POWERS OF CORPORATION CASES FULL TEXT/DIGEST

1.Philippine National Bank vs Court of First Instance of Pasig, Rizal Branch XXI
G.R. No. 63201 May 27, 1992

Facts: Private respondents are the registered owners of three parcels of land in Pasig, Metro Manila covered by OCT No. 853, TCT Nos. 32843 and 32897 of the Registry of Deeds of Rizal. On March 1, 1954, private respondents entered into a contract of lease with Philippine Blooming Mills, Co., Inc., (PBM) whereby the latter shall lease the aforementioned parcels of land as factory site.
PBM was duly organized and incorporated on January 19, 1952 with a corporate term of twenty-five (25) years. This leasehold right of PBM covering the parcels of land was duly annotated at the back of the above stated certificates of title as Entry No. 9367/T-No. 32843.
The contract of lease provides that the term of the lease is for twenty years beginning from the date of the contract and “is extendable for another term of twenty years at the option of the LESSEE should its term of existence be extended in accordance with law.”.
The contract also states that the lessee agrees to “use the property as factory site and for that purpose to construct whatever buildings or improvements may be necessary or convenient and/or . . . for any purpose it may deem fit; and before the termination of the lease to remove all such buildings and improvements. In accordance with the contract, PBM introduced on the land, buildings, machineries and other useful improvements.
These constructions and improvements were registered with the Registry of Deeds of Rizal and annotated at the back of the respondents’ certificates of title as Entry No. 85213/T-No. 43338. On October 11, 1963, PBM executed in favor of Philippine National Bank (PNB), petitioner herein, a deed of assignment, conveying and transferring all its rights and interests under the contract of lease which it executed with private respondents.
The assignment was for and in consideration of the loans granted by PNB to PBM. The deed of assignment was registered and annotated at the back of the private respondents’ certificates of title, PBM executed in favor of PNB a real estate mortgage for a loan of P100,000.00 and an addendum to real estate mortgage for another loan of P1,590,000.00, covering all the improvements constructed by PBM on the leased premises. These mortgages were registered and annotated at the back of respondents’ certificates.
On October 7, 1981, private respondents filed a motion in the same proceedings which was given a different case number to wit, LRC Case No. R-2744, because of the payment of filing fees for the motion. The motion sought to cancel the annotations on respondents’ certificates of title pertaining to the assignment by PBM to PNB of the former’s leasehold rights, inclusion of improvements and the real estate mortgages made by PBM in favor of PNB, on the ground that the contract of lease entered into between PBM and respondents-movants had already expired by the failure of PBM and/or its assignee to exercise the option to renew the second 20-year lease commencing on March 1, 1974 and also by the failure of PBM to extend its corporate existence in accordance with law. The motion also states that since PBM failed to remove its improvements on the leased premises before the expiration of the contract of lease, such improvements shall accrue to respondents as owners of the land.

Issue: Whether or not the corporate life of PBM was extended by the continuance of the lease and subsequent registration of the title to the improvements under its name.

Held: No. The contract of lease expressly provides that the term of the lease shall be twenty years from the execution of the contract but can be extended for another period of twenty years at the option of the lessee should the corporate term be extended in accordance with law.
Clearly, the option of the lessee to extend the lease for another period of twenty years can be exercised only if the lessee as corporation renews or extends its corporate term of existence in accordance with the Corporation Code which is the applicable law.
Contracts are to be interpreted according to their literal meaning and should not be interpreted beyond their obvious intendment. Thus, in the instant case, the initial term of the contract of lease which commenced on March 1, 1954 ended on March 1, 1974. PBM as lessee continued to occupy the leased premises beyond that date with the acquiescence and consent of the respondents as lessor. Records show however, that PBM as a corporation had a corporate life of only twenty-five (25) years which ended an January 19, 1977. It should be noted however that PBM allowed its corporate term to expire without complying with the requirements provided by law for the extension of its corporate term of existence.
Section 11 of Corporation Code provides that a corporation shall exist for a period not exceeding fifty (50) years from the date of incorporation unless sooner dissolved or unless said period is extended. Upon the expiration of the period fixed in the articles of incorporation in the absence of compliance with the legal requisites for the extension of the period, the corporation ceases to exist and is dissolved ipso facto.
When the period of corporate life expires, the corporation ceases to be a body corporate for the purpose of continuing the business for which it was organized. But it shall nevertheless be continued as a body corporate for three years after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it and enabling it gradually to settle and close its affairs, to dispose of and convey its property and to divide its assets. There is no need for the institution of a proceeding for quo warranto to determine the time or date of the dissolution of a corporation because the period of corporate existence is provided in the articles of incorporation. When such period expires and without any extension having been made pursuant to law, the corporation is dissolved automatically insofar as the continuation of its business is concerned. The quo warranto proceeding under Rule 66 of the Rules of Court, as amended, may be instituted by the Solicitor General only for the involuntary dissolution of a corporation on the following grounds: a) when the corporation has offended against a provision of an Act for its creation or renewal; b) when it has forfeited its privileges and franchises by non-user; c) when it has committed or omitted an act which amounts to a surrender of its corporate rights, privileges or franchises; d) when it has mis-used a right, privilege or franchise conferred upon it by law, or when it has exercised a right, privilege or franchise in contravention of law. Hence, there is no need for the SEC to make an involuntary dissolution of a corporation whose corporate term had ended because its articles of incorporation had in effect expired by its own limitation.
Considering the foregoing in relation to the contract of lease between the parties herein, when PBM’s corporate life ended on January 19, 1977 and its 3-year period for winding up and liquidation expired on January 19, 1980, the option of extending the lease was likewise terminated on January 19, 1977 because PBM failed to renew or extend its corporate life in accordance with law. From then on, the respondents can exercise their right to terminate the lease pursuant to the stipulations in the contract.
G.R. No. 165887: June 7, 2011

MAJORITY STOCKHOLDERS OF RUBY INDUSTRIAL CORPORATION, Petitioner, v. MIGUEL LIM et al., Respondents.

VILLARAMA, JR., J.:

FACTS: Ruby Industrial Corporation (RUBY) is a domestic corporation engaged in glass manufacturing. Reeling from severe liquidity problems beginning in 1980, RUBY filed on December 13, 1983a petition for suspension of payments with the Securities and Exchange Commission (SEC) docketed as SEC Case No. 2556.
On December 20, 1983, the SEC issued an order declaring RUBY under suspension of payments and enjoining the disposition of its properties pending hearing of the petition, except insofar as necessary in its ordinary operations, and making payments outside of the necessary or legitimate expenses of its business.

On August 10, 1984, the SEC Hearing Panel created the management committee (MANCOM) for RUBY, composed of representatives from Allied Leasing and Finance Corporation (ALFC), Philippine Bank of Communications (PBCOM), China Banking Corporation (China Bank), Pilipinas Shell Petroleum Corporation (Pilipinas Shell), and RUBY represented by Mr. Yu Kim Giang.
The MANCOM was tasked to perform the following functions: (1) undertake the management of RUBY; (2) take custody and control over all existing assets and liabilities of RUBY; (3) evaluate RUBYs existing assets and liabilities, earnings and operations; (4) determine the best way to salvage and protect the interest of its investors and creditors; and (5) study, review and evaluate the proposed rehabilitation plan for RUBY.

