Vous êtes sur la page 1sur 23



For Torts
Cert to review dec. of CA affirmed CFI
Philamgen executed a bond with Tapnio in favor of PNB to guarantee the
payment of defendant Tapnios account with said bank.
In turn, to guarantee the payment of whatever amount the bonding
company would pay to the Philippine National Bank, both defendants executed the
indemnity agreement
the terms and conditions of this indemnity agreement,
whatever amount the plaintiff would pay would earn interest at the rate of
12% per annum, plus attorney's fees in the amount of 15 % of the whole
amount due in case of court litigation.
original amount of the bond was for P4,000.00; but the amount was later
reduced to P2,000.00.
not disputed that defendant Rita Gueco Tapnio was indebted to the bank in
the sum of P2,000.00, plus accumulated interests unpaid, which she failed to pay
despite demands.
Bank wrote a letter of demand to plaintiff: plaintiff paid the bank on
September 18, 1957, the full amount due and owing in the sum of P2,379.91, for
and on account of defendant Rita Gueco's obligation
Palintiff in turn made several demands bith verbal and written to the defs
but to no avail
Defendant Rita Gueco Tapnio admitted all the foregoing facts. She claims,
however, when demand was made upon her by plaintiff for her to pay her debt to
the Bank, that she told the Plaintiff that she did not consider herself to be indebted
to the Bank at all because she had an agreement with one Jacobo-Nazon whereby
she had leased to the latter her unused export sugar for a total of 2,800.
Accrdg. The lease agreementwas with the knowledge of the
But the Bank has placed obstacles to the consummation of the lease, and
the delay caused by said obstacles forced 'Nazon to rescind the lease contract.
Tapnio filed her third-party complaint against the Bank to recover from the
latter any and all sums of money which may be adjudged against her and in favor
of the plaitiff plus moral damages, attorney's fees and costs.

ISSUE: Whether the petitioner is liable for the damage caused.

Affirmed CA
As observed by the trial court, time is of the essence in the approval of the lease of sugar
quota allotments, since the same must be utilized during the milling season, because any
allotment which is not filled during such milling season may be reallocated by the Sugar
Quota Administration to other holders of allotments. 3 There was no proof that there was
any other person at that time willing to lease the sugar quota allotment of private
respondents for a price higher than P2.80 per picul. "The fact that there were isolated
transactions wherein the consideration for the lease was P3.00 a picul", according to the
trial court, "does not necessarily mean that there are always ready takers of said price. "
The unreasonableness of the position adopted by the petitioner's Board of Directors is
shown by the fact that the difference between the amount of P2.80 per picul offered by
Tuazon and the P3.00 per picul demanded by the Board amounted only to a total sum of
P200.00. Considering that all the accounts of Rita Gueco Tapnio with the Bank were
secured by chattel mortgage on standing crops, assignment of leasehold rights and
interests on her properties, and surety bonds and that she had apparently "the means to
pay her obligation to the Bank, as shown by the fact that she has been granted several
sugar crop loans of the total value of almost P80,000.00 for the agricultural years from
1952 to 1956", there was no reasonable basis for the Board of Directors of petitioner to
have rejected the lease agreement because of a measly sum of P200.00.
While petitioner had the ultimate authority of approving or disapproving the proposed
lease since the quota was mortgaged to the Bank, the latter certainly cannot escape its
responsibility of observing, for the protection of the interest of private respondents, that
degree of care, precaution and vigilance which the circumstances justly demand in
approving or disapproving the lease of said sugar quota. The law makes it imperative that
every person "must in the exercise of his rights and in the performance of his duties, act
with justice, give everyone his due, and observe honesty and good faith, 4 This petitioner
failed to do. Certainly, it knew that the agricultural year was about to expire, that by its
disapproval of the lease private respondents would be unable to utilize the sugar quota in
question. In failing to observe the reasonable degree of care and vigilance which the
surrounding circumstances reasonably impose, petitioner is consequently liable for the
damages caused on private respondents. Under Article 21 of the New Civil Code, "any
person who wilfully causes loss or injury to another in a manner that is contrary to morals,
good customs or public policy shall compensate the latter for the damage." The afore-
cited provisions on human relations were intended to expand the concept of torts in this
jurisdiction by granting adequate legal remedy for the untold number of moral wrongs
which is impossible for human foresight to specifically provide in the statutes. 5
A corporation is civilly liable in the same manner as natural persons for torts, because
"generally speaking, the rules governing the liability of a principal or master for a tort
committed by an agent or servant are the same whether the principal or master be a
natural person or a corporation, and whether the servant or agent be a natural or artificial
person. All of the authorities agree that a principal or master is liable for every tort which
he expressly directs or authorizes, and this is just as true of a corporation as of a natural
person, A corporation is liable, therefore, whenever a tortious act is committed by an
officer or agent under express direction or authority from the stockholders or members
acting as a body, or, generally, from the directors as the governing body."

Criminal Liability
The defendant Tan Boon Kong was charged with the violation of section
1458 of Act No. 2711 as amended for making a false return for tax purposes.
The trial court ruled in favor of Tan Boon Kong, basing its ruling on the
ground that the offense charged must be regarded as committed by the
corporation and not by its officials or agents.
It recognized and applied the separate juridical personality of the
corporation in the application of the criminal statute for acts done for and in behalf
of the corporation.
Hence the appeal

ISSUE: Whether the information sets forth facts rendering the defendant, as manager of
the corporation liable criminally under section 2723 of Act No. 2711 for violation of
section 1458 of the same act for the benefit of said corporation.
he Court brushed aside the defense of separate juridical personality of a corporation by
an officer who seeks to avoid criminal liability arising from violation of the law for
transactions done in behalf of the corporation. The courts reasoning was in line with the
piercing doctrine: that the veil of corporate fiction cannot be used to avoid the penalty
imposable for committing a criminal offense.
A corporation can act only through its officers and agents, and where the business
itself involves a violation of the law, the correct rule is that all who participate in it are
liable. In the present case the information or complaint alleges that the defendant was
the manager of a corporation which was engaged in business as a merchant, and as such
manager, he made a false return, for purposes of taxation, of the total amount of sale
made by said false return constitutes a violation of law, the defendant, as the author of
the illegal act, must necessarily answer for its consequences, provided that the allegation
are proven.
Section 1458 and 2723 read as follows:
SEC. 1458. Payment of percentage taxes Quarterly reports of earnings. The
percentage taxes on business shall be payable at the end of each calendar quarter
in the amount lawfully due on the business transacted during each quarter; and it
shall be on the duty of every person conducting a business subject to such tax,
within the same period as is allowed for the payment of the quarterly installments
of the fixed taxes without penalty, to make a true and complete return of the
amount of the receipts or earnings of his business during the preceeding quarter
and pay the tax due thereon. . . . (Act No. 2711.)
SEC. 2723. Failure to make true return of receipts and sales. Any person who,
being required by law to make a return of the amount of his receipts, sales, or
business, shall fail or neglect to make such return within the time required, shall
be punished by a fine not exceeding two thousand pesos or by imprisonment for a
term not exceeding one year, or both.
And any such person who shall make a false or fraudulent return shall be punished
by a fine not exceeding ten thousand pesos or by imprisonment for a term not
exceeding two years, or both. (Act No. 2711.)

