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G.R. No.

L-22399 March 30, 1967

REPUBLIC BANK, represented in this action by DAMASO P. PEREZ, etc., plaintiff-


appellant,
vs.
MIGUEL CUADERNO, BIENVENIDO DIZON, PABLO ROMAN,
THE BOARD OF DIRECTORS OF THE REPUBLIC BANK AND THE MONETARY
BOARD OF THE CENTRAL BANK OF THE PHILIPPINES, defendants-appellees.
Crispin D. Baizas and Associates and Halili, Bolinao and Associates for plaintiff-
appellant.

N. M. Balboa, F.E. Evangelista and S. Malvar for defendant-appellee Monetary Board.


Norberto J. Quisumbing and H.V. Quisumbing for other defendants-appellees.

REYES, J.B.L., J.:

Direct appeal from an order of the Court of First Instance of Manila, in its civil case
No. 53936, dismissing the petitioner's complaint on the ground of failure to state
cause of action.

In the Court below, Damaso Perez, a stockholder of the Republic Bank, a Philippine
banking corporation domiciled in Manila, instituted a derivative suit for and in behalf of
said Bank, against Miguel Cuaderno, Bienvenido Dizon, the Board of Directors of the
Republic Bank, and the Monetary Board of the Central Bank of the Philippines.
Paragraph 6 of the Complaint (Rec. on Appeal, p. 7) expressly pleaded the following: .

6. That the relator herein filed the present derivative suit without any further
demand on the Board of Directors of the Republic Bank for the reason that such
formal demand to institute the present complaint would be a futile formality
since the members of the board are personally chosen by defendant Pablo
Roman himself.

For a cause of action plaintiff alleged, inter alia, that Damaso Perez had complained to
the Monetary Board of the Central Bank against certain frauds allegedly committed by
defendant Pablo Roman, in that being chairman of the Board of Directors of the
Republic Bank, and of its Executive Loan Committee, in 1957 to 1959, "in grave abuse of
his fiduciary duty and taking advantage of his said positions and in connivance with
other officials of the Republic Bank", Roman had fraudulently granted or caused to be
granted loans to fictitious and non-existing persons and to their close friends, relatives
and/or employees, who were in reality their dummies, on the basis of fictitious and
inflated appraised values of real estate properties; that said loans amounted to almost
4 million pesos; that acting upon the complaint, Miguel Cuaderno (then Governor of the
Central Bank) and the Monetary Board ordered an investigation, which was carried out
by Bank Examiners; that they and the Superintendent of Banks of the Central Bank
reported that certain mortgage loans amounting to P2,303,400.00 were granted in
violation of sections 77, 78 and 88 of the General Banking Act; that acting on said
reports, the Monetary Board, of which defendant Cuaderno was a member, ordered a
new Board of Directors of the Republic Bank to be elected, which was done, and
subsequently approved by the Monetary Board; that on January 5, 1960, the latter
accepted the offer of Pablo Roman to put up adequate security for the questioned
loans made by the Republic Bank, and such security was made a condition for the
resumption of the Bank's normal operations; that subsequently, the Central Bank
through its Governor, Miguel Cuaderno, referred to special prosecutors of the
Department of Justice on July 22, 1960, the banking frauds and violations of the
Banking Act, reported by the Superintendent of Banks, for investigation and
prosecution, but no information was filed up to the time of the retirement of Cuaderno
in 1961; that other similar frauds were subsequently discovered; that to neutralize the
impending action against him, Pablo Roman engaged Miguel Cuaderno as technical
consultant at a compensation of P12,500.00 per month, and selected Bienvenido Dizon
as chairman of the Board of Directors of the Republic Bank; that the Board of
Directors composed of individuals personally selected and chosen by Roman, connived
and confederated in approving the appointment and selection of Cuaderno and Dizon;
that such action was motivated by bad faith and without intention to protect the
interest of the Republic Bank but were prompted to protect Pablo Roman from criminal
prosecution; that the appointment of Cuaderno and his acceptance of the position of
technical consultant are immoral, anomalous and illegal, and his compensation highly
unconscionable, because court actions involving the actuations of Cuaderno as Governor
and Member or Chairman of the Monetary Board are still pending in court; that as
member of the Monetary Board from 1961 to 1962, Bienvenido Dizon exercised
supervision over the Republic Bank; that the selection of Dizon as chairman of the
Board of the Republic Bank after he was forced to resign from the presidency of the
Philippine National Bank and from membership of the Monetary Board and within one
year thereafter is in violation of option 3, sub-paragraph (d) of the Anti-Graft and
Corrupt Practices Act; that both Cuaderno and Dizon were alter egos of Pablo Roman;
that the Monetary Board was about to approve the appointment of Cuaderno and Dizon
and would do so unless enjoined.

The complaint, therefore, prayed for a writ of preliminary injunction against the
Monetary Board to prevent its confirmation of the appointments of Dizon and
Cuaderno; against the Board of Directors of the Republic Bank from recognizing
Cuaderno as technical consultant and Dizon as Chairman of the Board; and against Pablo
Roman from appointing or selecting officers or directors of the Republic Bank, and
against the recognition of any such appointees until final determination of the action.
And concluded by praying that after due hearing, judgment be rendered, —

a) making the writ of injunction permanent;

b) declaring the appointment of defendant Miguel Cuaderno as technical


consultant with monthly compensation of P12,500.00 unconscionable, immoral,
illegal and null and void;
c) declaring the selection of defendant Bienvenido Dizon as chairman of the
Board of Directors of the Republic Bank violative of Section 3, sub-paragraph
(d) of Republic Act No. 5019, otherwise known as the Anti-Graft and Corrupt
Practices Act, and therefore, illegal and null and void;

d) declaring that defendant Pablo Roman, in view of his criminal liability for the
fraudulent real estate mortgage loans in the Republic Bank amounting to P4
million, has no right to select or to be allowed to select person or persons who
are his alter egos to manage the Republic Bank, and enjoining the defendant
Board of Directors of the Republic Bank from recognizing any officers or
directors appointed or selected by defendant Pablo Roman;

e) ordering defendants Miguel Cuaderno and Bienvenido Dizon to return to the


Republic Bank all amounts they may have received either in the form of
compensation, remuneration or emolument, with an interest thereon at the rate
of 6%; or to order defendant Pablo Roman to refund the amounts paid to said
defendant Miguel Cuaderno and defendant Bienvenido Dizon, and to pay such
reasonable damages to the plaintiff Republic Bank;

f) ordering all the defendants to pay the sum of P25,000.00 as attorney's fees,
including all expenses of litigation and costs of this suit.

The Monetary Board filed an answer with denials, admissions and affirmative defenses;
but the other defendants filed separate motions to dismiss on practically the same
grounds: no valid cause of action against the individual movants; lack of legal capacity of
plaintiff-relator to sue; and non-exhaustion of intra-corporate remedies. These motions
were duly opposed by plaintiff Damaso Perez.1äwphï1.ñët

On October 24, 1963, the court, "taking into consideration the grounds alleged in the
motions to dismiss and the opposition for the issuance of a writ of preliminary
injunction and the affirmative defenses filed by the defendants and the arguments in
support thereof", and "that there are already eight cases pending in the different
branches of this court between practically the same parties", denied the petition for a
writ of preliminary injunction and dismissed the case. The court in effect suggested
that the matter at issue in the case may be presented in any of the pending eight cases
by means of amended and supplemental pleadings.

Plaintiff Damaso Perez thereupon appealed to this Court.

The issue in this appeal, then, is whether or not the Court below erred in dismissing the
complaint. In this connection, it should be remembered that the defenses of the
Monetary Board of the Central Bank, being interposed in an answer and not in a motion
to dismiss, are not here at issue. Our sole concern is with the motions to dismiss of the
other defendants, Roman, Cuaderno, Dizon, and the Board of Directors of the Republic
Bank.
They mainly controvert the right of plaintiff to question the appointment and selection
of defendants Cuaderno and Dizon, which they contend to be the result of corporate
acts with which plaintiff, as stockholder, cannot interfere. Normally, this is correct,
but Philippine jurisprudence is settled that an individual stockholder is permitted to
institute a derivative or representative suit on behalf of the corporation wherein he
holds stock in order to protect or vindicate corporate rights, whenever the officials of
the corporation refuse to sue, or are the ones to be sued or hold the control of the
corporation. In such actions, the suing stockholder is regarded as a nominal party, with
the corporation as the real party in interest (Pascual vs. Del Saz Orozco, 19 Phil. 82,
85; Everett vs. Asia Banking Corp., 45 Phil. 518; Angeles vs. Santos, 64 Phil. 697;
Evangelista vs. Santos, 86 Phil. 388). Plaintiff-appellant's action here is precisely in
conformity, with these principles. He is neither alleging nor vindicating his own
individual interest or prejudice, but the interest of the Republic Bank and the damage
caused to it. The action he has brought is a derivative one, expressly manifested to be
for and in behalf of the Republic Bank, because it was futile to demand action by the
corporation, since its Directors were nominees and creatures of defendant Pablo Roman
(Complaint, p. 6). The frauds charged by plaintiff are frauds against the Bank that
redounded to its prejudice.

