Steinberg v. Velasco, 52 Phil.
953 [1929]
MONTELIBANO VS BACOLOD-MURCIA MILING
Facts: Plaintiffs-appellants, Alfredo Montelibano, Alejandro Montelibano, and the
Limited co-partnership Gonzaga and Company, had been and are sugar planters
adhered to the defendant-appellee’s sugar central mill under identical milling contracts.
Originally executed in 1919, said contracts were stipulated to be in force for 30 years
starting with the 1920-21 crop, and provided that the resulting product should be
divided in the ratio of 45% for the mill and 55% for the planters.Sometime in 1936, it was
proposed to execute amended milling contracts, increasing the planters’ share to 60%
of the manufactured sugar and resulting molasses, besides other concessions, but
extending the operation of the milling contract from the original 30 years to 45 years.
The Board of Directors of the appellee Bacolod-Murcia Milling Co., Inc., adopted a
resolution granting further concessions to the planters over and above those
contained in the printed Amended Milling Contract. The appellants initiated the present
action, contending that three Negros sugar centrals with a total annual production
exceeding one-third of the production of all the sugar central mills in the province, had
already granted increased participation (of 62.5%) to their planters, and that under the
resolution the appellee had become obligated to grant similar concessions to the
plaintiffs. The appellee Bacolod-Murcia Milling Co., inc., resisted the claim, and
defended by urging that the stipulations contained in the resolution were made
without consideration; that the resolution in question was, therefore, null and void ab
initio, being in effect a donation that was ultra vires and beyond the powers of the
corporate directors to adopt.
Issue: WON the board resolution is an ultra vires act and in effect a donation from the
board of directors?
Held: No. There can be no doubt that the directors of the appellee company had
authority to modify the proposed terms of the Amended Milling Contract for the
purpose of making its terms more acceptable to the other contracting parties. As the
resolution in question was passed in good faith by the board of directors, it is valid and
binding, and whether or not it will cause losses or decrease the profits of the central,
the court has no authority to review them. Whether the business of a corporation
should be operated at a loss during depression, or close down at a smaller loss, is a
purely business and economic problem to be determined by the directors of the
corporation and not by the court. The appellee Bacolod-Murcia Milling Company is,
under the terms of its Resolution of August 20, 1936, duty bound to grant similar
increases to plaintiffs-appellants herein.
Case Digest
FACTS:
Plaintiff is the receiver of the Sibuguey Trading Company, a domestic
corporation. The defendants are residents of the Philippine Islands and
Sibuguey Trading Company Inc. had an authorized capital stock of P20,000
divided into 2,000 shares of the par value of P10 each, which only P10,030 was
subscribed and paid. Ganzon and Mendaros are directors of the corporation. (Take note
of this computation to avoid confusion)
During the meeting of the Board of Directors of said corporation, knowing
very well of the face value of the corporation previously stated, the defendants Ganzon
along with other officers of the board passed a resolution authorizing the purchase by
the corporation of large portion of its own capital stock in the total amount of P3,300
for 330 shares, par value at P10 each. at the time the purchase was made, the
corporation was indebted in the sum of P13,807.50, and that according to its books, it
had accounts receivable in the sum of P19,126.02.
On September 11, 1923, when the petition was filed for its dissolution upon the
ground that it was insolvent, its accounts payable amounted to P9,241.19, and its
accounts receivable P12,512.47, or an apparent asset of P3,271.28 surplus over its
liabilities. Seeing this as profits, the board approved the distribution of its dividends in
the amount of P3,000. However, the payment of such dividends shall be in installment,
so that, according to the Board, the financial standing of the corporation may not be
impaired.
All of this acts, as alleged by plaintiff, is to the detriment and prejudice of
corporation’s creditors.
ISSUE:
Whether or not the defendant-officers of the corporation acted in grossly
negligent, hence, liable.
HELD:
The officers acted negligently and are liable. The court cited the following:
“Upon each of those points, the rule is well stated in Ruling Case Law, vol. 7,
p. 473, section 454 where it is said:
General Duty to Exercise Reasonable Care. — The directors of a
corporation are bound to care for its property and manage its affairs in good
faith, and for a violation of these duties resulting in waste of its assets or injury
to the property they are liable to account the same as other trustees. Are
there can be no doubt that if they do acts clearly beyond their power,
whereby loss ensues to the corporation, or dispose of its property or pay
away its money without authority, they will be required to make good the loss
 out of their private estates. This is the rule where the disposition made of
money or property of the corporation is one either not within the lawful
power of the corporation, or, if within the authority of the particular officer or
officers.
And section 458 which says:
Want of Knowledge, Skill, or Competency. — It has been said that
directors are not liable for losses resulting to the corporation from want of
knowledge on their part; or for mistake of judgment, provided they were
honest, and provided they are fairly within the scope of the powers and
discretion confided to the managing body. But the acceptance of the office of
a director of a corporation implies a competent knowledge of the duties
assumed, and directors cannot excuse imprudence on the ground of their
ignorance or inexperience; and if they commit an error of judgment through
mere recklessness or want of ordinary prudence or skill, they may be held
liable for the consequences. Like a mandatory, to whom he has been likened,
a director is bound not only to exercise proper care and diligence, but ordinary
skill and judgment. As he is bound to exercise ordinary skill and judgment, he
cannot set up that he did not possess them.”