Petitioner was the president and general manager of the Metal
Manufacturing of the Philippines, Inc. (MEMAP).
His company was in need of raw materials to be imported from abroad, so
he applied for a letter of credit to import steel sheets from Mitsui Bussan Kaisha,
Ltd. of Tokyo, Japan, the application being directed to the Continental Bank, herein
He obtained delivery of 150 M/T Cold Rolled Steel Sheets valued at P
71,023.60 under a trust receipt agreement under L/C No. 63/109, which cold rolled
steel sheets were consigned to the Continental Bank, under the express obligation
on the part of the Petitioner that the said steel sheets in trust and selling them and
turning over the proceeds of the sale to the Continental Bank.
He failed to return the said cold rolled sheets or settled his unpaid accounts
thereof despite demands.
He was convicted of estafa for defrauding the Continental Bank, a banking
institution duly organized and doing business in the City of Manila, hence, this
Petitioner seeks to avoid liability on his theory that the Bank knew all along
that he was dealing with him only as an officer of the Metal Company which was
the true and actual applicant for the letter of credit and which, accordingly,
assumed sole obligation under the trust receipt.
The trial court, Solicitor General and Court of Appeals disputed the theory
of the Petitioner following the general principle enunciated by the SC in People vs.
Tan Boon Kong, 54 Phil. 607, that for crimes committed by a corporation, the
responsible officers thereof would personally bear the criminal liability.

ISSUE: Whether petitioner Jose O. Sia, having only acted for and in behalf of the Metal
Manufacturing Company of the Philippines as President thereof in dealing with the
complainant, the Continental Bank, he may be liable for the crime charged.

No. The Tan Boon Kong case may not be squarely applicable to the instant case

Tan was the manager of a corporation which was engaged in business as a merchant, and
as such manager, he made a false return, for purposes of taxation, of the total amount of
sale made by said false return constitutes a violation of law. As the author of the illegal
act, must necessarily answer for its consequences provided that the allegations are

As compared to the SIA case, the Tan case is where corporation was directly required by
law to do an act in a given manner, and the same law makes the person who fails to
perform the act in the prescribed manner expressly liable criminally. The performance of
the act is an obligation directly imposed by the law on the corporation. Since it is a
responsible officer or officers of the corporation who actually perform the act for the
corporation, they must of necessity be the ones to assume the criminal liability; otherwise
this liability as created by the law would be illusory, and the deterrent effect of the law,

The act alleged to be a crime is not in the performance of an act directly ordained by law
to be performed by the corporation. The act is imposed by agreement of parties, as a
practice observed in the usual pursuit of a business or a commercial transaction. The
offense may arise, if at all, from the peculiar terms and condition agreed upon by the
parties to the transaction, not by direct provision of the law. The intention of the parties,
therefore, is a factor determinant of whether a crime was committed or whether a civil
obligation alone intended by the parties. With this explanation, the distinction adverted to
between the Tan Boon Kong case and the case at bar should come out clear and
In the absence of an express provision of law making the petitioner liable for the criminal
offense committed by the corporation of which he is a president as in fact there is no such
provisions in the Revised Penal Code under which petitioner is being prosecuted, the
existence of a criminal liability on his part may not be said to be beyond any doubt.

Moral Damages
Viva films and ABS CBN executed a film exhibition agreement.
Wherein ABS SCBN has the right to broadcast in their
network the films made by viva.
Viva films represented by Del Rosario, offered ABS CBN 52 original movies
and 52 re-runs worth 60M (P3M payable in cash and the balanced of 30M in
exchange for television spot).
However, out of this 52 films, Charo Santos-Concio representing ABS CBN
ticks off said films.
Del Rosario met with Eugenio Lopez III and the latter told the former that
ABS CNB is only willing to get 14 films for 36M
An offer was made by the ABS CBN however this offer was refused by Viva
Films board of directors rather they sold the whole package to the RBS Corp
(channel 7).
ABS-CBN sued RBS and Viva films, contending that the contract between
ABS CBN and RBS was valid and that RBS has no right over the film.
The RTC ruled in favour of the defendants and as an additional liability for
the ABS CBN, they required it to pay RBS moral damages because RBS suffered
from the acts of ABS-CBN like advertisement and publication for the airing of
Maging Sino Ka Man.

ISSUE: 1. Whether there was a valid contract bet ABS and VIVA
2. Whether the granting of Moral Damages to RBS Corp is valid.

1. There was no valid contract between ABS CBN and Viva Films, since the acceptance of
the offer of the ABS CBN by Del Rosario was made without the necessary approval of the
Board of Directors of Viva Films. The act of the agent outside his authorize acts cannot
make the principal binding.
2. Moral damages are in the category of an award designed to compensate the
claimant for actual injury suffered and not to impose a penalty on the wrongdoer. The
award is not meant to enrich the complainant at the expense of the defendant, but to
enable the injured party to obtain means, diversion, or amusements that will serve to
obviate then moral suffering he has undergone. It is aimed at the restoration, within the
limits of the possible, of the spiritual status quo ante, and should be proportionate to the
suffering inflicted. Trial courts must then guard against the award of exorbitant damages;
they should exercise balanced restrained and measured objectivity to avoid suspicion that
it was due to passion, prejudice, or corruption on the part of the trial court.
The award of moral damages cannot be granted in favor of a corporation
because, being an artificial person and having existence only in legal
contemplation, it has no feelings, no emotions, no senses, It cannot, therefore,
experience physical suffering and mental anguish, which call be experienced
only by one having a nervous system. The statement in People v. Manero and
Mambulao Lumber Co. v. PNB that a corporation may recover moral damages if it "has a
good reputation that is debased, resulting in social humiliation" is an obiter dictum. On
this score alone the award for damages must be set aside, since RBS is a corporation.


