Steinberg v. Velasco (1929) Johns, J.

Concept: Duties of Directors and Controlling Stockholders

FACTS:
During a meeting, the board approved the purchase of its own stock from erstwhile directors. They also
approved the payment of dividends to its stockholders. At the time, it appeared that the board acted
on the assumption that it had a surplus over and above its debts and liabilities, since it appeared from
the books that it had accounts receivable with a face value of around P19k and only around P14k in
accounts payable. Almost one year later, the corporation filed a petition for dissolution. By this time its
accounts receivable appeared on paper to be around P13k and its accounts payable around P9k.
However, the receiver was unable to collect.
ISSUE:
WON the actions of the board in approving the purchase of its own stock and the payment of dividends
to its stockholders were proper.
HELD:
NO. Directors of a corporation are bound to care for its property and manage its affairs in good faith. If
they do acts clearly beyond their power, whereby loss ensues to the corporation, or dispose of its
property or pay away its money without authority they will be required to make good the loss out of
their private estates. The acceptance of the office of a director implies a competent knowledge of the
duties assumed directors cannot excuse imprudence on the ground of their ignorance or
inexperience. If they commit an error of judgment through mere recklessness or want of ordinary
prudence or skill, they may be held liable for the consequences. Creditors of a corporation have the
right to assume that so long as there are outstanding debts and liabilities, the board 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.
The action of the board in purchasing the stock from the corporation and in declaring dividends on the
stock during the same meeting, which left only P4k from what had been P10k of the paid up capital
showed that the directors did not act in good faith or were grossly ignorant of their duties.