The complaint expressly pleads that the appointment of Cuaderno as technical


consultant, and of Bienvenido Dizon to head the Board of Directors of the Republic
Bank, were made only to shield Pablo Roman from criminal prosecution and not to
further the interests of the Bank, and avers that both men are Roman's alter egos.
There is no denying that the facts thus pleaded in the complaint constitute a cause of
action for the bank: if the questioned appointments were made solely to protect Roman
from criminal prosecution, by a Board composed by Roman's creatures and nominees,
then the moneys disbursed in favor of Cuaderno and Dizon would be an unlawful
wastage or diversion of corporate funds, since the Republic Bank would have no interest
in shielding Roman, and the directors in approving the appointments would be
committing a breach of trust; the Bank, therefore, could sue to nullify the
appointments, enjoin disbursement of its funds to pay them, and recover those paid out
for the purpose, as prayed for in the complaint in this case (Angeles vs. Santos, supra.).

Facts pleaded in the complaint are to be deemed accepted by the defendants who file a
motion to dismiss the complaint for failure to state a cause of action. This is the
cardinal principle in the matter. And, it has been ruled that the test of sufficiency of
the facts alleged is whether or not the Court could render a valid judgment as prayed
for, accepting as true the exclusive facts set forth in the complaint.1So rigid is the
norm prescribed that if the Court should doubt the truth of the facts averred it must
not dismiss the complaint but require an answer and proceed to trial on the merits.2

Defendants urge that the action is improper because the plaintiff was not authorized
by the corporation to bring suit in its behalf. Any such authority could not be expected
as the suit is aimed to nullify the action taken by the manager and the board of
directors of the Republic Bank; and any demand for intra-corporate remedy would be
futile, as expressly pleaded in the complaint. These circumstances permit a stockholder
to bring a derivative suit (Evangelista vs. Santos, 86 Phil. 394). That no other
stockholder has chosen to make common cause with plaintiff Perez is irrelevant, since
the smallness of plaintiff's holdings is no ground for denying him relief (Ashwander vs.
TVA, 80 L. Ed. 688). At any rate, it is yet too early in the proceedings for the absence
of other stockholders to be of any significance, no issues having even been joined.

There remains the procedural question whether the corporation itself must be made
party defendant. The English practice is to make the corporation a party plaintiff,
while in the United States, the usage leans in favor of its being joined as party
defendant (see Editorial Note, 51 LRA [NS] 123). Objections can be raised against
either method. Absence of corporate authority would seem to militate against making
the corporation a party plaintiff, while joining it as defendant places the entity in the
awkward position of resisting an action instituted for its benefit. What is important is
that the corporation' should be made a party, in order to make the Court's judgment
binding upon it, and thus bar future relitigation of the issues. On what side the
corporation appears loses importance when it is considered that it lay within the power
of the trial court to direct the making of such amendments of the pleadings, by adding
or dropping parties, as may be required in the interest of justice (Revised Rule 3, sec.
11). Misjoinder of parties is not a ground to dismiss an action. (Ibid.)

We see no reason to support the contention of defendant Bienvenido Dizon that the
action of plaintiff amounts to a quo warranto proceeding. Plaintiff Perez is not claiming
title to Dizon's position as head of the Republic Bank's board of directors. The suit is
aimed at preventing the waste or diversion of corporate funds in paying officers
appointed solely to protect Pablo Roman from criminal prosecution, and not to carry on
the corporation's bank business. Whether the complaint's allegations to such effect
are true or not must be determined after due hearing.

Independently of the grounds advanced by the defendants in their motions to dismiss,


the Court a quo gave as a further pretext for the dismissal of the action the pendency
of eight other lawsuits between practically the same parties; reasoning that the
question at issue in the present case could be incorporated in any one of the other
actions by amended or supplemental pleading. We fail to see that this justifies the
dismissal of the case under appeal. In the first place, there is no pretense that the
cause of action here was already included in any of the other pending cases. As a
matter of fact, dismissal of the present action was not sought on the ground of
pendency of another action between the same parties. Secondly, the amendment of a
complaint after a responsive pleading is filed, would rest upon the discretion of the
party and the Court. Hence, this case cannot be dismissed simply because of the
possibility that the cause of action here can be incorporated or introduced in any of
those of the pending cases.

In view of the foregoing, the order dismissing the complaint is reversed and set aside.
The case is remanded to the court of origin with instructions to overrule the motions
to dismiss and require the defendants to answer the complaint. Thereafter, the case
shall be tried and decided on its merits. Costs against defendants-appellees. So
ordered.

Concepcion, C.J., Dizon, Regala, Bengzon, J.P., Zaldivar, Sanchez and Castro, JJ.,
concur.
Makalintal, J., took no part.

G.R. No. L-16982 September 30, 1961

CATALINA R. REYES, petitioner,


vs.
HON. BIENVENIDO A. TAN, as Judge of the Court of First Instance of Manila,
Branch XIII and FRANCISCA R. JUSTINIANI, respondents.

Jose W. Diokno for petitioner.


Norberto J. Quisumbing for respondents.

LABRADOR, J.:

This is a petition for certiorari to review and set aside an order of the Court of First
Instance of Manila, Hon. Bienvenido A. Tan, presiding, in Civil Case No. 42375, entitled
"Francisca R. Justiniani vs. Wadhumal Dalamal, et al.", appointing a receiver of the
corporation Roxas-Kalaw Textile Mills, Inc. In said action, plaintiff Justiniani asks the
court to order the directors of the corporation, jointly and severally, to repair the
damage caused to the corporation, of which all the plaintiff and defendants are
members. The action was filed about January of 1960 and the order for the
appointment of the receiver issued on February 15, 1960, while the designation of the
receiver was made in an order of the court dated April 30, 1960.

In the complaint in said Civil Case No. 42375, it is alleged that the corporation, Roxas-
Kalaw Textile Mills, Inc., was organized on June 5, 1954 by defendants Cesar K. Roxas,
Adelia K. Roxas, Benjamin M. Roxas, Jose Ma. Barcelona and Morris Wilson, for and on
behalf of the following primary principals with the following shareholdings: Adelia K.
Roxas, 1200 Class A shares; I. Sherman, 900 Class A shares; Robert W. Born, 450 Class
A shares and Morris Wilson, 450 Class A shares; that the plaintiff holds both Class A
and Class B shares and number and value thereof are is follows: Class A — 50 shares,
Class B — 1,250 shares; that on May 8, 1957, the Board of Directors approved a
resolution designating one Dayaram as co-manager with the specific understanding that
he was to act as defendant Wadhumal Dalamal's designee, Morris Wilson was likewise
designated as co-manager with responsibilities for the management of the factory only,
that an office in New York was opened for the purpose of supervising purchases, which
purchases must have the unanimous agreement of Cesar K. Roxas, New York resident
member of the board of directors, Robert Born and Wadhumal Dalamal or their
respective representatives; that several purchases aggregating $289,678.86 were
made in New York for raw materials such as greige cloth, rayon and grey goods for the
textile mill and shipped to the Philippines, which shipment were found out to consist not
of raw materials but already finished products, such as, West Point Khaki rayon suiting
materials dyed in the piece, finished rayon tafetta in cubes, cotton eyelets, etc., for
which reasons the Central Bank of the Philippines stopped all dollar allocations for raw
materials for the corporation which necessarily led to the paralyzation of the operation
of the textile mill and its business; that the supplier of the aforesaid finished goods
was the United Commercial Company of New York in which defendant Dalamal had
interests and the letter of credit for said goods were guaranteed by the Indian
Commercial Company and the Indian Traders in which firms defendant Dalamal likewise
held interests; that the resale of the finished goods was the business of the Indian
Commercial Company of Manila, which company could not obtain dollar allocations for
importations of finished goods under the Central Bank regulations; that plaintiff and
some members of the board of directors urged defendants to proceed against Dalamal,
exposing his offense to the Central Bank, and to initiate suit against Dalamal for his
fraud against the corporation; that defendants refused to proceed against Dalamal and
instead continued to deal with the Indian Commercial Company to the damage and
prejudice of the corporation. The prayer asks for the appointment of a receiver and a
judgment marking defendants jointly and severally liable for the damages.

