Case Digest: Phil. Society for the Prevention of Cruelty to Animals v. Commission on Audit, 195 SCRA 444, September 25, 2007

Corporation Law | Charter Test, Private Corporation

• In 1905, the Philippine Society for the Prevention of Cruelty to Animals was established under Act No. 1285 by the Philippine Commission, focusing on enforcing animal welfare laws and protecting animals in the Philippines. Act No. 1285 granted the petitioner authority to appoint agents with the power of a police officer to arrest violators and to retain half of the fines collected for violations related to animal cruelty laws.
• Commonwealth Act No. 148 amended the petitioner's authority, limiting agents to denounce violations and redirecting collected fines to the general fund of the municipality where the offense occurred.
• Executive Order No. 63 by President Quezon delegated the responsibility of apprehending and prosecuting animal cruelty offenders to various governmental authorities.
• In 2003, the Commission on Audit (COA) conducted an audit survey at the petitioner's office.
• The petitioner questioned COA's jurisdiction, claiming it was a private entity not subject to COA's authority.

WoN the petitioner qualifies as a government agency that may be subject to audit by respondent COA. NO

Essentially, the "charter test" as it stands today provides:

The test to determine whether a corporation is government owned or controlled, or private in nature is simple. Is it created by its own charter for the exercise of a public function, or by incorporation under the general corporation law? Those with special charters are government corporations subject to its provisions, and its employees are under the jurisdiction of the Civil Service Commission, and are compulsory members of the Government Service Insurance System. xxx 

The petitioner is correct in stating that the charter test is predicated, at best, on the legal regime established by the 1935 Constitution, Section 7, Article XIII.

And since the underpinnings of the charter test had been introduced by the 1935 Constitution and not earlier, it follows that the test cannot apply to the petitioner, which was incorporated by virtue of Act No. 1285, enacted on January 19, 1905. Settled is the rule that laws in general have no retroactive effect, unless the contrary is provided.

The general principle of prospectivity of the law likewise applies to Act No. 1459, otherwise known as the Corporation Law, which had been enacted by virtue of the plenary powers of the Philippine Commission on March 1, 1906, a little over a year after January 19, 1905, the time the petitioner emerged as a juridical entity. Even the Corporation Law respects the rights and powers of juridical entities organized beforehand.

In a legal regime where the charter test doctrine cannot be applied, the mere fact that a corporation has been created by virtue of a special law does not necessarily qualify it as a public corporation.

As stated, at the time the petitioner was formed, the applicable law was the Philippine Bill of 1902, and, emphatically, as also stated above, no proscription similar to the charter test can be found therein.

The textual foundation of the charter test, which placed a limitation on the power of the legislature, first appeared in the 1935 Constitution. However, the petitioner was incorporated in 1905 by virtue of Act No. 1258, a law antedating the Corporation Law (Act No. 1459) by a year, and the 1935 Constitution, by thirty years. There being neither a general law on the formation and organization of private corporations nor a restriction on the legislature to create private corporations by direct legislation, the Philippine Commission at that moment in history was well within its powers in 1905 to constitute the petitioner as a private juridical entity.

Time and again the Court must caution even the most brilliant scholars of the law and all constitutional historians on the danger of imposing legal concepts of a later date on facts of an earlier date.

The amendments introduced by C.A. No. 148 made it clear that the petitioner was a private corporation and not an agency of the government. This was evident in Executive Order No. 63, issued by then President of the Philippines Manuel L. Quezon, declaring that the revocation of the powers of the petitioner to appoint agents with powers of arrest "corrected a serious defect" in one of the laws existing in the statute books.

As a curative statute, and based on the doctrines so far discussed, C.A. No. 148 has to be given retroactive effect, thereby freeing all doubt as to which class of corporations the petitioner belongs, that is, it is a quasi-public corporation, a kind of private domestic corporation, which the Court will further elaborate on under the fourth point.

Second, a reading of petitioner’s charter shows that it is not subject to control or supervision by any agency of the State, unlike government-owned and -controlled corporations. No government representative sits on the board of trustees of the petitioner. Like all private corporations, the successors of its members are determined voluntarily and solely by the petitioner in accordance with its by-laws, and may exercise those powers generally accorded to private corporations, such as the powers to hold property, to sue and be sued, to use a common seal, and so forth. It may adopt by-laws for its internal operations: the petitioner shall be managed or operated by its officers "in accordance with its by-laws in force." The pertinent provisions of the charter provide:

Section 1. Anna L. Ide, Kate S. Wright, John L. Chamberlain, William F. Tucker, Mary S. Fergusson, Amasa S. Crossfield, Spencer Cosby, Sealy B. Rossiter, Richard P. Strong, Jose Robles Lahesa, Josefina R. de Luzuriaga, and such other persons as may be associated with them in conformity with this act, and their successors, are hereby constituted and created a body politic and corporate at law, under the name and style of "The Philippines Society for the Prevention of Cruelty to Animals."

As incorporated by this Act, said society shall have the power to add to its organization such and as many members as it desires, to provide for and choose such officers as it may deem advisable, and in such manner as it may wish, and to remove members as it shall provide.

