TOPIC CredTrans – Simple Loan or Mutuum – Art.

1956
CASE NO. G.R. No. L-33205
CASE NAME Lirag Textile Mills, Inc. and Basilio L. Lirag v SSS (and Hon. De Castro)
MEMBER Mitchell

DOCTRINE
Art. 1956. No interest shall be due unless it has been expressly stipulated in writing

[This is not found in the case, as there was no explicitly stated doctrine, please correct me if I’m wrong☹]
Art. 1956 is subject to two exceptions:
1. Indemnity for damages—the debtor in delay is liable to pay legal interest as indemnity for
damages even in the absence of a stipulation for the payment of interest.
Art. 2209. If the obligation consists in the payment of the sum of money, and the debtor
incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment
of the interest agreed upon, and in the absence of stipulation, the legal interet, which is 6%.
2. Interest accruing from unpaid interest—interest due shall earn interest from the time it is
judicially demanded although the obligation may be silent upon this point (Art. 2212).

RECIT-READY DIGEST
SSS and Lirag Textile Mills, Inc. entered into a Purchase Agreement wherein SSS will purchase
10k Preferred Shares (note: preferred shares entitle the holder to dividends—it was 8% per annum for the
shares purchased here) of Lirag Inc. worth Php1M.Under the Agreement, Lirag Inc. agreed to redeem the
shares beginning 4th year from date of issuance at regular intervals of 1 year.
It also provides that should the Corp. fail to redeem the shares as agreed upon, the entire obligation
shall become due and demandable and Lirag, Inc. will be liable for 12% of the amount then outstanding as
liquidated damages.
To guarantee the redemption, Basilio Lirag, president of the Corporation, signed the agreement not
only as president but as Surety, undertaking to be solidarily liable with the Corp in the event that it fails to
perform any of its obligations. The Corp failed to redeem the shares and pay the dividends as agreed on.
Hence, a court action by SSS for specific performance and damages.

Issue: W/N Lirag Textile Mills, Inc. and its President as Surety are liable for the dividends (8% per
annum), liquidated damages (12%) as stipulated and legal interest on the unpaid dividends.

SC: Yes, the Contract entered into clearly indicates intention to pay interest in the form of dividends.
It is a debt instrument (see ratio). Petitioners are liable for the stipulated interest (in the form of dividends)
and legal interest being incurred in default for failing to pay out dividends due to SSS, as well as liquidated
damages for default as stipulated in the agreement.

FACTS
• SSS and Lirag Textile Mills (the Corporation) entered into a Purchase Agreement wherein SSS
agreed to purchase Preferred Shares of stock from Lirag Textile worth P1 million.
o On two separate occasions, SSS paid to the Corporation P500k, and was 5,000 Preferred
Shares with a par value of P100.00, evidenced by two stock certificates (10,000 shares in
total).
▪ These preferred shares are to earn 8% dividends per annum
o The Agreement provides that the Corporation will repurchase the shares sold to SSS at
regular intervals of one year, beginning in the 4 th year from the date of issue.
o It also provides that should the Corporation fail to redeem the shares as agreed upon,
the entire obligation shall immediately become due and demandable; and it shall further

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 be liable to SSS in an amount, as liquidated damages, equal to 12% of the amount
then outstanding.
o To guarantee the redemption of the stocks purchased by SSS, the payment of dividends
and other obligations of the Corporation, Basilio Lirag signed the Purchase
Agreement—not only as President but as a Surety, undertaking to be held solidarily
liable in the event that the Corporation fails to perform any of its obligations.
• The Corporation failed to redeem the shares and failed to pay the dividends in the amount and
periods as agreed upon.
• SSS sent demand letters to the Corporation summoning it to redeem the stock certificates and pay
the dividends, but Lirag Textile did not do so. The president (Basilio) also received demand letters
requiring him to make good his obligation as surety, but the obligations demanded still remained
pending.
• SSS filed with the CFI-Rizal an action for Specific Performance and damages against the
Corporation and Basilio on the ground of their failure to comply with the terms of the Purchase
Agreement
o It prayed that the Corporation and Basilio be adjudged liable to pay the entire P1M for the
latter’s failure to redeem the stocks and pay the dividends as scheduled.
o The Corporation and Basilio moved to dismiss the case
▪ They claim that there is no obligation on their part to redeem the preferred stocks,
because SSS is still a preferred stockholder of the corporation which means that
the corporation may repurchase the shares depending on its financial ability. The
further claimed that liability has not arisen because such depends on the non-
realization of any profit or earned surplus.
o The lower court, ruling that the Purchase Agreement is a debt instrument, decided in favor
of SSS, hence this petition.

