G.R. No.

L-17504 & L-17506

February 28, 1969

RAMON DE LA RAMA, FRANCISCO RODRIGUEZ, HORTENCIA SALAS, PAZ SALAS and PATRIA SALAS, heirs of Magdalena Salas, as stockholders on their own behalf and for the benefit of the Ma-ao Sugar Central Co., Inc., and other stockholders thereof who may wish to join in this action, plaintiffsappellants, vs. MA-AO SUGAR CENTRAL CO., INC., J. AMADO ARANETA, MRS. RAMON S. ARANETA, ROMUALDO M. ARANETA, and RAMON A. YULO, defendants-appellants. San Juan, Africa and Benedicto for plaintiffs-appellants. Vicente Hilado and Gianzon, Sison, Yulo and Associates for defendants-appellants. CAPISTRANO, J.: This was a representative or derivative suit commenced on October 20, 1953, in the Court of First Instance of Manila by four minority stockholders against the Ma-ao Sugar Central Co., Inc. and J. Amado Araneta and three other directors of the corporation. The complaint comprising the period November, 1946 to October, 1952, stated five causes of action, to wit: (1) for alleged illegal and ultra-vires acts consisting of self-dealing irregular loans, and unauthorized investments; (2) for alleged gross mismanagement; (3) for alleged forfeiture of corporate rights warranting dissolution; (4) for alleged damages and attorney's fees; and (5) for receivership. Plaintiffs prayed, in substance, as follows: Under the FIRST CAUSE OF ACTION, that the defendant J. Amado Araneta and his individual codefendants be ordered to render an accounting of all transactions made and carried out by them for defendant corporation, 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"; Under the SECOND CAUSE OF ACTION, that the individual defendants be held liable and be ordered to pay to the defendant 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20122, entitled 'Francisco Rodriguez vs. Ma-ao Sugar Central Co.'"; to return to the defendant corporation all amounts withdrawn by way of discretionary funds or backpay, and to account for the difference between the corporation's crop loan accounts payable and its crop loan accounts receivable; Under the THIRD CAUSE OF ACTION, that the corporation be dissolved and its net assets be distributed to the stockholders; and Under the FOURTH CAUSE OF ACTION, that the 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." THE FIFTH CAUSE OF ACTION was an application for the provisional remedy of receivership.

In their answer originally filed on December 1, 1953, and amended on February 1, 1955, defendants denied "the allegations regarding the supposed gross mismanagement, fraudulent use and diversion of corporate funds, disregard of corporate requirements, abuse of trust and violation of fiduciary relationship, etc., supposed to have been discovered by plaintiffs, all of which are nothing but gratuitous, unwarranted, exaggerated and distorted conclusions not supported by plain and specific facts and transactions alleged in the complaint." BY WAY OF SPECIAL DEFENSES, the defendants alleged, among other things: (1) that the complaint "is premature, improper and unjustified"; (2) that plaintiffs did not make an "earnest, not simulated effort" to exhaust first their remedies within the corporation before filing their complaint; (3) that no actual loss had been suffered by the defendant corporation on account of the transactions questioned by plaintiffs; (4) that the payments by the debtors of all amounts due to the defendant corporation constituted a full, sufficient and adequate remedy for the grievances alleged in the complaint and (5) that the dissolution and/or receivership of the defendant corporation would violate and impair the obligation of existing contracts of said corporation. BY WAY OF COUNTERCLAIM, the defendants in substance further alleged, among others, that the complaint was premature, improper and malicious, and that the language used was "unnecessarily vituperative abusive and insulting, particularly against defendant J. Amado Araneta who appears to be the main target of their hatred." Wherefore, the defendant sought to recover "compensation for damages, actual, moral, exemplary and corrective, including reasonable attorney's fees." After trial, the Lower Court rendered its Decision (later supplemented by an Order resolving defendants' Motion for Reconsideration), the dispositive portion of which reads: IN VIEW WHEREOF, the Court dismisses the petition for dissolution but condemns J. Amado Araneta to pay unto Ma-ao Sugar Central Co., Inc. the amount of P46,270.00 with 8% interest from the date of the filing of this complaint, plus the costs; the Court reiterates the preliminary injunction restraining the Maao Sugar Central Co., Inc. management to give any loans or advances to its officers and orders that this injunction be as it is hereby made, permanent; and orders it 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. From this judgment both parties appealed directly to the Supreme Court. Before taking up the errors respectively, assigned by the parties, we should state that the following findings of the Lower Court on the commission of corporate irregularities by the defendants have not been questioned by the defendants: 1. Failure to hold stockholders' meetings regularly. No stockholders' meetings were held in 1947, 1950 and 1951; 2. Irregularities in the keeping of the books. Untrue entries were made in the books which could not simply be considered as innocent errors;

3. Illegal investments in the Mabuhay Printing, P2,280,00, and the Acoje Mining, P7,000.00. The investments were made not in pursuance of the corporate purpose and without the requisite authority of two-thirds of the stockholders; 4. Unauthorized loans to J. Amado Araneta totalling P132,082.00 (which, according to the defendants, had been fully paid), in violation of the by-laws of the corporation which prohibits any director from borrowing money from the corporation; 5. Diversion of corporate funds of the Ma-ao Sugar Central Co., Inc. to: J. Amado Araneta & Co. Luzon Industrial Corp. Associated Sugar General Securities Bacolod Murcia Central Azucarera del Danao Talisay-Silay P243,415.62 585,918.17 463,860.36 86,743.65 501,030.61 97,884.42 4,365.90

