Carlos vs. Mindoro Sugar Co., et. al.

October 26, 1932

Imperial, J.
Digest by Clark Uytico
Topic: Corporate Powers
SUMMARY
Mindoro Sugar Co. is going bankrupt, so it transferred all its assets into Philippine Trust in consideration
that Philippine Trust would guarantee the bonds that Mindoro issued in the event Mindoro fails to pay.
PhilTrust then sold some bonds to a certain Diaz and paid them for quite some time until PhilTrust
suddenly stopped paying interest on the said bonds, alleging that the act of PhilTrust guaranteeing
Mindoro Sugars bonds was ultra vires for: not being indicated in its corporate charter, and for
contracting an obligation of P2,000,000, exceeding its capital of only P1,000,000 which is prohibited
according to the Banking laws. SC held that the act was not ultra vires because as the Philippine Trust
Company, although secondarily engaged in banking, was primarily organized as a trust corporation
with full power to acquire personal property such as the bonds in question, according to both section
13 (par. 5) of the Corporation Law and its duly registered by-laws and articles of incorporation. Also,
the exceeded the banking capital argument can easily be put in shambles when the fact that Mindoro
Sugar transferred all its real assets and the improvements thereon in favor of PhilTrust, hence forming
an increase in PhilTrusts assets and capital.
FACTS
The Mindoro Sugar Company is a corporation constituted in accordance with the laws of the country
and registered on July 30, 1917. According to its articles of incorporation, one of its principal purposes
was to acquire and exercise the franchise granted by Act No. 2720 to George H. Fairchild, to substitute
the organized corporation, the Mindoro Company, and to acquire all the rights and obligations of the
latter and of Horace Havemeyer and Charles J. Welch in the so-called San Jose Estate in the Province of
Mindoro.
The Philippine Trust Company is another domestic corporation, registered on October 21, 1917. In its
articles of incorporation some of its purposes are expressed thus: "To acquire by purchase,
subscription, or otherwise, and to invest in, hold, sell, or otherwise dispose of stocks, bonds,
mortgages, and other securities, or any interest in either, or any obligations or evidences of
indebtedness, of any other corporation or corporations, domestic or foreign.* * * Without in any
particular limiting any of the powers of the corporation, it is hereby expressly declared that the
corporation shall have power to make any guaranty respecting the dividends, interest, stock, bonds,
mortgages, notes, contracts or other obligations of any corporation, so far as the same may be
permitted by, the laws of the Philippine Islands now or hereafter in force." Its principal purpose,
then, as its name indicates, is to engage in the trust business.
November 17, 1917, the board of directors of the Philippine Trust Company, composed of Phil. C.
Whitaker, chairman, and James Ross, Otto Vorster, Charles' D. Ay ton, and William J, O'Donovan,
members, adopted a resolution authorizing its president, among other things, to purchase at par and
in the name and for the use of the trust corporation all or such part as he may deem expedient, of the
bonds in the value of P3,000,000 that the Mindoro Sugar Company was about to issue, and to resell
them, with or without the guarantee of said trust corporation, at a price not less than par, and to
guarantee to the Philippine National Bank the payment of the indebtedness to said bank by the
Mindoro Sugar Company or Charles J. Welch and Horace Havemeyer, up to P2,000,000.
In pursuance of this resolution, on December 21, 1917, the Mindoro Sugar Company executed in favor
of the Philippine Trust Company the deed of trust, transferring all of its property to it in consideration of
the bonds it had issued to the value of P3,000,000, the value of each bond being $1,000, which par
value, with interest at 8 per cent per annum, the Philippine Trust Company had guaranteed to the
holders, and in consideration, furthermore, of said trust corporation having guaranteed to the
Philippine National Bank all the obligations contracted by the Mindoro Sugar Company, Charles J. Welch
and Horace Havemeyer up to the aforesaid amount of P2,000,000.
The Philippine Trust Company then sold thirteen bonds, Nos. 1219 to 1231, to Ramon Diaz for P27,300,
at a net profit of P100 per bond. The four bonds Nos. 1219, 1220, 1221, and 1222, here in litigation,

are included in the thirteen sold to Diaz. The Philippine Trust Company paid the appellant, upon
presentation of the coupons, the stipulated interest from the date of their maturity until the 1st of July,
1928, when it stopped payments; and thenceforth it alleged that it did not deem itself bound to pay
such interest or to redeem the obligation because the guarantee given for the bonds was illegal and
void; it being an ultra vires act. Also, it has been intimated that according to section 121 of the
Corporation Law, the Philippine Trust Company, as a banking institution, could not guarantee the bonds
to the value of P3,000,000 because this amount far exceeds its capital of P1,000,000 of which only
one-half has been subscribed and paid.
ISSUE
WON Philippine Trust Company bound itself legally and acted within its corporate powers in acquiring
the bonds and subsequently guaranteeing them.
HELD
YES.
Dispositive: Wherefore, the decision appealed from is reversed and the Philippine Trust Company is
sentenced to pay to the appellant the sum of four thousand dollars ($4,000) with interest at eight per
cent (8%) per annum from July 1, 1928 until fully paid, and the costs of both instances. So ordered.
RATIO
The Philippine Trust Company, although secondarily engaged in banking, was primarily organized as a
trust corporation with full power to acquire personal property such as the bonds in question, according
to both section 13 (par. 5) of the Corporation Law and its duly registered by-laws and articles of
incorporation; secondly, that being thus authorized to acquire the bonds, it was given implied power to
guarantee them in order to place them upon the market under better, more advantageous conditions,
and thereby secure the profit derived from their sale.
It is not, however, ultra vires for a corporation to enter into contracts of guaranty or suretyship where it
does so in the legitimate furtherance of its purposes and business. And it is well settled that where a
corporation acquires commercial paper or bonds in the legitimate transaction of its business it may sell
them, and in furtherance of such a sale it may, in order to make them the more readily marketable,
indorse or guarantee their payment.
Whenever a corporation has the power to take and dispose of the securities of another corporation, of
whatsoever kind, it may, for the purpose of giving them a marketable quality, guarantee their
payment, even though the amount involved in the guaranty may subject the corporation to liabilities in
excess of the limit of indebtedness which it is authorized to incur. A corporation which, has power by
its charter to issue its own bonds has power to guarantee the bonds of another corporation, which has
been taken in payment of a debt due to it, and which it sells or transfers in payment of its own debt,
the guaranty being given to enable it to dispose of the bond to better advantage. And so guaranties of
payment of bonds taken by a loan and trust company in the ordinary course of its business, made in
connection with their sale, are not ultra vires, and are binding.
When a contract is not on its face necessarily beyond the scope of the power of the corporation by
which it was made, it will, in the absence of proof to the contrary, be presumed to be valid.
Corporations are presumed to contract within their powers. The doctrine of ultra vires, when invoked
for or against a corporation, should not be allowed to prevail where it would defeat the ends of justice
or work a legal wrong.
Re: Capital issues
This difficulty is easily obviated by bearing in mind that the banking operations are not the primary aim
of said corporation, which is engaged essentially in the trust business, and that the prohibition of the
law is not applicable to the Philippine Trust Company, for the evidence shows that Mindoro Sugar
Company transferred all its real property, with the improvements, to it, and the value of both, which
surely could not be less than the value of the obligation guaranteed, became a part of its capital and
assets; in other words, with the value of the real property transferred to it, the Philippine Trust
Company had enough capital and assets to meet the amount of the bonds guaranteed with interest
thereon.