Case Summary (G.R. No. 191353)
Causes of Action and Relief Sought
Plaintiffs alleged five causes of action: (1) illegal and ultra vires acts (self-dealing, irregular loans, unauthorized investments) and sought an accounting and recovery of diverted funds for the corporation; (2) gross mismanagement and specific accounting claims (including recovery of amounts in a related civil case and reconciliation of crop loan accounts); (3) forfeiture of corporate rights warranting dissolution and distribution of net assets; (4) damages (compensatory, moral, exemplary) and attorney’s fees (prayer for P300,000.00 and costs); and (5) application for provisional receivership.
Defendants’ Response, Special Defenses, and Counterclaim
Defendants denied the allegations of gross mismanagement and fraudulent diversion, asserting that such claims were unsubstantiated conclusions. Special defenses included prematurity and impropriety of the action (failure to exhaust intra-corporate remedies), absence of actual loss to the corporation, adequacy of remedies through debtors’ payments, and that dissolution or receivership would impair contractual obligations. By counterclaim, defendants alleged the complaint was premature, improper, malicious, and personally abusive toward J. Amado Araneta, and sought damages (actual, moral, exemplary) and attorney’s fees.
Lower Court Findings of Uncontested Corporate Irregularities
The trial court made several findings which defendants did not contest on appeal: (1) failure to hold stockholders’ meetings in 1947, 1950, and 1951; (2) irregular and untrue entries in corporate books; (3) unauthorized investments in Mabuhay Printing (P2,280.00) and Acoje Mining (P7,000.00) without two-thirds stockholder approval and outside corporate purpose; (4) unauthorized loans to J. Amado Araneta totaling P132,082.00 (defendants contended these were fully paid); and (5) transfers/diversion of corporate funds to affiliated companies (with specified amounts to various entities), effected without board approval and in violation of by-law restrictions.
Lower Court Judgment and Equitable Relief Ordered
The Court of First Instance dismissed the petition for dissolution but: (a) condemned J. Amado Araneta to pay Ma-Ao Sugar Central Co., Inc. P46,270.00 with 8% interest from the date of filing the complaint; (b) made permanent a preliminary injunction restraining management from giving loans or advances to officers; (c) ordered the corporation to refrain from making investments in Acoje Mining, Mabuhay Printing, and any other company whose purpose is not connected with the sugar central business; and (d) assessed costs such that costs of plaintiffs were to be borne by the corporation and J. Amado Araneta. Both parties appealed.
Plaintiffs’ Assignments of Error on Appeal
Plaintiffs-appellants contended the lower court erred in: (1) finding that the Ma-Ao investment in Philippine Fiber Processing Co., Inc. did not violate Sec. 17-1/2 of the Corporation Law; (2) failing to find the corporation insolvent; (3) holding that discriminatory acts against planters did not constitute mismanagement actionable derivatively; and (4) declining to dissolve the corporation despite proven culpable acts.
Defendants’ Assignments of Error on Appeal
Defendants-appellants challenged the lower court’s rulings by arguing that the court erred in: (1) ordering J. Amado Araneta to pay P46,270.00 with interest; and (2) not awarding damages sought in their counterclaim based on alleged prematurity, malice, and abusive language in the complaint.
Supreme Court Analysis — Investment in Philippine Fiber Processing Co.
Factual posture: Ma-Ao, through its president Araneta, subscribed to P300,000.00 capital stock of Philippine Fiber Processing Co., Inc., with staged payments in 1950–1952; additional shares (355,000) were transferred from Luzon Industrial Corporation to Ma-Ao in 1952. Board resolutions authorizing the transactions were passed only after some payments and transfers. Legal issue: whether these transactions violated Sec. 17-1/2 of the Corporation Law (which forbids investment of corporate funds in other corporations or businesses outside the main corporate purpose unless approved by stockholders holding two-thirds of the voting power in a meeting called for that purpose) or whether Sec. 13, par. 10 (power to acquire shares, etc., for accomplishing corporate purposes) controlled. The Court adopted the reconciliation advanced by Professor Sulpicio S. Guevara: when an acquisition of shares is in pursuance of the investing corporation’s corporate purpose, directors’ action (subject to statutory limitations) suffices; when the acquisition is merely an investment in a business foreign to the investing corporation’s purpose, stockholder approval by a two-thirds vote is required. Applying that principle, the Supreme Court agreed with the lower court that the investment in Philippine Fiber Processing Co. did not fall within Sec. 17-1/2 and therefore did not constitute a statutory violation requiring nullification.