The Court found that sums were taken out of the funds of the Ma-ao Sugar Central Co., Inc. and delivered to these affiliated companies, and vice versa, without the approval of the Ma-ao Board of Directors, in violation of Sec. III, Art. 6-A of the by-laws. The errors assigned in the appeal of the plaintiffs, as appellants, are as follows: I. THE LOWER COURT ERRED IN HOLDING THAT THE INVESTMENT OF CORPORATE FUNDS OF THE MA-AO SUGAR CENTRAL CO., INC., IN THE PHILIPPINE FIBER PROCESSING CO., INC. WAS NOT A VIOLATION OF SEC. 17- OF THE CORPORATION LAW. II. THE LOWER COURT ERRED IN NOT FINDING THAT THE MA-AO SUGAR CENTRAL CO., INC. WAS 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 ITS CULPABLE ACTS WERE INSUFFICIENT FOR THE DISSOLUTION OF THE CORPORATION. The portions of the Decision of the Lower Court assailed by the plaintiffs as appellants are as follows: (1) ".... Finally, as to the Philippine Fiber, the Court takes it that defendants admit having invested P655,000.00 in shares of stock of this company but that this was ratified by the Board of Directors in Resolutions 60 and 80, Exhibits "R" and "R-2"; more than that, defendants contend that since said company was engaged in the manufacture of sugar bags it was perfectly legitimate for Ma-ao Sugar either to manufacture sugar bags or invest in another corporation engaged in said manufacture, and they quote authorities for the purpose, pp. 28-31, memorandum; the Court is persuaded to believe that the defendants on this point are correct, because while Sec. 17-1/2 of the Corporation Law provides that: No corporation organized under this act shall invest its funds in any other corporation or business or for any purpose other than the main purpose for which it was organized unless its board of directors has been so authorized in a resolution by the affirmative vote of stockholders holding shares in the corporation entitling them to exercise at least two-thirds of the voting power on such proposal at the stockholders' meeting called for the purpose. the Court is convinced that that law should be understood to mean as the authorities state, that it is prohibited to the Corporation to invest in shares of another corporation unless such an investment is authorized by two-thirds of the voting power of the stockholders, if the purpose of the corporation in which investment is made is foreign to the purpose of the investing corporation because surely there is more logic in the stand that if the investment is made in a corporation whose business is important to the investing corporation and would aid it in its purpose, to require authority of the stockholders would be to unduly curtail the Power of the Board of Directors; the only trouble here is that the investment was made without any previous authority of the Board of Directors but was only ratified afterwards; this of course would have the effect of legalizing the unauthorized act but it is an indication of the manner in which corporate business is transacted by the Ma-ao Sugar administration, the fact that off and on, there would be passed by the Board of Directors, resolutions ratifying all acts previously done by the management, e.g. resolutions passed on February 25, 1947, and February 25, 1952, by the Board of Directors as set forth in the affidavit of Isidro T. Dunca p. 127, etc. Vol. 1. (Decision, pp. 239-241 of Record on Appeal.) xxx xxx xxx

(2) "On the other hand, the Court has noted against plaintiffs that their contention that Ma-ao Sugar is on the verge of bankruptcy has not been clearly shown; against this are Exh. C to Exh. C-3 perhaps the

best proof that insolvency is still far is that this action was filed in 1953 and almost seven years have passed since then without the company apparently getting worse than it was before; ..." (Decision, pp. 243-244,supra.) xxx xxx xxx

(3) "As to the crop loan anomalies in that instead of giving unto the planters the entire amount alloted for that, the Central withheld a certain portion for their own use, as can be seen in Appendix A of Exh. C1, while the theory of plaintiffs is that since between the amount of P3,791,551.78 the crop loan account payable, and the amount of P1,708,488.22, the crop loan receivable, there is a difference of P2,083,063.56, this would indicate that this latter sum had been used by the Central itself for its own purposes; on the other hand, defendants contend that the first amount did not represent the totality of the crop loans obtained from the Bank for the purpose of relending to the planters, but that it included the Central's own credit line on its 40% share in the standing crop; and that this irregularity amounts to a grievance by plaintiffs as planters and not as stockholders, the Court must find that as to this count, there is really reason to find that said anomaly is not a clear basis for the derivative suit, first, because plaintiffs' evidence is not very sufficient to prove clearly the alleged diversion in the face of defendants' defense; there should have been a showing that the Central had no authority to make the diversion; and secondly, if the anomaly existed, there is ground to hold with defendants that it was an anomaly pernicious not to the Central but to the planters; it was not even pernicious to the stockholders. Going to the discriminatory acts of J. Amado Araneta, namely, manipulation of cane allotments, withholding of molasses and alcohol shares, withholding of trucking allowance, formation of rival planters associations, refusal to deal with legitimate planters group, Exh. S; the Court notices that as to the failure to provide hauling transportation, this in a way is corroborated by Exh. 7, that part containing the decision of the Court of First Instance of Manila, civil 20122, Francisco Rodriguez v. Ma-ao Sugar; for the reason, however, that even if these were true, those grievances were grievances of plaintiffs as planters and not as stockholders just as the grievance as to the crop loans already adverted to, this Court will find insufficient merit on this count. (Decision, pp. 230-231, supra.) xxx xxx xxx

(4) "...; for the Court must admit its limitations and confess that it cannot pretend to know better than the Board in matters where the Board has not transgressed any positive statute or by-law especially where as here, there is the circumstance that presumably, an impartial representative in the Board of Directors, the one from the Philippine National Bank, against whom apparently plaintiffs have no quarrel, does not appear to have made any protest against the same; the net result will be to hold that the culpable acts proved are not enough to secure a dissolution; the Court will only order the correction of abuses, proved as already mentioned; nor will the Court grant any more damages one way or the other. (Decision, p. 244,supra.) On the other hand, the errors assigned in the appeal of the defendants as appellants are as follows: I.