The court held that if in truth and in fact the corporation had an actual bona
fide surplus of P3,000 over and above all of its debt and liabilities, the payment of the
P3,000 in dividends would not in the least impair the financial condition of the
corporation or prejudice the interests of its creditors.
It is very apparent that on June 24, 1922, the board of directors acted on
assumption that, because it appeared from the books of the corporation that it had
accounts receivable of the face value of P19,126.02, therefore it had a surplus over and
above its debts and liabilities. But as stated there is no stipulation as to the actual cash
value of those accounts, and it does appear from the stipulation that on February 28,
1924, P12,512.47 of those accounts had but little, if any, value, and it must be conceded
that, in the purchase of its own stock to the amount of P3,300 and in declaring the
dividends to the amount of P3,000, the real assets of the corporation were diminished
P6,300. It also appears from paragraph 4 of the stipulation that the corporation had a
"surplus profit" of P3,314.72 only. It is further stipulated that the dividends should "be
made in installments so as not to effect financial condition of the corporation." In other
words, that the corporation did not then have an actual bona fide surplus from which
the dividends could be paid, and that the payment of them in full at the time would
"affect the financial condition of the corporation."
It is, indeed, peculiar that the action of the board in purchasing the stock from
the corporation and in declaring the dividends on the stock was all done at the same
meeting of the board of directors, and it appears in those minutes that the both
Ganzon and Mendaros were formerly directors and resigned before the board
approved the purchase and declared the dividends, and that out of the whole 330
shares purchased, Ganzon, sold 100 and Mendaros 200, or a total of 300 shares out of
the 330, which were purchased by the corporation, and for which it paid P3,300. In
other words, that the directors were permitted to resign so that they could sell their
stock to the corporation. As stated, the authorized capital stock was P20,000 divided
into 2,000 shares of the par value of P10 each, which only P10,030 was subscribed and
paid. Deducting the P3,300 paid for the purchase of the stock, there would be left
P7,000 of paid up stock, from which deduct P3,000 paid in dividends, there would be
left P4,000 only. In this situation and upon this state of facts, it is very apparent that
the directors did not act in good faith or that they were grossly ignorant of their duties.
Creditors of a corporation have the right to assume that so long as there are
outstanding debts and liabilities, the board of directors will not use the assets of the
corporation to purchase its own stock, and that it will not declare dividends to
stockholders when the corporation is insolvent.
The amount involved in this case is not large, but the legal principles are
important, and we have given them the consideration which they deserve.
PRIME WHITE CEMENT VS IAC
In July 1969, Zosimo Falcon and Justo Trazo entered into an agreement with Alejandro
Te whereby it was agreed that from 1970 to 1976, Te shall be the sole dealer of 20,000
bags Prime White cement in Mindanao. Falcon was the president of Prime White
Cement Corporation (PWCC) and Trazo was a board member thereof. Te was likewise a
board member of PWCC. It was agreed that the selling price for a bag of cement shall
be P9.70.
Before the bags of cement can be delivered, Te already made known to the public that
he is the sole dealer of cements in Mindanao. Various hardwares then approached him
to be his sub-dealers, hence, Te entered into various contracts with them.
But then apparently, Falcon and Trazo were not authorized by the Board of PWCC to
enter into such contract. Nevertheless, the Board wished to retain the contract but
they wanted some amendment which includes the increase of the selling price per bag
to P13.30 and the decrease of the total amount of cement bags from 20k to 8k only
plus the contract shall only be effective for a period of three months and not 6 years.
Te refused the counter-offer. PWCC then awarded the contract to someone else.
Te then sued PWCC for damages. PWCC filed a counterclaim and in said counterclaim, it
is claiming for moral damages the basis of which is the claim that Te’s filing of a civil
case against PWCC destroyed the company’s goodwill. The lower court ruled in favor
Te.
ISSUE: Whether or not the ruling of the lower court is correct.
HELD: No. Te is what can be called as a self-dealing director – he deals business with the
same corporation in which he is a director. There is nothing wrong per se with that.
However, Sec. 32 provides that:
SEC. 32. Dealings of directors, trustees or officers with the corporation. —- A contract
of the corporation with one or more of its directors or trustees or officers is voidable,
at the option of such corporation, unless all the following conditions are present:
1. That the presence of such director or trustee in the board meeting in which the
contract was approved was not necessary to constitute a quorum for such meeting;
2. That the vote of such director or trustee was not necessary for the approval of the
contract;
3. That the contract is fair and reasonable under the circumstances; and
4. That in the case of an officer, the contract with the officer has been previously
authorized by the Board of Directors.
In this particular case, the Supreme Court focused on the fact that the contract
between PWCC and Te through Falcon and Trazo was not reasonable. Hence, PWCC has
all the rights to void the contract and look for someone else, which it did. The contract
is unreasonable because of the very low selling price. The Price at that time was at least
P13.00 per bag and the original contract only stipulates P9.70. Also, the original
contract was for 6 years and there’s no clause in the contract which protects PWCC
from inflation. As a director, Te in this transaction should protect the corporation’s
interest more than his personal interest. His failure to do so is disloyalty to the
corporation.
Anent the issue of moral damages, there is no question that PWCC’s goodwill and
reputation had been prejudiced due to the filing of this case. However, there can be no
award for moral damages under Article 2217 of the Civil Code in favor of a corporation.