After a denial of a motion to dismiss and the filing of an answer alleging that the
complaint states no cause of action, the motion for the appointment of a receiver was
set for hearing and subsequently the court entered the order for the appointment of a
receiver. The court found and held:

The second ground of the defendant's motion to dismiss and or deny the
petition is the allegedly want of a cause of action of the plaintiff's complaint.
Philippine jurisprudence is complete with authorities upholding the principle that
this ground for dismissal must appear in the face of the complaint itself; and
that to determine the sufficiency of the cause of action, only the facts alleged
in the complaint and no other, should be considered; in fine, the test of
sufficiency of cause of action is whether or not, admitting the facts alleged in
the complaint, the Court could render a valid judgment upon the same in
accordance with the prayer of the petition (e.g., Paminsan v. Costales, 29 Phil.
587, 489). The complaint in the instant case abounds with arguments
establishing and supporting plaintiff's cause of action for and in behalf of the
Roxas-Kalaw Textile Mills, Inc. against all the defendants (See e.g. paragraphs
4, 5, 6 and 7 of the Complaint). Taking these paragraphs of the complaint in
context, it is clear that the plaintiff has sufficient averred facts constituting a
cause or basis for a derivative suit for "injuries to the corporation, as by
negligence, mismanagement or fraud of its directors, are normally dealt with as
wrong to the whole group of share holders in their corporate capacity, to be
redressed in a suit by or on behalf of the corporation.1awphîl.nèt

Evident from the defendants' motion to dismiss and/or to deny the petition for
receivership is their complete failure to come up with a valid and substantial
defense against or denial of the complaint's allegations of mismanagement, if
not the actual commission of ultra vires and illegal acts. Invariably the props of
defendants' motion consist of the unconvincing countercharges of the
plaintiff's non-observance of the technicalities of our procedural law and
disregard of technical and evidently futile intracorporate remedies to redress
the violations charged against the defendants. It is clear that the controlling
majority did nothing for two years to protect the interests of corporation. (See
pars. 5-7, complaint.)

The defendants themselves having admitted in open court during the oral
discussion of their motion to dismiss and the plaintiff's motion for receivership
that the majority stockholders will under any condition entertain any suggestion
of the minority shareholders, the appointment of an independent third party in
the management of the corporation becomes imperative for the survival of the
company. (Order dated Feb. 15, 1960).

On April 30, 1960, the court issued mother order which reads as follows:

After this incident wherein it was clearly shown that the minority stockholders,
represented by the plaintiff, have no recourse whatsoever before the majority
stockholders of the company, and after it has been shown that the majority has
violated the law by importing into the Philippines finished goods instead of raw
materials as stipulated in their license, and since these acts are prejudicial to
the company because it might result in the cancellation of their license, the
Court is of the opinion and so holds that the appointment of a receiver is
absolutely necessary for the protection not only of the rights of the minority
but also those of the majority stockholders of the company.

In the first assignment of error, petitioner claims that respondent Justiniani neither
alleged nor proved the existence of an emergency requiring the immediate appoinment
of a receiver of the Roxas-Kalaw Textile Mill, Inc.; that the alleged fraudulent
transaction took place more than two years before the application for receivership, and
so was the refusal of the directors to sue or prosecute Dalamal. This contention is not
well founded. At the hearing of the petition for the appointment of a receiver held on
January 30, 1960, various records of shipments of finished textile goods on dollar
allocations for raw materials were exhibited. Publicity had also been given to the
importations of textiles by the corporation, in place of cotton raw materials. The
record shows the list of the various documents proving the purchase of letters of
credit for textiles. These textiles were denied importation and had to be re-exported.
The fact of the importation of finished textiles on dollar allocations for raw materials
in violation of Central Bank regulations was, therefore, conclusively shown.

It is also not denied by petitioner that the allocation of dollars to the corporation for
the importation of raw materials was suspended. In the eyes of the court below, as well
as in our own, the importation of textiles instead of raw materials, as well as the
failure of the Board of Directors to take action against those directly responsible for
the misuse of dollar allocations constitute fraud, or consent thereto on the part of the
directors. Therefore, a breach of trust was committed which justified the derivative
suit by a minority stockholder on behalf of the corporation.

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 stockholders. An illustration of a suit of this
kind is found in the case of Pascual vs. Del Saz Orozco (19 Phil. 82), decided by
this Court as early as 1911. In that case, the Banco Español-Filipino suffered
heavy losses due to fraudulent connivance between a depositor and an employee
of the bank, which losses, it was contended, could have been avoided if the
president and directors had been more vigilant in the administration of the
affairs of the bank. The stockholders 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 stockholders and the directors. This court held
that the suit could properly be maintained. (64 Phil., Angeles vs. Santos [G.R. No.
L-43413, prom. August 31, 1937] p. 697).

The claim that respondent Justiniani did not take steps to remedy the illegal
importation for a period of two years is also without merit. During that period of time
respondent had the right to assume and expect that the directors would remedy the
anomalous situation of the corporation brought about by their own wrong doing. Only
after such period of time had elapsed could respondent conclude that the directors
were remiss in their duty to protect the corporation property and business.

Counsel for petitioner claims that respondent Justiniani was treasurer of the
corporation for sometime and had control of funds and this notwithstanding, she had
not taken the steps to remedy the situation. In answer we state that the fraud
consisted in importing finished textile instead of raw cotton for the textile mill; the
fraud, therefore, was committed by the manager of the business and was consented to
by the directors, evidently beyond reach of respondent.

The directors permitted the fraudulent transaction to go unpunished and nothing


appears to have been done to remove the erring purchasing managers. In a way the
appointment of a receiver may have been thought of by the court below so that the
dollar allocation for raw material may be revived and the textile mill placed on an
operating basis. It is possible that if a receiver in which the Central Bank may have
confidence is appointed, the dollar allocation for raw material may be restored. Claim is
made that if a receiver is appointed, the Philippine National Bank to which the
corporation owes considerable sums of money might be led to foreclose the mortgage.
Precisely the appointment of a receiver in whom the bank may have had confidence
might rehabilitate the business and bring a restoration of the dollar allocation much
needed for raw material and an improvement in the business and assets the
corporation, thus insuring the collection of the bank's loan.

Considering the above circumstances we are led to agree with the judge below that the
appointment of a receiver was not only expedient but also necessary to restore the
faith and confidence of the Central Bank authorities in the administration of the
affairs of the corporation, thus ultimately leading to a restoration of the dollar
allocation so essential to the operation of the textile mills. The first assignment of
error is, therefore, overruled.

In the second assignment of error, petitioner claims that the management has been
changed and the new management has not been afforded a chance to show what it can
do. This ground of the petition was not mentioned or raised as a ground of defense or
objection to the appointment of a receiver in the court below. It is only raised for the
first time before Us in the petition for certiorari. The principle has long ago been
enunciated by Us that an appellate court may not consider any ground of objection that
was not raised in the court below. (Tan Machan v. Trinidad, 3 Phil. 684; Ramiro v. Graño,
54 Phil. 744; Vda. de Villaruel, et al. v. Manila Motor Co., Inc., et al., G.R. No. L-
10394, Dec. 13, 1958; Collector of Internal Revenue v. Estate of F. P. Buan, et al., G.R.
Nos. L-11438-39, and L-11542-46, July 31, 1958; S.V.S. Pictures, Inc., et al. v. The
Court of Appeals, et al., G.R. No. L-7075, January 29, 1960; Elena Peralta Vda. de Caina
vs. Hon. Andres Reyes, et al., G.R. No. L-15792, May 30, 1960).

The supposed new management, alleged as a ground for the reversal of the order of the
court below appointing a receiver, is not in itself a ground of objection to the
appointment of a receiver. The parties found to be guilty of the fraud, as a cause of
which receivership proceedings were instituted, were the Board of Directors, which
took no action to stop the anomalies being perpetrated by the management. But it
appears that the management must have acted directly under orders of the Board of
Directors. The appointment of a new management, therefore, would not remedy the
anomalous situation in which the corporation is found, because such situation was not
due to the management alone but principally because of direction of the Board of
Directors.

The second ground for the petition is, therefore, also without merit.

WHEREFORE, the court finds that the court below did not commit an abuse of
discretion in appointing a receiver for the corporation and the petition to set aside the
order for the appointment of a receiver should be, as it is hereby, dismissed. With
costs against the petitioner.

G.R. No. L-20457 October 29, 1966

ELTON W. CHASE, as minority stockholder and on behalf of the stockholders


similarly situated and for the benefit of AMERICAN MACHINERY AND PARTS
MANUFACTURING, INC., petitioner,
vs.
THE COURT of FIRST INSTANCE OF MANILA, BRANCH XIV, DR. VICTOR
BUENCAMINO, SR., VICTOR BUENCAMINO, JR., DOLORES A. BUENCAMINO
and JULIO B. FRANCIA, JR., respondents.

Norberto J. Quisumbing and Bumanglag for petitioner.


Ponce Enrile, Siguion-Reyna, Montecillo and Belo for respondents.

