Title
De la Rama vs. Ma-ao Sugar Central Co., Inc.
Case
G.R. No. L-17504
Decision Date
Feb 28, 1969
Minority stockholders sued Ma-ao Sugar Central for mismanagement, alleging illegal acts, self-dealing, and unauthorized investments. Court upheld some claims, ordered repayment, but denied dissolution and counterclaims.
representative suit
minority stockholders
illegal acts
A

Case Summary (G.R. No. L-17504)

Factual Background

The plaintiffs commenced a representative or derivative suit on October 20, 1953, alleging corporate irregularities covering the period November, 1946 to October, 1952. The complaint set forth five causes of action: (a) illegal and ultra vires acts consisting of self-dealing, irregular loans, and unauthorized investments; (b) gross mismanagement; (c) forfeiture of corporate rights warranting dissolution; (d) damages and attorney’s fees; and (e) application for appointment of a receiver. The plaintiffs sought, among other relief, an accounting, the recovery of amounts alleged to have been diverted to officers and affiliated concerns, the dissolution of the corporation and distribution of net assets, monetary damages aggregating P300,000.00, and provisional relief by way of receivership.

Pleadings and Defenses

Defendants filed an answer on December 1, 1953, amended February 1, 1955, denying the charges of gross mismanagement, fraudulent use and diversion of corporate funds, abuse of trust and breach of fiduciary duty as unsupported generalizations. By way of special defenses, defendants asserted that the complaint was premature and that plaintiffs failed to make an earnest effort to exhaust intra-corporate remedies, that no actual loss to the corporation had been shown, that payments by debtors constituted an adequate remedy, and that dissolution or receivership would impair contractual obligations. Defendants counterclaimed, alleging that the complaint was premature, improper and malicious, and sought recovery of actual, moral, exemplary and corrective damages, including attorney’s fees.

Trial Court Findings and Judgment

The trial court found merit in numerous corporate irregularities, findings which the defendants did not contest on appeal: failures to hold stockholders’ meetings in 1947, 1950 and 1951; untrue and irregular book entries; illegal investments in Mabuhay Printing (P2,280.00) and Acoje Mining (P7,000.00) without the required two-thirds stockholders’ approval; unauthorized loans to J. Amado Araneta totalling P132,082.00 in violation of the by-laws; and the diversion of corporate funds to several affiliated companies in the aggregate sums reflected in the record, including but not limited to transfers to J. Amado Araneta & Co. (P243,415.62), Luzon Industrial Corp. (P585,918.17), Associated Sugar (P463,860.36), General Securities (P86,743.65), Bacolod Murcia (P501,030.61), Central Azucarera del Danao (P97,884.42), and Talisay-Silay (P4,365.90). The court dismissed the petition for dissolution but ordered J. Amado Araneta to pay Ma-ao Sugar Central Co., Inc. P46,270.00 with eight percent interest from the filing of the complaint, made permanent a preliminary injunction restraining the corporation from giving loans or advances to its officers, enjoined investments in Acoje Mining and Mabuhay Printing and similar enterprises not connected with the sugar central business, and allocated costs as stated.

Appeals and Assigned Errors

Both sides appealed to the Supreme Court. The plaintiffs-appellants assigned four principal errors: that the Lower Court erred in holding that the investment in the Philippine Fiber Processing Co., Inc. did not violate Sec. 17-1/2 of the Corporation Law; that the Lower Court erred in finding that Ma-ao Sugar was not insolvent; that discriminatory acts against planters constituted mismanagement actionable in a derivative suit; and that the culpable acts proved warranted dissolution. The defendants-appellants challenged the award against J. Amado Araneta in the amount of P46,270.00 and the dismissal of their counterclaim for damages.

Supreme Court’s Findings on Insolvency, Crop Loans and Planter Grievances

The Supreme Court affirmed the Lower Court’s factual conclusion that plaintiffs failed to establish insolvency. The Court reiterated the established principle that insolvency is a question of fact determined by assets and liabilities and that impairment of capital alone does not establish insolvency where the corporation remains a going concern. The Court also held that anomalies in the crop loan accounts and asserted discriminatory acts affecting planters were grievances primarily of planters and not of stockholders in their derivative capacity; plaintiffs had not shown that such anomalies caused loss to the corporation. Accordingly, those grounds did not justify dissolution and did not provide proper subjects for the derivative suit.

Supreme Court’s Analysis of the Investment in Philippine Fiber

The Supreme Court confronted the apparent tension between Sec. 17-1/2 of the Corporation Law, which restricts investments in other businesses unless approved by two-thirds of the voting stock at a shareholders’ meeting called for that purpose, and Sec. 13, par. 10 of the Corporation Law, which grants corporations the power to acquire and hold shares and securities. The Court adopted the reconciliation articulated by Professor Sulpicio S. Guevara: an acquisition of shares that is in pursuance of the investing corporation’s corporate purpose does not require the affirmative vote of two-thirds of voting stock, whereas an acquisition made solely as an investment, and not necessary to accomplish the corporate purpose, requires the statutory stockholders’ approval. Applying that rule, the Court agreed with the Lower Court that the investment in Philippine Fiber Processing Co., Inc., engaged in the manufacture of sugar bags, was sufficiently connected with Ma-ao Sugar’s business so as not to fall under the prohibition of Sec. 17-1/2.

Injunction Against Investments and Its Reversal

The Supreme Court reversed that portion of the judgment ordering Ma-ao Sugar to refrain from making investments in Acoje Mining, Mabuhay Printing and any other company whose purpose was not connected with the sugar central business. The Court explained that Sec. 17-1/2 permits a corporation to invest outside its main purpose when such investment is authorized by the affirmative vote of stockholders holding shares entitling them to at least two-thirds of the voting power, and that an across-the-board prohibition was inconsistent with the statutory scheme. The remainder of the Lower Court’s judgment, including the accounting order, injunction against loans to officers, and the award against J. Amado Araneta, was affirmed.

Decision on the Account of J. Amado Araneta and the Counterclaim

The Supreme Court agreed with the trial court that the photostatic page of loans receivable did not constitute adequate primary proof that J. Amado Araneta had paid the P46,270.00 reflected in the books; the evidence suggested that the item had been transferred between accounts rather than actually discharged. The Court observed that no substitute for an official receipt or canceled check sufficed to establish payment. The Court also affirmed dismissal of the defendants’ counterclaim, agreeing with the trial court that plaintiffs’ pleadings did not demonstrate malice or bad faith and that allegations in pleading relevant to corporate grievance are privileged eve

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