ISSUE/S and HELD

1. W/N the Purchase Agreement is a debt instrument—YES
2. W/N the President (Basilio Lirag) is liable as a surety—YES
3. W/N the Corporation and Lirag are liable for the payment of interest (main issue for this
assigned case)—YES

RATIO
1. The Purchase Agreement is a debt instrument.
- It shows that the parties intended the repurchase as an absolute obligation which
does not depend on the Corporation’s financial ability. This is made apparent by
the fact that a Surety was required to ensure the fulfillment of the Corporation’s
obligations.
- The Corporation’s unconditional undertaking to redeem the shares on specified dates
constitutes a det defined as “an obligation to pay money at some fixed future time,”
or at a time which becomes definite and fixed by the acts of either party and which
they expressly or impliedly agreed to perform in the contract.

2. The President of Lirag Textile is liable as surety.

- President Lirag is precluded from denying his liability under the Purchase
Agreement. After his firm representation to "pay immediately to the VENDEE the
amounts then outstanding" evidencing his commitment as SURETY, he is estopped
from denying it. His signature in the agreement carries with it the official imprimatur
as petitioner corporation's president, in his personal capacity as majority stockholder,

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 as surety and as solidary obligor. The essence of his obligation as surety is to pay
immediately without qualification whatsoever if petitioner corporation does not pay.
- The Purchase Agreement constitutes the law between the parties and obligations
arising ex contractu must be fulfilled in accordance with the stipulations. Besides, it
was precisely this eventuality that was sought to be avoided when respondent SSS
required a surety for the obligation.
- Thus, it follows that Basilio Lirag cannot deny liability for petitioner corporation's
default. As surety, Basilio Lirag is bound immediately to pay respondent SSS the
amount then outstanding.
"The obligation of a surety differs from that of a guarantor in that the surety
insures the debt, whereas the guarantor merely insures solvency of the debtor;
and the surety undertakes to pay if the principal does not pay, whereas a
guarantor merely binds itself to pay if the principal is unable to pay."

3. (Main Issue) The Contract entered into clearly indicates intention to pay interest.
Lirag Corp. and Basilio Lirag are liable for both stipulated interest and legal interest.
- On the liability of petitioners to pay 8% cumulative dividend, SC agrees with the
observation of the lower court that the dividends stipulated by the parties served
evidently as interests.
- The amount 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, again
for the reason that the undertaking of Basilio L. Lirag as surety, included the payment
of dividends and other obligations then outstanding
- The award of P146,400.00 in liquidated damages representing 12% of the amount then
outstanding is correct, considering that petitioners in the stipulation of facts admitted
having failed to fulfill their obligations under the Purchase Agreement. The grant of
liquidated damages in the amount stated is expressly provided for in the Purchase
Agreement in case of contractual breach.
o The pronouncement of the lower court for the payment of interests on both the
unredeemed shares and unpaid dividends is also in order. Per stipulation of
facts, petitioners did not deny the fact of non-payment of dividends nor their
failure to purchase the preferred shares. Since these involve sums of money
which are overdue, they are bound to earn legal interest from the time of
demand, in this case, judicial, i.e.,the time of filing the action.
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DISPOSTIVE PORTION
Wherefore, the decision in Civil Case No. Q-12275 entitled "Social Security System vs. Lirag Textile Mills,
Inc. and Basilio L. Lirag" is hereby AFFIRMED in toto. Costs against petitioners.