vs. Court of Appeals, G.R. Nos. 187702 & 189014, October 22, 2014 — Directly on point: the Court expunged the SEC's petition for lack of capacity to file the suit because it was not a real party in interest.
• Government Service Insurance System vs. Court of Appeals, 603 Phil. 676 (2009) — The Court resolved to expunge the SEC's petition for lack of legal capacity to sue, ruling there was no plausible reason to deviate from the rule preserving the purity of judicial and quasi-judicial offices.
• Huntington Steel Products, Inc. vs. National Labor Relations Commission, 485 Phil. 227 (2004) — Cited for the proposition that the rule on non-forum shopping is mandatory but not jurisdictional, as jurisdiction over the subject matter is conferred by law.
• Roy III vs. Herbosa, 800 Phil. 459 (2016) — Cited by AZ 17/31 Realty, Inc. for the proposition that the Court had given non-compliant corporations time to cure defects rather than imposing immediate revocation; the Court's ruling aligned with this remedial approach.
• Legaspi Oil Co., Inc. vs. Court of Appeals, 296 Phil. 30 (1993) — Cited for the general definition of fraud as the voluntary execution of a wrongful act or willful omission with knowledge of its effects.
• Heirs of Roxas vs. Court of Appeals, 337 Phil. 41 (1997) — Cited for the distinction between actual fraud (intentional deception through misrepresentation or concealment) and constructive fraud (acts construed as fraud due to detrimental effect on public interests and confidence).
• Guingona, Jr. vs. Gonzales, 292 Phil. 327 (1993) — Cited for the principle that an administrative enumeration, though persuasive, does not ripen to a doctrine of practical construction without judicial acquiescence.

• Section 2, Rule 3, 1997 Rules of Civil Procedure — Defines a real party in interest as the party who stands to be benefited or injured by the judgment. Applied to deny the SEC's petition, as the SEC would not stand to be benefited or injured by the disposition.
• Section 3-5, Rule III, 2006 SEC Rules of Procedure — Requires a certification against forum shopping in complaints before the SEC. Applied with liberal construction given the overriding interest of the investing public; held to be mandatory but not jurisdictional.
• Section 3-9, Rule III, 2006 SEC Rules of Procedure — Authorizes the Commission to accept and take cognizance of a complaint motu proprio in the interest of public service and social justice or to protect the investing public.
• Section 6(i), Presidential Decree No. 902-A — Empowers the SEC to suspend or revoke the franchise or certificate of registration of corporations upon grounds including fraud in procuring the certificate, serious misrepresentation, refusal to comply with lawful orders, continuous inoperation for at least five years, failure to file by-laws, and failure to file required reports.
• SEC Resolution No. 359, series of 2010 — Authorizes the SEC-CRMD to revoke certificates of incorporation on enumerated grounds, including if any incorporator is already deceased at the time of incorporation. Held persuasive but not ripening to a doctrine of practical construction without judicial acquiescence.
• Section 10, Title II, Batas Pambansa Blg. 68 (Corporation Code) — Requires that incorporators be natural persons, not less than five but not more than fifteen, all of legal age, with a majority resident in the Philippines. Applied to show that Pacita, being deceased, was not qualified to be an incorporator.
• Section 5, Batas Pambansa Blg. 68 — Defines incorporators as stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof.
• Section 14, Batas Pambansa Blg. 68 — Requires the AOI to be duly signed and acknowledged by all incorporators and to contain the names, nationalities, and residences of the incorporators.
• Section 17, Batas Pambansa Blg. 68 — Provides that the SEC may reject the AOI or disapprove any amendment if not in compliance with the Code, but must give the incorporators a reasonable time to correct or modify objectionable portions. Applied as the basis for ordering amendment rather than revocation.
• Section 103, Batas Pambansa Blg. 68 — Governs amendment of the Articles of Incorporation, requiring affirmative vote of at least two-thirds of the outstanding capital stock for certain amendments.
• Section 144, Batas Pambansa Blg. 68 — Provides that violations of the Code not otherwise specifically penalized may result in dissolution of the corporation after notice and hearing before the SEC. Applied as the consequence for non-compliance with the order to amend.
• Articles 37 and 42, Civil Code of the Philippines — Provide that juridical capacity is lost only through death and that civil personality is extinguished by death. Applied to establish that Pacita had no legal capacity to be an incorporator.

Justices M. Lopez, J. Lopez, and Kho, Jr. concurred.

• Justice Leonen (Senior Associate Justice, Chairperson) — A separate dissenting opinion was filed, but the text of the dissent was not included in the provided decision; the specific points of disagreement and alternative reasoning are therefore not ascertainable from the provided text.