DEBT SECURITIES
personally to the representative.
G.R. No. L-33205 August 31, 1987
LIRAG TEXTILE MILLS, INC., and BASILIO L. LIRAG, petitioners, vs.
SOCIAL SECURITY SYSTEM, and HON. PACIFICO DE CASTRO,
respondents.
 On September 4, 1961, Social Security System and LTM
entered into a Purchase Agreement under which SSS agreed
to purchase from Lirag Textile Mills preferred shares of
stock worth P1,000,000.00 with a par value of P100 each.
 Paragraph 3 of the agreement further provides that LTM
shall repurchase the said stocks.
 To guarantee the redemption of the stocks, the payment of
dividends, as well as the other obligations of LTM, Basilio
Lirag, president of LTM, bound himself as surety so that
should LTM fail to perform any of its obligations in the said
Purchase Agreement, he shall immediately pay SSS the
amounts then outstanding.
 It has been the policy of SSS to be represented in the BOD
of the entity which has obtained financial assistance from it.
As such, Messrs. Rene Espina, Bernardino Abes and Heber
Catalan were each issued one common share of stock as a
qualifying share to their election to the BOD of LTM.
 During their respective tenure as members of the BOD, they
received per diems for their attendance therein in the same
manner and in the same amount as any other member of
the Board of Directors, participated in the deliberations
therein and freely exercised their right to vote in such
meetings. However, the per diems received by the SSS
representative do not go to the coffers of the System but
 LTM failed to redeem certificates of Stock Nos. 128 and 139,
nor was it able to pay dividends due to financial reverses.
Accordingly, the SSS filed an action for specific performance
and damages against Lirag Textile Mills, Inc. and Basilio L.
Lirag.
 LTM and Basilio, on its part claimed that SSS merely became
and still is a preferred stockholder of LTM, the redemption
of the shares purchased by SSS being dependent upon the
financial ability of LTM. The latter, thus, has no obligation to
redeem the preferred stocks.
 On the other hand, SSS claims that the Purchase Agreement
is a debt instrument, imposing upon LTM and Basilio the
obligation to pay the amount owed, and creating as
between them the relation of creditor and debtor, not that
of a stockholder and a corporation.
 The lower court, ruling that the purchase agreement was a
debt instrument, decided in favor of SSS.
ISSUE: WON the Purchase Agreement entered into by petitioners
and respondent SSS is a debt instrument.
HELD: YES.
The terms and conditions of the Purchase Agreement unmistakably
show that the parties intended the repurchase of the preferred
shares on respective scheduled dates to be an absolute obligation
which does not depend upon the financial ability of the corporation.
This absolute obligation on the part of LTM is made manifest by the
fact that a surety was required to see to it that the obligation is
fulfilled in the event of the principal debtor's inability to do so. The
unconditional undertaking of petitioner corporation to redeem the
preferred shares at the specified dates constitutes a debt which is
defined "as an obligation to pay money at some fixed future time,
or at a time which becomes definite and fixed by acts of either party
and which they expressly or impliedly, agree to perform in the
contract.
A stockholder sinks or swims with the corporation and there is no
obligation to return the value of his shares by means of repurchase
if the corporation incurs losses and financial reverses, much less
guarantee such repurchase through a surety.
If the parties intended SSS to be merely a stockholder of LTM, it
would have been sufficient that Preferred Certificates Nos. 128 and
139 were issued in its name. However, the parties did in fact
execute the Purchase Agreement, at the same time that the LTM
issued its preferred stock to SSS. The Purchase Agreement serves to
define the rights and obligations of the parties and to establish
firmly the liability of petitioners in case of breach of contract. The
Certificates of Preferred Stock serve as additional evidence of the
agreement between the parties, though the precise terms and
conditions thereof must be read together with, and regarded as
qualified by the terms and conditions of the Purchase Agreement.
The rights given by the Purchase Agreement for the benefit of SSS
are rights not enjoyed by ordinary stockholders. It suggests an
intention on the part of SSS to facilitate a loan to the corporation.
SSS is looked upon more as a lending institution rather than as an
investing agency, the purchase agreement supplied these protective
rights which would otherwise be furnished by collaterals to the
loan. Thus, the membership in the board is to have a watchdog in
the operation of the business of the corporation, so as to insure
against mismanagement which may result in losses not entirely
unavoidable since payment for purposes of redemption as well as
the dividends is expressly stipulated to come from profits and/or
surplus. Such a right is never exacted by an ordinary stockholder
merely investing in the corporation.
Moreover, the Purchase Agreement provided that failure on the
part of petitioner to repurchase the preferred shares on the
scheduled due dates renders the entire obligation due and
demandable, with petitioner in such eventuality liable to pay 12% of
the then outstanding obligation as liquidated damages. These
features of the Purchase Agreement, taken collectively, clearly show
the intent of the parties to be bound therein as debtor and creditor,
and not as corporation and stockholder.
NOTE: The dividends stipulated by the parties served evidently as
interests. The amount thereof was fixed at 8% per annum and was
not made to depend upon or to fluctuate with the amount of profits
or surplus realized, a clear indication that the parties intended to
give a sure and fixed earnings on the principal loan.
EQUITY SECURITIES
G.R. No. L-39427 February 24, 1934
TIRSO GARCIA, in his capacity as receiver of the Mercantile Bank of
China, plaintiff-appellee, vs. LIM CHU SING, defendant-appellant.
Defendant Lim Chu Sing executed and delivered to the Mercantile
Bank of China a PN for the sum of P19,605.17 payable on instalment
basis. One of the conditions stipulated therein is that in case of
defendant's default in the payment of any of the monthly
instalments, the entire amount or the unpaid balance thereof
together with interest thereon at 6% pa, shall become due and
payable on demand. The defendant had been, making several
partial payments thereon, leaving an unpaid balance of P9,105.17.
