G.R. No. L-33205 August 31, 1987 LIRAG TEXTILE MILLS, INC., an !ASILI" L. LIRAG, petitioners, vs.

S"CIAL SEC#RIT$ S$STEM, an %"N. &ACI'IC" (E CASTR", respondents.

'ERNAN, J.: This is an appeal by certiorari involving purely questions of law from the decision rendered by respondent judge in Civil Case No. Q- !!"# entitled $%ocial %ecurity %ystem versus &irag Te'tile (ills, )nc. and *asilio &. &irag.$ The antecedent facts, as stipulated by the parties during the trial, are as follows+ . That on %eptember ,, -. , the plaintiff /herein respondent %ocial %ecurity %ystem0 and the defendants /herein petitioners0 &irag Te'tile (ills, )nc. and *asilio &irag entered into a 1urchase 2greement under which the plaintiff agreed to purchase from the said defendant preferred shares of stoc3 worth 4N5 ()&&)4N 15%4% /1 ,666,666.660 subject to the conditions set forth in such agreement7... !. That pursuant to the 1urchase 2greement of %eptember ,, -. , the plaintiff, on 8anuary 9 , -.!, paid the defendant &irag Te'tile (ills, )nc. the sum of :);5 <=N>?5> T<4=%2N> 15%4% /1#66,666.660 for which the said defendant issued to plaintiff #,666 preferred shares with a par value of one hundred pesos /1 66660 per share as evidenced by stoc3 Certificate No. !@, ... 9. That further in pursuance of the 1urchase 2greement of %eptember ,, -. , the plaintiff paid to the &irag Te'tile (ills, )nc. the sum of :);5 =N>?5> T<4=%2N> 15%4% /1#66,666.660 for which the said defendant issued to plaintiff #,666 preferred shares with a par value of one hundred pesos /1 66.660 per share as evidenced by %toc3 Certificate No. 9-, ... ,. That in accordance with paragraph 9 of the 1urchase 2greement of %eptember ,, -. which provides for the repurchase by the &irag Te'tile (ills, )nc. of the shares of stoc3 at regular intervals of one year beginning with the ,th year following the date of issue, %toc3 Certificates Nos. !@ and 9- were to be repurchased by the &irag Te'tile (ills, )nc. thus+ C5?T. No. 2(4=NT >2T5 4: ?5>5(1T)4N !@ 1 66,666.66 :ebruary ,, -.# 66,666.66 :ebruary ,, -.. 66,666.66 :ebruary ,, -."

66,666.66 :ebruary ,, -.@ 66,666.66 :ebruary ,, -.9- 1 66,666.66 8uly 9, -.. 66,666.66 8uly 9, -." 66,666.66 8uly 9, -.@ 66,666.66 8uly 9, -.66,666.66 8uly 9, -"6 #. That to guarantee the redemption of the stoc3s purchased by the plaintiff, the payment of dividends, as well as the other obligations of the &irag Te'tile (ills, )nc., defendants *asilio &. &irag signed the 1urchase 2greement of %eptember ,, -. not only as president of the defendant corporation, but also as surety so that should the &irag Te'tile (ills, )nc. fail to perform any of its obligations in the said 1urchase 2greement, the surety shall immediately pay to the vendee the amounts then outstanding pursuant to Condition No. ,, to wit+ To guarantee the redemption of the stoc3s herein purchased, the payment of the dividends, as well as other obligations of the ;5N>4? herein, the %=?5TA hereby binds himself jointly and severally liable with the ;5N>4? so that should the ;5N>4? fail to perform any of its obligations hereunder, the %=?5TA shall immediately pay to the ;5N>55 the amounts then outstanding. B .. That defendant corporation failed to redeem certificates of %toc3 Nos. !@ and 9- by payment of the amounts mentioned in paragraph , above7 ". That the &irag Te'tile (ills, lnc. has not paid dividends in the amounts and within the period set forth in paragraph 6 of the complaint7) @. That letters of demands have been sent by the plaintiff to the defendant to redeem the foregoing stoc3 certificates and pay the dividends set forth in paragraph 6 of the complaint, but the &irag Te'tile (ills, )nc. has not made such redemption nor made such dividend payments7 -. That defendant *asilio &. &irag li3ewise received letters of demand from the plaintiff requiring him to ma3e good his obligation as surety7 6. That notwithstanding such letters of demand to the defendant *asilio &. &irag, %toc3 Certificates Nos. !@ and 9- issued to plaintiff are still unredeemed and no dividends have been paid on said stoc3 certificates7 . That paragraph # of the 1urchase 2greement provides that should the &irag Te'tile (ills, )nc. fail to effect any of the redemptions stipulated therein, the entire