THE LOWER COURT ERRED IN ADJUDGING J. AMADO ARANETA TO PAY TO MA-AO SUGAR CENTRAL CO., INC., THE AMOUNT OF P46,270.00, WITH 8% INTEREST FROM THE DATE OF FILING OF THE COMPLAINT. II. THE LOWER COURT ERRED IN NOT ORDERING THE PLAINTIFFS TO PAY THE DEFENDANTS, PARTICULARLY J. AMADO ARANETA, THE DAMAGES PRAYED FOR IN THE COUNTERCLAIM OF SAID DEFENDANTS. The portions of the Decision of the Lower Court assailed by the defendants as appellants are as follows: (1) "As to the alleged juggling of books in that the personal account of J. Amado Araneta of P46,270.00 was closed on October 31, 1947 by charges transferred to loans receivable nor was interest paid on this amount, the Court finds that this is related to charge No. 1, namely, the granting of personal loans to J. Amado Araneta; it is really true that according to the books, and as admitted by defendants, J. Amado Araneta secured personal loans; in 1947, the cash advance to him was P132,082.00 (Exh. A); the Court has no doubt that this was against the By-Laws which provided that: The Directors shall not in any case borrow money from the Company. (Sec. III, Art. 7); the Court therefore finds this count to be duly proved; worse, the Court also finds that as plaintiffs contend, while the books of the Corporation would show that the last balance of P46,270.00 was written off as paid, as testified to by Auditor Mr. Sanchez, the payment appeared to be nothing more than a transfer of his loan receivable account, stated otherwise, the item was only transferred from the personal account to the loan receivable account, so that again the Court considers established the juggling of the books; and then again, it is also true that the loans were secured without any interest and while it is true that in the Directors' meeting of 21 October, 1953, it was resolved to collect 8%, the Court does not see how such a unilateral action of the Board could bind the borrowers. Be it stated that defendants have presented in evidence Exh. 5 photostatic copy of the page in loan receivable and it is sought to be proved that J. Amado Araneta's debt was totally paid on 31 October, 1953; to the Court, in the absence of definite primary proof of actual payment having found out that there had already been a juggling of books, it cannot just believe that the amount had been paid as noted in the books. (Decision, pp. 233-235 of Record on Appeal.) (2) "With respect to the second point in the motion for reconsideration to the effect that the Court did not make any findings of fact on the counterclaim of defendants, although the Court did not say that in so many words, the Court takes it that its findings of fact on pages 17 to 21 of its decision were enough to justify a dismissal of the counterclaim, because the counterclaims were based on the fact that the complaint was premature, improper, malicious and that the language is unnecessarily vituperative abusive and insulting; but the Court has not found that the complaint is premature; nor has the Court found that the complaint was malicious; these findings can be gleaned from the decision with respect to the allegation that the complaint was abusive and insulting, the Court does not concur; for it has not seen anything in the evidence that would justify a finding that plaintiffs and been actuated by bad faith, nor is there anything in the complaint essentially libelous; especially as the rule is that allegations in pleading where relevant, are privileged even though they may not clearly proved afterwards; so that the

Court has not seen any merit in the counterclaims; and the Court had believed that the decision already carried with it the implication of the dismissal of the counterclaims, but if that is not enough, the Court makes its position clear on this matter in this order, and clarifies that it has dismissed the counterclaims of defendant; ..." (Order of September 3, 1960, pp. 248-249, supra.) Regarding Assignment of Errors Nos. 2, 3 and 4 contained in the brief of the plaintiffs as appellants, it appears to us that the Lower Court was correct in its appreciation (1) that the evidence presented did not show that the defendant Ma-ao Sugar Company was insolvent (2) that the alleged discriminatory acts committed by the defendant Central against the planters were not a proper subject of derivative suit, but, at most, constituted a cause of action of the individual planters; and (3) that the acts of mismanagement complained of and proved do not justify a dissolution of the corporation. Whether insolvency exists is usually a question of fact, to be determined from an inventory of the assets and their value, as well as a consideration of the liabilities.... But the mere impairment of capital stock alone does not establish insolvency there being other evidence as to the corporation being a going concern with sufficient assets. Also, the excess of liabilities over assets does not establish insolvency, when other assets are available. (Fletcher Cyc. of the Law of Private Corporations, Vol. 15A, 1938 Ed pp. 34-37; Emphasis supplied). But relief by dissolution will be awarded in such cases only where no other adequate remedy is available, and is not available where the rights of the stockholders can be, or are, protected in some other way. (16 Fletcher Cyc. Corporations, 1942 Ed., pp. 812-813, citing "Thwing v. McDonald", 134 Minn. 148, 156 N.W. 780, 158 N.W. 820, 159 N.W. 564, Ann. Cas. 1918 E 420; Mitchell v. Bank of St. Paul, 7 Minn. 252). The First Assignment of Error in the brief of the plaintiffs as appellants, contending that the investment of corporate funds by the Ma-ao Sugar Co., Inc., in another corporation (the Philippine Fiber Processing Co., Inc.) constitutes a violation of Sec. 17- of the Corporation Law, deserves consideration. Plaintiffs-appellants contend that in 1950 the Ma-ao Sugar Central Co., Inc., through its President, J. Amado Araneta,, subscribed for P300,000.00 worth of capital stock of the Philippine Fiber Processing Co. Inc., that payments on the subscription were made on September 20, 1950, for P150,000.00, on April 30, 1951, for P50,000.00, and on March 6, 1952, for P100,000.00; that at the time the first two payments were made there was no board resolution authorizing the investment; and that it was only on November 26, 1951, that the President of Ma-ao Sugar Central Co., Inc., was so authorized by the Board of Directors. In addition, 355,000 shares of stock of the same Philippine Fiber Processing Co., Inc., owned by Luzon Industrial, corporation were transferred on May 31, 1952, to the defendant Ma-ao Sugar Central Co., Inc., with a valuation of P355,000.00 on the basis of P1.00 par value per share. Again the "investment" was made without prior board resolution, the authorizing resolution having been subsequentIy approved only on June 4, 1952.