Subsequently, two (2) rehabilitation plans were submitted to the SEC: the BENHAR/RUBY Rehabilitation Plan of the majority stockholders led by Yu Kim Giang, and the Alternative Plan of the minority stockholders represented by Miguel Lim (Lim).

Both plans were endorsed by the SEC to the MANCOM for evaluation.

On April 26, 1991, over ninety percent (90%) of RUBYs creditors objected to the Revised BENHAR/RUBY Plan and the creation of a new management committee.
Instead, they endorsed the minority stockholders Alternative Plan. At the hearing of the petition for the creation of a new management committee, three (3) members of the original management committee (Lim, ALFC and Pilipinas Shell) opposed the Revised BENHAR/RUBY Plan on grounds that:(1) it would legitimize the entry of BENHAR, a total stranger, to RUBY as BENHAR would become the biggest creditor of RUBY;(2) it would put RUBYs assets beyond the reach of the unsecured creditors and the minority stockholders; and (3) it was not approved by RUBYs stockholders in a meeting called for the purpose.

Notwithstanding the objections of 90% of RUBYs creditors and three members of the MANCOM, the SEC Hearing Panel approved on September 18, 1991the Revised BENHAR/RUBY Plan and dissolved the existing management committee.
It also created a new management committee and appointed BENHAR as one of its members. In addition to the powers originally conferred to the management committee under Presidential Decree (P.D.) No. 902-A, the new management committee was tasked to oversee the implementation by the Board of Directors of the revised rehabilitation plan for RUBY.

ISSUE: Whether the minoritys pre-emptive rights were violated

HELD: Yes. COMMERCIAL LAW: Corporation Law, Pre-emptive right

Yes, THERE WAS BLATANT VIOLATION/.
(TAKE NOTE OF THIS DOCTRINE)
Pre-emptive right under Sec. 39 of the Corporation Code refers to the right of a stockholder of a stock corporation to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings. The right may be restricted or denied under the articles of incorporation, and subject to certain exceptions and limitations.The stockholder must be given a reasonable time within which to exercise their preemptive rights. Upon the expiration of said period, any stockholder who has not exercised such right will be deemed to have waived it.

The validity of issuance of additional shares may be questioned if done in breach of trust by the controlling stockholders. Thus, even if the pre-emptive right does not exist, either because the issue comes within the exceptions in Section 39 or because it is denied or limited in the articles of incorporation, an issue of shares may still be objectionable if the directors acted in breach of trust and their primary purpose is to perpetuate or shift control of the corporation, or to “freeze out” the minority interest.
In this case, the following relevant observations should have signaled greater circumspection on the part of the SEC — upon the third and last remand to it pursuant to our January 20, 1998 decision — to demand transparency and accountability from the majority stockholders, in view of the illegal assignments and objectionable features of the Revised BENHAR/RUBY Plan, as found by the CA and as affirmed by this Court:

There can be no gainsaying the well-established rule in corporate practice and procedure that the will of the majority shall govern in all matters within the limits of the act of incorporation and lawfully enacted by-laws not proscribed by law.
It is, however, equally true that other stockholders are afforded the right to intervene especially during critical periods in the life of a corporation like reorganization, or in this case, suspension of payments, more so, when the majority seek to impose their will and through fraudulent means, attempt to siphon off Rubys valuable assets to the great prejudice of Ruby itself, as well as the minority stockholders and the unsecured creditors.

Certainly, the minority stockholders and the unsecured creditors are given some measure of protection by the law from the abuses and impositions of the majority, more so in this case, considering the give-away signs of private respondents perfidy strewn all over the factual landscape.
Indeed, equity cannot deprive the minority of a remedy against the abuses of the majority, and the present action has been instituted precisely for the purpose of protecting the true and legitimate interests of Ruby against the Majority Stockholders. On this score, the Supreme Court, has ruled that:

“Generally speaking, the voice of the majority of the stockholders is the law of the corporation, but there are exceptions to this rule.There must necessarily be a limit upon the power of the majority. Without such a limit the will of the majority will be absolute and irresistible and might easily degenerate into absolute tyranny.x x x” (Additional emphasis supplied.)

Lamentably, the SEC refused to heed the plea of the minority stockholders and MANCOM for the SEC to order RUBY to commence liquidation proceedings, which is allowed under Sec. 4-9 of the Rules on Corporate Recovery.
Under the circumstances, liquidation was the only hope of the minority stockholders for effecting an orderly and equitable settlement of RUBYs obligations, and compelling the majority stockholders to account for all funds, properties and documents in their possession, and make full disclosure on the nullified credit assignments.
Oblivious to these pending incidents so crucial to the protection of the interest of the majority of creditors and minority shareholders, the SEC simply stated that in the interim, RUBYs corporate term was validly extended, as if such extension would provide the solution to RUBYs myriad problems.

Extension of corporate term requires the vote of 2/3 of the outstanding capital stock in a stockholders meeting called for the purpose. The actual percentage of shareholdings in RUBY as of September 3, 1996 — when the majority stockholders allegedly ratified the board resolution approving the extension of RUBY’s corporate life to another 25 years was seriously disputed by the minority stockholders, and we find the evidence of compliance with the notice and quorum requirements submitted by the majority stockholders insufficient and doubtful. Consequently, the SEC had no basis for its ruling denying the motion of the minority stockholders to declare as without force and effect the extension of RUBY’s corporate existence.
DENIED.
MAGALLANES WATERCRAFT ASSOCIATION, INC., AS REPRESENTED BY ITS BOARD OF TRUSTEES, NAMELY: EDILBERTO M. BAJAO, GERARDO O. PLAZA, ISABELITA MULIG, EDNA ABEJAY, MARCELO DONAN, NENITA O. VARQUEZ, MERLYN ALVAREZ, EDNA EXCLAMADOR, AND CESAR MONSON, Petitioner, v. MARGARITO C. AUGUIS AND DIOSCORO C. BASNIG, Respondents.
MENDOZA, J.:
This petition for review on certiorari, filed under Rule 45 of the Rules of Court, seeks to reverse and set aside the March 14, 2013 Decision1 and the January 17, 2014 Resolution2 of the Court of Appeals (CA) in CA-G.R. CV No. 01170-MIN, which affirmed with modification the January 11, 2007 Decision of the Regional Trial Court, Branch 33, Butuan City (RTC) in SEC Case No. 11-2004 (Civil Case No. 5420).