However, he defaulted in the payment of several installments thus
the unpaid balance of P9,105.17 has ipso facto become due and
demandable.
The debt which is the subject matter of the complaint was not really
an indebtedness of the defendant but of Lim Cuan Sy, who had an
account with the plaintiff bank in the form of "trust receipts"
guaranteed by the defendant as surety and with chattel mortgage
securities. The plaintiff bank, without the knowledge and consent of
the defendant, foreclosed the chattel mortgage and privately sold
the property covered thereby. Inasmuch as Lim Cuan Sy failed to
comply with his obligations, the plaintiff required the defendant, as
surety, to sign the subject PN. The defendant is the owner of shares
of stock of the plaintiff Mercantile Bank of China amounting to
P10,000. The plaintiff bank is now under liquidation.
ISSUE: WON it is proper to compensate the defendant's
indebtedness of P9,105.17 with the sum of P10,000 representing
the value of his shares of stock with the plaintiff bank.
HELD: NO.
According to the weight of authority, a share of stock or the
certificate thereof is not an indebtedness to the owner nor evidence
of indebtedness and, therefore, it is not a credit. Stockholders, as
such, are not creditors of the corporation. The capital stock of a
corporation is a trust fund to be used more particularly for the
security of creditors of the corporation, who presumably deal with it
on the credit of its capital stock. Therefore, the defendant not being
a creditor of the bank, although the latter is a creditor of the
former, there is no sufficient ground to justify a compensation.
NOTE: (SUMMARY OF RULING) (1) That failure to file an exception
to a ruling rendered in open court denying a motion for the
inclusion of a party as defendant deprives the petitioner, upon
appeal of the right to raise the question whether such denial proper
or improper; (2) that the shares of a banking corporation do not
constitute an indebtedness of the corporation to the stockholder
and, therefore, the latter is not a creditor of the former for such
shares; (3) that the indebtedness of a shareholder to a banking
corporation cannot be compensated with the amount of his shares
therein, there being no relation of creditor and debtor with
respect to such shares; and (4) that the percentage stipulated in a
contract, for costs and attorney's fees for the collection of an
indebtedness, includes judicial costs.
EQUITY SECURITIES: CONSIDERATION
G.R. No. L-27872 February 25, 1928
THE NATIONAL EXCHANGE CO., INC., plaintiff-appellee, vs. I. B.
DEXTER, defendant-appellant.
I. B. Dexter signed a written subscription to the corporate stock of C.
S. Salmon & Co. in the following form:
I hereby subscribe for 300 shares of the capital stock of C. S. Salmon
and Company, payable from the first dividends declared on any and
all shares of said company owned by me at the time dividends are
declared, until the full amount of this subscription has been paid.
Upon this subscription the sum of P15,000 was paid in January,
1920, from a dividend declared at about that time by the company,
supplemented by money supplied personally by the subscriber.
Beyond this nothing has been paid on the shares and no further
dividend has been declared by the corporation. There is therefore a
balance of P15,000 still paid upon the subscription.
ISSUE: WON the stipulation contained in the subscription to the
effect that the subscription is payable from the first dividends
declared on the shares has the effect of relieving the subscriber
from personal liability in an action to recover the value of the
shares.
HELD: NO
In the absence of restrictions in its character, a corporation, under
its general power to contract, has the power to accept subscriptions
upon any special terms not prohibited by law or contrary to public
policy, provided they are not such as to require the performance of
acts which are beyond the powers conferred upon the corporation
by its charter, and provided they do not constitute a fraud upon
other subscribers or stockholders, or upon persons who are or may
become creditors of the corporation.
Section 74 of the Organic Act of July 1, 1902 declared: "That all
franchises, privileges, or concessions granted under this Act shall
forbid the issue of stock or bonds except in exchange for actual cash
or for property at a fair valuation equal to the par value of the stock
or bonds so issued."
Further, the 1906 Corporation Law stated: "no corporation shall
issue stock or bonds except in exchange for actual cash paid to the
corporation or for property actually received by it at a fair valuation
equal to the par value of the stock or bonds so issued."
The prohibition against the issuance of shares by corporations
except for actual cash to the par value of the stock to its full
equivalent in property is thus enshrined in both the organic and
statutory law of the Philippines; and it would seem that our
lawmakers could scarcely have chosen language more directly
suited to secure absolute equality stockholders with respect to their
liability upon stock subscriptions. Now, if it is unlawful to issue stock
otherwise than as stated it is self-evident that a stipulation such as
that now under consideration, in a stock subcription, is illegal, for
this stipulation obligates the subcriber to pay nothing for the
shares except as dividends may accrue upon the stock. In the
contingency that dividends are not paid, there is no liability at all.
This is a discrimination in favor of the particular subcriber, and
hence the stipulation is unlawful.
Nor has a corporation have the power to receive a subscription
upon such terms as will operate as a fraud upon the other
subscribers or stockholders by subjecting the particular subscriber
to lighter burdens, or by giving him greater rights and privileges, or
as a fraud upon creditors of the corporation by withdrawing or
decreasing the capital. As a general rule, that an agreement
between a corporation and a particular subscriber, by which the
subscription is not to be payable, or is to be payable in part only, is
illegal and void as in fraud of other stockholders or creditors, or
both.
"Conditions attached to subscriptions, which, if valid, lessen the
capital of the company, are a fraud upon the grantor of the
franchise, and upon those who may become creditors of the
corporation, and upon unconditional stockholders."
In the appellant's brief, it is stated that a collateral agreement with
a subscriber to stock that his subscription shall not be collectible
except from dividends on the stock, is valid as between the parties
and a complete defense to a suit on notes given for the amount of
the subscription. This is untenable.