Expose is a radio program hosted by Carmelo Rima and Hermogenes Alegre
aired every morning over DZRC-AM which is owned by petitioner Filipinas
Broadcasting Network, Inc.
The hosts exposed various alleged complaints from students, teachers and
parents against respondents Agro Medical and Educational Center-Bicol Christian
College of Medicine (AMEC) and its administrators.
Claiming that the broadcasts were defamatory, AMEC and Angelita Ago, as
Dean of respondents College of Medicine, filed a complaint for damages against
petitioner FBNI and its hosts.
The lower court granted the award of moral damages which was affirmed
by the Court of Appeals. Hence, this appeal.

ISSUE: Whether or not AMEC is entitled to moral damages.

The SC held that a juridical person is generally not entitled to moral damages because,
unlike a natural person, it cannot experience physical suffering or such sentiments as
wounded feelings, serious anxiety, mental anguish or moral shock.40 The Court of
Appeals cites Mambulao Lumber Co. v. PNB, et al.41 to justify the award of moral
damages. However, the Courts statement in Mambulao that "a corporation may have a
good reputation which, if besmirched, may also be a ground for the award of moral
damages" is an obiter dictum.

Nevertheless, AMECs claim for moral damages falls under item 7 of Article 2219 of the
Civil Code. This provision expressly authorizes the recovery of moral damages in cases of
libel, slander or any other form of defamation. Article 2219(7) does not qualify whether
the plaintiff is a natural or juridical person. Therefore, a juridical person such as a
corporation can validly complain for libel or any other form of defamation and claim for
moral damages.

Moreover, where the broadcast is libelous per se, the law implies damages.45 In such a
case, evidence of an honest mistake or the want of character or reputation of the party
libeled goes only in mitigation of damages. Neither in such a case is the plaintiff required
to introduce evidence of actual damages as a condition precedent to the recovery of
some damages. In this case, the broadcasts are libelous per se. Thus, AMEC is entitled to
moral damages.

Debt Securities


SSS and Lirag Textile Mills, Inc. and Basilio Lirag entered in to a purchase
agreement wherein, SSS agreed to purchase preferred shares of stock of the
Their agreement also provided that said shares of stock will be repurchased
by the corporation as scheduled.
To guarantee performance of said obligation, Basilio Lirag not only signed
as president of the corporation but also signed as a suretty.
The corporation failed to redeem stocks as provided for in the purhcase
Demands of SSS remained unheeded so it filed an action for specific
performance and damages.
The corporation and Lirag denied the existence of said obligation
contending that SSS became and still a preferred stockholder of the corporation so
that redemption of the shares purchased depends upon the financial ability of said
Lower court ruled in favor of SSS.

ISSUE: Whether the purchase agreement was a debt instrument

SC affirmed the lower court's decision holding that the terms and conditions of the
agreement showed that the parties intended the repurchase of the shares on the
respective schedule dates to be an absolute obligation (an obligation to pay money at
some fixed future time) which does not depend upon the financial ability of the
corporation. Said obligation was manifested by the fact that Basilio Lirag signed as a
Therefore, Lirag cannot deny liability to SSS.

As private respondent rightly contends, if the parties intended it [SSS] to be merely a

stockholder of petitioner corporation, it would have been sufficient that Preferred
Certificates Nos. 128 and 139 were issued in its name as the preferred certificates
contained all the rights of a stockholder as well as certain obligations on the part of
petitioner corporation. However, the parties did in fact execute the Purchase Agreement,
at the same time that the petitioner corporation issued its preferred stock to the
respondent SSS. The Purchase Agreement 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 Preferred Stock 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 Purchase

Equity Securities
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; on the first of every month thereafter until the amount
of the promissory note together with the interest thereon is fully paid
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
Def. left unpaid balance 9,105.17.: 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.
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.
plaintiff bank, without the knowledge and consent of the
defendant, foreclosed the chattel mortgage and privately sold the property
covered thereby
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
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.

ISSUE: Whether 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; Acua Co
Chongco vs. Dievas, 12 Phil., 250).

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.

Consideration (Equity Shares)

The defendant, I. B. Dexter, signed a written subscription to the corporate
stock of C. S. Salmon & Co. in the following form:
I hereby subscribe for three hundred (300) shares of the
capital stock of C. S. Salmon and Company, payable from the first dividends
declared on any and all shares of said company owned by me at the time
dividends are declared, until the full amount of this subscription has been
Upon this subscription the sum of P15,000 was paid, from a dividend
declared at about that time by the company, supplemented by money supplied
personally by the subscriber.
Beyond this nothing has been paid on the shares and no
further dividend has been declared by the corporation. There is therefore a
balance of P15,000 still paid upon the subscription.
As the case reaches this court the sole question here presented for
consideration is one of law, namely, whether the stipulation contained in the
subscription to the effect that the subscription is payable from the first dividends
declared on the shares has the effect of relieving the subscriber from personal
liability in an action to recover the value of the shares. The trial court held, in
effect, that the stipulation mentioned is invalid.
This action was instituted in the CFI of Manila by the National Exchange Co.,
Inc., as assignee (through the Philippine National Bank) of C. S. Salmon & Co., for
the purpose of recovering from I. B. Dexter a balance of P15,000, the par value of
one hundred fifty shares of the capital stock of C. S. Salmon & co., with interest
and costs. Upon hearing the cause the trial judge gave judgment for the plaintiff to
recover the amount claimed, with lawful interest and with costs. From this
judgment the defendant appealed.

