Steinberg v.

Velasco AUTHOR: ADRE

52 PHIL. 953 (1929) NOTES: Corporation involved: Sibuguey Trading
TOPIC: Section 31, Corporation Code Company
Duty of Diligence: Business Judgments Rule Plaintiff: C. H. STEINBERG (receiver)
PONENTE: JOHNS, J. Defendants: Gregorio Velasco (President); Felix del
Castillo (VP); Andres L. Navallo
(Secretary-treasurer); and Rufino Manuel (director);
Other directors: Ganzon; Mendaros; Matias; Saavedra.
FACTS:
 Steinberg was the receiver of Sibuguey Trading Company.
 He filed a complaint against Velasco, et.al because at a meeting of the board of directors held on July 24,
1922, they approved and authorized various lawful purchases already made of a large portion of the capital
stock of the company from its various stockholders, thereby diverting its funds to the injury, damage and in
fraud of the creditors of the corporation.
 According to the facts in the case: Sibuguey Trading Company Inc. had an authorized capital stock of
P20,000 divided into 2,000 shares of the par value of P10 each, which only P10,030 was subscribed and paid.
(take note  )
 During the July 24, 1922 meeting of the Board of Directors of said corporation, knowing very well of the
face value of the corporation previously stated, Ganzon along with other officers of the board passed a
resolution authorizing the purchase by the corporation of large portion of its own capital stock in the total
amount of P3,300 for 330 shares, par value at P10 each.
 Details of the purchases made pursuant to the resolution:
o March 31, 1922, the corporation purchased from the defendant S. R. Ganzon 100 shares of
its capital stock of the par value of P10;
o June 29, 1922, it purchased from the defendant Felix D. Mendaros 100 shares of the par
value of P10;
o July 16, 1922, it purchased from the defendant Felix D. Mendaros 100 shares of the par
value of P10, each;
o April 5, 1922, it purchased from the defendant Dionisio Saavedra 10 shares of the same par
value
o June 29, 1922, it purchased from the defendant Valentin Matias 20 shares of like value.
o Total amount of the capital stock unlawfully purchased was P3, 300.
 During the time the purchase was made, the corporation was indebted in the sum of P13, 807.50, and that
according to its books; it had accounts receivable in the sum of P19, 126.02.
 Then on September 11, 1923, A petition was filed for Sibuguey’s dissolution upon the ground that it was
insolvent:
o Accounts payable amounted to P9,241.19
o Accounts receivable P12, 512.47, or an apparent asset of P3, 271.28 surplus over its
liabilities.
 Seeing this as profits, the board approved the distribution of its dividends in the amount of P3, 000.
 However, the payment of such dividends shall be in installment, so that, according to the Board, the financial
standing of the corporation may not be impaired.
 Such acts by the Board, according to Steinberg, are to the detriment and prejudice of corporation’s creditors.
 Lower court: Dismissed Steinberg’s complaint, and rendered judgment for the defendants, with costs against
the plaintiff.
 Hence, the appeal by Steinberg.
ISSUE(S): Whether or not the defendant-officers of the corporation acted with gross negligence and therefore are
made liable.

HELD: Yes. The officers acted negligently and are liable. The judgment of the lower court is reversed.
RATIO:
 Creditors of a corporation have the right to assume that so long as there are outstanding debts and
liabilities, the BOD will not use the assets of the corporation to buy its own stock, and will not declare
dividends to stockholders when the corporation is insolvent.
 In this case, it was found that the corporation did not have an actual bona fide surplus from which
dividends could be paid.
 Moreover, the Court noted that the Board of Directors purchased the stock from the corporation and
declared the dividends on the stock at the same Board meeting, and that the directors were permitted to
resign so that they could sell their stock to the corporation.
 Given all of this, it was apparent that the directors did not act in good faith or were grossly ignorant of
their duties.
 Either way, they are liable for their actions which affected the financial condition of the corporation and
prejudiced creditors
CASE LAW/ DOCTRINE: “General Duty to Exercise Reasonable Care. – The directors of a corporation are
duty bound to care for its property and manage its affairs in good faith, and for a violation of these duties resulting
in waste of its assets or injury to the property they are liable to account the same as other trustees. And there can
be no doubt that 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.”

If the directors of a corporation do acts clearly beyond their power, by reason of which a loss ensued, or
dispose of its property without authority, they will be required to make good the loss out of their private
estate.
other notes from the case:
The court quoted the Ruling Case Law on the matter:

“Want of Knowledge, Skill or Competency. – It has been said that directors are not liable for losses resulting to
the corporation from want of knowledge on their part; or for mistakes of judgment, provided they were honest,
and provided they are fairly within the scope of the powers and discretion confided to the managing body. But the
acceptance of the office of a director of a corporation implies a competent knowledge of the duties assumed, and
directors cannot excuse imprudence on the ground of their ignorance or inexperience; and 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. Like a mandatory, to whom he has been likened, a director is bound not only to exercise proper
care and diligence but ordinary skill and judgment. As he is bound to exercise ordinary skill and judgment, he
cannot set up that he did not possess them.”