Plaintiffs-appellants also contend that even assuming, arguendo, that the said Board Resolutions are valid, the transaction, is still wanting in legality, no resolution having been approved by the affirmative vote of stockholders holding shares in the corporation entitling them to exercise at least two-thirds of the voting power, as required in Sec. 17- of the Corporation Law. The legal provision invoked by the plaintiffs, as appellants, Sec. 17- of the Corporation Law, provides: No corporation organized under this act shall invest its funds in any other corporation or business, or for any purpose other than the main purpose for which it was organized, unless its board of directors has been so authorized in a resolution by the affirmative vote of stockholders holding shares in the corporation entitling them to exercise at least two-thirds of the voting power on such proposal at a stockholders' meeting called for the purpose .... On the other hand, the defendants, as appellees, invoked Sec. 13, par. 10 of the Corporation Law, which provides: SEC. 13. Every corporation has the power: xxx xxx xxx

(9) To enter into any obligation or contract essential to the proper administration of its corporate affairs or necessary for the proper transaction of the business or accomplishment of the purpose for which the corporation was organized; (10) Except as in this section otherwise provided, and in order to accomplish its purpose as stated in the articles of incorporation, to acquire, hold, mortgage, pledge or dispose of shares, bonds, securities and other evidences of indebtedness of any domestic or foreign corporation. A reading of the two afore-quoted provisions shows that there is need for interpretation of the apparent conflict. In his work entitled "The Philippine Corporation Law," now in its 5th edition, Professor Sulpicio S. Guevara of the University of the Philippines, College of Law, a well-known authority in commercial law, reconciled these two apparently conflicting legal provisions, as follows: j. Power to acquire or dispose of shares or securities. A private corporation, in order to accomplish its purpose as stated in its articles of incorporation, and subject to the limitations imposed by the Corporation Law, has the power to acquire, hold, mortgage, pledge or dispose of shares, bonds, securities, and other evidences of indebtedness of any domestic or foreign corporation. Such an act, if done in pursuance of the corporate purpose, does not need the approval of the stockholders; but when the purchase of shares of another corporation is done solely for investment and not to accomplish the purpose of its incorporation, the vote of approval of the stockholders is necessary. In any case, the purchase of such shares or securities must be subject to the limitations established by the Corporation Law; namely, (a) that no agricultural or mining corporation shall in anywise be interested in any other agricultural or mining corporation; or (b) that a non-agricultural or non-mining corporation shall be

restricted to own not more than 15% of the voting stock of any agricultural or mining corporation; and (c) that such holdings shall be solely for investment and not for the purpose of bringing about a monopoly in any line of commerce or combination in restraint of trade. (The Philippine Corporation Law by Sulpicio S. Guevara, 1967 Ed., p. 89.) (Emphasis ours.)lawphi1.nt 40. Power to invest corporate funds. A private corporation has the power to invest its corporate funds in any other corporation or business, or for any purpose other than the main purpose for which it was organized, provided that 'its board of directors has been so authorized in a resolution by the affirmative vote of stockholders holding shares in the corporation entitling them to exercise at least two-thirds of the voting power on such a proposal at a stockholders' meeting called for that purpose,' and provided further, that no agricultural or mining corporation shall in anywise be interested in any other agricultural or mining corporation. When the investment is necessary to accomplish its purpose or purposes as stated in it articles of incorporation, the approval of the stockholders is not necessary. (Id., p. 108.) (Emphasis ours.) We agree with Professor Guevara. We therefore agree with the finding of the Lower Court that the investment in question does not fall under the purview of Sec. 17- of the Corporation Law. With respect to the defendants' assignment of errors, the second (referring to the counterclaim) is clearly without merit. As the Lower Court aptly ruled in its Order of September 3, 1960 (resolving the defendants' Motion for Reconsideration) the findings of fact were enough to justify a dismissal of the counterclaim, "because the counterclaims were based on the fact that the complaint was premature, improper, malicious and that the language is unnecessarily vituperative abusive and insulting; but the Court has not found that the complaint is premature; nor has the Court found that the complaint was malicious; these findings can be gleaned from the decision; with respect to the allegation that the complaint was abusive and insulting, the Court does not concur; for it has not seen anything in the evidence that would justify a finding that plaintiffs had been actuated by bad faith, nor is there anything in the complaint essentially libelous especially as the rule is that allegations in pleadings where relevant, are privileged even though they may not be clearly proved afterwards; ..." As regards defendants' first assignment of error, referring to the status of the account of J. Amado Araneta in the amount of P46,270.00, this Court likewise agrees with the finding of the Lower Court that Exhibit 5, photostatic copy of the page on loans receivable does not constitute definite primary proof of actual payment, particularly in this case where there is evidence that the account in question was transferred from one account to another. There is no better substitute for an official receipt and a cancelled check as evidence of payment. In the judgment, the lower court ordered the management of the Ma-ao Sugar Central Co., Inc. "to refrain from making investments in Acoje Mining, Mabuhay Printing and any other company whose purpose is not connected with the sugar central business." This portion of the decision should be reversed because, Sec. 17- of the Corporation Law allows a corporation to "invest its fund in any other corporation or business, or for any purpose other than the main purpose for which it was organized,"