ISSUE: Whether the stipulation contained in the subscription to the effect that the
subscription is payable from the first dividends declared on the shares has the effect of
relieving the subscriber from personal liability in an action to recover the value of the

Under the American regime corporate franchises in the Philippine Islands are
granted subject to the provisions of section 74 of the Organic Act. In the Organic Act it is
among other things, declared: "That all franchises, privileges, or concessions granted
under this Act shall forbid the issue of stock or bonds except in exchange for actual cash
or for property at a fair valuation equal to the par value of the stock or bonds so
issued; . . . ." (Act of Congress of July 1, 1902, sec. 74.)
Pursuant to this provision we find that the Philippine Commission inserted in the
Corporation Law, enacted March 1, 1906, the following provision: ". . . no corporation
shall issue stock or bonds except in exchange for actual cash paid to the corporation or
for property actually received by it at a fair valuation equal to the par value of the stock
or bonds so issued." (Act No. 1459, sec. 16 as amended by Act No. 2792, sec. 2.)
The prohibition against the issuance of shares by corporations except for actual
cash to the par value of the stock to its full equivalent in property is thus enshrined in
both the organic and statutory law of the Philippine Islands; and it would seem that our
lawmakers could scarely have chosen language more directly suited to secure absolute
equality stockholders with respect to their liability upon stock subscriptions. Now, if it is
unlawful to issue stock otherwise than as stated it is self-evident that a stipulation such
as that now under consideration, in a stock subcription, is illegal, for this stipulation
obligates the subcriber to pay nothing for the shares except as dividends may accrue
upon the stock. In the contingency that dividends are not paid, there is no liability at all.
This is a discrimination in favor of the particular subcriber, and hence the stipulation is

The general doctrine of corporation law is in conformity with this conclusion:

Nor has a corporation the power to receive a subscription upon such terms
as will operate as a fraud upon the other subscribers or stockholders by
subjecting the particular subcriber to lighter burdens, or by giving him
greater rights and privileges, or as a fraud upon creditors of the
corporation by withdrawing or decreasing the capital. It is well settled
therefore, as a general rule, that an agreement between a corporation and
a particular subscriber, by which the subscription is not to be payable, or is
to be payable in part only, whether it is for the purpose of pretending that
the stock is really greater than it is, or for the purpose of preventing the
predominance of certain stockholders, or for any other purpose, is illegal
and void as in fraud of other stockholders or creditors, or both, and cannot
be either enforced by the subcriber or interposed as a defense in an action
on the subcription. (14 C. J., p. 570.)
We may add that the law in force in this jurisdiction makes no distinction, in
respect to the liability of the subcriber, between shares subscribed before incorporation
is effected and shares subscribed thereafter. All like are bound to pay full value in cash or
its equivalent, and any attempt to discriminate in favor of one subscriber by relieving him
of this liability wholly or in part is forbidden. In what is here said we have reference of
course primarily to subcriptions to shares that have not been previously issued. It is
conceivable that the power of the corporation to make terms with the purchaser would
be greater where the shares which are the subject of the transaction have been acquired
by the corporation in course of commerce, after they have already been once issued. But
the shares with which are here concerned are not of this sort.

Payment of the Balance of the Subscription

The plaintiff, Lingayen Gulf Electric Power Company is a domestic
corporation, while the defendant Irineo Baltazar subscribed for 600 shares leaving
a balance.
Later, majority of the stockholders held a meeting and adopted
stockholders' resolution No. 17, wherein they agreed to call the balance of all
unpaidsubscribed capital stock.
The resolution also provided that all unpaid subscription after the due dates
of calls would be subject to 12 per cent interest per annum and upon expiration of
the grace period all subscribed stocks remaining unpaid would revert to the
After the corporation reminded the defendant of his unpaid subscription,
the latter requested for an extension of payment and if in case he could not pay
the balance, his subscription would be reverted to the corporation.
Then he wrote again to the corporation offering to withdraw
completely his subscription by selling out to the corporation all his shares
of stock which was left unacted.
Resolution No. 4 was adopted by the stockholders wherein they agreed to
revalue the stocks and assets of the company so as to attract outside investors to
put in money for the rehabilitation of the company
It was admitted by the defendant that he received notice, demanding
payment of the unpaid balance of his subscription.
It was agreed by the parties that the call of the Board of Directors was not
published in a newspaper of general circulation as required by section 40 of the
Corporation Law.
The corporation demanded again the defendant for the payment of his
unpaid subscription which the latter disclaims liability on the grounds of absence
of valid call, and even if there is a valid call he was released from the obligation of
the balance of his subscription by stockholders' resolution No. 17 and No. 4.

ISSUES: 1. Whether there is a valid call

2. Whether the defendant released from the obligation of the unpaid balance of his
subscription by virtue of stockholders' resolution Nos. 17 and 4?

The law requires that notice of any call for the payment of unpaid subscription should be
made not only personally but also by publication. This is clear from the provisions of
section 40 of the Corporation Law, Act No. 1459, as amended. It will be noted that
section 40 is mandatory as regards publication, using the word "must". As correctly
stated by the trial court, the reason for the mandatory provision is not only to assure
notice to all subscribers, but also to assure equality and uniformity in the assessment on
Going to the claim of defendant and appellant that Resolution No. 17 of 1946 released
him from the obligation to pay for his unpaid subscription; the authorities are generally
agreed that in order to effect the release, there must be unanimous consent of the
stockholders of the corporation. The release attempted in Resolution No. 17 of 1946 was
not valid for lack of a unanimous vote. If found that at least seven stockholders were
absent from the meeting when said resolution was approved.

In conclusion we hold that under the Corporation Law, notice of call for payment for
unpaid subscribed stock must be published, except when the corporation is insolvent, in
which case, payment is immediately demandable. We also rule that release from such
payment must be made by all the stockholders.

