G.R. No. L-14606. April 28, 1960
LAGUNA TRANSPORTATION CO., INC., PETITIONER AND APPELLANT, VS. SOCIAL SECURITY SYSTEM, RESPONDENT AND APPELLEE.
BARRERA, J.:
filed with the Court of First Instance of Laguna a petition praying
that an order be issued by the court declaring that it is not bound to
register as a member of respondent Social Security System and,
therefore, not obliged to pay to the latter the contributions required
under the Social Security Act.[1]
To this petition, respondent filed its answer on February 11, 1958
praying for its dismissal due to petitioner’s failure to exhaust
administrative remedies, and for a declaration that petitioner is
covered by said Act, since the latter’s business has been in operation
for at least 2 years prior to September 1, 1957.
On February 11, 1958, respondent filed a motion for preliminary
hearing on its defense that petitioner failed to exhaust administrative
remedies. When the case was called for preliminary hearing, it was
postponed by agreement of the parties. Subsequently, it was set for
trial. On the date of the trial, the parties agreed to present, in lieu
of any other evidence, a stipulation of facts, which they did on May
27, 1958, as follows:
“1. That petitioner is a domestic corporation duly
organized and existing under the laws of the Philippines, with
principal place of business at Biñan, Laguna;“2. That
respondent is an agency created under Republic Act No. 1161, as amended
by Republic Act No. 1792, with the principal place of business at the
new GSIS Bldg., corner Arroceros and Concepcion Streets, Manila, where
it may be served with summons;“3. That respondent has served
notice upon the petitioner requiring it to register as member of the
System and to remit the premiums due from all the employees of the
petitioner and the, contribution of the latter to the System beginning
the month of September, 1957;“4. That sometime in 1949, the
Biñan Transportation Co., a corporation duly registered with the
Securities and Exchange Commission, sold part of the lines and
equipment it operates to Gonzalo Mercado, Artemio Mercado, Florentino
Mata and Dominador Vera Cruz;“5. That after the sale, the
said vendees formed an unregistered partnership under the name of
Laguna Transportation Company which continued to operate the lines and
equipment bought from the Biñan Transportation Company, in addition to
new lines which it was able to secure from the Public Service
Commission;“6. That the original partners forming the.
Laguna Transportation Company, with the addition of two new members,
organized a corporation known as the Laguna Transportation Company,
Inc., which was registered with the Securities and Exchange Commission
on June 20, 1956, and which corporation is the plaintiff now in this
case;“7. That the incorporators of the Laguna Transportation Company, Inc., and their corresponding shares are as follows:
Subscribed
Paid“Dominador Cruz ……. Maura Mendoza ……… Gonzalo Mercado ……. Artemio Mercado …….. Florentino Mata ………. Sabina Borja …………… “8. That the corporation continued the same transportation business of the unregistered partnership;
“9. That the plaintiff filed on August 30, 1957 an Employee’s Data Record * * * and a supplemental Information Sheet * * *;
“10.
That prior to November 11, 1957, plaintiff requested for exemption from
coverage by the System on the ground that it started operation only on
June 20, 1956, when it was registered with the Securities and Exchange
Commission but on November 11, 1957, the Social Security System
notified plaintiff that it was covered;“11. On November 14,
1957, plaintiff through counsel sent a letter to the Social Security
System contesting the claim of the System that plaintiff was covered, *
* *;“12. On November 27, 1957, Carlos Sanchez, Manager of
the Production Department of the respondent System for and in behalf of
the Acting Administrator, informed plaintiff that plaintiff’s business
has been in actual operation for at least two years, * * *;”
On the basis of the foregoing stipulation of facts, the court, on
August 15, 1958, rendered a decision the dispositive part of which,
reads:
“Wherefore, the Court is of the opinion and
so declares that the petitioner was an employer engaged in business as
common carrier which had been in operation for at least two years prior
to the enactment of Republic Act No. 1161, as amended by Republic Act
1792 and by virtue thereof, it was subject to compulsory coverage under
said law. * * *.”
From this decision, petitioner appealed directly to us, raising purely questions of law.
Petitioner claims that the lower court erred in holding that it is
an employer engaged in business as a common carrier which had been in
operation for at least 2 years prior to the enactment of the Social
Security Act and, therefore, subject to compulsory coverage thereunder.
Section 9 of the Social Security Act, in part, provides:
“Sec. 9. Compulsory Coverage.—Coverage in
the System shall be compulsory upon all employees between the ages of
sixteen and sixty years, inclusive, if they have been for at least six
months in the service of an employer who is a member of the System. Provided, That the
Commission may not compel any employer to become a member of the System
unless he shall have been in operation for at least two years * * *.” (Italics supplied.)
