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  Today is Thursday, March 02, 2017 Custom SearchRepublic of the Philippines SUPREME COURT ManilaEN BANC G.R. No. L-14606 April 28, 1960LAGUNA TRANSPORTATION CO., INC.,  petitioner-appellant, vs. SOCIAL SECURITY SYSTEM,  respondent-appellee. Yatco & Yatco for appellant.Solicitor General Edilberto Barot, Solicitor Camilo Quiason and Crispin Baizas for appellee. BARRERA, J  .: On January 24, 1958, petitioner Laguna Transportation Co., Inc. filed with the Court of First Instance of Lagunapetition 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 dismissaldue to petitioner's failure to exhaust administrative remedies, and for a declaration that petitioner is covered bysaid 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 toexhaust administrative remedies. When the case was called for preliminary hearing, it was postponed byagreement 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 Systemand to remit the premiums due from all the employees of the petitioner and the contribution of the latter tothe System beginning the month of September, 1957;4. That sometime in 1949, the Biñan Transportation Co., a corporation duly registered with the Securitiesand Exchange Commission, sold part of the lines and equipment it operates to Gonzalo Mercado, ArtemioMercado, Florentino Mata and Dominador Vera Cruz;5. That after the sale, the said vendees formed an unregistered partnership under the name of LagunaTransportation Company which continued to operate the lines and equipment bought from the BiñanTransportation Company, in addition to new lines which it was able to secure from the Public ServiceCommission;6. That the srcinal partners forming the Laguna Transportation Company, with the addition of two newmembers, organized a corporation known as the Laguna Transportation Company, Inc., which wasregistered with the Securities and Exchange Commission on June 20, 1956, and which corporation is theplaintiff now in this case;7. That the incorporators of the Laguna Transportation Company, Inc., and their corresponding shares areas follows:Name No. of Shares AmountSubscribed AmountPaid  Dominador Cruz 333 shares P33,300.00 P9,160.81Maura Mendoza 333 shares 33,300.00 9,160.81Gonzalo Mercado 66 shares 6,600.00 1,822.49 Artemio Mercado 94 shares 9,400.00 2,565.90Florentino Mata 110 shares 11,000.00 3,021.54Sabina Borja 64 shares 6,400.00 1,750.001,000 shares P100,000.00 P27,481.558. 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 supplementalInformation Sheet . . .;10. That prior to November 11, 1957, plaintiff requested for exemption from coverage by the System on theground that it started operation only on June 20, 1956, when it was registered with the Securities andExchange Commission but on November 11, 1957, the Social Security System notified plaintiff that it wascovered;11. On November 14, 1957, plaintiff through counsel sent a letter to the Social Security System contestingthe claim of the System that plaintiff was covered, . . .12. On November 27, 1957, Carlos Sanchez, Manager of the Production Department of the respondentSystem for and in behalf of the Acting Administrator, informed plaintiff that plaintiff's business has been inactual operation for at least two years, . . .On the basis of the foregoing stipulation of facts, the court, on August 15, 1958, rendered a decision thedispositive part of which reads: Wherefore , the Court is of the opinion and so declares that the petitioner was an employer engaged inbusiness 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 tocompulsory 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 commoncarrier 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 employeesbetween the ages of sixteen and sixty years, inclusive, if they have been for at least six months in theservice 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 twoyears . . . . (Italics supplied.).It is not disputed that the Laguna Transportation Company, an unregistered partnership composed of GonzaloMercado, Artemio Mercado, Florentina Mata, and Dominador Vera Cruz, commenced the operation of itsbusiness as a common carrier on April 1, 1949. These 4 srcinal partners, with 2 others (Maura Mendoza andSabina Borja) later converted the partnership into a corporate entity, by registering its articles of incorporation withthe 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, usingthe same lines and equipment. There was, in effect, only a change in the form of the organization of the entityengaged 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, 1954and 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, itmust be considered to have been in operation only on said date. While it is true that a corporation once formed isconferred a juridical personality separate and district 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 toa point beyond its reasons and policy, and when invoked in support of an end subversive of this policy, will bedisregarded 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 lookedupon as a legal entity as a general rule, and until sufficient reason to the contrary appears; but, when themotion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, thelaw 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 wasenacted. 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, ithas not been in operation for a period of at least 2 years. the door to fraudulent circumvention of the statutewould, thereby, be opened.Moreover, petitioner admitted that as an employer engaged in the business of a common carrier, its operationcommenced on April 1, 1949 while it was a partnership and continued by the corporation upon its formation onJune 20, 1956. Unlike in the conveyance made by the Biñan Transportation Company to the partners GonzaloMercado, Artemio Mercado, Florentino Mata, and Dominador Vera Cruz, no mention whatsoever is made either inthe pleadings or in the stipulation of facts that the lines and equipment of the unregistered partnership had beensold and transferred to the corporation, petitioner herein. This omission, to our mind, clearly indicates that therewas, in fact, no transfer of interest, but a mere change in the form of the organization of the employer engaged inthe transportation business, i.e., from an unregistered partnership to that of a corporation. As a rule, courts willlook to the substance and not to the form.(Colonial Trust Co. vs . Montolo Eric Works, 172 Fed. 310; MetropolitanHolding Co. vs . Snyder, 79 F. 2d 263, 103 A.L.R. 612; Arnold vs. Willits, et al., 44 Phil., 634; 1 Fletcher CyclopediaCorporations [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 thepurpose of continuing its business, in payment for which corporate capital stock was issued, such corporation ispresumed to have assumed partnership debts, and is  prima facie liable therefor. (Stowell vs. Garden City NewsCorps., 57 P. 2d 12; Chicago Smelting & Refining Corp. vs. Sullivan, 246 IU, App. 538; Ball vs. Bross., 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 ona new coat, or taken on a corporate cloak, and the corporation is a mere continuation of the partnership. (8Fletcher 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 againstpetitioner-appellant. So ordered. Paras, C. J., Bengzon, Montemayor, Bautista Angelo, Labrador, Concepcion and Gutierrez, David, JJ.,  concur. The Lawphil Project - Arellano Law Foundation
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