Supreme Court Analysis — Insolvency, Planters’ Grievances, and Dissolution
Insolvency: The Court agreed with the lower court that plaintiffs failed to prove insolvency. Determination of insolvency is factual and requires inventory of assets and liabilities; mere impairment of capital or an excess of liabilities over assets is insufficient where other assets or prospects indicate the corporation remains a going concern. Grievances of planters: the Court held that alleged discriminatory actions (manipulation of cane allotments, withholding of molasses and alcohol shares, withholding trucking allowance, formation of rival planters’ associations, and refusal to deal with legitimate planters’ groups) concerned rights of individual planters rather than derivative corporate injury; such grievances therefore were not proper bases for a derivative suit by stockholders. Dissolution: dissolution is an extraordinary remedy to be granted only when no adequate remedy exists; the culpable acts proved, w
...continue readingCase Syllabus (G.R. No. 191353)
Case Caption, Citation and Decision
- Jurisprudence citation: 136 Phil. 418 [ G.R. Nos. L-17504 & L-17506. February 28, 1969 ].
- Decision penned by Justice Capistrano.
- Composition of the Court: Concepcion, C.J., Reyes, J.B.L., Dizon, Zaldivar, Castro, Fernando, and Barredo, JJ., concurred; Makalintal, Sanchez, and Teehankee, JJ., did not take part.
Nature of Proceeding and Commencement
- Representative (derivative) suit filed October 20, 1953, in the Court of First Instance of Manila.
- Complaint covered alleged wrongful acts during the period November 1946 to October 1952.
- Suit instituted by four minority stockholders on their own behalf and for the benefit of Ma-Ao Sugar Central Co., Inc., and other stockholders who might join.
Parties
- Plaintiffs-Appellants: Ramon De la Rama, Francisco Rodriguez, Hortencia Salas, Paz Salas and Patria Salas, heir of Magdalena Salas, as stockholders on their own behalf and for the benefit of Ma-Ao Sugar Central Co., Inc., and other stockholders.
- Defendants-Appellants: Ma-Ao Sugar Central Co., Inc.; J. Amado Araneta; Mrs. Ramon S. Araneta; Romualdo M. Araneta; Ramon A. Yulo.
Causes of Action Alleged by Plaintiffs (Complaint)
- Complaint comprised five causes of action spanning November 1946 to October 1952:
- First cause: Alleged illegal and ultra vires acts consisting of self-dealing, irregular loans, and unauthorized investments; prayer that J. Amado Araneta and co-defendants render an accounting and "to collect, produce and/or pay to the defendant corporation the outstanding balance of the amounts so diverted and still unpaid to defendant corporation."
- Second cause: Alleged gross mismanagement; prayer that individual defendants be ordered to pay to the corporation "whatever amounts may be recovered by the plaintiffs in Civil Case No. 20122, entitled Francisco Rodriguez vs. Ma-ao Sugar Central Co."; to return amounts withdrawn as discretionary funds or backpay; and to account for differences between crop loan accounts payable and receivable.
- Third cause: Alleged forfeiture of corporate rights warranting dissolution; prayer that the corporation be dissolved and its net assets distributed to stockholders.
- Fourth cause: Alleged damages and attorney's fees; prayer that defendants be ordered "to pay the sum of P300,000.00 by way of compensatory, moral and exemplary damages and for expenses of litigation, including attorney's fees and costs of the suit."
- Fifth cause: Application for the provisional remedy of receivership.
Relief Sought (Summary)
- Accounting of transactions and recovery of diverted funds to the corporation.
- Recovery of amounts alleged in related Civil Case No. 20122.
- Return of discretionary withdrawals and accounting for crop loan anomalies.
- Dissolution of Ma-Ao Sugar Central Co., Inc., and distribution of net assets.