Petitioner Magallanes Watercraft Association, Inc. (MWAI) is a local association of motorized banca owners and operators ferrying cargoes and passengers from Magallanes, Agusan del Norte, to Butuan City and back. Respondents Margarito C. Auguis (Auguis) and Dioscoro C. Basnig (Basnig) were members and officers of MWAI – vice-president and secretary, respectively.3

On December 5, 2003, the Board of Trustees (Board) of MWAI passed Resolution No. 1, Series of 2003, and thereafter issued Memorandum No. 001 suspending the rights and privileges of Auguis and Basnig as members of the association for thirty (30) days for their refusal to pay their membership dues and berthing fees because of their pending oral complaint and demand for financial audit of the association funds. Auguis had an accumulated unpaid obligation of P4,059.00 while Basnig had P7,552.00.4

In spite of the suspension of their privileges as members, Auguis and Basnig still failed to settle their obligations with MWAI. For said reason, the latter issued Memorandum No. 002, Series of 2004, dated January 8, 2004, suspending their rights and privileges for another thirty (30) days.5

On February 6, 2004y respondents filed an action for damages and attorney’s fees with a prayer for the issuance of a writ of preliminary injunction before the RTC. In its January 11, 2007 decision, the trial court ordered Auguis and Basnig to pay their unpaid accounts. It, nonetheless, required MWAI to pay them actual damages and attorney’s fees.6

Aggrieved, MWAI appealed before the CA.

The CA Ruling

In its March 14, 2013 decision, the CA affirmed with modification the RTC decision. According to the appellate court, the RTC correctly held that MWAI was guilty of an ultra vires act. The CA noted that neither MWAI’s Articles of Incorporation nor its By-Laws7 contained any provision that expressly and/or impliedly vested power or authority upon its Board to recommend the imposition of disciplinary sanctions on its delinquent officers and/or members. It further noted that MWAI lacked the authority to suspend the right of the respondents to operate their bancas, which was granted through a Certificate of Public Convenience. The appellate court pointed out that the Maritime Industry Authority (MARINA) expressly reminded MWAI that it was the sole government agency which had the authority to suspend, cancel and’or revoke the franchise of the two. The CA explained that the suspension of their berthing privileges resulted in the failure of the latter to operate their bancas—contrary to the express reminder of the MARINA. Hence, the CA concluded that MWAI acted beyond the scope of its powers when it suspended the rights of Auguis and Basnig as members of MWAI to berth on the seaport of Magallanes and operate their bancas.

It also ruled that MWAI was bound to indemnify respondents because they suffered financial losses as a result of the illegal suspension of their berthing privileges and their right to operate their bancas. The appellate court agreed with the RTC that MWAI was liable for damages in favor of the respondents. The CA, however, deleted the award of actual damages for their failure to adduce evidence to prove the claimed loss of actual income. It, nonetheless, awarded them temperate damages in recognition of the pecuniary loss they suffered. Moreover, the CA saw it fit to grant a reduced amount of attorney’s fees because Auguis and Basnig were compelled to litigate or incur expenses to protect their interests. The dispositive portion of the CA decision reads:chanRoblesvirtualLawlibrary
WHEREFORE, for lack of merit, the present appeal is hereby DISMISSED. The assailed Decision dated 11 January 2007 of the Regional Trial Court (RTC), 10th Judicial Region, Branch 33 of Libertad, Butuan City in SEC Case No. 11-2004 (Civil Case No. 5420) is AFFIRMED with MODIFICATION as follows:
1. DELETING the award for actual damages. In lieu thereof, temperate damages in the amount of P40,000.00 and P20,000.00 are respectively awarded to appellees Dioscoro C. Basnig and Margarito C. Auguis;
2. IMPOSING legal interest at the rate of 12% per annum from the finality of this decision until its full satisfaction; and
3. REDUCING the attorney’s fees to P30,000.00.
SO ORDERED.8cralawred
MWAI moved for reconsideration, but its motion was denied by the CA in its January 17, 2014 resolution.

Undaunted, it filed this present petition with the sole
ASSIGNMENT OF ERROR

THE HONORABLE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR WHEN IT AWARDED TEMPERATE DAMAGES WITH A LEGAL RATE OF INTEREST OF 12% PER ANNUM FROM THE FINALITY OF THE DECISION UNTIL FULLY PAID AS WELL AS REDUCED ATTORNEY’S FEES IN FAVOR OF THE RESPONDENTS.9cralawred
MWAI insists that the award of temperate damages and attorney’s fees was baseless. It faults the CA in finding that it was guilty of an ultra vires act when it suspended respondents’ berthing rights because its by-laws obliged Auguis and Basnig as members to: (1) obey and comply with the by¬laws, rules and regulations that may be promulgated by the association from time to time; and (2) to pay its membership dues and other assessments. Thus, MWAI argues that respondents cannot claim either actual or temperate damages because the suspension of their rights and privileges was anchored on its by-laws.

Petitioner also contends that respondents are not entitled to attorney’s fees either because the award of attorney’s fees is the exception rather than the rule. It points out that it was through respondents’ own fault that their rights were suspended. Hence, they cannot be considered as having been compelled to litigate.

In their Comment,10 dated July 16, 2015, respondents countered that they were entitled to temperate damages as the suspension of their operations was arbitrary, baseless and contrary to law and public policy. They claimed that attorney’s fees were rightfully awarded because they were compelled to litigate as a consequence of MWAI’s ultra vires act.

In its Reply to the Comment,11 dated January 5, 2016, MWAI reiterated the arguments it presented in its petition for review.
The Court’s Ruling

The petition is meritorious.

Corporate powers include implied and incidental powers

Central to the resolution of the propriety of the award of temperate damages and attorney’s fees is the contested authority of MWAI to suspend rights and privileges of its members for the latter’s failure to pay their obligations. If the suspension of rights and privileges of members is not among the corporate powers granted to MWAI, then the same is an ultra vires act which exposes MWAI to possible liability.

Section 45 of the Corporation Code provides for the powers possessed by a corporation, to wit:chanRoblesvirtualLawlibrary
Sec. 45. Ultra vires acts of corporations. – No corporation under this Code shall possess or exercise any corporate powers except those conferred by this Code or by its articles of incorporation and except such as are necessary or incidental to the exercise of the powers so conferred.cralawred
From a reading of the said provision, it is clear that a corporation has: (1) express powers, which are bestowed upon by law or its articles of incorporation; and (2) necessary or incidental powers to the exercise of those expressly conferred. An act which cannot fall under a corporation’s express or necessary or incidental powers is an ultra vires act. In University of Mindanao, Inc. v. Bangko Sentral ng Pilipinas12] (University of Mindanao), the Court explained:chanRoblesvirtualLawlibrary
Corporations are artificial entities granted legal personalities upon their creation by their incorporators in accordance with law. Unlike natural persons, they have no inherent powers. Third persons dealing with corporations cannot assume that corporations have powers. It is up to those persons dealing with corporations to determine their competence as expressly defined by the law and their articles of incorporation.

A corporation may exercise its powers only within those definitions. Corporate acts that are outside those express definitions under the law or articles of incorporation or those “committed outside the object for which a corporation is created” are ultra vires.

x x x x
[Emphasis supplied]
The CA concluded that the suspension by MWAI of respondents’ rights as members for their failure to settle membership dues was an ultra vires act as MWAFs articles of incorporation and by-laws were bereft of any provision that expressly and impliedly vested power or authority upon its Board to recommend the imposition of disciplinary actions on its delinquent officers and/or members.

