158 GARCIA v LIM CHU SHING AUTHOR: Castro

[59, Phil. 962. February 24, 1934]
TOPIC: Nature of Subscription Contract
PONENTE: Villa-real, J.
NOTES: Appeal was taken by Lim Chu Sing from the CFI
Manila’s decision that his debt may not be compensated by his
shares with the plaintiff bank.
Garcia – receiver of Mercantile Bank of China, which is
undergoing liquidation
Lim Chu Sing – defendant and surety of Lim Cuan Sy (surety –
liable if principal does not pay)

Note: shares of stock – P10,000; debt – P9,105.17

FACTS:

 Lim Chu Sing is the owner of shares of stock of the Mercantile Bank of China amounting to P10,000. The bank is
now under liquidation.

 Lim Chu Sing is a surety of Lim Cuan Sy. The principal Lim Cuan Sy had an account with the bank in the form of
trust receipts, which were guaranteed by Lim Chu Sing as surety and with chattel mortgage securities.

 Since Lim Cuan Sy failed to comply with his obligations with the bank, Lim Chu Sing, as a surety, was required to
sign a promissory note.

 On June 20, 1930, Lim Chu Sing executed a promissory note in the amount of P19,605.17, with interest at 6 per
cent per annum, in favor of Mercantile Bank of China.

 Lim Chu Sing made several partial payments, but left an unpaid balance of P9,105.17.

 The bank foreclosed the chattel mortgages and privately sold the property without Lim Chu Sing’s knowledge and
consent. The proceeds of the sale of the mortgaged chattels together with other payments were applied to the
amount of the promissory note, leaving the balance which the plaintiff now seeks to collect.

 Lim Chu Sing is alleging that the debt of P9,106.17 may be compensated with his credit amounting to P10,000
with the Mercantile Bank of China.

ISSUE:
Whether the P10,000, representing Lim Chu Sing’s value of the shares of stock with the bank may be used to compensate
the debt of P9,105.17

HELD: No. The shares of stock may not be used to compensate for the debt since there is no creditor-debtor relationship
with respect to the shares.
RATIO:
The shares of a banking corporation do not constitute an indebtedness of the corporation to the stockholder and,
therefore, the stockholder is not a creditor of the bank for such shares.

The indebtedness of a shareholder to a banking corporation cannot be compensated with the amount of his shares,
there being no relation of creditor and debtor with respect to such shares.

A share of stock is not an indebtedness to the owner nor evidence of indebtedness, therefore, it is not a credit.

Stockholders, as such, are not creditors of the corporation. 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.

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. It is only Lim Chu Sing who is the
debtor of the bank, not the other way around.
Other rulings:

1) The 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 was proper or
improper.

2) The percentage stipulated in a contract, for costs and attorney's fees for the collection of an indebtedness, includes
judicial costs.

CASE LAW/ DOCTRINE:

The shares of a banking corporation do not constitute an indebtedness of the corporation to the stockholder and, therefore,
the stockholder is not a creditor of the bank for such shares. The indebtedness of a shareholder to a banking corporation
cannot be compensated with the amount of his shares, there being no relation of creditor and debtor with respect to such
shares.