- Payment of P300,000.00 for compensatory, moral and exemplary damages plus litigation expenses and attorney's fees.
- Appointment of a receiver as provisional remedy.
Defendants' Answer, Denials and Special Defenses
- Original answer filed December 1, 1953; amended February 1, 1955.
- General denial of allegations of gross mismanagement, fraudulent use and diversion of corporate funds, disregard of corporate requirements, abuse of trust and violation of fiduciary relationship, describing plaintiffs' claims as "gratuitous, unwarranted, exaggerated and distorted conclusions not supported by plain and specific facts and transactions alleged in the complaint."
- Special defenses alleged, among others:
- Complaint is "premature, improper and unjustified."
- Plaintiffs did not make an "earnest, not simulated effort" to exhaust remedies within the corporation before filing suit.
- No actual loss suffered by the corporation on account of transactions questioned.
- Payments by debtors of all amounts due to the corporation constituted a full, sufficient and adequate remedy.
- Dissolution and/or receivership would violate and impair the obligation of existing contracts of the corporation.
Defendants' Counterclaim
- Defendants alleged that the plaintiffs' complaint was premature, improper and malicious and described the language used as "unnecessarily vituperative, abusive and insulting, particularly against defendant J. Amado Araneta who appears to be the main target of their hatred."
- Wherefore, defendants sought recovery of "compensation for damages, actual, moral, exemplary and corrective, including reasonable attorney's fees."
Findings of the Lower Court Accepted as Unquestioned by Defendants
- The following findings of corporate irregularities by the Lower Court were not questioned by defendants on appeal:
- Failure to hold stockholders' meetings regularly — no stockholders' meetings held in 1947, 1950 and 1951.
- Irregularities in the keeping of the books — untrue entries made in the books that could not simply be considered innocent errors.
- Illegal investments in Mabuhay Printing (P2,280.00) and Acoje Mining (P7,000.00) — investments made not in pursuance of corporate purpose and without requisite authority of two-thirds of stockholders.
- Unauthorized loans to J. Amado Araneta totaling P132,082.00 — alleged by defendants to have been fully paid — in violation of by-laws prohibiting any director from borrowing money from the corporation.
- Diversion of corporate funds of Ma-Ao Sugar Central Co., Inc. to affiliated companies and vice versa without Board approval, in violation of Sec. III, Art. 6-A of the by-laws.
Detailed Diversion of Funds Findings (Affiliated Companies and Amounts)
- The Lower Court found that sums were taken out of Ma-Ao Sugar Central Co., Inc. funds and delivered to, or received from, affiliated companies without Board approval:
- 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
- Talisay-Silay: P4,365.90
Lower Court Dispositive Judgment (as rendered and supplemented)
- Dispositive portion of Lower Court Judgment (quoted and summarized):
- Petition for dissolution dismissed.
- J. Amado Araneta condemned to pay Ma-Ao Sugar Central Co., Inc. the amount of P46,270.00 with 8% interest from the date of filing of the complaint, plus costs.
- Preliminary injunction reiterated and made permanent, restraining Ma-Ao management from giving any loans or advances to its officers.
- Ma-Ao ordered to refrain from making investments in Acoje Mining, Mabuhay Printing, and any other company whose purpose is not connected with the sugar central business.
- Costs of plaintiffs to be borne by the Corporation and J. Amado Araneta.
- Lower Court later supplemented its Decision by an Order resolving defendants' Motion for Reconsideration (Order of September 3, 1960 referenced).
Appeals — Errors Assigned by Plaintiffs-Appellants
- Plaintiffs assigned these errors in their appeal: I. The Lower Court erred in holding that the investment of Ma-Ao corporate funds in Philippine Fiber Processing Co., Inc. was not a violation of Sec. 17-1/2 of the Corporation Law. II. The Lower Court erred in not finding Ma-Ao Sugar Central Co., Inc. insolvent. III. The Lower Court erred in holding that the discriminatory acts committed against planters did not constitute mismanagement. IV. The Lower Court erred in holding that the culpable acts were insufficient for dissolution of the corporation.
Portions of the Lower Court Decision Assailed by Plaintiffs (Excerpts and Themes)
- On Phili