It shall have the right to sue and be sued, to use a common seal, to receive legacies and donations, to conduct social enterprises for the purpose of obtaining funds, to levy dues upon its members and provide for their collection to hold real and personal estate such as may be necessary for the accomplishment of the purposes of the society, and to adopt such by-laws for its government as may not be inconsistent with law or this charter.

x x x x

Sec. 3. The said society shall be operated under the direction of its officers, in accordance with its by-laws in force, and this charter.

x x x x

Sec. 6. The principal office of the society shall be kept in the city of Manila, and the society shall have full power to locate and establish branch offices of the society wherever it may deem advisable in the Philippine Islands, such branch offices to be under the supervision and control of the principal office.

Third. The employees of the petitioner are registered and covered by the Social Security System at the latter’s initiative, and not through the Government Service Insurance System, which should be the case if the employees are considered government employees. This is another indication of petitioner’s nature as a private entity. Section 1 of Republic Act No. 1161, as amended by Republic Act No. 8282, otherwise known as the Social Security Act of 1997, defines the employer:

Employer – Any person, natural or juridical, domestic or foreign, who carries on in the Philippines any trade, business, industry, undertaking or activity of any kind and uses the services of another person who is under his orders as regards the employment, except the Government and any of its political subdivisions, branches or instrumentalities, including corporations owned or controlled by the Government: Provided, That a self-employed person shall be both employee and employer at the same time. (Emphasis supplied)

Fourth. The respondents contend that the petitioner is a "body politic" because its primary purpose is to secure the protection and welfare of animals which, in turn, redounds to the public good.

This argument, is, at best, specious. The fact that a certain juridical entity is impressed with public interest does not, by that circumstance alone, make the entity a public corporation, inasmuch as a corporation may be private although its charter contains provisions of a public character, incorporated solely for the public good. This class of corporations may be considered quasi-public corporations, which are private corporations that render public service, supply public wants, or pursue other eleemosynary objectives. While purposely organized for the gain or benefit of its members, they are required by law to discharge functions for the public benefit. Examples of these corporations are utility, railroad, warehouse, telegraph, telephone, water supply corporations and transportation companies. It must be stressed that a quasi-public corporation is a species of private corporations, but the qualifying factor is the type of service the former renders to the public: if it performs a public service, then it becomes a quasi-public corporation.

Authorities are of the view that the purpose alone of the corporation cannot be taken as a safe guide, for the fact is that almost all corporations are nowadays created to promote the interest, good, or convenience of the public. A bank, for example, is a private corporation; yet, it is created for a public benefit. Private schools and universities are likewise private corporations; and yet, they are rendering public service. Private hospitals and wards are charged with heavy social responsibilities. More so with all common carriers. On the other hand, there may exist a public corporation even if it is endowed with gifts or donations from private individuals.

The true criterion, therefore, to determine whether a corporation is public or private is found in the totality of the relation of the corporation to the State. If the corporation is created by the State as the latter’s own agency or instrumentality to help it in carrying out its governmental functions, then that corporation is considered public; otherwise, it is private. Applying the above test, provinces, chartered cities, and barangays can best exemplify public corporations. They are created by the State as its own device and agency for the accomplishment of parts of its own public works.

It is clear that the amendments introduced by C.A. No. 148 revoked the powers of the petitioner to arrest offenders of animal welfare laws and the power to serve processes in connection therewith.

Fifth. The respondents argue that since the charter of the petitioner requires the latter to render periodic reports to the Civil Governor, whose functions have been inherited by the President, the petitioner is, therefore, a government instrumentality.

This contention is inconclusive. By virtue of the fiction that all corporations owe their very existence and powers to the State, the reportorial requirement is applicable to all corporations of whatever nature, whether they are public, quasi-public, or private corporations—as creatures of the State, there is a reserved right in the legislature to investigate the activities of a corporation to determine whether it acted within its powers. In other words, the reportorial requirement is the principal means by which the State may see to it that its creature acted according to the powers and functions conferred upon it. These principles were extensively discussed in Bataan Shipyard & Engineering Co., Inc. v. Presidential Commission on Good Government. Here, the Court, in holding that the subject corporation could not invoke the right against self-incrimination whenever the State demanded the production of its corporate books and papers, extensively discussed the purpose of reportorial requirements, viz:

x x x The corporation is a creature of the state. It is presumed to be incorporated for the benefit of the public. It received certain special privileges and franchises, and holds them subject to the laws of the state and the limitations of its charter. Its powers are limited by law. It can make no contract not authorized by its charter. Its rights to act as a corporation are only preserved to it so long as it obeys the laws of its creation. There is a reserve[d] right in the legislature to investigate its contracts and find out whether it has exceeded its powers. It would be a strange anomaly to hold that a state, having chartered a corporation to make use of certain franchises, could not, in the exercise of sovereignty, inquire how these franchises had been employed, and whether they had been abused, and demand the production of the corporate books and papers for that purpose. The defense amounts to this, that an officer of the corporation which is charged with a criminal violation of the statute may plead the criminality of such corporation as a refusal to produce its books. To state this proposition is to answer it. While an individual may lawfully refuse to answer incriminating questions unless protected by an immunity statute, it does not follow that a corporation vested with special privileges and franchises may refuse to show its hand when charged with an abuse of such privileges. (Wilson v. United States, 55 Law Ed., 771, 780.)

WHEREFORE, the petition is GRANTED. Petitioner is DECLARED a private domestic corporation subject to the jurisdiction of the Securities and Exchange Commission. The respondents are ENJOINED from investigating, examining and auditing the petitioner's fiscal and financial affairs.