provided that its board of directors has been so authorized by the affirmative vote of stockholders holding shares entitling them to exercise at least two-thirds of the voting power. IN VIEW OF ALL THE FOREGOING, that part of the judgment which orders the Ma-ao Sugar Central Co., Inc. "to refrain from making investments in Acoje Mining, Mabuhay Printing, and any other: company whose purpose is not connected with the sugar central business," is reversed. The other parts of the judgment are, affirmed. No special pronouncement as to costs.

G.R. No. L-43413

August 31, 1937

HIGINIO ANGELES, JOSE E. LARA and AGUEDO BERNABE, as stockholders for an in behalf and for the benefit of the corporation, Paraaque Rice Mill, Inc. and the other stockholders who may desire to join, plaintiffs-appellees, vs. TEODORICO B. SANTOS, ESTANISLAO MAYUGA, APOLONIO PASCUAL, and BASILISA RODRIGUEZ,defendant-appellants. P. Masalin and A. Sta. Maria for appellants. Eulogio P. Revilla and Barrera and Reyes for appellees. LAUREL, J.: The plaintiff and the defenant aree all stockholders and member of the board of directors of the "Paraaque Rice Mill, Inc., "a corporation organized for the purpose of operating a rice mill in the municipality of Paraaque, Province of Rizal. On September 6, 1932, a complaint entitle "Higinio Angeles, Jose de Lara, Aguedo Bernabe, as stockholders, for and in behalf of the corporation, Paraaque Rice Mill, Inc., and other stockholders of said corporation who may desire to join, plaintiff, vs. Teodorico B. Santos, Estanislao Mayuga, Apolonio Pascual, and Basilisa Rodriguez, defendant was filed with the Court of First Instance of Rizal. After formal allegation relative to age and residence of the parties and the due incorporation of the Paraaque Rice Mill, Inc., the complaint avers subtantially the following: (a) That the plaintiffs are stockholders and constitute the minority and the defendants are also stockholers and constitute the majority of the board of directors of the Paraaque Rice Mill, Inc.; (b) that at an extraordinary meeting held on February 21, 1932, the stockholders appointed an investigation committee of which the plaintiff Jose de Lara was chairman and the stockholers Dionisio Tomas and Aguedo Bernabe were members, to investigate and determine the properties, operations, and losses of the corporation as shown in the auditor's report corresponding to the year 1931, but the defendants, particularly Teodorico B. Santos, who was the president of the corporation, denied access to the properties, books and record of the corporation which were in their possession (c) That the defendant Teodorico B. Santos, in violation of the by-laws of the corporation, had taken possession of the books, vouchers, and corporate records as well as of the funds and income of the Paraaque Rice Mill, Inc., all of which, according to the by-laws, should be under the exclusive control and possession of the secretary-treasurer, the plaintiff Aguedo Bernabe; (d) That the said Teodorico B. Santos, had

appropriated to his own benefit properties, funds, and income of the corporation in the sum of P10,000; (e) that Teodoro B. Santos, for the purpose of illegally controlling the affairs of the corporation, refuse to sign and issue the corresponding certificate of stock for the 600 fully paid-up share of the plaintiff, Higinio Angeles, of the total value of P15,000; ( f ) that notwithstanding written requests made in conformity with the by-laws of the corporation of three members of the board of directors who are holders of more than one-third of the subscribed capital stock of the corporation, the defendant Teodorico B. Santos as president of the corporation refuse to call a meeting of the board of directors and of the stockholers; (g) that in violation of the by-laws of the corporation, the defendant who constitute the majority of the board of directors refused to hold ordinary monthly meetings of the board since March, 19332; (h) that Teodorico B. Santos as president of the corporation, in connivance with his co-defendants, was disposing of the properties and records of the corporation without authority from the board of directors or the stockholders of the corporation and without making any report of his acts to the said board of directors or to any other officer of the corporation, and that, to prevent any interferrence with or examination of his arbitrary acts, he arbitrarily suspended plaintiff Jose de Lara from the office of general manager to which office the latter had been lawfully elected by the stockholders; and (i) that the corporation had gained about P4,000 during the first half of the year 1932, but that because of the illegal and arbitrary acts of the defendants not only the funds but also the books and records of the corporation are in danger of disappearing. The complaint prays: (a) That after the filing of the bond in an amount to be fixed by the court, Melchor de Lara of Paraaque, Rizal, be appointed receiver of the properties, funds and business of the Paraaque Rice Mill, Inc., as well as the books and record thereof, with authority to continue the business of the corporation; (b) that the defendant Teodorico B. Santos be ordered to render a detailed accounting of the properties, funds and income of the corporation from the year 1927 to date; (c) that the said defendant be required to pay to the corporation the amount of P10,000 and other amounts which may be found due to the said corporation as damages or for my other cause, (d) that said defendant be ordered to sign the certificate of stock subscribed to and paid by the plaintiff Higinio Angeles; and (e) that the members of the board of directors of the Paraaque Rice Mill, Inc., be removed and an exrtraodinary meeting of the stockholders called for the purpose of electing a new board of directors. On the date of the filling of the complaint, September 6, 1932, the court issue an ex parte order of receivership appointing Melchor de Lara as receiver of the corporation upon the filling of a bond of P1,000 by the plaintiffs-appellees. The bond of the receiver was fixed at P4,000. Upon an urgent motion of the defendants-appellants setting forth the reasons why Melchor de Lara should not have been appointed receiver, and upon agreement of the parties, the trial court, by order of September 13, 1932, appointed Benigno Agco, as receiver, in lieu of Melchor de Lara. About a month after, or on October 14, 1932, the court, after considering the memoranda filed by both parties revoked its order appointing Agco as receiver. On July 12, 1933, the defendants-appellants presented their amended answer to the complaint, containing a general and specific denial, and alleging as special defense that the defendant Teodorico B.