Any attempt to discriminate in favor of one subscriber by relieving
him of this liability wholly or in part is forbidden. In what is here said
we have reference primarily to subscriptions to shares that have not
been previously issued. It is conceivable that the power of the
corporation to make terms with the purchaser would be greater
where the shares which are the subject of the transaction have
been acquired by the corporation in course of commerce, after they
have already been once issued. But the shares with which are here
concerned are not of this sort.
ES: PAYMENT OF THE BALANCE OF THE SUBSCRIPTION
G.R. No. L-4824 June 30, 1953
LINGAYEN GULF ELECTRIC POWER COMPANY, INC., plaintiff-
appellant, vs. IRINEO BALTAZAR, defendant-appellee.
Defendant Irineo Baltazar subscribed for 600 shares of Lingayen
Gulf on account of which he had paid upon the organization of the
corporation the sum of P15,000. After incorporation, the defendant
made further payments on account of his subscription, leaving a
balance of P18,500 unpaid for, which amount, the plaintiff now
claims in this action.
On July 23, 1946, stockholders of the corporation adopted
resolution No. 17. By said resolution, it was agreed upon by the
stockholders present to call the balance of all unpaid subscribed
capital stock as of July 23, 1946, the first 50% payable within 60
days beginning August 1, 1946, and the remaining 50% payable
within 60 days beginning October 1, 1946. The resolution also
provided, that all unpaid subscription after the due dates of both
calls would be subject to 12% interest per annum. Lastly, after the
expiration of 60 days' grace period, all subscribed stocks remaining
unpaid would revert to the corporation.
The defendant, on September 25, 1946, asked the corporation for
him to be allowed to pay his unpaid subscription by February 1,
1947. He also agreed that if he could not do so, his unpaid
subscription would be reverted to the corporation.
On December 19, 1947, the defendant wrote another letter to the
corporation, offering to withdraw completely from the corporation
by selling out to the corporation all his shares of stock in the total
amount of P23,000. This was left unacted upon by the plaintiff.
On April 17, 1948, the BOD adopted another resolution which in
effect set aside the earlier resolution, on the ground that the same
is null and void, and because the plaintiff corporation was not in a
financial position to absorb the unpaid balance of the subscribed
capital stock.
Admittedly, the defendant received notice from the Secretary-
Treasurer of the company, demanding payment of the unpaid
balance of his subscription. Although, such call of the BOD was not
published in a newspaper of general circulation.
On September 28, 1949, the legal counsel of the plaintiff
corporation wrote a letter to the defendant, demanding the
payment of the unpaid balance of his subscription amounting to
P18,500. Copy of this letter was sent by registered mail to the
defendant on September 29,1 949. (See Exhibit G). The defendant
ignored the said demand. Hence this action.
The lower court found that the call for payment embodied in
resolution No. 17 of July 23, 1946 was null and void for lack of
publication; consequently, he dismissed the complaint as
premature. He further held said resolution null and void in so far as
it tried to relieve the defendant from liability on his unpaid
subscription, on the ground that the resolution was not approved
by all the stockholders of the corporation.
HELD:
We agree with the lower court that the law requires that notice of
any call for the payment of unpaid subscription should be made not
only personally but also by publication. This is clear from the
provisions of section 40 of the Corporation Law, Act No. 1459, as
amended, which reads as follows:
SEC. 40. Notice of call for unpaid subscriptions must be either
personally served upon each stockholder or deposited in the post
office, postage prepaid, addressed to him at his place of residence,
if known, and if not known, addressed to the place where the
principal office of the corporation is situated. The notice must also
be published once a week for four successive weeks in some
newspaper of general circulation devoted to the publication of
general news published at the place where the principal office of
the corporation is established or located, and posted in some
prominent place at the works of the corporation if any such there
be. If there be no newspaper published at the place where the
principal office of the corporation is established or located, then
such notice may be published in any newspaper of general news in
the Philippines.
Section 40 is mandatory as regards publication. The reason for the
mandatory provision is not only to assure notice to all subscribers,
but also to assure equality and uniformity in the assessment on
stockholders.
"Not only must personal notice be given, but the notice must also
be published once a week, for four consecutive weeks, in some
newspaper."
When the corporation becomes insolvent, with proceedings
instituted by creditors to wind up and distribute its assets, no call or
assessment is necessary before the institution of suits to collect
unpaid balance on subscription. (Poizat Ruling)
Going to the claim of defendant and appellant that Resolution No.
17 of 1946 released him from the obligation to pay for his unpaid
subscription, the authorities are generally agreed that in order to
effect the release, there must be unanimous consent of the
stockholders of the corporation. The release attempted in
Resolution No. 17 of 1946 was not valid for lack of a unanimous
vote. If found that at least seven stockholders were absent from the
meeting when said resolution was approved.
In conclusion we hold that under the Corporation Law, notice of call
for payment for unpaid subscribed stock must be published, except
when the corporation is insolvent, in which case, payment is
immediately demandable. We also rule that release from such
payment must be made by all the stockholders.
ES: LIABILITY FOR UNPAID SUBSCRIPTION
G.R. No. L-68097 January 16, 1986
EDWARD A. KELLER & CO., LTD., petitioner-appellant, vs. COB
GROUP MARKETING, INC., et. al.
Edward A. Keller & Co., Ltd. appointed COB Group Marketing as
exclusive distributor of its household products, Brite and Nuvan in
Panay and Negros, as shown in a sales agreement were agreement
Keller sold on credit its products to COB Group Marketing.
As security for COB’s credit purchases up to the amount of P35,000,
one Asuncion Manahan mortgaged her land to Keller. Manahan
assumed solidary liability with COB Group.