The Court disagrees.

Under Section 3(a) and Section 3(c) Article V of MWAI’s By-Laws, its members are bound “[t]o obey and comply with the by-laws, rules and regulations that may be promulgated by the association from time to time” and “[t]o pay membership dues and other assessments of the association.”13 Thus, the respondents were obligated to pay the membership dues of which they were delinquent. MWAI could not be faulted in suspending the rights and privileges of its delinquent members.

The fact alone that neither the articles of incorporation nor the by¬laws of MWAI granted its Board the authority to discipline members does not make the suspension of the rights and privileges of the respondents ultra vires. In National Power Corporation v. Vera,14 the Court stressed that an act might be considered within corporate powers, even if it was not among the express powers, if the same served the corporate ends.

For if that act is one which is lawful in itself and not otherwise prohibited, and is done for the purpose of serving corporate ends, and reasonably contributes to the promotion of those ends in a substantial and not in a remote and fanciful sense, it may be fairly considered within the corporation’s charter powers.

This Court is guided by jurisprudence in the application of the above standard. In the 1963 case of Republic of the Philippines v. Acoje Mining Company, Inc. [G.R. No. L-18062, February 28, 1963, 7 SCRA 361] the Court affirmed the rule that a corporation is not restricted to the exercise of powers expressly conferred upon it by its charter, but has the power to do what is reasonably necessary or proper to promote the interest or welfare of the corporation.
[Emphasis supplied]
In University of Mindanao, the Court wrote that corporations were not limited to the express powers enumerated in their charters, but might also perform powers necessary or incidental thereto, to wit:chanRoblesvirtualLawlibrary
A corporation may exercise its powers only within those definitions. Corporate acts that are outside those express definitions under the law or articles of incorporation or those “committed outside the object for which a corporation is created” are ultra vires.

The only exception to this rule is when acts are necessary and incidental to carry out a corporation’s purposes, and to the exercise of powers conferred by the Corporation Code and under a corporation’s articles of incorporation. xxx

x x x x

Montelibano, et al. v. Bacolod-Murcia Milling Co., Inc. stated the test to determine if a corporate act is in accordance with its purposes:chanRoblesvirtualLawlibrary
It is a question, therefore, in each case, of the logical relation of the act to the corporate purpose expressed in the charter. If that act is one which is lawful in itself, and not otherwise prohibited, is done for the purpose of serving corporate ends, and is reasonably tributary to the promotion of those ends, in a substantial, and not in a remote and fanciful, sense, it may fairly be considered within charter powers. The test to be applied is whether the act in question is in direct and immediate furtherance of the corporation’s business, fairly incident to the express powers and reasonably necessary to their exercise. If so, the corporation has the power to do it; otherwise, not.cralawred
[Emphases Supplied; citations omitted]
Based on the foregoing, MWAI can properly impose sanctions on Auguis and Basnig for being delinquent members considering that the payment of membership dues enables MWAI to discharge its duties and functions enumerated under its charter. Moreover, respondents were obligated by the by-laws of the association to pay said dues. The suspension of their rights and privileges is not an ultra vires act as it is reasonably necessary or proper in order to further the interest and welfare of MWAI. Also, the imposition of the temporary ban on the use of MWAI’s berthing facilities until Auguis and Basnig have paid their outstanding obligations was a reasonable measure that the former could undertake to ensure the prompt payment of its membership dues.15 Otherwise, MWAI will be rendered inutile as it will have no means of ensuring that its members will promptly settle their obligations. It will be exposed to deleterious consequences as it will be unable to continue with its operations if the members continue to be delinquent in the payment of their obligations, without fear of possible sanctions.

Award of Temperate Damages improper

Having settled the propriety of respondents’ suspension of privileges, the Court finds that the grant of temperate damages in their favor is baseless. Temperate damages may be recovered when the court finds that some pecuniary loss has been suffered but its amount cannot, from the nature of the case, be proved with certainty.16 As such, its award is premised on the fact that actual damages could have been recovered were it not for the fact that the precise amount of damages could not be accurately ascertained. In other words, if a party-claimant had not suffered any damages, no damages either actual nor temperate, are recoverable.

Damages resulting from a person’s valid exercise of a right, is damnum absque injuria.17 In Diaz v. Davao Light and Power Co., Inc.,18 the Court further expounded, to wit:chanRoblesvirtualLawlibrary
Petitioner may have suffered damages as a result of the filing of the complaints. However, there is a material distinction between damages and injury. Injury is the illegal invasion of a legal right; damage is the loss, hurt or harm which results from the injury; and damages are the recompense or compensation awarded for the damage suffered. Thus, there can be damage without injury in those instances in which the loss or harm was not the result of a violation of a legal duty. In such cases, the consequences must be borne by the injured person alone; the law affords no remedy for damages resulting from an act which does not amount to a legal injury or wrong. These situations are often called damnum absque injuria. Whatever damages Diaz may have suffered would have to be borne by him alone since it was his acts which led to the filing of the complaints against him.cralawred
Considering that the suspension of Auguis and Basnig was in the lawful exercise of MWAFs rights and powers as a corporation, no remedy for any consequent damage, which they could have suffered, is available. They shall bear the losses they may have suffered as a consequence of their lawful suspension. Further, the Court notes that in suspending the rights and privileges of the said respondents, MWAI merely denied them access from its berthing facilities and in no way suspended or revoked their certificates of public convenience.

Anent the award of attorney’s fees, the Court likewise finds it without basis. It is a settled rule that attorney’s fees shall not be recovered as cost where the party’s persistence in litigation is based on his mistaken belief in the righteousness of his cause.19

WHEREFORE, the petition is GRANTED. The March 14, 2013 Decision and the January 17, 2014 Resolution of the Court of Appeals in CA-G.R. CV No. 01170-MIN are REVERSED and SET ASIDE. The complaint for damages against petitioner Magallanes Watercraft Association, Inc. is DISMISSED for lack of merit.

