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DEBT SECURITIES representative do not go to the coffers of the System but

personally to the representative.

G.R. No. L-33205 August 31, 1987
 LTM failed to redeem certificates of Stock Nos. 128 and 139,
LIRAG TEXTILE MILLS, INC., and BASILIO L. LIRAG, petitioners, vs. nor was it able to pay dividends due to financial reverses.
SOCIAL SECURITY SYSTEM, and HON. PACIFICO DE CASTRO, Accordingly, the SSS filed an action for specific performance
respondents. and damages against Lirag Textile Mills, Inc. and Basilio L.
 On September 4, 1961, Social Security System and LTM  LTM and Basilio, on its part claimed that SSS merely became
entered into a Purchase Agreement under which SSS agreed and still is a preferred stockholder of LTM, the redemption
to purchase from Lirag Textile Mills preferred shares of of the shares purchased by SSS being dependent upon the
stock worth P1,000,000.00 with a par value of P100 each. financial ability of LTM. The latter, thus, has no obligation to
 Paragraph 3 of the agreement further provides that LTM redeem the preferred stocks.
shall repurchase the said stocks.  On the other hand, SSS claims that the Purchase Agreement
 To guarantee the redemption of the stocks, the payment of is a debt instrument, imposing upon LTM and Basilio the
dividends, as well as the other obligations of LTM, Basilio obligation to pay the amount owed, and creating as
Lirag, president of LTM, bound himself as surety so that between them the relation of creditor and debtor, not that
should LTM fail to perform any of its obligations in the said of a stockholder and a corporation.
Purchase Agreement, he shall immediately pay SSS the  The lower court, ruling that the purchase agreement was a
amounts then outstanding. debt instrument, decided in favor of SSS.
 It has been the policy of SSS to be represented in the BOD
of the entity which has obtained financial assistance from it. ISSUE: WON the Purchase Agreement entered into by petitioners
As such, Messrs. Rene Espina, Bernardino Abes and Heber and respondent SSS is a debt instrument.
Catalan were each issued one common share of stock as a
qualifying share to their election to the BOD of LTM.
 During their respective tenure as members of the BOD, they The terms and conditions of the Purchase Agreement unmistakably
received per diems for their attendance therein in the same show that the parties intended the repurchase of the preferred
manner and in the same amount as any other member of shares on respective scheduled dates to be an absolute obligation
the Board of Directors, participated in the deliberations which does not depend upon the financial ability of the corporation.
therein and freely exercised their right to vote in such This absolute obligation on the part of LTM is made manifest by the
meetings. However, the per diems received by the SSS fact that a surety was required to see to it that the obligation is
fulfilled in the event of the principal debtor's inability to do so. The loan. Thus, the membership in the board is to have a watchdog in
unconditional undertaking of petitioner corporation to redeem the the operation of the business of the corporation, so as to insure
preferred shares at the specified dates constitutes a debt which is against mismanagement which may result in losses not entirely
defined "as an obligation to pay money at some fixed future time, unavoidable since payment for purposes of redemption as well as
or at a time which becomes definite and fixed by acts of either party the dividends is expressly stipulated to come from profits and/or
and which they expressly or impliedly, agree to perform in the surplus. Such a right is never exacted by an ordinary stockholder
contract. merely investing in the corporation.

A stockholder sinks or swims with the corporation and there is no Moreover, the Purchase Agreement provided that failure on the
obligation to return the value of his shares by means of repurchase part of petitioner to repurchase the preferred shares on the
if the corporation incurs losses and financial reverses, much less scheduled due dates renders the entire obligation due and
guarantee such repurchase through a surety. demandable, with petitioner in such eventuality liable to pay 12% of
the then outstanding obligation as liquidated damages. These
If the parties intended SSS to be merely a stockholder of LTM, it features of the Purchase Agreement, taken collectively, clearly show
would have been sufficient that Preferred Certificates Nos. 128 and the intent of the parties to be bound therein as debtor and creditor,
139 were issued in its name. However, the parties did in fact and not as corporation and stockholder.
execute the Purchase Agreement, at the same time that the LTM
issued its preferred stock to SSS. The Purchase Agreement serves to NOTE: The dividends stipulated by the parties served evidently as
define the rights and obligations of the parties and to establish interests. The amount thereof was fixed at 8% per annum and was
firmly the liability of petitioners in case of breach of contract. The not made to depend upon or to fluctuate with the amount of profits
Certificates of Preferred Stock serve as additional evidence of the or surplus realized, a clear indication that the parties intended to
agreement between the parties, though the precise terms and give a sure and fixed earnings on the principal loan.
conditions thereof must be read together with, and regarded as
qualified by the terms and conditions of the Purchase Agreement. EQUITY SECURITIES