In July, 1970 the parties executed a second sales agreement
whereby COB's territory was extended to Northern and Southern
Luzon. As security for the credit purchases up to P25,000 for that
area, Tomas C. Lorenzo, Jr. and his father Tomas, Sr. (now deceased)
executed a mortgage on their land in Nueva Ecija. Like Manahan,
the Lorenzos were solidarily liable with COB Group Marketing for its
obligations under the sales agreement.
Eventually, it was found put that COB owed Keller about P179,000.
On the same day, May 8 1971, Bax, as a representative of COB, and
R. Oefeli of Keller signed the conditions for the settlement of COB's
liability.
Subsequently, COB, through Bax, executed two additional chattel
mortgages over its 12 trucks (already mortgaged to Northern
Motors, Inc.) as security for its obligation to Keller. However, the
second mortgages did not become effective because the first
mortgagee, Northern Motors, did not give its consent. But the
second mortgages served the purpose of being admissions of the
liability COB Group Marketing to Keller.
Keller sued on September 16, 1971 COB, its stockholders and the
mortgagors, Manahan and Lorenzo.
HELD:
We find that the lower courts erred in nullifying the admissions of
liability made in 1971 by Bax as president and general manager of
COB Group Marketing and in giving credence to the alleged
overpayment computed by Bax.
The lower courts not only allowed Bax to nullify his admissions as to
the liability of COB Group Marketing but they also erroneously
rendered judgment in its favor in the amount of its supposed
overpayment in the sum of P100,596.72, in spite of the fact that
COB Group Marketing was declared in default and did not file any
counterclaim for the supposed overpayment.
There was a conference on COB's liability on May 8 1971. Bax in that
discussion did not present his reconciliation statements to show
overpayment. His Exhibits 7 and 8 were an afterthought. He
presented them long after the case was filed.
Bax admitted that Keller sent his company monthly statements of
accounts but he could not produce any formal protest against the
supposed inaccuracy of the said statements. He lamely explained
that he would have to dig up his company's records for the formal
protest. He did not make any written demand for reconciliation of
accounts.
As to the liability of the stockholders, it is settled that a
stockholder is personally liable for the financial obligations of a
corporation to the extent of his unpaid subscription.
ES: DELINQUENCY SUBSCRIPTION
G.R. No. L-19761 January 29, 1923
PHILIPPINE TRUST COMPANY, as assignee in insolvency of "La
Cooperativa Naval Filipina," plaintiff-appellee, vs. MARCIANO
RIVERA, defendant-appellant.
It appears that in 1918, Cooperativa Naval Filipina was duly
incorporated with a capital of P100,000, divided into oP1,000 shares
of a par value of P100 each. Among its incorporators was Mariano
Rivera, who subscribed for 450 shares representing a value of
P45,000.
In the course of time the company became insolvent and went into
the hands of the Philippine Trust Company, as assignee in
bankruptcy; and by it this action was instituted to recover 1/2 of the
stock subscription of the defendant, which admittedly has never
been paid.
The reason given for the failure of the defendant to pay the entire
subscription is, that not long after the Cooperativa Naval Filipina
had been incorporated, a meeting of its stockholders occurred, at
which a resolution was adopted to the effect that the capital should
be reduced by 50% and the subscribers released from the obligation
to pay any unpaid balance of their subscription in excess of 50 per
centum of the same. As a result of this resolution it seems to have
been supposed that the subscription of the various shareholders
had been cancelled to the extent stated; and fully paid certificate
were issued to each shareholders for one-half of his subscription. It
does not appear that the formalities prescribed in section 17 of the
Corporation Law (Act No. 1459), as amended, relative to the
reduction of capital stock in corporations were observed, and in
particular it does not appear that any certificate was at any time
filed in the Bureau of Commerce and Industry, showing such
reduction.
The trial judge, therefore held that the resolution relied upon the
defendant was without effect and that the defendant was still liable
for the unpaid balance of his subscription.
ISSUE: WON the trial judge is correct.
HELD: YES.
Subscription to the capital of a corporation constitute a fund to
which creditors have a right to look for satisfaction of their claims
and that the assignee in insolvency can maintain an action upon any
unpaid stock subscription in order to realize assets for the payment
of its debts. A corporation has no power to release an original
subscriber to its capital stock from the obligation of paying for his
shares, without a valuable consideration for such release; and as
against creditors a reduction of the capital stock can take place only
in the manner an under the conditions prescribed by the statute or
the charter or the articles of incorporation. Moreover, strict
compliance with the statutory regulations is necessary.
In the case before us the resolution releasing the shareholders from
their obligation to pay 50 per centum of their respective
subscriptions was an attempted withdrawal of so much capital from
the fund upon which the company's creditors were entitled
ultimately to rely and, having been effected without compliance
with the statutory requirements, was wholly ineffectual.
G.R. No. L-35961 December 2, 1932
ROMANA MIRANDA, in her capacity as judicial administratrix of
the intestate estate of Alberto Miranda, plaintiff-appellant, vs.
THE TARLAC RICE MILL CO., INC., defendant-appellee.
On June 8, 1926 Alberto Miranda executed a written contract
whereby he subscribed for 100 shares of the capital stock of a
corporation for the purpose of operating a rice mill in Tarlac, said
corporation to be known as Tarlac Rice Mill Company, Inc., that the
par value of each share was P100; and that Alberto Miranda
obligated himself to pay to the treasurer of the corporation or its
assign the sum of P10,000 on instalment basis.
On July 10, 1926 Alberto Miranda "assigned," mortgaged, or
transferred in lieu of cash for the benefit and to the credit of the
Tarlac Rice Mill Company a parcel of land.
He likewise appointed Evaristo Magbag (President), Eusebio R.