SO ORDERED.chanroblesvirtuallawlibrary

APPRAISAL RIGHT

TURNER vs. LORENZO SHIPPING
Stockholder’s Right of Appraisal

The Corporation Code defines how the right of appraisal is exercised, as well as the implications of the right of appraisal, as follows:

1) The appraisal right is exercised by any stockholder who has voted against the proposed corporate action by making a written demand on the corporation within 30 days after the date on which the vote was taken for the payment of the fair value of his shares. The failure to make the demand within the period is deemed a waiver of the appraisal right.
2) If the withdrawing stockholder and the corporation cannot agree on the fair value of the shares within a period of 60 days from the date the stockholders approved the corporate action, the fair value shall be determined and appraised by three disinterested persons, one of whom shall be named by the stockholder, another by the corporation, and the third by the two thus chosen. The findings and award of the majority of the appraisers shall be final, and the corporation shall pay their award within 30 days after the award is made. Upon payment by the corporation of the agreed or awarded price, the stockholder shall forthwith transfer his or her shares to the corporation.
3) All rights accruing to the withdrawing stockholder’s shares, including voting and dividend rights, shall be suspended from the time of demand for the payment of the fair value of the shares until either the abandonment of the corporate action involved or the purchase of the shares by the corporation, except the right of such stockholder to receive payment of the fair value of the shares.
4) Within 10 days after demanding payment for his or her shares, a dissenting stockholder shall submit to the corporation the certificates of stock representing his shares for notation thereon that such shares are dissenting shares. A failure to do so shall, at the option of the corporation, terminate his rights under this Title X of the Corporation Code. If shares represented by the certificates bearing such notation are transferred, and the certificates are consequently canceled, the rights of the transferor as a dissenting stockholder under this Title shall cease and the transferee shall have all the rights of a regular stockholder; and all dividend distributions that would have accrued on such shares shall be paid to the transferee.
5) If the proposed corporate action is implemented or effected, the corporation shall pay to such stockholder, upon the surrender of the certificates of stock representing his shares, the fair value thereof as of the day prior to the date on which the vote was taken, excluding any appreciation or depreciation in anticipation of such corporate action.

Notwithstanding the foregoing, no payment shall be made to any dissenting stockholder unless the corporation has unrestricted retained earnings in its books to cover the payment. In case the corporation has no available unrestricted retained earnings in its books, Section 83 of the Corporation Code provides that if the dissenting stockholder is not paid the value of his shares within 30 days after the award, his voting and dividend rights shall immediately be restored.

The trust fund doctrine backstops the requirement of unrestricted retained earnings to fund the payment of the shares of stocks of the withdrawing stockholders. Under the doctrine, the capital stock, property, and other assets of a corporation are regarded as equity in trust for the payment of corporate creditors, who are preferred in the distribution of corporate assets. The creditors of a corporation have the right to assume that the board of directors will not use the assets of the corporation to purchase its own stock for as long as the corporation has outstanding debts and liabilities. There can be no distribution of assets among the stockholders without first paying corporate debts. Thus, any disposition of corporate funds and assets to the prejudice of creditors is null and void.
G.R. No. L-20850 November 29, 1965
THE EDWARD J. NELL COMPANY, petitioner,
vs.
PACIFIC FARMS, INC., respondent.
Agrava & Agrava for petitioner.
Araneta, Mendoza & Papa for respondent.
CONCEPCION, J.:
Appeal by certiorari, taken by Edward J. Nell Co. — hereinafter referred to as appellant — from a decision of the Court of Appeals.
On October 9, 1958, appellant secured in Civil Case No. 58579 of the Municipal Court of Manila against Insular Farms, Inc. — hereinafter referred to as Insular Farms a judgment for the sum of P1,853.80 — representing the unpaid balance of the price of a pump sold by appellant to Insular Farms — with interest on said sum, plus P125.00 as attorney’s fees and P84.00 as costs. A writ of execution, issued after the judgment had become final, was, on August 14, 1959, returned unsatisfied, stating that Insular Farms had no leviable property. Soon thereafter, or on November 13, 1959, appellant filed with said court the present action against Pacific Farms, Inc. — hereinafter referred to as appellee — for the collection of the judgment aforementioned, upon the theory that appellee is the alter ego of Insular Farms, which appellee has denied. In due course, the municipal court rendered judgment dismissing appellant’s complaint. Appellant appealed, with the same result, to the court of first instance and, subsequently, to the Court of Appeals. Hence this appeal by certiorari, upon the ground that the Court of Appeals had erred: (1) in not holding the appellee liable for said unpaid obligation of the Insular Farms; and (2) in not granting attorney’s fees to appellant.
With respect to the first ground, it should be noted that appellant’s complaint in the municipal court was anchored upon the theory that appellee is an alter ego of Insular Farms, because the former had purchased all or substantially all of the shares of stock, as well as the real and personal properties of the latter, including the pumping equipment sold by appellant to Insular Farms. The record shows that, on March 21, 1958, appellee purchased 1,000 shares of stock of Insular Farms for P285,126.99; that, thereupon, appellee sold said shares of stock to certain individuals, who forthwith reorganized said corporation; and that the board of directors thereof, as reorganized, then caused its assets, including its leasehold rights over a public land in Bolinao, Pangasinan, to be sold to herein appellee for P10,000.00. We agree with the Court of Appeals that these facts do not prove that the appellee is an alter ego of Insular Farms, or is liable for its debts. The rule is set forth in Fletcher Cyclopedia Corporations, Vol. 15, Sec. 7122, pp. 160-161, as follows:
Generally where one corporation sells or otherwise transfers all of its assets to another corporation, the latter is not liable for the debts and liabilities of the transferor, except: (1) where the purchaser expressly or impliedly agrees to assume such debts; (2) where the transaction amounts to a consolidation or merger of the corporations; (3) where the purchasing corporation is merely a continuation of the selling corporation; and (4) where the transaction is entered into fraudulently in order to escape liability for such debts.
In the case at bar, there is neither proof nor allegation that appellee had expressly or impliedly agreed to assume the debt of Insular Farms in favor of appellant herein, or that the appellee is a continuation of Insular Farms, or that the sale of either the shares of stock or the assets of Insular Farms to the appellee has been entered into fraudulently, in order to escape liability for the debt of the Insular Farms in favor of appellant herein. In fact, these sales took place (March, 1958) not only over six (6) months before the rendition of the judgment (October 9, 1958) sought to be collected in the present action, but, also, over a month before the filing of the case (May 29, 1958) in which said judgment was rendered. Moreover, appellee purchased the shares of stock of Insular Farms as the highest bidder at an auction sale held at the instance of a bank to which said shares had been pledged as security for an obligation of Insular Farms in favor of said bank. It has, also, been established that the appellee had paid P285,126.99 for said shares of stock, apart from the sum of P10,000.00 it, likewise, paid for the other assets of Insular Farms.
Neither is it claimed that these transactions have resulted in the consolidation or merger of the Insular Farms and appellee herein. On the contrary, appellant’s theory to the effect that appellee is an alter ego of the Insular Farms negates such consolidation or merger, for a corporation cannot be its own alter ego.
It is urged, however, that said P10,000.00 paid by appellee for other assets of Insular Farms is a grossly inadequate price, because, appellant now claims, said assets were worth around P285,126.99, and that, consequently, the sale must be considered fraudulent. However, the sale was submitted to and approved by the Securities and Exchange Commission. It must be presumed, therefore, that the price paid was fair and reasonable. Moreover, the only issue raised in the court of origin was whether or not appellee is an alter ego of Insular Farms. The question of whether the aforementioned sale of assets for P10,000.00 was fraudulent or not, had not been put in issue in said court. Hence, it may, not be raised on appeal.
Being a mere consequence of the first assignment of error, which is thus clearly untenable, appellant’s second assignment of error needs no discussion.
WHEREFORE, the decision appealed from is hereby affirmed, with costs against the appellant. It is so ordered..