The rights given by the Purchase Agreement for the benefit of SSS G.R. No. L-39427 February 24, 1934
are rights not enjoyed by ordinary stockholders. It suggests an TIRSO GARCIA, in his capacity as receiver of the Mercantile Bank of
intention on the part of SSS to facilitate a loan to the corporation. China, plaintiff-appellee, vs. LIM CHU SING, defendant-appellant.
SSS is looked upon more as a lending institution rather than as an
investing agency, the purchase agreement supplied these protective Defendant Lim Chu Sing executed and delivered to the Mercantile
rights which would otherwise be furnished by collaterals to the Bank of China a PN for the sum of P19,605.17 payable on instalment
basis. One of the conditions stipulated therein is that in case of such, are not creditors of the corporation. The capital stock of a
defendant's default in the payment of any of the monthly corporation is a trust fund to be used more particularly for the
instalments, the entire amount or the unpaid balance thereof security of creditors of the corporation, who presumably deal with it
together with interest thereon at 6% pa, shall become due and on the credit of its capital stock. Therefore, the defendant not being
payable on demand. The defendant had been, making several a creditor of the bank, although the latter is a creditor of the
partial payments thereon, leaving an unpaid balance of P9,105.17. former, there is no sufficient ground to justify a compensation.
However, he defaulted in the payment of several installments thus
NOTE: (SUMMARY OF RULING) (1) That failure to file an exception
the unpaid balance of P9,105.17 has ipso facto become due and
to a ruling rendered in open court denying a motion for the
inclusion of a party as defendant deprives the petitioner, upon
The debt which is the subject matter of the complaint was not really appeal of the right to raise the question whether such denial proper
an indebtedness of the defendant but of Lim Cuan Sy, who had an or improper; (2) that the shares of a banking corporation do not
account with the plaintiff bank in the form of "trust receipts" constitute an indebtedness of the corporation to the stockholder
guaranteed by the defendant as surety and with chattel mortgage and, therefore, the latter is not a creditor of the former for such
securities. The plaintiff bank, without the knowledge and consent of shares; (3) that the indebtedness of a shareholder to a banking
the defendant, foreclosed the chattel mortgage and privately sold corporation cannot be compensated with the amount of his shares
the property covered thereby. Inasmuch as Lim Cuan Sy failed to therein, there being no relation of creditor and debtor with
comply with his obligations, the plaintiff required the defendant, as respect to such shares; and (4) that the percentage stipulated in a
surety, to sign the subject PN. The defendant is the owner of shares contract, for costs and attorney's fees for the collection of an
of stock of the plaintiff Mercantile Bank of China amounting to indebtedness, includes judicial costs.
P10,000. The plaintiff bank is now under liquidation.
ISSUE: WON it is proper to compensate the defendant's
indebtedness of P9,105.17 with the sum of P10,000 representing G.R. No. L-27872 February 25, 1928
the value of his shares of stock with the plaintiff bank. THE NATIONAL EXCHANGE CO., INC., plaintiff-appellee, vs. I. B.
HELD: NO. DEXTER, defendant-appellant.

