Case Summary (G.R. No. 144476)
Petitioners and Respondents
Petitioners: Ong Yong et al. (G.R. No. 144476)
Respondents: David S. Tiu et al. and FLADC (G.R. No. 144629)
Key Dates
- August 15, 1994: Pre-Subscription Agreement executed
- February 23, 1996: Tius purported to rescind the agreement
- May 19, 1997 & September 11, 1998: SEC decisions confirming rescission
- October 5, 1999: Court of Appeals affirms with modification
- February 1, 2002: Supreme Court Decision affirming CA but modifying interest and share allocations
- March 15, 2002: Motions for reconsideration and writ of execution filed
- October 18, 2004: Resolution granting Ongs’ motions for reconsideration
Applicable Law
- 1987 Philippine Constitution (equal protection, due process)
- Corporation Code (capital stock subscription, dissolution, reduction of capital, trust fund doctrine)
- Civil Code (Articles on rescission, pari delicto)
- Securities Regulation Code (SEC jurisdiction)
- Business Judgment Rule
Factual Background
FLADC, owned by the Tius, faced foreclosure of its P190 million mortgage on the Masagana Citimall project. The Tius and the Ongs entered into a Pre-Subscription Agreement:
- Authorized capital stock increased to 2 million shares at P100 par. Ongs subscribed to 1 million shares (P100 million cash). Tius subscribed to 549,800 additional shares via real properties valued at P99.8 million plus existing 450,200 shares.
- Ongs injected P100 million cash plus P70 million extra to help pay the PNB loan; Tius contributed a building and two parcels of land.
- Management rights were divided: Tius to nominate VP and Treasurer; Ongs to nominate President, Secretary, Chairman, and six directors.
In February 1996 the Tius sought to rescind, alleging breaches by the Ongs: refusal to credit shares, denial of officer positions, and denial of office space. The Ongs countered that Tius refused corporate duties, failed to pay transfer taxes to effectuate share issuances, and that one property already belonged to FLADC.
Procedural History
- SEC Hearing Officer (May 19, 1997) confirmed rescission; SEC en banc (September 11, 1998) affirmed, classifying Ongs’ P70 million as premium on capital (no interest).
- Court of Appeals (October 5, 1999) affirmed SEC en banc, ordered liquidation of FLADC, returned investments, allocated remaining assets to Tius, and imposed mutual interest obligations under Civil Code Article 2209.
- Supreme Court (February 1, 2002) affirmed CA decision with modifications: awarded interest on P20 million loan at 12% from judicial demand and P70 million advance at 10% from June 19, 1996; credited Tius with 49,800 shares.
- Parties filed motions for reconsideration; Tius moved for writ of execution.
Issues on Reconsideration
- Whether the Tius had legal capacity to rescind a subscription contract to FLADC shares in their personal capacities.
- Whether rescission violated the Trust Fund Doctrine and the Corporation Code’s requirements for distribution of corporate assets.
- Whether specific performance would have been a more appropriate remedy.
- Whether corporate dissolution or reduction of capital stock procedures were circumvented.
Legal Analysis
Subscription Contract and Standing to Rescind
- The Pre-Subscription Agreement constituted a subscription contract between FLADC and the Ongs (Corp. Code, Sec. 60). The Tius were not parties to that contract and lacked the legal personality to seek its rescission. Only FLADC, as party in interest, could do so (Civil Code, Art. 1311).
Trust Fund Doctrine and Corporate Asset Distribution
- Subscriptions to capital stock form a trust fund for creditors (Phil. Trust Co. v. Rivera). Distribution of corporate capital assets is allowed only by (a) decrease of authorized capital stock (Corp. Code, Sec. 38), (b) redemption of shares, or (c) dissolution and liquidation (Secs. 117–120). Rescission would have bypassed these statutory safeguards, prejudice corporate creditors, and effectuate an unauthorized liquidation.
Available Remedies and Business Judgment Rule
- Tius had intra-corporate remedies under the Corporation Code and SEC rules to address alleged management violations and financial misappropriation (e.g., derivative suits, removal of officers), rather than extraordinary rescission. Courts must defer to corporate decision-making in the absence of oppression or fraud (business judgment rule).
Comparative B
Case Syllabus (G.R. No. 144476)
Procedural History
- Petitioners Ong Yong, Juanita Tan Ong, Wilson T. Ong, Anna L. Ong, William T. Ong, Willie T. Ong, and Julie Ong Alonzo filed a Motion for Reconsideration dated March 15, 2002, and Willie Ong separately moved for Partial Reconsideration.
- Respondents David S. Tiu, Cely Y. Tiu, Moly Yu Gow, Belen See Yu, D. Terence Y. Tiu, John Yu, and Lourdes C. Tiu filed a Motion for Issuance of Writ of Execution of the Court’s February 1, 2002 Decision.
- Case originated as SEC Case No. 02-96-5269 (Tius sought to confirm rescission of the Pre-Subscription Agreement); appealed to SEC en banc (SEC AC Nos. 598 & 601), then to the Court of Appeals (CA), and finally to the Supreme Court in G.R. Nos. 144476 and 144629.
- February 1, 2002 SC Decision affirmed with modifications the CA’s October 5, 1999 decision (which affirmed, with modifications, the SEC en banc September 11, 1998 decision).
- On reconsideration, Special Second Division reversed the February 1, 2002 Decision, dismissed the SEC petition, and denied the writ of execution motion.
Facts
- In 1994, FLADC, owner of Masagana Citimall in Pasay City, faced foreclosure by PNB on a ₱190 million mortgage.
- The Tius, majority shareholders of FLADC, invited the Ongs to invest under a Pre-Subscription Agreement to avert foreclosure.
- Ongs subscribed to 1,000,000 shares at ₱100 par (₱100 million cash); Tius subscribed to an additional 549,800 shares for contributions of:
• Four-storey building valued ₱20 million (200,000 shares)
• 1,902.30 sqm lot valued ₱30 million (300,000 shares)
• 151 sqm lot valued ₱49.8 million (49,800 shares) - Ongs also advanced ₱70 million to FLADC and ₱20 million to Tius; those sums, plus Ongs’ ₱100 million, paid off the PNB loan.
- Ongs and Tius agreed to equal 50-50 shareholdings, divided board seats, and Ongs’ exclusive right to manage the mall.
Pre-Subscription Agreement Terms
- Authorized capital stock increased to 2,000,000 shares at ₱100 par.
- Ongs: 1,000,000 new shares; Tius: existing 450,200 shares plus 549,800 new shares.
- Board composition: Tius nominate Vice-President, Treasurer, and five directors; Ongs nominate President, Secretary, chairman and six directors.
- Ongs granted operational control of the mall.