ISLAMIC DIRECTORATE OF THE PHILIPPINES, MANUEL F. PEREA and SECURITIES & EXCHANGE COMMISSION, petitioners, vs.COURT OF APPEALS and IGLESIA NI CRISTO, respondents.
G.R. No. 117897, 14 May 1997.

HERMOSISIMA, JR., J.:

1971, the ISLAMIC DIRECTORATE OF THE PHILIPPINES (“IDP”) was incorporated with the primary purpose of establishing a mosque, school, and other religious infrastructures in Quezon City.

IDP purchased a 49,652-square meter lot in Tandang Sora, QC, which was covered by TCT Nos. RT-26520 (176616) and RT-26521 (170567).

When President Marcos declared martial law in 1972, most of the members of the 1971 Board of Trustees (“Tamano Group”)flew to the Middle East to escape political persecution.

Thereafter, two contending groups claiming to be the IDP Board of Trustees sprung: the Carpizo group and Abbas group.

In a suit between the two groups, SEC rendered a decision in 1986 declaring both groups to be null and void. SEC recommeded that the a new by-laws be approved and a new election be conducted upon the approval of the by-laws. However, the SEC recommendation was not heeded.

In 1989, the Carpizo group passed a Board Resolution authorizing the sale of the land to Iglesia Ni Cristo (“INC”), and a Deed of Sale was eventually executed.

In 1991, the Tamano Group filed a petition before the SEC questioning the sale.

Meanwhile, INC filed a suit for specific performance before RTC Branch 81 against the Carpizo group. INC also moved to compel a certain Leticia Ligon (who is apparently the mortgagee of the lot) to surrender the title.

The Tamano group sought to intervene, but the intervention was denied despite being informed of the pending SEC case. In 1992, the Court subsequently ruled that the INC as the rightful owner of the land, and ordered Ligon to surrender the titles for annotation. Ligon appealed to CA and SC, but her appeals were denied.

In 1993, the SEC ruled that the sale was null and void . On appeal CA reversed the SEC ruling.

MAIN ISSUE: W/N the sale between the Carpizo group and INC is null and void.

RULING: YES.

Since the SEC has declared the Carpizo group as a void Board of Trustees, the sale it entered into with INC is likewise void. Without a valid consent of a contracting party, there can be no valid contract.

In this case, the IDP, never gave its consent, through a legitimate Board of Trustees, to the disputed Deed of Absolute Sale executed in favor of INC. Therefore, this is a case not only of vitiated consent, but one where consent on the part of one of the supposed contracting parties is totally wanting. Ineluctably, the subject sale is void and produces no effect whatsoever.

Further, the Carpizo group failed to comply with Section 40 of the Corporation Code, which provides that: ” … a corporation may, by a majority vote of its board of directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and assets… when authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock; or in case of non-stock corporation, by the vote of at least two-thirds (2/3) of the members, in a stockholders’ or members’ meeting duly called for the purpose….”

The subject lot constitutes the only property of IDP. Hence, its sale to a third-party is a sale or disposition of all the corporate property and assets of IDP. For the sale to be valid, the majority vote of the legitimate Board of Trustees, concurred in by the vote of at least 2/3 of the bona fide members of the corporation should have been obtained. These twin requirements were not met in the case at bar.

ANCILLARY ISSUE: W/N The Ligon ruling constitutes res judicata.

RULING: NO.

Section 49(b), Rule 39 enunciates the first concept of res judicata known as “bar by prior judgment,” whereas, Section 49(c), Rule 39 is referred to as “conclusiveness of judgment.”

There is “bar by former judgment” when, between the first case where the judgment was rendered, and the second case where such judgment is invoked, there is identity of parties, subject matter and cause of action. When the three identities are present, the judgment on the merits rendered in the first constitutes an absolute bar to the subsequent action. But where between the first case wherein judgment is rendered and the second case wherein such judgment is invoked, there is only identity of parties but there is no identity of cause of action, the judgment is conclusive in the second case, only as to those matters actually and directly controverted and determined, and not as to matters merely involved therein. This is what is termed “conclusiveness of judgment.”

Neither applies to the case at bar. There is no “bar by former judgment” since while there may be identity of subject matter (IDP property) in both cases, there is no identity of parties. The principal parties in the first case were Ligon and the Iglesia Ni Cristo. The IDP can not be considered essentially a formal party thereto for the simple reason that it was not duly represented by a legitimate Board of Trustees.

Res Judicata in the form of “conclusiveness of judgment” cannot likewise apply for the reason that the primary issue in the first case is the possession of the titles, and not the sale of the land, as in this case.

BOMAN ENVIRONMENTAL DEVELOPMENT CORPORATION, Petitioners, v. HON. COURT OF APPEALS and NILCAR Y. FAJILAN, Respondents.

Lim, Duran & Associates for Petitioner.

Renato J . Dilag for Private Respondent.

SYLLABUS

1. COMMERCIAL LAW; SECURITIES AND EXCHANGE COMMISSION; ORIGINAL AND EXCLUSIVE JURISDICTION TO SETTLE CONTROVERSIES ARISING OUT OF INTRA-CORPORATE ON PARTNERSHIP RELATIONS. — Under Section 5 (b) of P.D. No. 902-A, as amended, grants the SEC original and exclusive jurisdiction to hear and decide cases involving “b) Controversies arising out of intra-corporate or partnership relations, between and among stockholders, members, or associate; between any or all of them and the corporation, partnership or association of which they are stockholders, members or associates, respectively; . . .” (Emphasis supplied.)

2. ID.; CORPORATION CODE; PERFECTION OF AGREEMENT TO SELL SHARES AND INTERESTS AS WELL AS EXECUTION OF THE PROMISSORY NOTE AS PAYMENT OF THE PRICE OF SALE; AN INTRA-CORPORATE TRANSACTION WITHIN THE COVERAGE OF SECTION 5 (b) OF P.D. NO. 902, AS AMENDED. — This case involves an intra-corporate controversy because the parties are a stockholder and the corporation. As correctly observed by the trial court, the perfection of the agreement to sell Fajilan’s participation and interests in BEDECO and the execution of the promissory note for payment of the price of the sale did not remove the dispute from the coverage of Section 5(b) of P.D. No. 902, as amended, for both the said agreement (Annex C) and the promissory note (Annex D) arose from intra-corporate relations. Indeed, all the signatories of both documents were stockholders of the corporation at the time of signing the same. It was an intra-corporate transaction, hence, this suit is an intra-corporate controversy.

3. ID.; ID.; SALE OF SHARES OF STOCKS NOT FULLY PAID, RETAINS MEMBERSHIP OF SELLER AS STOCKHOLDER. — Fajilan’s offer to resign as president and director “effective as soon as my shares and interests thereto (sic) are sold fully paid” (Annex A-1, p. 239, Rollo) implied that he would remain a stockholder until his shares and interests were fully paid for, for one cannot be a director or president of a corporation unless he is also a stockholder thereof. The fact that he was replaced as president of the corporation did not necessarily mean that he ceased to be a stockholder considering how the corporation failed to complete payment of the consideration for the purchase of his shares of stock and interests in the goodwill of the business. There has been no actual transfer of his shares to the corporation. In the books of the corporation he is still a stockholder.