obligation shall immediately become due and demandable and the &irag Te'tile (ills, )nc., shall, furthermore, be liable to the plaintiff in an amount equivalent to twelve per cent / !C0 of the amount then outstanding as liquidated damages7 !. That the failure of the &irag Te'tile (ills, )nc. to redeem the foregoing certificates of stoc3 and pay dividends thereon were due to financial reverses, to wit+ /a0 =nrestrained smuggling into the country of te'tiles from the =nited %tates and other countries7 /b0 =nrestricted entry of supposed remmants which competed with te'tiles of domestic produce to the disadvantage and economic prejudice of the latter7 /c0 %carcity of money and the unavailability of financing facilities7 /d0 1ayment of interest on matured loans e'tended to defendant corporation7 /e0 Construction of the (ontalban plant of the defendant corporation financed largely through reparation benefits7 /f0 &abor problems occasioned by the fact that the defendant company is financial DsicE unable to improve, in a substantial way, the economic plight of its wor3ers as a result of which two costly stri3es had occurred, one in -.# and another in -.@7 and /g0 The occurrence of a fire which destroyed more than million worth of raw cotton, paralyFed operations partially, increased overhead costs and wiped out any e'pected profits that year7 9. That it has been the policy of the plaintiff to be represented in the board of directors of the corporation or entity which has obtained financial assistance from the %ystem be it in terms of loans, mortgages or equity investments. Thus, pursuant to paragraph . of the 1urchase 2greement of %eptember ,, -. which provides as follows+ The ;5N>55 shall be allowed to have a representative in the *oard of >irectors of the ;5N>4? with the right to participate in the discussions and to vote therein7 ,. That (essrs. ?ene 5spina, *ernardino 2bes and <eber Catalan were each issued one common share of stoc3 as a qualifying share to their election to the *oard of >irectors of the &irag Te'tiles (ills, )nc.7 #. That (essrs. ?ene 5spina, *ernardino 2bes and <eber Catalan, during their respective tenure as member of the *oard of >irectors of the &irag Te'tile (ills, )nc. attended the meetings of the said *oard, received per diems for their

attendance therein in the same manner and in the same amount as any other member of the *oard of >irectors, participated in the deliberations therein and freely e'ercised their right to vote in such meetings. <owever, the per diems received by the %%% representative do not go to the coffers of the %ystem but personally to the representative in the said board of directors. 1 :or failure of &irag Te'tile (ills, )nc. and *asilio &. &irag to comply with the terms of the 1urchase 2greement, the %%% filed an action for specific performance and damages before the then Court of :irst )nstance of ?iFal, QueFon City, praying that therein defendants &irag Te'tile (ills, )nc. and *asilio &. &irag be adjudged liable for / 0 the entire obligation of 1 ( which became due and demandable upon defendantsB failure to repurchase the stoc3s as scheduled7 /! dividends in the amount of 1!!6,666.667 /9 liquidated damages in an amount equivalent to twelve percent D !CE of the amount then outstanding7 /,0 e'emplary damages in the amount of 1 66,666.66 and /#0 attorneyBs fees of 1!6,666.66. &irag Te'tile (ills, )nc. and *asilio &. &irag moved for the dismissal of the complaint, but were denied the relief sought. Thus, they filed their answer with counterclaim, denying the e'istence of any obligation on their part to redeem the preferred stoc3s, on the ground that the %%% became and still is a preferred stoc3holder of the corporation so that redemption of the shares purchased depended upon the financial ability of said corporation. )nsofar as defendant *asilio &irag is concerned, it was alleged that his liability arises only if the corporation is liable and does not perform its obligations under the 1urchase 2greement. They further contended that no liability on their part has arisen because of the financial condition of the corporation upon which such liability was made to depend, particularly the non-realiFation of any profit or earned surplus. Thus, the other claims for dividends, liquidated damages and e'emplary damages are allegedly without basis. 2fter entering into the %tipulation of :acts above-quoted, the parties filed their respective memoranda and submitted the case for decision. The lower court, ruling that the purchase agreement was a debt instrument, decided in favor of %%% and sentenced &irag Te'tile (ills, )nc. and *asilio &. &irag to pay %%% jointly and severally 1 ,666,666.66 plus legal interest until the said amount is fully paid7 1!!6,666.66 representing the @C per annum dividends on the preferred shares plus legal interest up to the time of actual payment7 1 ,.,,66.66 as liquidated damages7 and 1 6,666.66 as attorneyBs fees. The counterclaim of &irag Te'tile (ills, )nc. and *asilio &. &irag was dismissed. <ence, this petition. 1etitioners assign the following errors+ . The trial court erred in deciding that the 1urchase 2greement is a debt instrument7 !. ?espondent judge erred in holding petitioner corporation liable for the payment of the @C preferred and cumulative dividends on the preferred shares since the purchase agreement provides that said dividends shall be paid from the net profits and earned surplus of petitioner corporation and respondent %%% has admitted that due to losses sustained since - -.,, no dividends had been and can be declared by petitioner corporation7