Santos refused to sign the certificate of stock in favor of the plaintiff Higinio Angeles for 600 shares valued at P15,00, because the board of directors decided to give Higinio Angeles only 320 shares of stock worth P8,000. The answer contains a counter-claim for P5,000 alleged illegal and malicious procurement by the plaintiffs of an ex parte order of receivership. Damages in the amount of P2,000 are also alleged to have been suffered by the defendants by reason of the failure of the plaintiffs to present their grievances to the Board of directors before going to court. The amended answer sets forth, furthermore, a cross-complaint against the plaintiffs, and in behalf of the Paraaque Rice Mill, Inc., based on the alleged failure of the plaintiff Higinio Angeles to render a report of his administration of the corporation from February 14 to June 30, 1928, during which time the corporation is alleged to have accrued earnings of approximately P3,000. In both the counter claim and cross-complaint Paraaque Rice Mill, Inc. is joined as party defendant. On July 24, 1934, the plaintiffs-appellees renewed their petition for the appointment of a receiver pendente litealleging, among other things, that defendant Teodorico B. Santos was using the funds of the corporation for purely personal ends; that said Teodorico B. Santos was managing to the interest of the Corporation and its stockholders; that said defendant did not render any account of his management or for the condition of the business of the corporation; that since 1932 said defendant called no meeting of the board of directors or of the stockholders thus enabling him to continue holding, without any election, the position of present and, finally, that of manager; and that, without the knowledge and consent of the stockholders and of the board of directors, the said defendant installed a small rice mill for converting rice husk into "tiqui-tiqui", the income of which was never turned over or reported to the treasurer of the corporation. The defendant-appellants objected to the petition for the appointment of a receiver on the ground, among others, that the court had no jurisdiction over the Paraaque Rice Mill, Inc., because it had not been include as party defendant in this case and that, therefore the court could not properly appoint a receiver of the corporationpendente lite. After hearing both parties, the trial court by order of October 31, 1934, appointed Emilio Figueroa, as receiver of the corporation, after giving a bond in the amount of P2,000. An urgent for the reconsideration of this order filed by counsel for the defendant-appellant on November 3, 1934, was denied by the court on November 7, 1934. On November 8, 1934, the trial court, having heard the case on its merits rendered a decision, the dispositive part of which is as follows: Por todo lo expuesto el Juzgado fall este asunto: 1. Ordenando al demandado Teodorico B. Santos a rendircuenta ellada de las propiedads, fondos e ingresos dela corporacion Paraaque Rice Mill, Inc., de el ao 1931 hasta la fecha; 2. Condenando a dicho demandado a pagar a la corporacion Paraaque Rice Mill, Inc., cualesquiera cantida o cantidades que resultate en deber a dicha corporacion; de acuerdo con dicha rendicion de cuentas;

3. Declarando al demanante Higinio M. Angeles con derecho a tener expedido a su nombre 600 acciones por valor par de P15,000. 4. Destituyendo a los demandados de su cargo como directores e la corporacion hasta la nueva eleccion por los accionistas que se convocara una vez firme esta sentencia; y 5. Condenando a los demandados a pagar las costas. On November 21, 1934, the defendants-appellants, moved for reconsideration of the decision and at the same time prayed for the dismissal of the case, because of defect of parties defendant. On December 6, 1934, the Paraaque Rice Mill, Inc., thru counsel for the defendants, entered a special appearance for the sole purpose of objecting to the order of the court of October 31, 1934, appointing a receiver, on the ground that the Paraaque Rice Mill, Inc., was not a party to the proceedings. And on December 8, 1934, the defendants excepted to the decision of the trial court and moved for a new trial on the ground that the evidence presented was insufficient to justify the decision and that said decision was contrary to law. The motions for reconsideration and new trial and the special appearance were, by separate orders bearing date of December 19, 1934, denied by the trial court. The case was finally elevated to this court by bill of exceptions. The defendants-appellants submit the following assignment of errors: 1. The lower court erred in holding that it has jurisdiction to appoint a receiver o the corporation, "Paraaque Rice Mill, Inc.," on October 31, 1934. 2. The lower court erred in overruling the motion of the defendants the include the defendant corporation as party defendant and in holding that it is not a necessary party. 3. The lower court erred in not granting a motion for a new trial because there is a defect of party defendant. 4. The lower court erred in not dismissing the case because a necessary defendant was not made a party in the case. 5. The lower court erred in ordering the defendant Teodorico B. Santos to render a detailed accounting of the properties, funds and income of the corporation "Paraaque Rice Mill, Inc.," from the year 1931 to this date. 6. The lower court erred in condemning the defendant Teodorico B. Santos to pay the corporation whatever sum or sums which may be found owing to said corporation, in accordance with the said accounting to be one by him. 7. The lower court erred in ordering the destitution of the defendants from their office as members of the board of directors of the corporation, until the new election of the stockholders which shall be held once the decision has become final..