DIZON, J.:

This is an action for certiorari filed by Elton Chase to review and annul the orders of
the Court of First Instance of Manila, Branch XIV, in Civil Case No. 43946 entitled
"Elton W. Chase, etc. vs. Dr. Victor Buencamino, Sr., et al." denying his application for
receivership of American Machinery & Parts Manufacturing, Inc., a domestic
corporation hereinafter referred to as AMPARTS.

On August 20, 1960, petitioner, a minority stockholder of AMPARTS, filed a derivative


suit in the Court of First Instance of Manila against Dr. Victor Buencamino Sr., Victor
Buencamino, Jr., Dolores A. Buencamino and Julio B. Francia, Jr., majority stockholders
and corporate directors of AMPARTS charging them with breach of trust; praying for
their removal as directors and, if necessary, for the dissolution and liquidation of said
corporation. Attached to the complaint was an application for the appointment of a
receiver of AMPARTS.

Respondents opposed the application for receivership and subsequently filed their
answer to the complaint. After a hearing on the application the court, then presided by
the Hon. Magno S. Gatmaitan, issued an order dated June 10, 1961 denying the same,
but requiring respondents to file bond in the amount of P100,000.00 to answer for
whatever damages petitioner might suffer by reason of the denial. Petitioner's motion
for reconsideration was likewise denied.

After trial on the merits, the court rendered judgment finding Dr. Buencamino guilty
of mismanagement and condemning him "to pay Amparts the sum of P1,970,200 with
legal interest from date of the filing of the complaint; he is also prohibited from
collecting any interest on the sum of P300,000.00 paid by him on the 15th July, 1955 on
the initial subscription, and such interest as has already been paid to him is ordered
refunded with legal interest from the date of the filing of the complaint . . ."

On May 8, 1962, petitioner filed a motion for the appointment of Lawrence Moran as
receiver of Amparts until the full amount of the above judgment against respondent
Buencamino is fully satisfied or until the dissolution or liquidation of said corporation.

On May 12, 1962, the Court issued the following order:

After hearing the parties and with a view to protect the interests of both and
to prevent a possibility of abuse, the Court resolves that until further orders,
the hereinafter while the case is pending:

(1) Mr. Chase shall have free access to AMPARTS and its records personally
and/or through representative duly authorized;

(2) Decisions of Dr. Buencamino and/or management of AMPARTS shall be made


known to Chase who shall have the right to object and if so, the matter shall be
notified to the Court which shall resolve the difficulties; in the interim, pending
the objection, the decision shall not be enforced or made operative;

With this resolution, the Court disposes for the present of the issue of
receivership.

Supplementing the above-quoted order, the respondent court, now presided by the Hon.
Jesus De Veyra, issued the following order of August 27, 1962:

As for the appointment of a receiver, Judge Gatmaitan decided on the


temporary measure of giving plaintiff (petitioner herein) a veto right, appealable
to this Court, on all decisions of management. Considering that up to the
present, the Buencaminos own 2/3 of the stock of the corporation, the solution
is equitable and must be allowed to continue subject to the condition that once a
decision of management is made known to plaintiff, he must make known his
objection thereto to the Court within five (5) days from receipt of said
decision, otherwise he shall be deemed to have waived any objection to the
decision.

The only issue to be resolved, considering the above facts, is whether or not the
respondent court committed a grave abuse of discretion in issuing its orders of June
10, 1961, June 21, 1961, May 12, 1962, and August 27 of the same year mentioned
heretofore.

It is well settled in this jurisdiction that where corporate directors are guilty of a
breach of trust and intracorporate remedy is futile, the minority stockholders may
resort to the courts for appropriate relief and, incidentally, ask for the appointment of
a receiver for the protection of their rights. In such case, however, the appointment of
a receiver is a matter addressed to the sound discretion of the court, and it has been
frequently held that such discretion to appoint a receiver who would take over the
administration of the corporate business should be exercised with great caution and
only when the necessity therefor is clear.

The facts of the present case show that, in connection with the order of June 10, 1961,
which denied petitioner's application for the appointment of a receiver, the court
required respondents herein to file a bond in the amount of P100,000.00 to answer for
whatever damages petitioner might suffer by reason of the denial. Again, perhaps by
reason of the judgment rendered against Dr. Buencamino finding him guilty of
mismanagement etc., the respondent court, through the Hon. Jesus de Veyra, issued
the order of August 27, 1962 whose pertinent portion is quoted above.

Upon the facts of the case, and considering the precautionary measures adopted by the
respondent court for the protection of petitioner's rights and interest in AMPARTS,
We can not find our way clear to ruling that said court had committed a grave abuse of
discretion in issuing the orders complained of.

WHEREFORE, the petition for certiorari is dismissed, with costs.

G.R. No. L-40620 May 5, 1979

RICARDO L. GAMBOA, LYDIA R. GAMBOA, HONORIO DE 1A RAMA, EDUARDO


DE LA RAMA, and the HEIRS OF MERCEDES DE LA RAMA-
BORROMEO, petitioners,
vs.
HON. OSCAR R. VICTORIANO as Presiding Judge of the Court of First Instance
of Negros Occidental, Branch II, BENJAMIN LOPUE, SR., BENJAMIN LOPUE,
JR., LEONITO LOPUE, and LUISA U. DACLES respondents.

Exequiel T. A Alejandro for petitioners.

Acuña, Lirazan & Associates for private respondents.

CONCEPCION JR., J,:

Petition for certiorari to review the order of the respondent judge, dated January 2,
1975, denying the petitioners' motion to dismiss the complaint filed in Civil Case No.
10257 of the Court of First Instance of Negros Occidental, entitled, "Benjamin Lopue
Sr., et al., plaintiffs, versus Ricardo Gamboa, et al., defendants," as well as the order
dated April 4, 1975, denying the motion for the reconsideration of Said order.
In the aforementioned Civil Case No. 10257 of the Court of First Instance of Negros
Occidental, the herein petitioners, Ricardo L. Gamboa, Lydia R. Gamboa, Honorio de la
Rama, Eduardo de la Rama, and the late Mercedes de la Rama-Borromeo, now
represented by her heirs, as well as Ramon de la Rama, Paz de la Rama-Battistuzzi, and
Enzo Battistuzzi, were sued by the herein private respondents, Benjamin Lopue, Sr.,
Benjamin Lopue, Jr., Leonito Lopue, and Luisa U. Dacles to nullify the issuance of 823
shares of stock of the Inocentes de la Rama, Inc. in favor of the said defendants. The
gist of the complaint, filed on April 4, 1972, is that the plaintiffs, with the exception
of Anastacio Dacles who was joined as a formal party, are the owners of 1,328 shares
of stock of the Inocentes de la Rama, Inc., a domestic corporation, with an authorized
capital stock of 3,000 shares, with a par value of P100.00 per share, 2,177 of which
were subscribed and issued, thus leaving 823 shares unissued; that upon the plaintiffs'
acquisition of the shares of stock held by Rafael Ledesma and Jose Sicangco, Jr., then
President and Vice-President of the corporation, respectively, the defendants
Mercedes R. Borromeo, Honorio de la Rama, and Ricardo Gamboa, remaining members of
the board of directors of the corporation, in order to forestall the takeover by the
plaintiffs of the afore-named corporation, surreptitiously met and elected Ricardo L.
Gamboa and Honorio de la Rama as president and vice-president of the corporation,
respectively, and thereafter passed a resolution authorizing the sale of the 823
unissued shares of the corporation to the defendants, Ricardo L. Gamboa, Lydia R.
Gamboa, Honorio de la Rama, Ramon de la Rama, Paz R. Battistuzzi Eduardo de la Rama,
and Mercedes R. Borromeo, at par value, after which the defendants Honorio de la
Rama, Lydia de la Rama-Gamboa, and Enzo Battistuzzi were elected to the board of
directors of the corporation; that the sale of the unissued 823 shares of stock of the
corporation was in violation of the plaintiffs' and pre-emptive rights and made without
the approval of the board of directors representing 2/3 of the outstanding capital
stock, and is in disregard of the strictest relation of trust existing between the
defendants, as stockholders thereof; and that the defendants Lydia de la Rama-
Gamboa, Honorio de la Rama, and Enzo Battistuzzi were not legally elected to the board
of directors of the said corporation and has unlawfully usurped or intruded into said
office to the prejudice of the plaintiffs. Wherefore, they prayed that a writ of
preliminary injunction be issued restraining the defendants from committing, or
continuing the performance of an act tending to prejudice, diminish or otherwise injure
the plaintiffs' rights in the corporate properties and funds of the corporation, and
from disposing, transferring, selling, or otherwise impairing the value of the 823 shares
of stock illegally issued by the defendants; that a receiver be appointed to preserve
and administer the property and funds of the corporation; that defendants Lydia de la
Rama-Gamboa, Honorio de la Rama, and Enzo Battistuzzi be declared as usurpers or
intruders into the office of director in the corporation and, consequently, ousting them
therefrom and declare Luisa U. Dacles as a legally elected director of the corporation;
that the sale of 823 shares of stock of the corporation be declared null and void; and
that the defendants be ordered to pay damages and attorney's fees, as well as the
costs of suit . 1
Acting upon the complaint, the respondent judge, after proper hearing, directed the
clerk of court "to issue the corresponding writ of preliminary injunction restraining the
defendants and/or their representatives, agents, or persons acting in their behalf from
the commission or continuance of any act tending in any way to prejudice, diminish or
otherwise injure plaintiffs' rights in the corporate properties and funds of the
corporation Inocentes de la Rama, Inc.' and from disposing, transferring, selling or
otherwise impairing the value of the certificates of stock allegedly issued illegally in
their names on February 11, 1972, or at any date thereafter, and ordering them to
deposit with the Clerk of Court the corresponding certificates of stock for the 823
shares issued to said defendants on February 11, 1972, upon plaintiffs' posting a bond
in the sum of P50,000.00, to answer for any damages and costs that may be sustained
by the defendants by reason of the issuance of the writ, copy of the bond to be
furnished to the defendants. " 2 Pursuant thereto, the defendants deposited with the
clerk of court the corporation's certificates of stock Nos. 80 to 86, inclusive,
representing the disputed 823 shares of stock of the corporation. 3

