Case Summary (G.R. No. 30460)
Petitioner and Respondents
Petitioner seeks recovery for unlawful stock purchases and dividend distributions that depleted corporate assets. Respondents include both the direct sellers of corporate shares and the board members who authorized transactions.
Key Dates
• June 29, 1922: Initial share purchases executed by corporation.
• July 16 and 24, 1922: Further share purchases; board resolutions authorizing stock buy‐backs and dividends.
• September 11, 1923: Dissolution petition filed alleging insolvency.
• February 28, 1924: Receiver appointed and attempts made to collect receivables.
• March 12, 1929: Decision rendered by the Supreme Court.
Applicable Law
Pre‐1935 corporate law governed by Act No. 1459 (Revised Corporation Law) and common‐law principles of fiduciary duty. No Philippine constitution was yet in force; corporate acts are judged under statutory and equitable rules prevailing under the U.S. colonial regime.
Factual Background
Sibuguey Trading Company had an authorized capital of ₱20,000 (2,000 shares at ₱10 par) and a paid‐up capital of ₱10,030. Between June 29 and July 24, 1922, the board approved and funded purchase of 330 of its own shares at par (₱3,300). Simultaneously, directors who sold their holdings had tendered resignations. The board also declared ₱3,000 in dividends to be paid in installments from an asserted surplus.
Financial Condition at Time of Transactions
As of June 30, 1922, the corporation’s books reflected accounts payable of ₱13,807.50 and receivables of ₱19,126.02, yielding a purported surplus of ₱3,314.72. By June 30, 1923, payables had declined to ₱9,241.19, receivables to ₱12,512.47, indicating an apparent net asset of ₱3,271.28—without proof of actual collectibility.
Directors’ Resolutions and Intent
At the July 24 board meeting, the president and manager recommended setting aside ₱3,000 from surplus for dividends to avoid impairing solvency. The resolution was approved, stipulating that stockholders indebted to the corporation must settle accounts before receiving dividends.
Receiver’s Efforts and Insolvency Proceedings
Upon his February 28, 1924 appointment, the receiver attempted to collect the receivables by correspondence and personal visits to Malangas, Mindanao. Most debtors lacked assets or means to pay; no suits could be filed for want of funds. The corporation’s dissolution was then sought on insolvency grounds.
Legal Issues
- Whether a corporation may lawfully purchase its own shares when indebted and without a bona fide surplus.
- Whether a dividend declaration from an unverified surplus violates the fiduciary obligations of directors and prejudices creditors.
- The personal liability of directors and purchasers for unauthorized depletion of corporate assets.
Court’s Analysis
The Court observed:
- The real assets of the corporation were diminished by ₱6,300 (₱3,300 in share buy‐backs and ₱3,000 in dividends) whereas the stipulated surplus was only ₱3,314.72.
- There was no evidence that receivables would be collected at face value. The board assumed collectibility without verification, neglecting ordinary care.
- Directors brea
Case Syllabus (G.R. No. 30460)
Citation
- 52 Phil. 953
- G.R. No. 30460
- March 12, 1929
Facts
- On July 24, 1922, the board of directors approved the purchase of the corporation’s own shares:
• 100 shares from S. R. Ganzon for ₱1,000
• 100 shares from Felix D. Mendaros for ₱1,000 (purchased June 29, 1922)
• 100 shares from Felix D. Mendaros for ₱1,000 (purchased July 16, 1922)
• 10 shares from Dionisio Saavedra for ₱100 (purchased June 29, 1922) - During the same period, various defendants acquired shares directly from the corporation:
• Gregorio Velasco – 13 shares for ₱130
• Felix del Castillo – 42 shares for ₱420
• Andres Navallo – 15 shares for ₱150
• Felix D. Mendaros – 10 shares for ₱100 - The authorized capital stock was 2,000 shares (₱10 par value), of which ₱10,030 was subscribed and paid up.
- As of June 30, 1922:
• Accounts payable amounted to ₱13,807.50
• Accounts receivable amounted to ₱19,126.02
• Net surplus profit was ₱3,314.72 - On June 30, 1922, the board resolved to set aside ₱3,000 of surplus for dividends, to be paid in installments, requiring stockholders with outstanding accounts to settle first.
- Dividend payments totaling ₱3,000 were made between September 30, 1922, and May 12, 1923, based on a balance sheet showing a total surplus of ₱3,725.49 and a reserve fund of ₱2,889.23.
- On September 11, 1923, upon filing for dissolution for insolvency:
• Accounts payable stood at ₱9,241.19
• Accounts receivable stood at ₱12,512.47 - After appointment on February 28, 1924, the receiver made diligent efforts to collect receivables but was unab