8. The lower court erred in declaring that Higino Angeles is entitled to have in his name 600 shares of stock of the par value of P15,000. 9. The lower court erred in overruling and denying appellants' motion for the reconsideration and the dismissal of the case dated November 21, 1934. 10. The lower court erred in denying the motion of these appellants for new trial. In their discussion of the first, second, third, and fourth assignment of error, the defendants-appellants vigorously assert that the Paraaque Rice Mill, Inc., is a necessary party in this case, and that not having been made a party, the trial court was without jurisdiction to appoint a receiver and should have dismissed the case. There is ample evidence in the present case to show that the defendants have been guilty of breach of trust as directors of the corporation and the lower court so found. The board of directors of a corporation is a creation of the stockholders and controls and directs the affairs of the corporation by allegation of the stockholers. But the board of directors, or the majority thereof, in drawing to themselves the power of the corporation, occupies a position of trusteeship in relation to the minority of the stock in the sense that the board should exercise good faith, care and diligence in the administration of the affairs of the corporation and should protect not only the interest of the majority but also those of the minority of the stock. Where a majority of the board of directors wastes or dissipates the funds of the corporation or fraudulently disposes of its properties, or performs ultra viresacts, the court, in the exercise of its equity jurisdiction, and upon showing that intracorporate remedy is unavailing, will entertain a suit filed by the minority members of the board of directors, for and in behalf of the corporation, to prevent waste and dissipation and the commission of illegal acts and otherwise redress the injuries of the minority stockholders against the wrongdoing of the majority. The action in such a case is said to be brought derivatively in behalf of the corporation to protect the rights of the minority stockholers thereof (7 R. C. L., pars. 293 and 294, and authority therein cited; 13 Fletcher, Cyc. of Corp., pars. 593, et seq., an authorities therein cite). It is well settled in this jurisdiction that where corporate directors are guilty of a breach of trust not of mere error of judgment or abuse of discretion and intracorporate remedy is futile or useless, a stockholder may institute a suit in behalf of himself and other stockholders and for the benefit of the corporation, to bring about a redress of the wrong inflicted directly upon the corporation and indirectly upon the stockholers. An illustration of a suit of this kind is found in the case of Pascual vs. Del Sanz Orozco (19 Phil., 82), decided by this court as early as 1911. In that case, the Banco Espaol-Filipino suffered heavy losses due to fraudulent connivance between a depositor and an employee of the bank, which losses, it was contened, could have been avoided if the president and directors has been more vigilant in the administration of the affairs of the bank. The stockholers constituting the minority brought a suit in behalf of the bank against the directors to recover damages, and this over the objection of the majority of the stockholers and the directors. This court held that the suit properly be maintained. The contention of the defendants in the case at bar that the Paraaque Rice Mill, Inc., should have been brought in as necessary party and the action maintained in its name and in its behalf directly states the

general rule, but not the exception recognize by this court in the case of Everrett vs. Asia Banking Corporation (49 Phil., 512, 527). In that case, upon invocation of the general rule by the appellees there, this court said: Invoking the well-known rule that shareholers cannot ordinarily sue in equity to redress wrong done to the corporation, but that the action must be brought by the board of directors, the appellees argue and the court below held that the corporation Teal & Company is a necessary party plaintiff and that the plaintiff stockholder, not having made any demand on the board to bring the action, are not the proper parties plaintiff. But, like most rules, the rule in question has its exceptions. It is alleged in the complaint and, consequently, admitted through the demurrer that the corporation Teal & Company is under the complete control of the principal defendants in the case, and, in these circumstances it is obvious that a demand upon the board of directors to institute action and prosecute the same effectively would have been useless, and the law does not require litigants to perform useless acts. (Exchange Bank of Wewoka vs. Bailey, 29 Okla., 246; Fleming and Hewins vs. Black Warrior Copper Co., 15 Ariz., 1; Wickersham vs. Crittenen, 106 Cal., 329; Glem vs. Kittanning Brewing Co., 259 Pa., 510; Hawes vs. Contra Costa Water Company, 104 U.S., 450.) The action having been properly brought and by the lower court entertained it was within its power, upon proper showing, to appoint a receiver of the corporation pendente lite (secs. 173, 174, et seq. Code of Civil Procedure). The appointment of a receiver upon application of the minority stockholers is power to be exercised with great caution. But this does not mean that right of the minority stockholers may be entirely disregarded, and where the necessity has arisen, the appointment of a receiver for a corporation is a matter resting largely in the sound discretion of the trial court. Counsel for appellants argue that the appointment of a receiver pendente lite in the present case has deprived the corporation, Paraaque Rice Mill, Inc., of property without due process of law. But it is too plain to require argument that the receiver was precisely appointed to preserve the properties of the corporation. The receivership in this case shall continue until a new board of directors shall have been elected and the corporation. The first, second, third, and fourth assignments of error are, therefore, overruled. The appellants contend in their fifth and sixth assignments of error that lower court erred in ordering the defendant, Tedorico B. Santos, to render a detailed accounting of the properties, funds and income of the corporation, Paraaque Rice Mill., Inc., from the year 1931 and in condemning him to pay "the corporation whatever sum or sums which may be found owing to said corporation, in accordance with said accounting to be done by him." We note that the lower court in its decision not only orders the defendant Santos to account for the properties and funds of the corporation, but it also and at the same time adjudges him to pay an undermine amount which is made to depend upon the result of such accounting. The accounting order was probably intended by the lower court to be file with it in this proceeding. This requirement will delay the final disposition of the case and we are of the opinion that this accounting should better be filed with the new board of directors whose election has been ordered by the lower court. The decision of the lower court in this respect is therefore modified so that the defendant Santos shall render a complete accounting of all the corporate properties and funds that may

