LIRAG TEXTILE MILLS, INC. and BASILIO L. LIRAG vs.

SOCIAL SECURITY SYSTEM and HON. PACIFICO DE CASTRO

153 SCRA 338

FACTS:
SSS, herein respondent, and Lirag Textile, herein petitioner, entered into a Purchase Agreement
under which SSS agreed to purchase from Lirag Textile preferred shares of stock worth
P1,000,000.00 subject to the following conditions:
 For the repurchase by Lirag Textile of the shares of stock at regular intervals of 1 year and
payment of dividends; and
 Failure to redeem and pay the dividends, the entire obligation shall become immediately
due and demandable, and Lirag Textile shall be liable to SSS in amount equivalent to 12%
of the amount then outstanding as liquidated damages.

Under such agreement, Basilio Lirag, as President of Lirag Textile, signed the agreement as a
surety to guarantee the redemption of the stocks, payment of dividends and other obligations.
Pursuant to the agreement, SSS paid Lirag Textile P500,000.00 on two occasions and the latter
issued 5,000 preferred shares of stock with a par value of P100 as evidence by Stock Certificate
Nos. 128 and 139.

Despite sending letters of demand to Lirag Textile, it still has not made any redemption nor made
dividend payments. Since Lirag Textile failed to comply with the terms of the agreement, SSS
filed an action for specific performance and damages.

Lirag Textile contends that there is no obligation on their part to redeem since SSS is still a
preferred stockholder of the corporation and such redemption is dependent upon the financial
ability of the corporation. As for Mr. Lirag’s part, he contends that his liability arises only if the
company is liable and does not perform its obligations under the agreement. The lower court ruled
in favor of SSS, held that the Purchase Agreement was a debt instrument and sentenced
petitioners to pay SSS jointly and severally P1,000,000.00 plus legal interest and P220,000.00
representing the 8% per annum dividends plus legal interest, among others.

ISSUES:
1. Whether or not the Purchase Agreement is a debt instrument
2. Whether or not petitioners are liable to pay the 8% cumulative dividends

HELD:
1. YES. The Purchase Agreement is a debt instrument. Its terms and conditions show that parties
intended the repurchase of the preferred shares on the scheduled dates to be an absolute
obligation which does not depend upon the financial ability of Lirag Textile. This absolute
obligation is made manifest by the fact that a surety was required. Also, the undertaking of Lirag
Textile 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

MACAPAGAL, DIVINE 1
fixed by acts of either party and which they expressly or impliedly, agree to perform in the
contract.”

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 Agreement, taken collectively, clearly
show the intent of the parties to be bound therein as debtor and creditor, and not as corporation
and stockholder. Thus, it follows that Mr. Lirag cannot deny liability for Lirag Textile’s default. As
surety, he is bound immediately to pay SSS the amount then outstanding.

2. YES. 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. The fact that the dividends were supposed to be paid out of net
profits and earned surplus, of which there were none, does not excuse petitioners from the
payment thereof, again for the reason that the undertaking of Mr. Lirag as surety, included the
payment of dividends and other obligations then outstanding.

MACAPAGAL, DIVINE 2