On October 31, 1972, the plaintiffs therein, now private respondents, entered into a
compromise agreement with the defendants Ramon de la Rama, Paz de la Rama
Battistuzzi and Enzo Battistuzzi , 4 whereby the contracting parties withdrew their
respective claims against each other and the aforenamed defendants waived and
transferred their rights and interests over the questioned 823 shares of stock in
favor of the plaintiffs, as follows:

3. That the defendants Ramon L. de la Rama, Paz de la Rama Battistuzzi


and Enzo Battistuzzi will waive, cede, transfer or other wise convey, as
they hereby waive, cede, transfer and convey, free from all liens and
encumbrances unto the plaintiffs, in such proportion as the plaintiffs may
among themselves determine, all of the rights, interests, participations
or title that the defendants Ramon L. de la Rama, Paz de la Rama
Battistuzzi Enzo Battistuzzi now have or may have in the eight hundred
twenty-three (823) shares in the capital stock of the corporation
INOCENTES DELA RAMA, INC.' which were issued in the names of the
defendants in the above-entitled case on or about February 11, 1972, or
at any date thereafter and which shares are the subject-matter of the
present suit.

The compromise agreement was approved by the trial court on December 4, 1972, 5 As
a result, the defendants filed a motion to dismiss the complaint, on November 19, 1974,
upon the grounds: (1) that the plaintiffs' cause of action had been waived or
abandoned; and (2) that they were estopped from further prosecuting the case since
they have, in effect, acknowledged the validity of the issuance of the disputed 823
shares of stock. The motion was denied on January 2, 1975. 6

The defendants also filed a motion to declare the defendants Ramon L. de la Rama, Paz
de la Rama Battistuzzi and Enzo Battistuzzi in contempt of court, for having violated
the writ of preliminary injunction when they entered into the aforesaid compromise
agreement with the plaintiffs, but the respondent judge denied the said motion for
lack of merit. 7

On February 10, 1975, the defendants filed a motion for the reconsideration of the
order denying their motion to dismiss the complaint' and subsequently, an Addendum
thereto, claiming that the respondent court has no jurisdiction to interfere with the
management of the corporation by the board of directors, and the enactment of a
resolution by the defendants, as members of the board of directors of the corporation,
allowing the sale of the 823 shares of stock to the defendants was purely a
management concern which the courts could not interfere with. When the trial court
denied said motion and its addendum, the defendants filed the instant petition for
certiorari for the review of said orders.

The petition is without merit. The questioned order denying the petitioners' motion to
dismiss the complaint is merely interlocutory and cannot be the subject of a petition
for certiorari. The proper procedure to be followed in such a case is to continue with
the trial of the case on the merits and, if the decision is adverse, to reiterate the
issue on appeal. It would be a breach of orderly procedure to allow a party to come
before this Court every time an order is issued with which he does not agree.

Besides, the order denying the petitioners' motion to dismiss the complaint was not
capriciously, arbitrarily, or whimsically issued, or that the respondent court lacked
jurisdiction over the cause as to warrant the issuance of the writ prayed for. As found
by the respondent judge, the petitioners have not waived their cause of action against
the petitioners by entering into a compromise agreement with the other defendants in
view of the express provision of the compromise agreement that the same "shall not in
any way constitute or be considered a waiver or abandonment of any claim or cause of
action against the other defendants." There is also no estoppel because there is
nothing in the agreement which could be construed as an affirmative admission by the
plaintiff of the validity of the resolution of the defendants which is now sought to be
judicially declared null and void. The foregoing circumstances and the fact that no
consideration was mentioned in the agreement for the transfer of rights to the said
shares of stock to the plaintiffs are sufficient to show that the agreement was merely
an admission by the defendants Ramon de la Rama, Paz de la Rama Battistuzzi and Enzo
Battistuzzi of the validity of the claim of the plaintiffs.

The claim of the petitioners, in their Addendum to the motion for reconsideration of
the order denying the motion to dismiss the complaint, questioning the trial court's
jurisdiction on matters affecting the management of the corporation, is without merit.
The well-known rule is that courts cannot undertake to control the discretion of the
board of directors about administrative matters as to which they have legitimate
power of, 10 action and contracts intra vires entered into by the board of directors are
binding upon the corporation and courts will not interfere unless such contracts are so
unconscionable and oppressive as to amount to a wanton destruction of the rights of
the minority. 11 In the instant case, the plaintiffs aver that the defendants have
concluded a transaction among themselves as will result to serious injury to the
interests of the plaintiffs, so that the trial court has jurisdiction over the case.

The petitioners further contend that the proper remedy of the plaintiffs would be to
institute a derivative suit against the petitioners in the name of the corporation in
order to secure a binding relief after exhausting all the possible remedies available
within the corporation.

An individual stockholder is permitted to institute a derivative suit on behalf of the


corporation wherein he holds stock in order to protect or vindicate corporate rights,
whenever the officials of the corporation refuse to sue, or are the ones to be sued or
hold the control of the corporation. In such actions, the suing stockholder is regarded
as a nominal party, with the corporation as the real party in interest. 12 In the case at
bar, however, the plaintiffs are alleging and vindicating their own individual interests or
prejudice, and not that of the corporation. At any rate, it is yet too early in the
proceedings since the issues have not been joined. Besides, misjoinder of parties is not
a ground to dismiss an action. 13

WHEREFORE, the petition should be, as it is hereby DISMISSED for lack of merit.
With costs against the petitioners.

SO ORDERED.

G.R. No. 113032 August 21, 1997

WESTERN INSTITUTE OF TECHNOLOGY, INC., HOMERO L. VILLASIS, DIMAS


ENRIQUEZ, PRESTON F. VILLASIS & REGINALD F. VILLASIS, petitioner,
vs.
RICARDO T. SALAS, SALVADOR T. SALAS, SOLEDAD SALAS-TUBILLEJA,
ANTONIO S. SALAS, RICHARD S. SALAS & HON. JUDGE PORFIRIO
PARIAN, respondents.

HERMOSISIMA, JR., J.:

Up for review on certiorari are: (1) the Decision dated September 6, 1993 and (2) the
Order dated November 23, 1993 of Branch 33 of the Regional Trial Court of Iloilo City
in Criminal Cases Nos. 37097 and 37098 for estafa and falsification of a public
document, respectively. The judgment acquitted the private respondents of both
charges, but petitioners seek to hold them civilly liable.
Private respondents Ricardo T. Salas, Salvador T. Salas, Soledad Salas-Tubilleja,
Antonio S. Salas, and Richard S. Salas, belonging to the same family, are the majority
and controlling members of the Board of Trustees of Western Institute of Technology,
Inc. (WIT, for short), a stock corporation engaged in the operation, among others, of
an educational institution. According to petitioners, the minority stockholders of WIT,
sometime on June 1, 1986 in the principal office of WIT at La Paz, Iloilo City, a Special
Board Meeting was held. In attendance were other members of the Board including one
of the petitioners Reginald Villasis. Prior to aforesaid Special Board Meeting, copies of
notice thereof, dated May 24, 1986, were distributed to all Board Members. The notice
allegedly indicated that the meeting to be held on June 1, 1986 included Item No. 6
which states:

Possible implementation of Art. III, Sec. 6 of the Amended By-Laws of Western


Institute of Technology, Inc. on compensation of all officers of the
corporation. 1

In said meeting, the Board of Trustees passed Resolution No. 48, s. 1986, granting
monthly compensation to the private respondents as corporate officers retroactive
June 1, 1985, viz.:

Resolution No. 48 s. 1986

On the motion of Mr. Richard Salas (accused), duly seconded by Mrs. Soledad
Tubilleja (accused), it was unanimously resolved that:

The Officers of the Corporation be granted monthly compensation


for services rendered as follows: Chairman — P9,000.00/month,
Vice Chairman — P3,500.00/month, Corporate Treasurer —
P3,500.00/month and Corporate Secretary — P3,500.00/month,
retroactive June 1, 1985 and the ten per centum of the net
profits shall be distributed equally among the ten members of the
Board of Trustees. This shall amend and superceed (sic) any
previous resolution.