9. ?espondent judge erred in sentencing petitioners to pay 1 ,.,,66.66 in liquidated damages7 ,. ?espondent judge erred in sentencing petitioners to pay 1 6,666.66 by way of attorneyBs fees7 #. ?espondent judge erred in sentencing petitioners to pay interest from the time of firing the complaint u to the time of full payment both on the 1 ,666,666.66 invested by respondent %%% in petitionerBs corporation and on the 1!!6,666.66 which the %%% claims as dividends due on its investments7 .. ?espondent judge erred in holding that petitioner &irag is liable to redeem the 1 ,666,666.66 worth of preferred shares purchased by respondent %%% from petitioner corporation and the @C cumulative dividend, it appearing that &irag was merely a surety and not an insurer of the obligation7 ". ?espondent judge erred in dismissing the counterclaim of petitioners. The fundamental issue in this case is whether or not the 1urchase 2greement entered into by petitioners and respondent %%% is a debt instrument. 1etitioners claim that respondent %%% merely became and still is a preferred stoc3holder of the petitioner corporation, the redemption of the shares purchased by said respondent being dependent upon the financial ability of petitioner corporation. 1etitioner corporation, thus, has no obligation to redeem the preferred stoc3s. 4n the other hand, respondent %%% claims that the 1urchase 2greement is a debt instrument, imposing upon the petitioners the obligation to pay the amount owed, and creating as between them the relation of creditor and debtor, not that of a stoc3holder and a corporation. Ge uphold the lower courtBs finding that the 1urchase 2greement is, indeed, a debt instrument. )ts terms and conditions unmista3ably show that the parties intended the repurchase of the preferred shares on the respective scheduled dates to be an absolute obligation which does not depend upon the financial ability of petitioner corporation. This absolute obligation on the part of petitioner corporation is made manifest by the fact that a surety was required to see to it that the obligation is fulfilled in the event of the principal debtorBs inability to do so. The unconditional underta3ing of petitioner corporation to redeem the preferred shares at the specified dates constitutes a debt which is defined $as an obligation to pay money at some fixed future time, or at a time which becomes definite and fi'ed by acts of either party and which they e'pressly or impliedly, agree to perform in the contract. 2 2 stoc3holder sin3s or swims with the corporation and there is no obligation to return the value of his shares by means of repurchase if the corporation incurs losses and financial reverses, much less guarantee such repurchase through a surety. 2s private respondent rightly contends, if the parties intended it /%%%0 to be merely a stoc3holder of petitioner corporation, it would have been sufficient that 1referred Certificates Nos. !@ and 9- were issued in its name as the preferred certificates contained all the rights of a stoc3holder as well as certain obligations on the part of petitioner corporation. <owever, the parties did in fact e'ecute the 1urchase 2greement, at the same time that the petitioner