have come to his possession during the period mentioned in the jugment of the lower court to the new board of director to be elected by the stockholders. In the seventh assignment of error, the appellants contend that the lower court erred in ordering the removal of the defendants from their offices as members of the board of directors of the corporation. The Corporation Law, as amended, in section 29 to 34, provide for the election and removal of the directors of a corporation. Our Corporation Law (Act No. 1459, as amended), does not confer expressly upon the court the power to remove a director of a corporation. In some jurisdictions, statutes expressly provide a more or less summary method for the confirmation of the election and for the a motion of the directors of a corporation. This is true in New York, New Jersey, Virginia and other states of the American Union. There are abundant authorities, however, which hold that if the court has acquire jurisdiction to appoint a receiver because of the mismanagement of directors these may thereafter be remove and others appointed in their place by the court in the exercise of its equity jurisdiction (2 Fletcher, Cyc. of Corp., ftn. sec. 358, pp. 18 an 119). In the present case, however, the properties and assets of the corporation being amply protected by the appointment of a receiver and view of the statutory provisions above referred to, we are of the opinion that the removal of the directors is, under the circumstances, unnecessary and unwarranted. The seventh assignment of error is, therefore, sustained. Under the eighth assignment of error, the appellants argue that the lower court erred in deciding that the plaintiff Higinio Angeles is entitled to the issuance in his name of a certificate covering 600 shares of stock of the total par value of P15,000. A review of the evidence, oral and documentary, relative to the number of shares of stock to which Higinio Angeles is entitled, shows that Higinio Angeles brought in P15,000 party in money and party in property, for 600 shares of stock. The very articles of incorporation signed by all the incorporators, among whom are the defendants, show that Higinio Angeles paid P5,600 on account of his subscription amounting to P10,000. The amount of P5,600 is the value of Angeles' cinematograph building in Bacoor, Cavite, which he transferred to the municipality of Paraaque where the same was reconstructed for the use of the corporation. The receipts signed by the Philippine Engineering Company and the testimony of Higinio Angeles and Aguedo Bernabe (secretary-treasurer of the corporation) show that Higinio Angeles paid with his own funds the sum of P2,750 to the Philippine Engineering Co., as part of the purchase price of the ricemill bought for the corporation. Angeles paid a further sum of P2,397.99 to the Philippine Engineering Company. It also appears that for the installation of the Rice Mill, the construction of camarin, and the cement paving (cementacion) of the whole area of twocamarines, and for the excavation of a well for the use of the rice mill the plaintiff Higinio Angeles paid with his own funds the amount of P7,431.47. Adding all these sums together we have a total of P18, 179.46. At a meeting of the board of directors on December 27, 1931, which meeting was convoked by Angeles, it seemed to have been agreed that Angeles was to be given shares of stock of the total par value of P15,000. Angeles wanted to have P16,000 worth of stock to his credit for having made the disbursements mentioned above, but he finally agreed to accept 600 share worth only P15,000. The certificate of stock, however, was not issued as disagreement arose between him and the defendant Santos. We, therefore, find no error in the decision of the lower court ordering the issuance of a certificate for 600 shares of stock of the total par value of P15,000 to Higinio Angeles.

It is unnecessary to consider the ninth and tenth assignments of error. In view of the foregoing, we hold: (1) That the action in the present case was properly instituted by the plaintiff as stockholders for and in behalf of the corporation Paraaque Rice Mill, Inc., and other stockholders of the said corporation; (2) That the lower court committed no reveiwable error in appointing a receiver of the corporation pendente lite; (3) That the lower court committed no error in ordering an election of the new board of directors, which election shall be held within thirty days from the date this decision becomes final; (4) That Teodorico B. Santos shall render an accounting of all the properties, funds and income of the corporation which may have come into his possession to the new board of directors; (5) That the receiver, Emilio Figueroa, shall continue in office until the election and qualification of the members of the new board of directors; (6) That upon the constitution of the new board of directors, the said receiver shall turn over all the properties of the corporation in his possession to the corporation, or such person or persons as may be duly authorized by it; and. (7) That Higinio Angeles, or his successor in interest, is entitled to 600 shares of stock at the par value of P15,000 and the lower court committed no error in ordering the issuance of the corresponding certificate of stock. On June 10, 1937, counsel for the plaintiff-appellees filed a motion making it appear of record that Higinio Angeles, one of the plaintiffs and appellees, died on May 4, 1937 and that one of his daughters, Maura Angeles y Reyes, had been granted letters of administration as evidenced by the document attached to the motion as Exhibit A, and praying that said Maura Angeles y Reyes be substituted as one of the plaintiffs and appellees in lieu of Higinio Angeles, deceased. This motion is hereby granted. Defendant-appellants shall pay the costs in both instances. So ordered.