There were no other business.

The Chairman declared the meeting adjourned at 5:11 P.M.

This is to certify that the foregoing minutes of the regular meeting of the
Board of Trustees of Western Institute of Technology, Inc. held on March 30,
1986 is true and correct to the best of my knowledge and belief.

(Sgd)
ANTONI
O S.
SALAS
Corporate
Secretary
2

A few years later, that is, on March 13, 1991, petitioners Homero Villasis, Prestod
Villasis, Reginald Villasis and Dimas Enriquez filed an affidavit-complaint against private
respondents before the Office of the City Prosecutor of Iloilo, as a result of which
two (2) separate criminal informations, one for falsification of a public document under
Article 171 of the Revised Penal Code and the other for estafa under Article 315, par.
1(b) of the RPC, were filed before Branch 33 of the Regional Trial Court of Iloilo City.
The charge for falsification of public document was anchored on the private
respondents' submission of WIT's income statement for the fiscal year 1985-1986
with the Securities and Exchange Commission (SEC) reflecting therein the
disbursement of corporate funds for the compensation of private respondents based on
Resolution No. 4, series of 1986, making it appear that the same was passed by the
board on March 30, 1986, when in truth, the same was actually passed on June 1, 1986,
a date not covered by the corporation's fiscal year 1985-1986 (beginning May 1, 1985
and ending April 30, 1986). The Information for falsification of a public document
states:

The undersigned City Prosecutor accuses RICARDO T. SALAS, SALVADOR T.


SALAS, SOLEDAD SALAS-TUBILLEJA, ANTONIO S. SALAS and RICHARD S.
SALAS (whose dates and places of birth cannot be ascertained) of the crime of
FALSIFICATION OF A PUBLIC DOCUMENT, Art. 171 of the Revised Penal
Code, committed as follows:

That on or about the 10th day of June, 1986, in the City of Iloilo,
Philippines and within the jurisdiction of this Honorable Court, the
above-named accused, being then the Chairman, Vice-Chairman,
Treasurer, Secretary, and Trustee (who later became Secretary),
respectively, of the board of trustees of the Western Institute
of Technology, Inc., a corporation duly organized and existing
under the laws of the Republic of the Philippines, conspiring and
confederating together and mutually helping one another, to
better realized (sic) their purpose, did then and there wilfully,
unlawfully and criminally prepare and execute and subsequently
cause to be submitted to the Securities and Exchange Commission
an income statement of the corporation for the fiscal year 1985-
1986, the same being required to be submitted every end of the
corporation fiscal year by the aforesaid Commission, and
therefore, a public document, including therein the disbursement
of the retroactive compensation of accused corporate officers in
the amount of P186,470.70, by then and there making it appear
that the basis thereof Resolution No. 4, Series of 1986 was
passed by the board of trustees on March 30, 1986, a date
covered by the corporation's fiscal year 1985-1986 (i.e., from May
1, 1985 to April 30, 1986), when in truth and in fact, as said
accused well knew, no such Resolution No. 48, Series of 1986 was
passed on March 30, 1986.

CONTRARY TO LAW.

Iloilo City, Philippines, November 22, 1991. 3 [Emphasis ours].

The Information, on the other hand, for estafa reads:

The undersigned City Prosecutor accuses RICARDO SALAS, SALVADOR T.


SALAS, SOLEDAD SALAS-TUBILLEJA, ANTONIO S. SALAS, RICHARD S.
SALAS (whose dates and places of birth cannot be ascertained) of the crime of
ESTAFA, Art. 315, par. 1 (b) of the Revised Penal Code, committed as follows:

That on or about the 1st day of June, 1986, in the City of Iloilo,
Philippines, and within the jurisdiction of this Honorable Court,
the above-named accused, being then the Chairman, Vice-
Chairman, Treasurer, Secretary, and Trustee (who later became
Secretary), respectively; of the Board of Trustees of Western
Institute of Technology, Inc., a corporation duly organized and
existing under the laws of the Republic of the Philippines,
conspiring and confederating together and mutually helping one
another to better realize their purpose, did then and there
wilfully, unlawfully and feloniously defraud the said corporation
(and its stockholders) in the following manner, to wit: herein
accused, knowing fully well that they have no sufficient, lawful
authority to disburse — let alone violation of applicable laws and
jurisprudence, disbursed the funds of the corporation by
effecting payment of their retroactive salaries in the amount of
P186,470.00 and subsequently paying themselves every 15th and
30th of the month starting June 15, 1986 until the present, in the
amount of P19,500.00 per month, as if the same were their own,
and when herein accused were informed of the illegality of these
disbursements by the minority stockholders by way of objections
made in an annual stockholders' meeting held on June 14, 1986 and
every year thereafter, they refused, and still refuse, to rectify
the same to the damage and prejudice of the corporation (and its
stockholders) in the total sum of P1,453,970.79 as of November
15, 1991.

CONTRARY TO LAW.

Iloilo City, Philippines, November 22, 1991. 4 [Emphasis ours]


Thereafter, trial for the two criminal cases, docketed as Criminal Cases Nos. 37097
and 37098, was consolidated. After a full-blown hearing, Judge Porfirio Parian handed
down a verdict of acquittal on both counts 5 dated September 6, 1993 without imposing
any civil liability against the accused therein.

Petitioners filed a Motion for Reconsideration 6 of the civil aspect of the RTC Decision
which was, however, denied in an Order dated November 23, 1993. 7

Hence, the instant petition.

Significantly on December 8, 1994, a Motion for Intervention, dated December 2,


1994, was filed before this Court by Western Institute of Technology, Inc., supposedly
one of the petitioners herein, disowning its inclusion in the petition and submitting that
Atty. Tranquilino R. Gale, counsel for the other petitioners, had no authority
whatsoever to represent the corporation in filing the petition. Intervenor likewise
prayed for the dismissal of the petition for being utterly without merit. The Motion
for Intervention was granted on January 16, 1995. 8

Petitioners would like us to hold private respondents civilly liable despite their acquittal
in Criminal Cases Nos. 37097 and 37098. They base their claim on the alleged illegal
issuance by private respondents of Resolution No. 48, series of 1986 ordering the
disbursement of corporate funds in the amount of P186,470.70 representing
retroactive compensation as of June 1, 1985 in favor of private respondents, board
members of WIT, plus P1,453,970.79 for the subsequent collective salaries of private
respondents every 15th and 30th of the month until the filing of the criminal
complaints against them on March 1991. Petitioners maintain that this grant of
compensation to private respondents is proscribed under Section 30 of the Corporation
Code. Thus, private respondents are obliged to return these amounts to the corporation
with interest.

We cannot sustain the petitioners. The pertinent section of the Corporation Code
provides:

Sec. 30. Compensation of directors — In the absence of any provision in the by-
laws fixing their compensation, the directors shall not receive any
compensation, as such directors, except for reasonable per diems: Provided,
however, That any such compensation (other than per diems) may be granted to
directors by the vote of the stockholders representing at least a majority of
the outstanding capital stock at a regular or special stockholders' meeting. In no
case shall the total yearly compensation of directors, as such directors, exceed
ten (10%) percent of the net income before income tax of the corporation
during the preceding year. [Emphasis ours]

There is no argument that directors or trustees, as the case may be, are not entitled
to salary or other compensation when they perform nothing more than the usual and
ordinary duties of their office. This rule is founded upon a presumption that
directors/trustees render service gratuitously, and that the return upon their shares
adequately furnishes the motives for service, without compensation. 9 Under the
foregoing section, there are only two (2) ways by which members of the board can be
granted compensation apart from reasonable per diems: (1) when there is a provision in
the by-laws fixing their compensation; and (2) when the stockholders representing a
majority of the outstanding capital stock at a regular or special stockholders' meeting
agree to give it to them.