Cabrera, Marcos P. Puno (Vice-Presidents), and C. M. Dizon to be his
attorneys-in-fact for the purpose of obtaining, securing or soliciting
credit against the aforesaid property in an amount not to exceed
P10,000 in accordance with his subscription contract, to increase
the capital of the corporation.
On February 19, 1927 the aforesaid attorneys-in-fact, acting on
behalf of said corporation and Alberto Miranda, borrowed P10,000
from Mariano Tablante. They jointly and severally guaranteed the
payment of this sum; and mortgaged to Mariano Tablante the
aforementioned parcel of land to secure the payment of the PN.
The sum of P10,000 obtained from Mariano Tablante was retained
by the corporation. When the PN became due, Alberto Miranda
arranged for an extension of time in which to pay it, and on July 19,
1929 he sold the aforementioned parcel of land under pacto de
retro to Vicente Panlilio for P10,000, and paid Mariano Tablante.
Alberto Miranda died on May 24, 1930.
Tarlac Rice Mill eventually ceased to do business from the year
1928, but the other stockholders have not paid for their shares in
accordance with their subscription agreement, and no action has
been taken by the corporation to require them to do so.
The principal contention of the appellant is that the officers of the
corporation violated the terms of the power of attorney in
mortgaging the land on February 19, 1927 for P10,000, because the
only sum then due and payable by Alberto Miranda to the
corporation was P3,000, and that when the remaining instalments
of the stock subscription became due, Alberto Miranda was under
no obligation to pay them, because the corporation had already
ceased to do business, and it had taken no steps to compel the
other stockholders to pay for the shares for which they had
subscribed.
HELD:
It is true that when the property was mortgaged on February 19,
1927 the amount due from Alberto Miranda in accordance with the
subscription agreement was only P3,000, and it is likewise true that
it does not appear from the evidence that any call was issued by the
directors for the payment of any subscriptions.
The fact that Alberto Miranda agreed on June 8, 1926 to pay the
amount of his subscription installments on certain fixed dates did
not, of course prevent him from authorizing the officers of the
corporation as his attorneys-in-fact to pay his subscription prior to
the dates fixed in the subscription agreement. In one paragraph of
the power of attorney it is stated that the attorneys-in-fact of
Alberto Miranda are authorized to mortgage or convey the property
in any way convenient to them in the amount not to exceed
P10,000 in accordance with the subscription contract, but the
phrase "in accordance with the subscription contract" is followed by
the following words "for or to increase the capital of the said Tarlac
Rice Mill Company, Inc., in order to carry out the purposes for which
said firm is to be organized." Under the circumstances, it seems to
us that it would be a strained construction of the power of attorney,
taking into consideration the whole document, to hold that the
officers of the corporation acting as attorneys-in-fact- of Alberto
Miranda were authorized to mortgage or convey the land for only
the amount then due from Alberto Miranda in accordance with the
subscription agreement.
It can hardly be contended that the power of attorney
contemplated that the property should be mortgaged three times,
that is, each time that an instalment became due. We are inclined
to the view that it was the intention of the parties that the property
should be mortgaged immediately for a sum not to exceed P10,000,
not only for the purpose of paying the subscription agreement of
Alberto Miranda, but also for the purpose, as stated in the power of
attorney, of increasing the capital of the corporation, not the capital
stock, in order to carry out the purposes for which it was to be
organized.
This view of the matter is confirmed by the subsequent conduct of
the parties. Although the corporation retained the full amount of
the loan obtained from Mariano Tablante, and Alberto Miranda had
to pay that obligation, he never sought, so far as the record shows,
to recover from the corporation any part of the sum of P10,000. As
we have already stated, the mortgage was executed on February 19,
1927; it was satisfied by Alberto Miranda on July 19, 1929, and he
lived until May 24, 1930. It does not appear that he ever sought to
evade the satisfaction of the mortgage by alleging that his
attorneys-in-fact exceeded their authority in mortgaging the
property on February 19, 1927 for P10,000. On the contrary he
repaid to Mariano Tablante the amount which the officers of the
corporation had borrowed. The fact that he at no time sought to
recover from the corporation any part of the sum borrowed by the
officers of the corporation in his name certainly tends to show that
he acquiesced in the action taken by them. The phrase "in
accordance with the subscription contract" found in the power of
attorney probably was intended to mean "in pursuance of the
subscription agreement", that is, it referred to the obligation, and
had no particular reference to the dates when the different
installments were to be paid.
Section 38 of the Corporation Law provides that the board of
directors of every corporation may at any time declare due and
payable to the corporation unpaid subscriptions to the capital stock
and may collect the same with interest accrued thereon or such
percentage of said unpaid subscriptions as it may deem necessary.
This power of the directors is absolute and cannot be limited by the
subscription contract, but this does not mean that the directors may
not rely on the subscription contract if they see fit to do so.
No call is necessary when a subscription is payable, not upon call or
demand by the directors or stockholders, but immediately, or on
specified day, or on or before a specified day, or when it is payable
in installments at specified times. In such cases it is the duty of the
subscriber to pay the subscription or instalment thereof as soon as
it is due, without any call or demand, and, if he fails to do so, an
action may be brought at any time.
When this action was filed on September 2, 1930, the last of the
instalments had already become payable in accordance with the
subscription agreement. it must be borne in mind that this is not an
action by the corporation to recover on a subscription agreement,
but an action by the administratrix of a stockholder to recover what
was paid in to the corporation by the stockholder. It does not
appear from the evidence whether or not the corporation has any
debts. Neither the fact that the corporation has ceased to do
business nor the fact that the other stockholders have not been
required to pay for their shares in accordance with their
subscription agreement justifies us in ordering the corporation to
return to the plaintiff the amount paid in by Alberto Miranda. If the
directors have failed to perform their duty with respect to the other
stockholders, the law provides a remedy therefor.