4. ID.; ID.; ID.; STOCKHOLDER’S SUIT AGAINST CORPORATION TO ENFORCE PAYMENT OF SHAREHOLDINGS SOLD TO IT, COGNIZABLE BY THE SEC ALONE. — Fajilan’s suit against the corporation to enforce the latter’s promissory note or compel the corporation to pay for his shareholdings is cognizable by the SEC alone which shall determine whether such payment will not constitute a distribution of corporate assets to a stockholder in preference over creditors of the corporation.

5. ID.; ID.; SEC; EXCLUSIVE SUPERVISION, CONTROL AND REGULATORY JURISDICTION TO INVESTIGATE SALE OF SHAREHOLDINGS TO THE CORPORATION. — The SEC has exclusive supervision, control and regulatory jurisdiction to investigate whether the corporation has unrestricted retained earnings to cover the payment for the shares, and whether the purchase is for a legitimate corporate purpose as provided in Sections 41 and 122 of the Corporation Code.

6. ID.; ID.; SECTIONS 41 AND 122 OF THE CORPORATION CODE DEEMED WRITTEN INTO THE AGREEMENT BETWEEN THE CORPORATION AND THE STOCKHOLDER. — Section 41 and 122 of the Corporation Code should be deemed written into the agreement between the corporation and the stockholders even if there is no express reference to them in the promissory note. The principle is well settled that an existing law enters into and forms part of a valid contract without need for the parties’ expressly making reference to it (Lakas ng Manggagawang Makabayan v. Abiera, 36 SCRA 437).

7. ID.; ID.; CORPORATE CREDITORS; PREFERENCE OVER STOCKHOLDERS IN THE DISTRIBUTION OF CORPORATE ASSETS. — The requirement of unrestricted retained earnings to cover the shares is based on the trust fund doctrine which means that the capital stock, property and other assets of a corporation are regarded as equity in trust for the payment of corporate creditors. The reason is that creditors of a corporation are preferred over the stockholders in the distribution of corporate assets. There can be no distribution of assets among the stockholders without first paying corporate creditors. Hence, any disposition of corporate funds to the prejudice of creditors is null and void. “Creditors of a corporation have the right to assume that so long as there are outstanding debts and liabilities, the board of directors will not use the assets of the corporation to purchase its own stock . . .”

D E C I S I O N

GRIÑO-AQUINO, J.:

The only issue in this case is whether or not a suit brought by a withdrawing stockholder against the corporation to enforce payment of the balance due on the consideration (evidenced by a corporate promissory note) for the surrender of his shares of stock and interests in the corporation, involves an intra-corporate dispute. The resolution of that issue will determine whether the Securities and Exchange Commission (SEC) or a regular court has jurisdiction over the action.

On May 7, 1984, respondent Nilcar Y. Fajilan offered in writing to resign as President and Member of the Board of Directors of petitioner, Boman Environmental Development Corporation (BEDECO), and to sell to the company all his shares, rights, and interests therein for P300,000 plus the transfer to him of the company’s Isuzu pick-up truck which he had been using. The letter-offer (Exh. A-1) reads as follows:jgc:chanrobles.com.ph

“07 May 1984

“THE BOARD OF DIRECTORS,

BOMAN ENVIRONMENTAL DEVELOPMENT

CORPORATION

2nd Floor, AGS Building,

466 EDSA, Makati,

Metro Manila

Gentlemen:jgc:chanrobles.com.ph

“With deepest regrets, I am tendering my resignation as member of the Board of Directors and President of the Company effective as soon as my shares and interests thereto are sold and fully paid.

“It is really painful to leave the Company which we painstakingly labored and nortured for years to attain its success today, however, family interests and other considerations dictate me otherwise.

“Thank you for your interest of buying my shares and other interests on the Company. It is really my intention to divest myself of these investments and sell them all for PESOS: THREE HUNDRED THOUSAND (P300,000) payable in cash in addition to the Isuzu pick up I am presently using for and in behalf of the Company.

“Thank you.

NILCAR Y. FAJILAN

Director/President” (p. 239, Rollo.)

At a meeting of the Board of Directors of BEDECO on June 14, 1984, Fajilan’s resignation as president was accepted and new officers were elected. Fajilan’s offer to sell his shares to the corporation was approved, the Board promising to pay for them on a staggered basis from July 15, 1984 to December 15, 1984 (Annex B).

The resolution of the Board was communicated to Fajilan in the following letter-agreement dated June 25, 1984 to which he affixed his conformity (Annex C):jgc:chanrobles.com.ph

“June 25, 1984

“Mr. Nilcar Y. Fajilan

No. 159 Aramismis Street

Project 7, Quezon City

“Dear Mr. Fajilan:jgc:chanrobles.com.ph

“Please be informed that after due deliberation the Board of Directors has accepted your offer to sell your share and interest in the company at the price of P300,000.00, inclusive of your unpaid salary from February 1984 to May 31, 1984, loan principal, interest on loan, profit sharing and share on book value of the corporation as at May 31, 1984. Payment of the P300,000.00 shall be as follows:jgc:chanrobles.com.ph

“July 15, 1984 P100,000.00

September 15, 1984 P 75,000.00

October 15, 1984 P 62,500.00

December 15, 1984 P 62,500.00

_________

P300,000.00

“To assure you of payment of the above amount on respective due dates, the company will execute the necessary promissory note.

“In addition to the above, the Ford Courier Pick-up will belong to you subject to your assumption of the outstanding obligation thereof with Fil-Invest. It is understood that upon your full payment of the pick-up, arrangement will be made and negotiated with Fil-Invest regarding the transfer of the ownership of the vehicle to your name.

“If the above meets your requirements, kindly signify your conformity/approval by signing below.

Very truly yours,

(SGD) JAMES C. PERALTA

Corporate Secretary

“CONFORME:chanrob1es virtual 1aw library

(SGD) NILCAR Y. FAJILAN

Noted:chanrob1es virtual 1aw library

(SGD) ALFREDO S. PANGILINAN (SGD) MAXIMO R. REBALDO

(SGD) BENEDICTO M. EMPAYNADO”

“SUBSCRIBED AND SWORN TO before me, this 3rd day of July, 1984, Alfredo S. Pangilinan exhibiting to me his Residence Certificate No. 1696224 issued at Makati, Metro Manila on January 24, 1984, in his capacity as President of Boman Environmental Development Corporation with Corporate Residence Certificate No. 207911 issued at Makati, Metro Manila on March 26, 1984.

“(SGD) ERNESTO B. DURAN

NOTARY PUBLIC

Until December 31, 1984

PTR No. 8582861 Issued

on January 24, 1984 at

Makati, Metro Manila.

Doc. No. 392

Page No. 80

Book No. X

Series of 1984.” (p. 245, Rollo.)

