Title
Securities and Exchange Commission vs. AZ 17/31 Realty, Inc.
Case
G.R. No. 239010
Decision Date
Jul 6, 2022
A corporation's inclusion of a deceased incorporator violated the Corporation Code but did not constitute fraud warranting dissolution; amendment of Articles of Incorporation ordered.
securities and exchange commission
certificate of registration
court of appeals

Case Summary (G.R. No. 239010)

Factual Background

AZ 17/31 Realty, Inc. was incorporated on April 23, 2008 as a close corporation with seven incorporators and the corporate purpose of acquiring, developing, and disposing of real estate. The Articles of Incorporation listed subscriptions and paid amounts showing substantial paid-in capital, most notably a large property contribution by Antonio de Zuzuarregui, Jr. Family relationships were material: Enrique de Zuzuarregui and Antonio, Jr. were the sons of Pacita Javier. The Articles of Incorporation named Pacita Javier as an incorporator with an asserted subscription of 1,437 shares and a corresponding paid amount. Complainant Azucena Locsin-Garcia alleged that Pacita had been dead since August 17, 2004, and therefore could not have been an incorporator in 2008.

Proceedings before the SEC-CRMD

By letter dated January 9, 2016, Locsin-Garcia sought revocation of AZ 17/31 Realty, Inc.'s certificate of registration on grounds of fraud in its procurement. The Company Registration and Monitoring Department of the Securities and Exchange Commission verified through the National Statistics Office that Pacita died on August 17, 2004, with Enrique listed as informant. The SEC-CRMD considered the inclusion of a deceased incorporator a misrepresentation that deceived the Commission and the investing public. By Order dated May 30, 2016, the SEC-CRMD revoked the corporation’s certificate of registration after concluding that the legal incapacity of Pacita rendered her inclusion fraudulent.

Proceedings before the SEC En Banc

AZ 17/31 Realty, Inc. appealed to the SEC En Banc. The company argued that the inclusion of Pacita was benign, that other incorporators were unwilling participants, that the company complied with reportorial and tax obligations, and that revocation was excessive. The SEC En Banc, relying on SEC Resolution No. 359, upheld SEC-CRMD’s jurisdiction to revoke certificates after due process and affirmed the revocation. The En Banc also applied a liberal construction to Locsin-Garcia’s procedural deficiency of failing to attach a certificate against forum shopping because of the interest of the investing public.

Court of Appeals Proceedings

AZ 17/31 Realty, Inc. invoked Rule 43 and sought injunctive relief. The Court of Appeals issued a temporary restraining order and subsequently a writ of preliminary injunction against implementation of the SEC En Banc Decision. By Decision dated April 24, 2018, the Court of Appeals reversed the SEC En Banc and set aside the revocation. The appellate court held that the inclusion of a deceased person as an incorporator did not amount to fraud warranting dissolution, emphasizing that the corporation retained six qualified incorporators even if Pacita were struck from the roster and that paid-up capitalization requirements were satisfied.

The Parties’ Contentions on Review

The Securities and Exchange Commission petitioned for reinstatement of its En Banc Decision, arguing that falsification and misrepresentation in the Articles of Incorporation — including the inclusion of a deceased incorporator and submission of falsified notarized documents — constituted fraud under PD No. 902-A and under SEC Regulation No. 359. Azucena Locsin-Garcia filed her own petition seeking affirmance of revocation and reiterated that the Articles of Incorporation falsely depicted Pacita as living, signing the AOI, being an initial director, and subscribing and paying for shares. AZ 17/31 Realty, Inc. defended the Court of Appeals decision and claimed the inclusion was a superfluity, that the minimum statutory requirements were met without Pacita, and that lesser penalties or amendment rather than revocation would suffice.

Threshold Legal Questions Identified

The Supreme Court framed several threshold questions: whether a quasi-judicial body like the SEC may file a petition for review defending its own disposition when an appellate court ruled against it; which SEC department has jurisdiction over revocation complaints; and whether the inclusion of a deceased person as an incorporator constitutes fraud in procuring a certificate of registration.

The Supreme Court’s Disposition on SEC’s Capacity to Sue

The Court held that the Securities and Exchange Commission lacked capacity to seek review in G.R. No. 239010 because it was not a real party in interest. Citing Section 2, Rule 3 of the 1997 Rules of Civil Procedure and prior precedents, the Court explained that a quasi‑judicial agency whose decision has been reviewed by a higher tribunal does not have the right to actively prosecute review of the appellate court’s adverse ruling. Accordingly, the petition of the SEC was expunged.

Jurisdiction of SEC-CRMD and Procedural Defects

Addressing G.R. No. 240888, the Court found that the SEC-CRMD properly assumed jurisdiction under SEC Resolution No. 359, series of 2010, which authorized the CRMD to revoke certificates of incorporation after due process on enumerated grounds. The Court further held that the statutory and SEC procedural requirement to attach a certification against forum shopping, while mandatory, is not jurisdictional. The Commission may, motu proprio, take cognizance of complaints in the interest of the investing public. Consequently, the CRMD’s taking of Locsin-Garcia’s letter complaint was valid despite her failure to attach the certification.

Definition and Legal Standard for Fraud in Procuring a Certificate of Registration

The Court defined fraud in procuring a certificate of registration to encompass two principal situations: (1) incorporation effected with the specific and dominant intention of pursuing a fraudulent business purpose; and (2) material misrepresentations in the Articles of Incorporation made to meet the statutory minimum qualifications for incorporation. The first involves using the corporate form to perpetrate an enterprise of fraudulent character. The second concerns false statements that render the corporation’s claimed compliance with the Corporation Code untrue, such as misrepresenting the number of incorporators or paid-up capital.

Application of the Standard to the Present Case

Applying those standards and the Corporation Code (Batas Pambansa Blg. 68), the Court found no evidence that AZ 17/31 Realty, Inc. was organized to pursue a fraudulent business purpose. The company regularly operated as a close corporation, did not publicly offer shares, and had substantial paid-in capital, largely from Antonio, Jr., exceeding the 25 percent paid-up requirement. Even if Pacita were removed as an incorporator, six qualified incorporators remained. The Court therefore concluded that the inclusion of Pacita did not meet the threshold of fraud warranting dissolution under PD No. 902-A. The Court acknowledged that the inclusion of a deceased person was improper because a deceased person lacks juridical capacity, but it found revocation to be unduly severe given the circumstances.

Treatment of SEC Resolution No. 359

The Court treated SEC Resolution No. 359 as persuasive evidence of what the Commission considers fraud in procurement, but not as binding doctrine absent sustained judicial acquiescence. The Court observed that the Resolution enumerated items such as inclusion of a deceased incorporator and submission of falsified documents among grounds for revocation, but held that such administrative construction did not, by itself, transform every such instance into judicially cognizable fraud leading to dissolution.

Remedies Ordered and Monitoring

Although the Court declined to reinstate revocation, it did not condone the inclusion of a deceased person. The Court affirmed the Court of Appeals Decision with modification and ordered AZ 17/31 Realty, Inc. to amend its Articles of Incorporation and drop Pacita Javier as an incorporator within six months from notice of the Decision. The Court further ordered the return to Pacita’s estate of her property and any accrued earnings arising from the purported subscription. The Securities and Exchange Commission was directed to strictly monitor compliance and to submit a report within thirty

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