Liability for Unpaid Subscription


This case is about the liability of a marketing distributor under its sales
agreements with the owner of the products.
Keller & Co., Ltd. appointed COB Group Marketing, Inc. as exclusive
distributor of its household products, Brite and Nuvan in Panay and Negros, as
shown in the sales agreement dated March 14, 1970
Keller sold on credit its products
As security for COB Group Marketing's credit purchases up to the amount of
P35,000, one Asuncion Manahan mortgaged her land to Keller.
Manahan assumed solidarily with COB Group Marketing the
faithful performance of all the terms and conditions of the sales agreement
July, 1970 the parties executed a second sales agreement whereby COB
Group Marketing's territory was extended to Northern and Southern Luzon. As
security for the credit purchases up to P25,000 of COB Group Marketing for that
area, Tomas C. Lorenzo, Jr. and his father Tomas, Sr. (now deceased) executed a
mortgage on their land in Nueva Ecija. Like Manahan, the Lorenzos were solidarily
liable with COB Group Marketing for its obligations under the sales agreement
board of directors of COB Group Marketing were apprised by Jose E. Bax the
firm's president and general manager, that the firm owed Keller about P179,000.
Bax was authorized to negotiate with Keller for the settlement of his firm's liability
Bax and R. Oefeli of Keller signed the conditions for the settlement of COB
Group Marketing's liability
May 20, COB Group Marketing, through Bax executed two second chattel
mortgages over its 12 trucks (already mortgaged to Northern Motors, Inc.) as
security for its obligation to Keller amounting to P179,185.16 as of April 30, 1971
(Exh. PP and QQ). However, the second mortgages did not become effective
because the first mortgagee, Northern Motors, did not give its consent. But the
second mortgages served the purpose of being admissions of the liability COB
Group Marketing to Keller.
The stockholders of COB Group Marketing, Moises P. Adao and Tomas C.
Lorenzo, Jr., in a letter dated July 24, 1971 to Keller's counsel, proposed to pay
Keller P5,000 on November 30, 1971 and thereafter every thirtieth day of the
month for three years until COB Group Marketing's mortgage obligation had been
fully satisfied. They also proposed to substitute the Manahan mortgage with a
mortgage on Adao's lot at 72 7th Avenue, Cubao
Keller sued on September 16, 1971 COB Group Marketing, its stockholders
and the mortgagors, Manahan and Lorenzo.
COB Group Marketing, Trinidad C. Ordonez and Johnny de la Fuente were
declared in default (290 Record on Appeal).
On the other hand, Bax although not an accountant, presented his own
reconciliation statements wherein he showed that COB Group Marketing overpaid
Keller P100,596.72 (Exh. 7 and 8). He claimed overpayment although in his
answer he did not allege at all that there was an overpayment to Keller.
The statement of the Appellate Court that COB Group Marketing alleged in
its answer that it overpaid Keller P100,596.72 is manifestly erroneous first,
because COB Group Marketing did not file any answer, having been declared in
default, and second, because Bax and the other stockholders, who filed an answer,
did not allege any overpayment. As already stated, even before they filed their
answer, Bax admitted that COB Group Marketing owed Keller around P179,000
The lower courts not only allowed Bax to nullify his admissions as to the
liability of COB Group Marketing but they also erroneously rendered judgment in its
favor in the amount of its supposed overpayment in the sum of P100,596.72 (Exh.
8-A), in spite of the fact that COB Group Marketing was declared in default and did
not file any counterclaim for the supposed overpayment.
The lower courts harped on Keller's alleged failure to thresh out with
representatives of COB Group Marketing their "diverse statements of credits and
payments". This contention has no factual basis. In Exhibit J, quoted above, it is
stated by Bax and Keller's Oefeli that "discussion

ISSUE: Whether the stockholders are liable for the financial obligations of the corporatiosn


As to the liability of the stockholders, it is settled that a stockholder is personally liable for
the financial obligations of a corporation to the extent of his unpaid subscription (Vda. de
Salvatierra vs. Garlitos 103 Phil. 757, 763; 18 CJs 1311-2).

The following respondents are solidarity liable with COB Group Marketing up to the
amounts of their unpaid subscription to be applied to the company's liability herein: Jose
E. Bax P36,000; Francisco C. de Castro, P36,000; Johnny de la Fuente, P12,000; Sergio C.
Ordonez, P12,000; Trinidad C. Ordonez, P3,000; Magno C. Ordonez, P3,000; Adoracion C.
Ordonez P3,000; Tomas C. Lorenzo, Jr., P3,000 and Luz M. Aguilar-Adao, P6,000.

Deliquency Subscription


This action was instituted on November 21, 1921, in the CFI of Manila, by
the Philippine Trust Company, as assignee in insolvency of La Cooperativa Naval
Filipina, against Marciano Rivera, to recover a balance of P22,500, alleged to be
due upon defendants subscription to the capital stock of said insolvent
corporation. Upon judgment in favor of plaintiff, the defendant appealed.

ISSUE: Whether the defendant was still liable for the unpaid subscription

The reason given for defendants failure to pay the entire subscription is that after the
Cooperative Naval Filipina had been incorporated, a meeting of its stockholders occurred,
at which a resolution was adopted to the effect that the capital should be reduced by 50
per centum and the subscribers released from the obligation to pay any unpaid balance of
their subscription in excess of 50 per centum of the same.
Consequently, the subscriptions of the various shareholders had been cancelled to the
extent stated; and fully paid certificates were issued to each shareholder for one half of
his subscription. It does not appear that the formalities prescribed in Section 17 of the
Corporation Law (Act No. 1459), as amended, relative to the reduction of capital stock in
corporations were observed, and in particular it does not appear that any certificate was
at any time filed in the Bureau of Commerce and Industry, showing such reduction.
The trial judge therefore held that the resolution relied upon by the defendant was
without effect and that the defendant was still liable for the unpaid balance of his
subscription. In this we think his Honor was clearly right.
It is established doctrine that subscriptions to the capital of a corporation constitute a
fund to which creditors have a right to look for satisfaction of their claims and that the
assignee in insolvency can maintain an action upon any unpaid stock subscription in
order to realize assets for the payment of its debts. (Velasco vs. Poizat, 37 Phil., 802).
A corporation has no power to release an original subscriber to its capital stock from the
obligation of paying for his shares, without a valuable consideration for such release; and
as against creditors, a reduction of the capital stock can take place only in the manner
and under the conditions prescribed by the statute or the charter or the articles of
incorporation. Moreover, strict compliance with the statutory regulations is necessary (14
C.J., 498, 620).
In the case before us, the resolution releasing the shareholders from their obligation to
pay 50 per centum of their respective subscriptions was an attempted withdrawal of so
much capital from the fund upon which the companys creditors were entitled ultimately
to rely and, having been effected without compliance with the statutory requirements,
was wholly ineffectual.
Judgment affirmed.
2. Reduction of capital stock to camouflage profitability to justify a purge of union
members is invalid.