A promissory note dated July 3, 1984, was signed by BEDECO’S new president, Alfredo Pangilinan, in the presence of two directors, committing BEDECO to pay him P300,000 over a six-month period from July 15, 1984 to December 15, 1984. The promissory note (Exh. D) provided as follows:jgc:chanrobles.com.ph

“PROMISSORY NOTE

Makati, Metro Manila

July 3, 1984

“FOR VALUE RECEIVED, BOMAN ENVIRONMENTAL DEVELOPMENT CORPORATION, a domestic corporation duly registered with the Securities and Exchange Commission, with office at Rm. 608, Metro Bank Bldg., Ayala Blvd., Makati, Metro Manila, promise to pay NILCAR Y. FAJILAN of 17 Aramismis St., Project 7, Quezon City, the sum of PESOS: THREE HUNDRED THOUSAND (P300,000.00), Philippine Currency payable as follows:jgc:chanrobles.com.ph

“P100,000.00 — July 15, 198

75,000.00 — Sept. 15, 1984

62,500.00 — October 15, 1984

62,500.00 — Dec. 15, 1984

_________

P300,000.00

BOMAN ENVIRONMENTAL

DEVELOPMENT CORPORATION

By:chanrob1es virtual 1aw library

(SGD) ALFREDO S. PANGILINAN

President

“Signed in the presence of:chanrob1es virtual 1aw library

(SGD) MAXIMO R. REBALDO

(SGD) BENEDICTO M. EMPAYNADO”

(Annex D, p. 247, Rollo.)

However, BEDECO paid only P50,000 on July 15, 1984 and another P50,000 on August 31, 1984 and defaulted in paying the balance of P200,000.

On April 30, 1985, Fajilan filed a complaint in the Regional Trial Court of Makati for collection of that balance from BEDECO.

In an order dated September 9, 1985, the trial court, through Judge Ansberto Paredes, dismissed the complaint for lack of jurisdiction. It ruled that the controversy arose out of intra-corporate relations, hence, the Securities and Exchange Commission has original and exclusive jurisdiction to hear and decide it.

His motion for reconsideration of that order having been denied, Fajilan filed a “Petition for Certiorari, and Mandamus with Preliminary Attachment” in the Intermediate Appellate Court.

In a decision dated March 2, 1987, the Court of Appeals set aside Judge Paredes’ order of dismissal and directed him to take cognizance of the case. BEDECO’s motion for reconsideration was denied in a resolution dated March 24, 1987 Court of Appeals.

In its decision, the Appellate Court characterized the case as a suit for collection of a sum of money as Fajilan “was merely suing on the balance of the promissory note” (p. 4, Decision; p. 196, Rollo) which BEDECO failed and refused to pay in full. More particularly, the Court of Appeals held:jgc:chanrobles.com.ph

“While it is true that the circumstances which led to the execution of the promissory note by the Board of Directors of respondent corporation was an intra-corporate matter, there arose no controversy as to the sale of petitioner’s interests and rights as well as his shares as Member of the Board of Directors and President of respondent corporation. The intra-corporate matter of the resignation of petitioner as Member of the Board of Directors and President of respondent corporation has long been settled without issue.

“The Board of Directors of respondent corporation has likewise long settled the sale by petitioner of all his shares, rights and interests in favor of the corporation. No controversy arose out of this transaction. The jurisdiction of the Securities and Exchange Commission therefore need not be invoked on this matter.” (p. 196, Rollo.)

The petition is impressed with merit.

Section 5(b) of P.D. No. 902-A, as amended, grants the SEC original and exclusive jurisdiction to hear and decide cases involving —

“b) Controversies arising out of intra-corporate or partnership relations, between and among stockholders, members, or associate; between any or all of them and the corporation, partnership or association of which they are stockholders, members or associates, respectively; . . .” (Emphasis supplied.)

This case involves an intra-corporate controversy because the parties are a stockholder and the corporation. As correctly observed by the trial court, the perfection of the agreement to sell Fajilan’s participation and interests in BEDECO and the execution of the promissory note for payment of the price of the sale did not remove the dispute from the coverage of Section 5(b) of P.D. No. 902, as amended, for both the said agreement (Annex C) and the promissory note (Annex D) arose from intra-corporate relations. Indeed, all the signatories of both documents were stockholders of the corporation at the time of signing the same. It was an intra-corporate transaction, hence, this suit is an intra-corporate controversy.

Fajilan’s offer to resign as president and director “effective as soon as my shares and interests thereto (sic) are sold fully paid” (Annex A-1, p. 239, Rollo) implied that he would remain a stockholder until his shares and interests were fully paid for, for one cannot be a director or president of a corporation unless he is also a stockholder thereof. The fact that he was replaced as president of the corporation did not necessarily mean that he ceased to be a stockholder considering how the corporation failed to complete payment of the consideration for the purchase of his shares of stock and interests in the goodwill of the business. There has been no actual transfer of his shares to the corporation. In the books of the corporation he is still a stockholder.

Fajilan’s suit against the corporation to enforce the latter’s promissory note or compel the corporation to pay for his shareholdings is cognizable by the SEC alone which shall determine whether such payment will not constitute a distribution of corporate assets to a stockholder in preference over creditors of the corporation. The SEC has exclusive supervision, control and regulatory jurisdiction to investigate whether the corporation has unrestricted retained earnings to cover the payment for the shares, and whether the purchase is for a legitimate corporate purpose as provided in Sections 41 and 122 of the Corporation Code, which reads as follows:jgc:chanrobles.com.ph

“SEC. 41. Power to acquire own shares. — A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose or purposes, including but not limited to the following cases: Provided, That the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired;

“1. To eliminate fractional shares arising out of stock dividends;

“2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; and

“3. To pay dissenting or withdrawing stockholders entitled payment for their shares under the provisions of this Code,”

“Sec. 12. Corporate liquidation. . . .
x x x

“Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities, (77a, 89a, 16a).”cralaw virtua1aw library

These provisions of the Corporation Code should be deemed written into the agreement between the corporation and the stockholders even if there is no express reference to them in the promissory note. The principle is well settled that an existing law enters into and forms part of a valid contract without need for the parties’ expressly making reference to it (Lakas ng Manggagawang Makabayan v. Abiera, 36 SCRA 437).

The requirement of unrestricted retained earnings to cover the shares is based on the trust fund doctrine which means that the capital stock, property and other assets of a corporation are regarded as equity in trust for the payment of corporate creditors. The reason is that creditors of a corporation are preferred over the stockholders in the distribution of corporate assets. There can be no distribution of assets among the stockholders without first paying corporate creditors. Hence, any disposition of corporate funds to the prejudice of creditors is null and void. “Creditors of a corporation have the right to assume that so long as there are outstanding debts and liabilities, the board of directors will not use the assets of the corporation to purchase its own stock . . .” (Steinberg v. Velasco, 52 Phil. 953.)

WHEREFORE, the petition for certiorari is granted. The decision of the Court of Appeals is reversed and set aside. The order of the trial court dismissing the complaint for lack of jurisdiction is hereby reinstated. No costs.

SO ORDERED.

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