This proscription, however, against granting compensation to directors/trustees of a


corporation is not a sweeping rule. Worthy of note is the clear phraseology of Section
30 which states: ". . . [T]he directors shall not receive any compensation, as such
directors, . . . ." The phrase as such directors is not without significance for it delimits
the scope of the prohibition to compensation given to them for services performed
purely in their capacity as directors or trustees. The unambiguous implication is that
members of the board may receive compensation, in addition to reasonable per diems,
when they render services to the corporation in a capacity other than as
directors/trustees.10 In the case at bench, Resolution No. 48, s. 1986 granted monthly
compensation to private respondents not in their capacity as members of the board,
but rather as officers of the corporation, more particularly as Chairman, Vice-
Chairman, Treasurer and Secretary of Western Institute of Technology. We quote
once more Resolution No. 48, s. 1986 for easy reference, viz.:

Resolution No. 48 s. 1986

On the motion of Mr. Richard Salas (accused), duly seconded by Mrs. Soledad
Tubilleja (accused), it was unanimously resolved that:

The Officers of the Corporation be granted monthly compensation


for services rendered as follows: Chairman — P9,000.00/month,
Vice Chairman — P3,500.00/month, Corporate Treasurer —
P3,500.00/month and Corporate Secretary — P3,500.00/month,
retroactive June 1, 1985 and the ten per centum of the net
profits shall be distributed equally among the ten members of the
Board of Trustees. This shall amend and superceed (sic) any
previous resolution.

There were no other business.

The Chairman declared the meeting adjourned at 5:11 P.M.

This is to certify that the foregoing minutes of the regular meeting of the
Board of Trustees of Western Institute of Technology, Inc. held on March 30,
1986 is true and correct to the best of my knowledge and belief.
(Sgd) ANTONIO S. SALAS
Corporate Secretary 11 [Emphasis
ours]

Clearly, therefore, the prohibition with respect to granting compensation to corporate


directors/trustees as such under Section 30 is not violated in this particular case.
Consequently, the last sentence of Section 30 which provides:

. . . . . . . In no case shall the total yearly compensation of directors, as such


directors, exceed ten (10%) percent of the net income before income tax of the
corporation during the preceding year. (Emphasis ours]

does not likewise find application in this case since the compensation is being given to
private respondents in their capacity as officers of WIT and not as board members.

Petitioners assert that the instant case is a derivative suit brought by them as minority
shareholders of WIT for and on behalf of the corporation to annul Resolution No. 48, s.
1986 which is prejudicial to the corporation.

We are unpersuaded. A derivative suit is an action brought by minority shareholders in


the name of the corporation to redress wrongs committed against it, for which the
directors refuse to sue. 12 It is a remedy designed by equity and has been the principal
defense of the minority shareholders against abuses by the majority. 13 Here, however,
the case is not a derivative suit but is merely an appeal on the civil aspect of Criminal
Cases Nos. 37097 and 37098 filed with the RTC of Iloilo for estafa and falsification of
public document. Among the basic requirements for a derivative suit to prosper is that
the minority shareholder who is suing for and on behalf of the corporation must allege
in his complaint before the proper forum that he is suing on a derivative cause of action
on behalf of the corporation and all other shareholders similarly situated who wish to
join. 14 This is necessary to vest jurisdiction upon the tribunal in line with the rule that
it is the allegations in the complaint that vests jurisdiction upon the court or quasi-
judicial body concerned over the subject matter and nature of the action. 15 This was
not complied with by the petitioners either in their complaint before the court a
quo nor in the instant petition which, in part, merely states that "this is a petition for
review on certiorari on pure questions of law to set aside a portion of the RTC decision
in Criminal Cases Nos. 37097 and 37098" 16 since the trial court's judgment of
acquittal failed to impose any civil liability against the private respondents. By no
amount of equity considerations, if at all deserved, can a mere appeal on the civil aspect
of a criminal case be treated as a derivative suit.

Granting, for purposes of discussion, that this is a derivative suit as insisted by


petitioners, which it is not, the same is outrightly dismissible for having been
wrongfully filed in the regular court devoid of any jurisdiction to entertain the
complaint. The ease should have been filed with the Securities and Exchange
Commission (SEC) which exercises original and exclusive jurisdiction over derivative
suits, they being intra-corporate disputes, per Section 5 (b) of P.D. No. 902-A:
In addition to the regulatory and adjudicative functions of the Securities and
Exchange Commission over corporations, partnerships and other forms of
associations registered with it as expressly granted under existing laws and
decrees, it shall have original and exclusive jurisdiction to hear and decide cases
involving:

xxx xxx xxx

b) Controversies arising out of intra-corporate or partnership relations, between


and among stockholders, members, or associates; between any or all of them and
the corporation, partnership or association of which they are stockholders,
members or associates, respectively; and between such corporation, partnership
or association and the State insofar as it concerns their individual franchise or
right to exist as such entity;

xxx xxx xxx

[Emphasis ours]

Once the case is decided by the SEC, the losing party may file a petition for review
before the Court of Appeals raising questions of fact, of law, or mixed questions of
fact and law. 17 It is only after the case has ran this course, and not earlier, can it be
brought to us via a petition for review on certiorari under Rule 45 raising only pure
questions of law.18 Petitioners, in pleading that we treat the instant petition as a
derivative suit, are trying to short-circuit the entire process which we cannot here
sanction.

As an appeal on the civil aspect of Criminal Cases Nos. 37097 and 37098 for
falsification of public document and estafa, which this petition truly is, we have to deny
the petition just the same. It will be well to quote the respondent court's
ratiocinations acquitting the private respondents on both counts:

The prosecution wants this Court to believe and agree that there is falsification
of public document because, as claimed by the prosecution, Resolution No. 48,
Series of 1986 (Exh. "1-E-1") was not taken up and passed during the Regular
Meeting of the Board of Trustees of the Western Institute of Technology
(WIT), Inc. on March 30, 1986, but on June 1, 1986 special meeting of the same
board of trustees.

This Court is reluctant to accept this claim of falsification. The prosecution


omitted to submit the complete minutes of the regular meeting of the Board of
Trustees on March 30, 1986. It only presented in evidence Exh. "C", which is
page 5 or the last page of the said minutes. Had the complete minutes (Exh. "1")
consisting of five (5) pages, been submitted, it can be readily seen and
understood that Resolution No. 48, Series of 1986 (Exh. "1-E-1") giving
compensation to corporate officers, was indeed included in Other Business, No.
6 of the Agenda, and was taken up and passed on March 30, 1986. The mere fact
of existence of Exh. "C" also proves that it was passed on March 30, 1986 for
Exh. "C" is part and parcel of the whole minutes of the Board of Trustees
Regular Meeting on March 30, 1986. No better and more credible proof can be
considered other than the Minutes (Exh. "1") itself of the Regular Meeting of
the Board of Trustees on March 30, 1986. The imputation that said Resolution
No. 48 was neither taken up nor passed on March 30, 1986 because the matter
regarding compensation was not specifically stated or written in the Agenda and
that the words "possible implementation of said Resolution No. 48, was
expressly written in the Agenda for the Special Meeting of the Board on June 1,
1986, is simply an implication. This evidence by implication to the mind of the
court cannot prevail over the Minutes (Exh. "1") and cannot ripen into proof
beyond reasonable doubt which is demanded in all criminal prosecutions.

This Court finds that under the Eleventh Article (Exh. "3-D-1") of the Articles
of Incorporation (Exh. "3-B") of the Panay Educational Institution, Inc., now the
Western Institute of Technology, Inc., the officers of the corporation shall
receive such compensation as the Board of Directors may provide. These
Articles of Incorporation was adopted on May 17, 1957 (Exh. "3-E"). The
Officers of the corporation and their corresponding duties are enumerated and
stated in Sections 1, 2, 3 and 4 of Art. III of the Amended By-Laws of the
Corporation (Exh. "4-A") which was adopted on May 31, 1957. According to Sec.
6, Art. III of the same By-Laws, all officers shall receive such compensation as
may be fixed by the Board of Directors.

It is the perception of this Court that the grant of compensation or salary to


the accused in their capacity as officers of the corporation, through Resolution
No. 48, enacted on March 30, 1986 by the Board of Trustees, is authorized by
both the Articles of Incorporation and the By-Laws of the corporation. To state
otherwise is to depart from the clear terms of the said articles and by-laws. In
their defense the accused have properly and rightly asserted that the grant of
salary is not for directors, but for their being officers of the corporation who
oversee the day to day activities and operations of the school.

xxx xxx xxx

. . .[O]n the question of whether or not the accused can be held liable for estafa
under Sec. 1 (b) of Art. 315 of the Revised Penal Code, it is perceived by this
Court that the receipt and the holding of the money by the accused as salary on
basis of the authority granted by the Articles and By-Laws of the corporation
are not tainted with abuse of confidence. The money they received belongs to
them and cannot be said to have been converted and/or misappropriated by
them.