G.R. No. L-19893 March 31, 1923
ARNALDO F. DE SILVA, plaintiff-appellant, vs. ABOITIZ &
COMPANY, INC., defendant-appellee.
De Silva subscribed for 650 shares of stock of Aboitiz of the value of
P500 each. He only paid for the value of 200 shares, for which he
became indebted to the corporation in the amount of P255,000,
representing the unpaid value of his subscription. The secretary of
the corporation notified him of the resolution passed by its Board,
declaring the unpaid subscriptions to have become due and
demandable. The resolution also stated that all such shares which
remain unpaid will be declared delinquent, and will be advertised
for sale at public auction. De Silva thus filed a complaint in the CFI
against the corporation, asking the court to enjoin the corporation
from holding such sale. He said that the corporation exceeded its
authority, as he said that its By-laws stated that the unpaid shares
shall be paid out of the 70% of the profit obtained, which shall be
distributed among the subscribers, who shall not receive any
dividend until the shares are paid in full. Further, he contends that
the By-laws provide an operative way of paying for the shares
continuously until their full amortization. The CFI dismissed the
case.
ISSUE: Whether the corporation may declare the unpaid shares
delinquent and/or collect their value by another method different
from that prescribed in the By-laws.
HELD:
In the By-laws, it is stated that the directors are authorized to create
a special emergency fund or extraordinary reserve fund, when, in its
judgment, and in case all the shares subscribed to have been fully
paid. The directors are given the discretion to do whatever is stated
in the By-laws relative to the application of the 70% profit. They
may decide whether or not such profit shall be used to pay for the
unpaid subscriptions.
If the Board of Directors does not wish to make use of such
authority, it has 2 other remedies for accomplishing the purpose, as
enunciated in Velasco v Poizat: : 1) to sell the stock for the account
of the delinquent subscriber, and 2) to bring a legal action against
him for the amount due.
In this case, BoDs elected to avail themselves of the first remedy
granted to it by law, and declared that payment of De Silva’s
subscription to 450 shares which had not been fully paid by him was
due, and that said shares were delinquent, and performed all the
other acts subsequent to said declaration, as it deemed it
disadvantageous to the corporation to apply a part of the profit
realized or to be realized to the payment of his subscription. De
Silva has no right to prevent the Board from following, any other
method than that mentioned in the law, for the very reason that the
law does not give stockholders any right in connection with the
determination of the question whether or not there should be
deducted from the 70% of the profit distributable among the
stockholders such amount as may be deemed fit for the payment of
subscriptions due and unpaid.
CLASSES OF SHARES: REDEEMABLE SHARES
G.R. No. 51765 March 3, 1997
REPUBLIC PLANTERS BANK, petitioner, vs. HON. ENRIQUE A.
AGANA, SR., as Presiding Judge, Court of First Instance of Rizal,
Branch XXVIII, Pasay City, ROBES-FRANCISCO REALTY &
DEVELOPMENT CORPORATION and ADALIA F. ROBES,
respondents.
On September 18, 1961, RFRD secured a loan from Republic
Planters Bank in the amount of P120,000.00. Instead of giving the
legal tender totaling to the full amount of the loan, which is
P120,000.00, the bank lent such amount partially in the form of
money and partially in the form of stock certificates, each for 400
shares with a par value of P10.00 per share, or for P4,000.00 each,
for a total of P8,000.00. Said stock certificates were in the name of
Adalia F. Robes and Carlos F. Robes, who subsequently, however,
endorsed his shares in favor of Adalia F. Robes.
Said certificates of stock bear the following terms and conditions:
The Preferred Stock shall have the following rights, preferences,
qualifications and limitations, to wit:
1. Of the right to receive a quarterly dividend of One Per
Centum (1%), cumulative and participating. xxx xxx xxx
2. That such preferred shares may be redeemed, by the
system of drawing lots, at any time after two (2) years from the date
of issue at the option of the Corporation. . . .
On January 31, 1979, private respondents proceeded against
petitioner and filed a Complaint anchored on private respondents'
alleged rights to collect dividends under the preferred shares in
question and to have petitioner redeem the same under the terms
and conditions of the stock certificates.
On September 7, 1979, the trial court rendered the herein assailed
decision in favor of private respondents, ordering petitioner to pay
private respondents the face value of the stock certificates as
redemption price, plus 1% quarterly interest thereon until full
payment.
HELD: This petition is meritorious.
A preferred share of stock is one which entitles the holder thereof
to certain preferences over the holders of common stock. The
preferences are designed to induce persons to subscribe for shares
of a corporation.
The most common forms of preferred shares may be classified into
two: (1) preferred shares as to assets; and (2) preferred shares as to
dividends. The former is a share which gives the holder thereof
preference in the distribution of the assets of the corporation in
case of liquidation; the latter is a share the holder of which is
entitled to receive dividends on said share to the extent agreed
upon before any dividends at all are paid to the holders of common
stock. There is no guaranty, however, that the share will receive
any dividends.
Under the old Corporation Law in force at the time the contract
between the petitioner and the private respondents was entered
into, it was provided that "no corporation shall make or declare any
dividend except from the surplus profits arising from its business, or
distribute its capital stock or property other than actual profits
among its members or stockholders until after the payment of its
debts and the termination of its existence by limitation or lawful
dissolution." Similarly, the present Corporation Code provides that
the board of directors of a stock corporation may declare dividends
only out of unrestricted retained earnings. The Code substituted the
phrase "unrestricted retained earnings," which may be a more
precise term, in place of "surplus profits arising from its business" in
the former law. Thus, the declaration of dividends is dependent
upon the availability of surplus profit or unrestricted retained
earnings, as the case may be. Preferences granted to preferred
stockholders, moreover, do not give them a lien upon the property
of the corporation nor make them creditors of the corporation, the
right of the former being always subordinate to the latter. Dividends
are thus payable only when there are profits earned by the
corporation and as a general rule, even if there are existing profits,
the board of directors has the discretion to determine whether or
not dividends are to be declared. Shareholders, both common and
preferred, are considered risk takers who invest capital in the
business and who can look only to what is left after corporate debts
and liabilities are fully paid.