Alberto Miranda executed a written contract whereby he subscribed for 100

shares of the capital stock of a corporation to be organized under the laws of the
Philippine Islands for the purpose of operating a rice mill in Tarlac, said corporation
to be known as Tarlac Rice Mill Company, Inc., that the par value of each share
was P100; and that Alberto Miranda obligated himself to pay to the treasurer of
the corporation or its assign the sum of P10,000
On July 10, 1926 Alberto Miranda by means of a public document
"assigned" mortgaged, or transferred in lieu of cash for the benefit and to the
credit of the Tarlac Rice Mill Company, Inc., a corporation to be organized and to
exist under and by virtue of the laws of the Philippine Islands"
o carry out the true intent, meaning, and purposes thereof I
have hereby further voluntarily made, constituted, and appointed and by
these presents do make, constitute and appoint, either jointly, Evaristo
Magbag, duly elected President and Treasurer of said Company, Eusebio R.
Cabrera and Marcos P. Puno, duly elected Vice-Presidents of the same
company, or anyone of the three named elected officers of the Tarlac Rice
Mill Company, Inc., jointly with C. M. Dizon to be my true and lawful
attorney-in-fact, for me and in my name, in my behalf to transfer,
mortgage, convey or confirm or in any way convenient to them to any local
or foreign bank, firm or individual in order to obtain, secure or solicit credit
against my above described property in an amount not to exceed ten
thousand pesos (P10,000), Philippine currency, in accordance with the
subscription contract voluntary executed by me, for or to increase the
capital of the said Tarlac Rice Mill Company, Inc., in order to carry out the
purposes for which such firm is to be organized.
ereby transfer my right and interest in the said described
properties, and by these presents do hereby give and grant unto my said
attorneys-in fact full power and authority to do and perform all and every
act and thing whatsoever requisite and necessary to be done in all about
the premises as fully to all intents and purposes as I might or could do if
personally present with full power of substitution or revocation, hereby
ratify and confirm all that my said attorneys-in-fact, anyone or all of the
three Evaristo Magbag, Eusebio R. Cabrera, and Marcos P. Puno, jointly with
C. M. Dizon or their substitutes shall lawfully do or cause to be done by
virtue of these presents.
the president and vice-president of the Tarlac Rice Mill Company, Inc., and
C. M. Dizon, acting on behalf of said corporation and Alberto Miranda, borrowed
P10,000 from Mariano Tablante, and agreed to repay said sum on or before
February 19, 1928, with interest at 12 per cent per annum, and to pay a further
sum of 25 per cent of the principal for attorney's fees and expenses of collection in
case the promissory note should not be paid at maturity.
Marcos Puno, Evaristo Magbag, and Dizon & Co., Inc., jointly and severally
guaranteed the payment of this sum; and the president and vice-president of the
Tarlac Rice Mill Company, Inc., and C. M. Dizon as attorneys-in-fact of Alberto
Miranda mortgaged to Mariano Tablante the aforementioned parcel of land to
secure the payment of said promissory note.
The sum of P10,000 obtained from Mariano Tablante was retained by the
corporation. When the promissory note became due, Alberto Miranda arranged for
an extension of time in which to pay it, and on July 19, 1929 he sold the
aforementioned parcel of land under pacto de retro to Vicente Panlilio for P10,000,
and paid Mariano Tablante.
Miranda died subsequently
It is agreed that the defendant corporation ceased to do business from the
year 1928, and that the other stockholders have not paid for their shares in
accordance with their subscription agreement, and that no action has been taken
by the corporation to require them to do so.
The principal contention of the appellant is that the officers of the
corporation violated the terms of the power of attorney in mortgaging the land on
February 19, 1927 for P10,000, because the only sum then due and payable by
Alberto Miranda to the corporation was P3,000, and that when the remaining
instalments of the stock subscription became due, Alberto Miranda was under no
obligation to pay them, because the corporation had already ceased to do
business, and it had taken no steps to compel the other stockholders to pay for the
shares for which they had subscribed.

It is true that when the property was mortgaged on February 19, 1927 the amount due
from Alberto Miranda in accordance with the subscription agreement was only P3,000,
and it is likewise true that it does not appear from the evidence that any call was issued
by the directors for the payment of any subscriptions.

Section 38 of the Corporation Law provides that the board of directors of every
corporation may at any time declare due and payable to the corporation unpaid
subscriptions to the capital stock and may collect the same with interest accrued thereon
or such percentage of said unpaid subscriptions as it may deem necessary. In his work,
"The Philippine Law of Stock Corporations", page 97, Justice Fisher expresses the opinion
that this power of the directors is absolute and cannot be limited by the subscription
contract, but this does not mean that the directors may not rely on the subscription
contract if they see fit to do so.
No call is necessary when a subscription is payable, not upon call or demand by
the directors or stockholders, but immediately, or on specified day, or on or before
a specified day, or when it is payable in installments at specified times. In such
cases it is the duty of the subscriber to pay the subscription or instalment thereof
as soon as it is due, without any call or demand, and, if he fails to do so, an action
may be brought at any time. (Fletcher: Cyclopedia of the Law of Private
Corporations, vol. 2, page 1509.)
When this action was filed on September 2, 1930, the last of the instalments had already
become payable in accordance with the subscription agreement. it must be borne in
mind that this is not an action by the corporation to recover on a subscription agreement,
but an action by the administratrix of a stockholder to recover what was paid in to the
corporation by the stockholder. It does not appear from the evidence whether or not the
corporation has any debts. Neither the fact that the corporation has ceased to do
business nor the fact that the other stockholders have not been required to pay for their
shares in accordance with their subscription agreement justifies us in ordering the
corporation to return to the plaintiff the amount paid in by Alberto Miranda. If the
directors have failed to perform their duty with respect to the other stockholders, the law
provides a remedy therefor.
In the case at bar it is not contended that Alberto Miranda cancelled his subscription
agreement, or that the corporation attempted to release him therefrom.
For the foregoing reasons, the decision appealed from is affirmed, with the costs against
the appellant.


The plaintiff subscribed for 650 shares of stock of the defendant

corporation of the value of P500 each, of which he has paid only the total value of
200 shares, there remaining 450 shares unpaid, for which he was indebted to the
corporation in the sum of P225,000, the value thereof.
The Corporation on April 22, 1922, notified him of a resolution adopted by
the board of directors of the corporation on the preceding day, declaring the
unpaid subscriptions to the capital stock of the corporation to have become due
and payable on the following May 31st at the office thereof.
Unpaid shares shall be declared delinquent. For failure to pay, his unpaid
shares was sold by the corporation.
The plaintiff filed a preliminary injunction alleging as the grounds of his
petition: (1) That, according to aforesaid article 46 of the by-law of the
corporation, which was inserted in the complaint, all the shares subscribed to by
the incorporation that were not paid for at the time of the incorporation, shall be
paid out of the 70 per cent of the profit obtained, the same to be distributed
among the subscribers, who shall not receive any dividend until said shares were
paid in full; (2) that in declaring the plaintiff's unpaid subscription to the capital
stock to have become due and payable on May 31st, and in publishing the
aforesaid notice declaring his unpaid shares delinquent, the defendant
corporation has violated the aforesaid article, which prescribes an operative
method of paying for the shares continuously until their full amortization, thus
violating and disregarding a right of the plaintiff vested under the said by-laws; (3)
that the aforesaid acts of the defendant corporation were in excess of its powers
and executive authority and the plaintiff had no other plain, speedy and adequate
remedy in the ordinary course of law than that prayed for in the said complaint, to
prevent the defendant from taking any further action in connection with the sale
and alienation of the said shares.