19
xxx xxx xxx
[Emphasis ours]

From the foregoing factual findings, which we find to be amply substantiated by the
records, it is evident that there is simply no basis to hold the accused, private
respondents herein, civilly liable. Section 2(b) of Rule 111 on the New Rules on Criminal
Procedure provides:

Sec. 2. Institution of separate civil action.

xxx xxx xxx

(b) Extinction of the penal action does not carry with it extinction of the civil,
unless the extinction proceeds from a declaration in a final judgment that the
fact from which the civil might arise did not exist. [Emphasis ours]

Likewise, the last paragraph of Section 2, Rule 120 reads:

Sec. 2. Form and contents of judgment.

xxx xxx xxx

In case of acquittal, unless there is a clear showing that the act from which the
civil liability might arise did not exist, the judgment shall make a finding on the
civil liability of the accused in favor of the offended party. [Emphasis ours]

The acquittal in Criminal Cases Nos. 37097 and 37098 is not merely based on
reasonable doubt but rather on a finding that the accused-private respondents did not
commit the criminal acts complained of. Thus, pursuant to the above rule and settled
jurisprudence, any civil action ex delicto cannot prosper. Acquittal in a criminal action
bars the civil action arising therefrom where the judgment of acquittal holds that the
accused did not commit the criminal acts imputed to them. 20

WHEREFORE, the instant petition is hereby DENIED with costs against petitioners.

SO ORDERED.

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.
Marcelino Lontok for appellant.
Nicolas Santiago for appellee.

VILLA-REAL, J.:

This is an appeal taken by the defendant Lim Chu Sing from the judgment rendered by
the Court of First Instance of Manila, the dispositive part of which reads as follows:

Wherefore, judgment is rendered sentencing the defendant to pay the sum of


P9,105.17 with interest thereon at the rate of six per cent per annum from
September 1, 1932, until fully paid, plus the sum of P910.51, as attorney's fees,
with the costs of this suit.

In conformity with the stipulation, this judgment shall be subject to execution


after ninety (90) days. So ordered.

In support of his appeal, the appellant assigns the following alleged errors as
committed by the court a quo in its decision, to wit:

1. In denying the motion dated December 27, 1932, praying for the inclusion of
Lim Cuan Sy, being the principal debtor, as party to this suit.

2. In holding as improper the compensation of the defendant's debt of


P9,106.17, claimed in the complaint, with his credit amounting to P10,000 with
the Mercantile Bank of China.

3. In not ordering that after the compensation the plaintiff-appellee, as


receiver of the Mercantile Bank of China, should liquidate the dividends of the
defendant-appellant's shares.

4. In sentencing the defendant-appellant to pay to the plaintiff-appellee the


sum of P910.51 as attorney's fees, plus interest at 6 per cent per annum on the
sum of P9,105.17, with costs.

5. In denying the motion for a new trial.

When the case was called for hearing, the parties submitted the following stipulation
of facts for the consideration of the trial court, to wit:

Come now both parties and to this Honorable Court respectfully submit the
following stipulation:

1. The defendant admits the facts alleged in the complaint.


2. The plaintiff admits the allegations in the answer, particularly with reference
to the fact that the defendant is the owner of two hundred shares at a par
value of fifty pesos (P50) each, that is (Pl0,000).

3. The court may render judgment in accordance with this stipulation, but the
same shall be subject to execution after ninety (90) days.

Wherefore, they respectfully submit this stipulation and pray that judgment be
rendered in accordance therewith.

The facts alleged in the complaint and admitted by both parties under the above
quoted stipulation of facts are as follows:

On June 20, 1930, the defendant-appellant Lim Chu Sing executed and delivered to the
Mercantile Bank of China promissory note for the sum of P19,605.17 with interest
thereon at 6 per cent per annum, payable monthly as follows: P1,000 on July 1, 1930;
P500 on August 1, 1930; and P500 on the first of every month thereafter until the
amount of the promissory note together with the interest thereon is fully paid (Exhibit
A). One of the conditions stipulated in said promissory note is that in case of
defendant's default in the payment of any of the monthly installments, as they become
due, the entire amount or the unpaid balance thereof together with interest thereon at
6 per cent per annum, 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 by reason of which the
unpaid balance of P9,105.17 on the promissory note has ipso facto become due and
demandable.

The facts alleged in the answer and admitted by both parties under the same
stipulation of facts are as follows:

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 a promissory note for the sum of P19,105.17
payable in the manner hereinbefore stated (Exhibit A). The defendant had been paying
the corresponding installments until the debt was reduced to the sum of P9,105.17
claimed in the complaint. 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.

On December 27, 1932, the defendant-appellant Lim Chu Sing filed a motion praying
for the inclusion of the principal debtor Lim Cuan Sy as party defendant so that he
could avail himself of the benefit of the exhaustion of the property of said Lim Cuan
Sy. Said motion was denied in open court by the presiding judge without the defendant-
appellant having excepted to such order of denial.

The proceeds of the sale of the mortgaged chattels together with other payments
made were applied to the amount of the promissory note in question, leaving the
balance which the plaintiff now seeks to collect.

The first question to be decided in this appeal is whether or not the court a quo erred
in denying the motion for inclusion of a party a defendant, filed by the defendant-
appellant.

According to the provisions of section 141 of the Code of Civil Procedure, ". . . Rulings
of the court upon minor matters, such as adjournments, postponements of trials, the
extension of time for filing pleadings or motions, and other matters addressed to the
discretion of the court in the performance of its duty, shall not be subject to
exception. But exception may be taken to any other ruling, order, or judgment of the
court made during the pendency of the action in the Court of First Instance." "An
`exception' has been defined as an objection taken to the decision of the trial court
upon a matter of law, and is a notice that the party taking it preserves for the
consideration of the appellate court a ruling deemed erroneous. (8 Am. Enc. P. and P.,
157.)" " `Errors in a judgment or decree will not be noticed on appeal in the absence of
objections and exceptions taken below, and they should be sufficiently specific to
direct the attention of the court to the alleged defects.' (8 Enc. Pl and Pr., 289.)"
(Garcia de Lara vs. Gonzales de Lara, 2 Phil., 297.) Inasmuch as an exception is an
objection taken to the decision of the trial court upon a matter of law and is a notice
that the party taking it will submit for the consideration of the appellate court the
ruling deemed erroneous, failure to interpose it deprived the appellant of the right to
raise the question whether or not the court a quo committed the alleged error
attributed to it in its ruling which had not been excepted to by the said appellant. The
inclusion in, or exclusion from an action of a certain party is a question of law. The
herein defendant-appellant, not having excepted to the order of the Court of First
Instance of Manila denying his motion for the inclusion of Lim Cuan Sy as party
defendant, is estopped from raising such question upon appeal (Roman Catholic Bishop
of Lipa vs. Municipality of San Jose, 27 Phil., 571; Vergara vs. Laciapag, 28 Phil., 439;
Andrews vs. Morente Rosario, 9 Phil., 634).

The second question to be decided is whether or not it is proper to compensate the


defendant-appellant's indebtedness of P9,105.17, which is claimed in the complaint,
with the sum of P10,000 representing the value of his shares of stock with the
plaintiff entity, the Mercantile Bank of China.

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 (14 Corpus Juris, p. 388, see. 511). Stockholders, as such, are not creditors of
the corporation (14 Corpus Juris, p. 848, Sec. 1289). It is the prevailing doctrine of the
American courts, repeatedly asserted in the broadest terms, that 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 (14
Corpus Juris, p. 383, sec. 505). Therefore, the defendant-appellant Lim Chu Sing not
being a creditor of the Mercantile Bank of China, although the latter is a creditor of
the former, there is no sufficient ground to justify a compensation (art. 1195, Civil
Code; Acuña Co Chongco vs. Dievas, 12 Phil., 250).

The third question to be decided in this appeal is whether or not the court a quo erred
in sentencing the said defendant-appellant to pay the sum of P910.51 as attorney's fees
in addition to interest at 6 per cent per annum on the amount sought in the complaint.

The pertinent clause of the promissory note Exhibit A reads as follows: "In case of
default of any of the above installments, the total amount of the balance still unpaid of
this note will become due and payable on demand plus interest thereon at the rate of 6
per cent per annum from date of this note until payment is made. And I further agree
to pay an additional sum equivalent to 10 per cent of the said note to cover cost and
attorney's fees for collection."

The stipulation relative to the payment of interest at the rate of 6 per cent per annum
on the unpaid balance of the promissory note Exhibit A refers to the capital and the 10
per cent stipulated for costs and attorney's fees cannot be considered as interest but
an indemnity for damages occasioned by the collection of the indebtedness through
judicial process. Therefore the two rates in question cannot be combined and
considered usurious interest.

With reference to the costs, the 10 per cent stipulated in the promissory note is for
costs and attorney's fees which may be incurred in the collection of the indebtedness
through judicial process. Therefore, the defendant-appellant should not again be made
to pay for them (Bank of the Philippine Islands vs. Yulo, 31 Phil., 476).

In view of the foregoing, this court is of the opinion and so holds: (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.

Wherefore, with the sole modification that the costs be eliminated from the appealed
judgment, the same is hereby affirmed, without special pronouncement as to costs of
this instance. So ordered.
Malcolm, Hull, Imperial, and Goddard, JJ., concur.