Redeemable shares, on the other hand, are shares usually
preferred, which by their terms are redeemable at a fixed date, or
at the option of either issuing corporation, or the stockholder, or
both at a certain redemption price. A redemption by the
corporation of its stock is, in a sense, a repurchase of it for
cancellation. 18 The present Code allows redemption of shares even
if there are no unrestricted retained earnings on the books of the
corporation. This is a new provision which in effect qualifies the
general rule that the corporation cannot purchase its own shares
except out of current retained earnings. 19 However, while
redeemable shares may be redeemed regardless of the existence of
unrestricted retained earnings, this is subject to the condition that
the corporation has, after such redemption, assets in its books to
cover debts and liabilities inclusive of capital stock. Redemption,
therefore, may not be made where the corporation is insolvent or if
such redemption will cause insolvency or inability of the corporation
to meet its debts as they mature.
We come now to the merits of the case. The petitioner argues that
it cannot be compelled to redeem the preferred shares issued to
the private respondent. We agree.
The trial court ruled that on the question of the redemption by the
defendant of said preferred shares of stock, the very wordings of
the terms and conditions in said stock certificates clearly allows the
same. What respondent judge failed to recognize was that while the
stock certificate does allow redemption, the option to do so was
clearly vested in the petitioner bank. The redemption therefore is
clearly the type known as "optional". Thus, except as otherwise
provided in the stock certificate, the redemption rests entirely with
the corporation and the stockholder is without right to either
compel or refuse the redemption of its stock. Furthermore, the
terms and conditions set forth therein use the word "may". “May"
denotes discretion, and cannot be construed as having a mandatory
effect.
The redemption of said shares cannot be allowed. As pointed out by
the petitioner, the Central Bank made a finding that said petitioner
has been suffering from chronic reserve deficiency, and that such
finding resulted in a directive by then Gov. G.S. Licaros of the
Central Bank, to the President and Acting Chairman of the Board of
the petitioner bank prohibiting the latter from redeeming any
preferred share, on the ground that said redemption would reduce
the assets of the Bank to the prejudice of its depositors and
creditors. Redemption of preferred shares was prohibited for a just
and valid reason. The directive issued by the Central Bank Governor
was obviously meant to preserve the status quo, and to prevent the
financial ruin of a banking institution that would have resulted in
adverse repercussions, not only to its depositors and creditors, but
also to the banking industry as a whole. The directive, in limiting the
exercise of a right granted by law to a corporate entity, may thus be
considered as an exercise of police power.
The respondent judge also stated that since the stock certificate
granted the private respondents the right to receive a quarterly
dividend of One Per Centum (1%) cumulative and participating, it
"clearly and unequivocably (sic) indicates that the same are
"interest bearing stocks" or stocks issued by a corporation under an
agreement to pay a certain rate of interest thereon. As such,
plaintiffs (private respondents herein) become entitled to the
payment thereof as a matter of right without necessity of a prior
declaration of dividend." There is no legal basis for this observation.
Both Sec. 16 of the Corporation Law and Sec. 43 of the present
Corporation Code prohibit the issuance of any stock dividend
without the approval of stockholders, representing not less than 2/3
of the outstanding capital stock at a regular or special meeting duly
called for the purpose. These provisions underscore the fact that
payment of dividends to a stockholder is not a matter of right but a
matter of consensus. Furthermore, "interest bearing stocks", on
which the corporation agrees absolutely to pay interest before
dividends are paid to common stockholders, is legal only when
construed as requiring payment of interest as dividends from net
earnings or surplus only.
CLASSES OF SHARES: TREASURY SHARES
G.R. No. L-28398 August 6, 1975
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. JOHN L.
MANNING, W.D. McDONALD, E.E. SIMMONS and THE COURT OF
TAX APPEALS, Respondents.
Quick Summary:
Facts: Reese, the majority stockholder of Mantrasco, executed a
trust agreement between him, Mantrasco, Ross, Selph, carrascoso &
Janda law firm and the minority stockholders, Manning, McDonald
and Simmons. Said agreement was entered into because of Reese’s
desire that Mantrasco and Mantrasoc’s 2 subsidiaries, Mantrasco
Guam and Port Motors, to continue under the management of
Manning, McDonald and Simmons upon his [Reese] death. When
Reese died, Mantrasco paid Reese’s estate the value of his shares.
When said purchase price has been fully paid, the 24,700 shares,
which were declared as dividends, were proportionately distributed
to Manning, McDonald and Simmons. Because of this, the BIR
issued assessments on Manning, McDonald and Simmons for
deficiency income tax for 1958. Manning et al, opposed this
assessment but the BIR still found them liable. Manning et al.
appealed to the CTA, which absolved them from any liability.
Held: The manifest intention of the parties to the trust agreement
was, in sum and substance, to treat the 24,700 shares of Reese as
absolutely outstanding shares of Reese's estate until they were fully
paid. Such being the true nature of the 24,700 shares, their
declaration as treasury stock dividend in 1958 was a complete
nullity and plainly violative of public policy. A stock dividend, being
one payable in capital stock, cannot be declared out of outstanding
corporate stock, but only from retained earnings.