corporation issued its preferred stoc3 to the respondent %%%. The 1urchase 2greement serves to define the rights and obligations of the parties and to establish firmly the liability of petitioners in case of breach of contract. The Certificates of 1referred %toc3 serve as additional evidence of the agreement between the parties, though the precise terms and conditions thereof must be read together with, and regarded as qualified by the terms and conditions of the 1urchase 2greement. The rights given by the 1urchase 2greement to respondent %%% are rights not enjoyed by ordinary stoc3holders. This fact could only lead to the conclusion made by the trial court that+ The aforementioned rights specially stipulated for the benefit of the plaintiff /respondent %%%0 suggest eloquently an intention on the part of the plaintiff /respondent %%%0 to facilitate a loan to the defendant corporation upon the latterBs request. )n order to afford protection to the plaintiff which otherwise is provided by means of collaterals, as the plaintiff e'acts in its grants of loans in its ordinary transactions of this 3ind, as it is loo3ed upon more as a lending institution rather than as an investing agency, the purchase agreement supplied these protective rights which would otherwise be furnished by collaterals to the loan. Thus, the membership in the board is to have a watchdog in the operation of the business of the corporation, so as to insure against mismanagement which may result in losses not entirely unavoidable since payment for purposes of redemption as well as the dividends is e'pressly stipulated to come from profits andHor surplus. %uch a right is never e'acted by an ordinary stoc3holder merely investing in the corporation. 3 (oreover, the 1urchase 2greement provided that failure on the part of petitioner to repurchase the preferred shares on the scheduled due dates renders the entire obligation due and demandable, with petitioner in such eventuality liable to pay !C of the then outstanding obligation as liquidated damages. These features of the 1urchase 2greement, ta3en collectively, clearly show the intent of the parties to be bound therein as debtor and creditor, and not as corporation and stoc3holder. 1etitionersB contention that it is beyond the power and competence of petitioner corporation to redeem the preferred shares or pay the accrued dividends due to financial reverses can not serve as legal justification for their failure to perform under the 1urchase 2greement. The 1urchase 2greement constitutes the law between the parties and obligations arising ex contractu must be fulfilled in accordance with the stipulations. * *esides, it was precisely this eventuality that was sought to be avoided when respondent %%% required a surety for the obligation. Thus, it follows that petitioner *asilio &. &irag cannot deny liability for petitioner corporationBs default. 2s surety, *asilio &. &irag is bound immediately to pay respondent %%% 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 debtor7 and the surety underta3es to pay if the principal does not pay, whereas a guarantor merely binds itself to pay if the principal is unable to pay. 5

4n the liability of petitioners to pay @C cumulative dividend, Ge agree with the observation of the lower court that the dividends stipulated by the parties served evidently as interests. + The amount thereof was fi'ed at @C per annum and was not made to depend upon or to fluctuate with the amount of profits or surplus realiFed, a clear indication that the parties intended to give a sure and fi'ed 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 e'cuse petitioners from the payment thereof, again for the reason that the underta3ing of petitioner *asilio &. &irag as surety, included the payment of dividends and other obligations then outstanding. The award of the sum of 1 ,.,,66.66 in liquidated damages representing !C of the amount then outstanding is correct, considering that petitioners in the stipulation of facts admitted having failed to fulfill their obligations under the 1urchase 2greement. The grant of liquidated damages in the amount stated is e'pressly provided for in the 1urchase 2greement in case of contractual breach. The pronouncement of the lower court for the payment of interests on both the unredeemed shares and unpaid dividends is also in order. 1er stipulation of facts, petitioners did not deny the fact of non-payment of dividends nor their failure to purchase the preferred shares. %ince 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. 1etitioner *asilio &. &irag is precluded from denying his liability under the- 1urchase 2greement. 2fter his firm representation to $pay immediately to the ;5N>55 the amounts then outstanding$ evidencing his commitment as %=?5TA, he is estopped from denying the same. <is signature in the agreement carries with it the official imprimatur as petitioner corporationBs president, in his personal capacity as majority stoc3holder, 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. To have another interpretation of petitioner &iragBs liability as surety would violate the integrity of the 1urchase 2greement as well as the clear and unmista3able intent of the parties to the same. G<5?5:4?5, the decision in Civil Case No. Q- !!"# entitled $%ocial %ecurity %ystem vs. &irag Te'tile (ills, )nc. and *asilio &. &irag$ is hereby affirmed in toto. Costs against petitioners. %4 4?>5?5>. Gutierrez, Jr., Feliciano, Bidin and Cortes, JJ., concur.

'ootnot,s