It is not disputed that the Laguna Transportation Company, an
unregistered partnership composed of Gonzalo Mercado, Artemio Mereado,
Florentina Mata, and Dominador Vera Cruz, commenced the operation of
its business as a common carrier on April 1, 1949. These 4 original
partners, with 2 others (Maura Mendoza and Sabina Borja) later
converted the partnership into a corporate entity, by registering its
articles of incorporation with the Securities and Exchange Commission
on June 20, 1956. The firm name “Laguna Transportation Company” was not
altered, except with the addition of the word “Inc.” to indicate that
petitioner was duly incorporated under existing laws. The corporation
continued the same transportation business of the unregistered
partnership, using the same lines and equipment. There was, in effect,
only a change in the form of the organization of the entity engaged in
the business of transportation of passengers. Hence, said entity as an
employer engaged in business, was already in operation for at least 3
years prior to the enactment of the Social Security Act on June 18,
1954 and for at least two years prior to the passage of the amendatory
act on June 21, 1957. Petitioner argues that, since it was registered
as a corporation with the Securities and Exchange Commission only on
June 20, 1956, it must be considered to have been in operation only on
said date. While it is true that a corporation once formed is conferred
a juridical personality separate and distinct from the persons
composing it, it is but a legal fiction introduced for purposes of
convenience and to subserve the ends of justice. The concept cannot be
extended to a point beyond its reasons and policy, and when invoked in
support of an end subversive of this policy, will be disregarded by the
courts. (13 Am. Jur. 160.)
“If any general rule can be laid down, in the
present state of authority, it is that a corporation will be looked
upon as a legal entity as a general rule, and until sufficient reason
to the contrary appears; but, when the notion of legal entity is used
to defeat public convenience, justify wrong, protect fraud, or defend
crime, the law will regard the corporation as an association of
persons.” (1 Fletcher Cyclopedia Corporations [Perm. Ed.] 135-136; U.S.
Milwaukee Refrigeration Transit Co., 142 Fed. 247, cited in Koppel
Philippines, Inc. vs. Yatco, 43 Off. Gaz., 4604.)
To adopt petitioner’s argument would defeat, rather than promote,
the ends for which the Social Security Act was enacted. An employer
could easily circumvent the statute by simply changing his form of
organization every other year, and then claim exemption from
contribution to the System as required, on the theory that, as a new
entity, it has not been in operation for a period of at least 2 years.
The door to fraudulent circumvention of the statute would, thereby, be
opened.
Moreover, petitioner admitted that as an employer engaged in the
business of a common carrier, its operation commenced on April 1, 1949
while it was a partnership and continued by the corporation upon its
formation on June 20, 1956. Unlike in the conveyance made by the Biñan
Transportation Company to the partners Gonzalo Mercado, Artemio
Mercado, Florentino Mata, and Dominador Vera Cruz, no mention
whatsoever is made either in the pleadings or in the stipulation of
facts that the lines and equipment of the unregistered partnership had
been sold and transferred to the corporation, petitioner herein. This
omission, to our mind, clearly indicates that there was, in fact, no
transfer of interest, but a mere change in the form of the organization
of the employer engaged in the transportation business, i.e., from an
unregistered partnership to that of a corporation. As a rule, courts
will look to the substance and not to the form. (Colonial Trust Co. vs. Montollo Eric Works, 172 Fed. 310; Metropolitan Holding Co. vs. Snyder, 79 F. 2d 263, 103 A.L.R. 612; Arnold vs. Willits, et al., 44 Phil., 634; 1 Fletcher Cyclopedia Corporations [Perm. Ed.] 139-140.)
Finally, the weight of authority supports the view that where a
corporation was formed by, and consisted of members of a partnership
whose business and property was conveyed and transferred to the
corporation for the purpose of continuing its business, in payment for
which corporate capital stock was issued, such corporation is presumed
to have assumed partnership debts, and is prima facie liable therefor. (Stowell vs. Garden City News Corps., 57 P. 2d 12; Chicago Smelting & Refining Corp. vs. Sullivan, 246 IU, App. 538; Ball vs.
Bros., 83 June 19, N.Y. Supp. 692.) The reason for the rule is that the
members of the partnership may be said to have simply put on a new
coat, or taken on a corporate cloak, and the corporation is a mere
continuation of the partnership. (8 Fletcher Cyclopedia Corporations
[Perm. Ed.] 402-411.)
Wherefore, finding no error in the judgment of the court a quo, the same is hereby affirmed, with costs against petitioner-appellant. So ordered.
Paras, C. J., Bengzon, Montemayor, Bautista Angelo, Labrador, Concepcion and Gutierrez David, JJ., concur.
Padilla and Endencia, JJ., on leave, took no part.
[1] Rep. Act No. 1161, as amended by Rep. Act No. 1792, which took effect on June 21, 1957.