A stock dividend always involves a transfer of surplus (or profit) to
capital stock. A stock dividend is a conversion of surplus or
undivided profits into capital stock, which is distributed to
stockholders in lieu of a cash dividend.
Facts:
 1952 - Mantrasco had an authorized capital stock of P2.5M
divided into 25,000 common shares. 24,700 of these shares
are owned by Julius Reese while the rest, at 100 each, are
owned by Manning, McDonald & Simmons.
 February 29, 1958 - a trust agreement was executed
between Reese, Mantrasco, Ross, Selph, carrascoso & Janda
law firm, Manning, McDonald and Simmons. Said
agreement was entered into because of Reese’s desire that
Mantrasco and Mantrasoc’s 2 subsidiaries, Mantrasco
 Guam and Port Motors, to continue under the management
of Manning, McDonald and Simmons upon his [Reese]
death.
 October 19, 1954 - Reese died. However, the projected
transfer of his shares in the name of Mantrasco could not
be immediately effected for lack of sufficient funds to cover
the initial payment on the shares.
 February 2, 1955 - after Mantrasco made a partial payment
of Reese's shares, the certificate for the 24,700 shares in
Reese's name was cancelled and a new certificate was
issued in the name of Mantrasco. Also, new certificate was
endorsed to the law firm of Ross, Selph, Carrascoso and
Janda, as trustees for and in behalf of Mantrasco.
 December 22, 1958 - a resolution was passed during a
special meeting of Mantrasco stockholders.
 November 25, 1963 - entire purchase price of Reese's
interest in Mantrasco was finally paid in full by Mantrasco.
 May 4, 1964 - trust agreement was terminated and the
trustees delivered to Mantrasco all the shares which they
were holding in trust.
 September 14, 1962 - BIR ordered an examination of
Mantrasco’s books. This examination disclosed that:
1. as of December 31, 1958 the 24,700 shares declared as
dividends had been proportionately distributed to Manning,
McDonald & Simmons, representing a total book value or
acquisition cost of P7,973,660
2. Manning, McDonald & Simmons failed to declare the said
stock dividends as part of their taxable income for the year 1958
 Thus, BIR examiners concluded that the distribution of
Reese's shares as stock dividends was in effect a distribution
of the "asset or property of the corporation as may be
gleaned from the payment of cash for the redemption of
said stock and distributing the same as stock dividend."
 April 14, 1965 - Commissioner of Internal Revenue issued
notices of assessment for deficiency income taxes to
Manning, McDonald & Simmons for the year 1958.
 Manning, McDonald & Simmons opposed said assessments.
BIR still held them liable for these assessments.
 CTA: absolved Manning, McDonald & Simmons from any
liability on the ground that their respective 1/3 interest in
Mantrasco remained the same before and after the
declaration of stock dividends and only the number of
shares held by each of them changed.
Issues:
1. WON the shares are treasury shares [NO]
2. WON Manning, McDonald & Simmons should pay for
deficiency income taxes [YES]
Ratio:
1. Treasury shares are stocks issued and fully paid for and re-
acquired by the corporation either by purchase, donation, forfeiture
or other means. Treasury shares are therefore issued shares, but
being in the treasury they do not have the status of outstanding
shares. Consequently, although a treasury share, not having been
retired by the corporation re-acquiring it, may be re-issued or sold
again, such share, as long as it is held by the corporation as a
treasury share, participates neither in dividends, because dividends
cannot be declared by the corporation to itself, nor in the meetings
of the corporation as voting stock, for otherwise equal distribution
of voting powers among stockholders will be effectively lost and the
directors will be able to perpetuate their control of the corporation,
though it still represents a paid-for interest in the property of the
corporation.
In this case, such essential features of a treasury share are lacking in
the former shares of Reese.
The manifest intention of the parties to the trust agreement was, in
sum and substance, to treat the 24,700 shares of Reese as
absolutely outstanding shares of Reese's estate until they were fully
paid. Such being the true nature of the 24,700 shares, their
declaration as treasury stock dividend in 1958 was a complete
nullity and plainly violative of public policy. A stock dividend, being
one payable in capital stock, cannot be declared out of outstanding
corporate stock, but only from retained earnings.
Nature of a stock dividend
 A stock dividend always involves a transfer of surplus (or
profit) to capital stock.
 A stock dividend is a conversion of surplus or undivided
profits into capital stock, which is distributed to
stockholders in lieu of a cash dividend.
2. The ultimate purpose which the parties to the trust
agreement aimed to realize is to make Manning, McDonalds &
Simmons the sole owners of Reese’s interest in Mantrasco by
utilizing the periodic earnings of Mantrasco and its subsidiaries to
directly subsidize their purchase of said interests and by making it
appear that they have not received any income from those firms
when, in fact, by the formal declaration of non-existent stock
dividends in the treasury they secured to themselves the means to
turn around as full owners of Reese’s shares.
 Manning, McDonald & Simmons, using the trust instrument
as a convenient technical device, bestowed unto
themselves the full worth and value of Reese's corporate
holdings with the use of the very earnings of the companies.
 Such package device, obviously not designed to carry out
the usual stock dividend purpose of corporate expansion
reinvestment but exclusively for expanding the capital base
of Manning, McDonald & Simmons in Mantrasco, cannot be
allowed to deflect their responsibilities toward our income
tax laws.
 All these amounts are subject to income tax as being a flow
of cash benefits to Manning, McDonald & Simmons.
Commissioner’s assessment is erroneous
 Commissioner should not have assessed the income tax on
the total acquisition cost of the alleged treasury stock
dividends in 1 lump sum.
 The record shows that the earnings of Mantrasco over a
period of years were used to gradually wipe out the
holdings of Reese.
 Consequently, those earnings should be taxed for each of
the corresponding years when payments were made to
Reese’s estate on account of his 24,700 shares.