ISSUE: Whether under the provision of article 46 of the by-laws of the defendant
corporation, the latter may declare the unpaid shares delinquent, or collect their value by
another method different from that prescribed in the aforecited article.

es. Said article reads thus:
ART. 46. The net profit resulting from the annual liquidation shall be distributed as
Ten per cent (10%) for the Board of Directors and in the manner prescribed
in article twenty-six (26) of these by-laws;
ten per cent (10%) for the general manager;
ten per cent (10%) for the reserve fund, and
seventy per cent (70%) for the shareholders in equal parts.
Provided, however, That from this seventy per cent dividend the Board of Directors may
deduct such amount as it may deem fit for the payment of the unpaid subscription to the
capital stock and not pay any dividend to the holders of the said unpaid shares until they
are fully paid; and
Provided, further, That when all the shares have been paid in full as provided in the
preceding paragraph, the Board of Directors may also deduct such amount as it may
deem fit for the creation of an emergency special fund, or extraordinary reserve fund
when in its judgment the same may convenient for the development of the business of
the corporation or for meeting any such contingencies as may arise from its operation,
whenever the distributable dividend is found, after the foregoing deduction, to be not
less than ten per cent (10%) of the paid up capital stock.
No dividend shall be declared or paid, except when there remains a net profit after the
payment of all the expenses incurred, or allowances made, by the corporation to carry
out the operation of its business; so that no such dividend may be
declared as may affect the capital of the corporation.

In the instant case the board of directors of the defendant corporation made use of the
discretionary power granted to it by that law and declared that payment of plaintiff's
subscription to 450 shares which had not been paid by him was due, and that said shares
were delinquent.
The words "Provided, however, that from this seventy per cent dividend the board of
directors may deduct such amount as it may deem fit for the payment, etc - means that
the board of directors is also authorized to create a special emergency fund or
extraordinary reserve fund, when, in its judgment, and in case all the shares subscribed
to have been fully paid, the same is convenient for the development of the business of
the corporation or for meeting any such contingencies as may arise from its operation,
applying said 70 per cent of the profit on the payment of the shares that may have not
been fully paid, provided that the distributable dividend remaining after the deduction to
be made for the creation of the said special emergency fund or extraordinary reserve
fund is not less than 10 per cent of the capital actually paid.
So that it is discretionary on the part of the board of directors to do whatever is provided
in the said article relative to the application of a part of the 70 per cent of the profit
distributable in equal parts on the payment of the shares subscribed to and not fully
paid, and to the creation of a special emergency fund or extraordinary reserve fund; and
the fact itself that said special fund may not be created when the dividend appearing to
be distributable, after deducting from the said 70 per cent the amount to be applied on
the payment of the unpaid subscription, is less than 10 per cent of the capital actually
paid, shows that it is the board of directors and not the delinquent subscriber that may
and must judge and decide whether or not such value must be paid out of a part of the
70 per cent of the profit distributable in equal parts among the shareholders, as provided
in the first part of the said article. It lies therefore, within the discretion of the board of
directors to make use of such authority.
and performed all the other acts subsequent to said declaration that are mentioned in
the complaint, as it did not deem it advantageous to the corporation to apply on the
payment of said shares, as was authorized by the by-law, a part of the profit that was, or
might have been realized, and was distributable among the stockholders in equal parts.
For the foregoing, the orders appealed from are affirmed, with the costs of both instances
against the appellant.

Redeemable Shares
Private respondent Corporation secured a loan from petitioner BANK in the
amount of P120,000.
As part of the proceeds of the loan, preferred shares of stocks were issued
to private respondent Corporation. Instead of giving the legal tender totaling to
the full amount of the loan, petitioner lent such amount partially in the form of
money and partially in the form of stock certificates for 800 shares with a par
value of P10.00 per share for a total of P8,000. said stock certificates were in the
name of private respondent Adalia and Carlos Robes.
The stock certificates bear the term and condition - that such preferred
shares may be redeemed, by the system of drawing lots, at any time after 2 years
from the date of issue at the option of the corporation
Thereafter, private respondents proceeded against the petitioner and filed
a complaint anchored on private respondents alleged rights to collect dividends
under the preferred shares in question and to have petitioner redeem the same
under the terms and conditions of the stock certificates.
The trial court rendered the assailed decision in favor of private
respondents and ordered the petitioner to pay the face value of the stock
certificates as redemption price plus interest.

ISSUE: Whther petitioner can be compelled to redeem the preferred shares issued to the
private respondents.


NO, because the very wordings of the terms and conditions in the stock certificates
clearly allows redemption of the preferred shares.

While the stock certificate does allow redemption, the option to do so was clearly vested
in the petitioner bank. The redemption is optional Thus, except as otherwise provided
in the stock certificate, the redemption rests entirely with the corporation and the
stockholder is without right to either compel or refuse the redemption of its stock.

The use of the word MAY in the terms and conditions denotes discretion and cannot be

Furthermore, redemption of the said shares cannot be allowed because it would reduce
the assets of the Bank to prejudice its depositors and creditors. As pointed out by the
petitioner, the Central Bank made a finding that said petitioner has been suffering from
chronic reserve deficiency. Thus, redemption of preferred shares was prohibited for a just
and valid reason.

Treasury Shares Sec 9 of the Corporation Code

MANTRASCO had an authorized capital stock of P2,500 divided into 25,000
common shares; 24,700 of these were owned by Julius S. Reese, and the rest, at
100 shares each, by the 3 respondents.
In view of Reeses desire that upon his death MANTRASCO and its 2
subsidiaries MANTRASCO (Guam), Inc. and Port Motors, Inc. would continue
under the management of the respondents, a trust agreement on his and the
respondents interests in MANTRASCO was executed by and among Reese
(OWNER), MANTRASCO (COMPANY), the law firm of Ross, Selph, Carrascoso and
Janda (TRUSTEES) and the respondents (MANAGERS).
Reese died but the transfer could not be immediately effected due to
insufficient funds.
Subsequently, the entire purchase price of Reeses interest in MANTRASCO
was finally paid and the trust agreement was terminated and the trustees
delivered to MANTRASCO all shares which they were holding in trust.
Meanwhile, MANTRASCOs books were being examined by the BIR and they
found out the respondents failed to declare stock dividends as part of their
taxable income. BIR examiners concluded that the distribution of Reeses shares
as stock dividends was in effect a distribution of the asset or property of the
corporation as may be gleaned from the payment of cash for the redemption of
said stock and distributing the same as stock dividend.

ISSUE: Whether the distributed shares should be considered as treasury shares.


NO. The manifest intention of the parties to the trust agreement was to treat the 24,700
shares of Reese as absolutely outstanding shares of Reeses estate until they were fully
paid. Such being the true nature of the 24,700 shares, their declaration as treasury stock
was a complete nullity and plainly violative of public policy. A stock dividend, being one
payable in capital stock, cannot be declared out of outstanding corporate stock, but only
from retained earnings.

Where corporate earnings are used to purchase outstanding stock treated as treasury
stock as a technical, but prohibited device, to avoid effects of income taxation,
distribution of said corporate earnings in the form of stock dividends will subject
stockholders receiving them to income tax.

Treasury shares are issued shares, but being in the treasury, they do not have
the status of outstanding shares.

Types of Dividends and Other Distributions


Appellant Nielson & Co. Inc. and Appellee Lepanto Consolidated Mining Co.
entered a contract whereby appellant Nielson agreed for a period of five years,
with the right to renew for a like period, to explore, develop and operate the
mining claims of Lepanto and to mine, or mine or mill, such pay ore as may be
found therein and to market the metallic products recovered therefrom which may
prove to be marketable, as well as to render for Lepanto other services specified in
the contact.
It thus appear that the principal and paramount undertaking of Nielson
under the management contract was the operation and development of the mine
and operation of the mill.
Nielson would receive 10% of any dividends declared and paid, when and
as paid, Nielson should be paid 10% of the stock dividends declared by Lepanto
during the period of the extension of contract.

ISSUE: Whether the Court erred in ordering Lepanto to issue and deliver to Nielson shares
of stock together with fruits thereof.

The term dividend both in the technical sense and its ordinary acceptation, is that part
or portion of the profits, of the enterprise which he corporation, by its governing agents,
sets apart for ratable division among the holders of the capital stock. It means the fund
actually set aside, and declared by the directors of the corporation as a dividends, and
duly ordered by the director, or by the stockholders at a corporate meeting, to be divided
or distributed among the stockholders according to their respective interests.

It is Our considered view, therefore, that under Sec. 16 of the Corporation

Law stock dividends cannot be issued to a person who is not a stockholder in payment of
services rendered. And so, in the case at bar Nielson can not be paid in shares of stock
which form part of the stock dividends of Lepanto for services rendered under the
management contract. We sustain the contention of Lepanto that the understanding
between Lepanto and Nielson was simply to make the cash value of the stock dividends
declared as the basis for determining the amount of compensation that should be paid to
Nielson, in the proportion of 10% of the cash value of the stock dividends declared.

The consideration for which shares of stock may be issued are: (1) cash;
(2) property; and (3) undistributed profits.

Declaration and Payment of Dividends


ANSCOR started out with P1,000,000.00 capitalization dived to 10,000

Don Andres subscribed to 4,963 shares of 5,000 original shares issued.
September 1945, ANSCOR increased its Authorized capital stock to P2.5M
divided to 25,000 shares, and don Andres subscribed to 10,000 shares making his
shares 14,962.
A month later he gave his two sons 1,250 shares each.
When don Andres died he left 180,000(plus) shares.
Half of which was given to his wife and half went to his estate.
Feb 1968, NASCOR increased it capital stock to 75M divided into
150,000.00 shares wherein it was divided to common and preferred shares.
The wife of Don Andres wants to exchange her common shares to
preferred shares which was granted by ANSCOR.
ANSCOR then repurchase on two occasions Common shares of Don Andres.
Upon examination of books of ANSCOR the BIR sought for recovery of income tax
on the redeemed or repurchase common shares.

ISSUE: Whether ANSCOR's redemption of stocks from its stockholder as well as the
exchange of common with preferred shares can be considered as "essentially equivalent
to the distribution of taxable dividend" making the proceeds thereof taxable under the
provisions of the above-quoted law.
As a general rule A stock dividend representing the transfer of surplus to capital account
shall not be subject to tax. Except in cases of redemption or cancellation of stock
dividends which is essentially equivalent to a distribution of taxable dividends making
the proceed thereof taxable income. If the source is the original capital subscription upon
establishment of the corporation or from initial capital investment in an existing
enterprise, its redemption to the concurrent value of acquisition may not be considered
as income but a mere return of capital. On the contrary, if the redeemed shares are from
stock dividend declaration other than as initial capital investment, the proceeds of the
redemption is ADDITIONAL WEALTH, for it is not merely a return of capital but a gain
thereon. Applying the rule in the case, the original common shares owned by the estate
were only 25,4247.5. Since there was subsequent increased in the capital stocks, the
redeemed shares to the extent of 80T plus by ANSCOR was made out of corporate profits
such as stock dividend. Therefore it will be subjected to income tax.

Liability for Improper Dividends and Distribution


Steinberg is the Receiver of the Sibuguey Trading Company, Incorporated,

he seeking to make GREGORIO VELASCO, ET AL (as officers of the said corporation
i.e board of directors) for the amount they approved to be paid for the acquisition
of the corporations own shares that came from their retired stockholders where in
fact there is an existing debt by the corporations to its creditors.
Gregorio et al. alleged that the purchase of the shares was for the purpose
of increasing the recievables of the corporation.
However, there was a finding that, Gregorio et al, approved or made a
resolution for such acquisition when they know that their recievables will not cover
the amount of debt and yet they still continue to use the money of the corporation
to repurchase the stocks of the corporation released to its retired stockholders.

ISSUE: What is the responsibility of the directors when they know that there is an
outstanding debt existing between the corporation and its creditors

Creditors of a corporation have the right to assume that so long as there are outstanding
debts and liabilities, the board of directors will not use the assets of the corporation to
purchase its own stock, and that it will not declare dividends to stockholders when the
corporation is insolvent. Therefore Gregorio Et al is required to pay.