I. B. Dexter signed a written subscription to the corporate stock of C.

According to the weight of authority, a share of stock or the
certificate thereof is not an indebtedness to the owner nor evidence S. Salmon & Co. in the following form:
of indebtedness and, therefore, it is not a credit. Stockholders, as
I hereby subscribe for 300 shares of the capital stock of C. S. Salmon or for property at a fair valuation equal to the par value of the stock
and Company, payable from the first dividends declared on any and or bonds so issued."
all shares of said company owned by me at the time dividends are
Further, the 1906 Corporation Law stated: "no corporation shall
declared, until the full amount of this subscription has been paid.
issue stock or bonds except in exchange for actual cash paid to the
Upon this subscription the sum of P15,000 was paid in January, corporation or for property actually received by it at a fair valuation
1920, from a dividend declared at about that time by the company, equal to the par value of the stock or bonds so issued."
supplemented by money supplied personally by the subscriber.
Beyond this nothing has been paid on the shares and no further The prohibition against the issuance of shares by corporations
dividend has been declared by the corporation. There is therefore a 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
balance of P15,000 still paid upon the subscription.
statutory law of the Philippines; and it would seem that our
ISSUE: WON the stipulation contained in the subscription to the lawmakers could scarcely have chosen language more directly
effect that the subscription is payable from the first dividends suited to secure absolute equality stockholders with respect to their
declared on the shares has the effect of relieving the subscriber liability upon stock subscriptions. Now, if it is unlawful to issue stock
from personal liability in an action to recover the value of the otherwise than as stated it is self-evident that a stipulation such as
shares. that now under consideration, in a stock subcription, is illegal, for
this stipulation obligates the subcriber to pay nothing for the
HELD: NO shares except as dividends may accrue upon the stock. In the
In the absence of restrictions in its character, a corporation, under contingency that dividends are not paid, there is no liability at all.
its general power to contract, has the power to accept subscriptions This is a discrimination in favor of the particular subcriber, and
upon any special terms not prohibited by law or contrary to public hence the stipulation is unlawful.
policy, provided they are not such as to require the performance of Nor has a corporation have the power to receive a subscription
acts which are beyond the powers conferred upon the corporation upon such terms as will operate as a fraud upon the other
by its charter, and provided they do not constitute a fraud upon subscribers or stockholders by subjecting the particular subscriber
other subscribers or stockholders, or upon persons who are or may to lighter burdens, or by giving him greater rights and privileges, or
become creditors of the corporation. as a fraud upon creditors of the corporation by withdrawing or
Section 74 of the Organic Act of July 1, 1902 declared: "That all decreasing the capital. As a general rule, that an agreement
franchises, privileges, or concessions granted under this Act shall between a corporation and a particular subscriber, by which the
forbid the issue of stock or bonds except in exchange for actual cash subscription is not to be payable, or is to be payable in part only, is
illegal and void as in fraud of other stockholders or creditors, or Defendant Irineo Baltazar subscribed for 600 shares of Lingayen
both. Gulf on account of which he had paid upon the organization of the
corporation the sum of P15,000. After incorporation, the defendant
"Conditions attached to subscriptions, which, if valid, lessen the made further payments on account of his subscription, leaving a
capital of the company, are a fraud upon the grantor of the balance of P18,500 unpaid for, which amount, the plaintiff now
franchise, and upon those who may become creditors of the claims in this action.
corporation, and upon unconditional stockholders."
On July 23, 1946, stockholders of the corporation adopted
In the appellant's brief, it is stated that a collateral agreement with resolution No. 17. By said resolution, it was agreed upon by the
a subscriber to stock that his subscription shall not be collectible stockholders present to call the balance of all unpaid subscribed
except from dividends on the stock, is valid as between the parties capital stock as of July 23, 1946, the first 50% payable within 60
and a complete defense to a suit on notes given for the amount of days beginning August 1, 1946, and the remaining 50% payable
the subscription. This is untenable. within 60 days beginning October 1, 1946. The resolution also
Any attempt to discriminate in favor of one subscriber by relieving provided, that all unpaid subscription after the due dates of both
him of this liability wholly or in part is forbidden. In what is here said calls would be subject to 12% interest per annum. Lastly, after the
we have reference primarily to subscriptions to shares that have not expiration of 60 days' grace period, all subscribed stocks remaining
been previously issued. It is conceivable that the power of the unpaid would revert to the corporation.
corporation to make terms with the purchaser would be greater
The defendant, on September 25, 1946, asked the corporation for
where the shares which are the subject of the transaction have him to be allowed to pay his unpaid subscription by February 1,
been acquired by the corporation in course of commerce, after they 1947. He also agreed that if he could not do so, his unpaid
have already been once issued. But the shares with which are here
subscription would be reverted to the corporation.
concerned are not of this sort.
On December 19, 1947, the defendant wrote another letter to the
ES: PAYMENT OF THE BALANCE OF THE SUBSCRIPTION corporation, offering to withdraw completely from the corporation
G.R. No. L-4824 June 30, 1953 by selling out to the corporation all his shares of stock in the total
amount of P23,000. This was left unacted upon by the plaintiff.
appellant, vs. IRINEO BALTAZAR, defendant-appellee. On April 17, 1948, the BOD adopted another resolution which in
effect set aside the earlier resolution, on the ground that the same
is null and void, and because the plaintiff corporation was not in a
financial position to absorb the unpaid balance of the subscribed SEC. 40. Notice of call for unpaid subscriptions must be either
capital stock. personally served upon each stockholder or deposited in the post
office, postage prepaid, addressed to him at his place of residence,
Admittedly, the defendant received notice from the Secretary- if known, and if not known, addressed to the place where the
Treasurer of the company, demanding payment of the unpaid principal office of the corporation is situated. The notice must also
balance of his subscription. Although, such call of the BOD was not be published once a week for four successive weeks in some
published in a newspaper of general circulation. newspaper of general circulation devoted to the publication of
On September 28, 1949, the legal counsel of the plaintiff general news published at the place where the principal office of
corporation wrote a letter to the defendant, demanding the the corporation is established or located, and posted in some
payment of the unpaid balance of his subscription amounting to prominent place at the works of the corporation if any such there
P18,500. Copy of this letter was sent by registered mail to the be. If there be no newspaper published at the place where the
defendant on September 29,1 949. (See Exhibit G). The defendant principal office of the corporation is established or located, then
ignored the said demand. Hence this action. such notice may be published in any newspaper of general news in
the Philippines.
The lower court found that the call for payment embodied in
resolution No. 17 of July 23, 1946 was null and void for lack of Section 40 is mandatory as regards publication. The reason for the
publication; consequently, he dismissed the complaint as mandatory provision is not only to assure notice to all subscribers,
premature. He further held said resolution null and void in so far as but also to assure equality and uniformity in the assessment on
it tried to relieve the defendant from liability on his unpaid stockholders.
subscription, on the ground that the resolution was not approved "Not only must personal notice be given, but the notice must also
by all the stockholders of the corporation. be published once a week, for four consecutive weeks, in some
HELD: newspaper."

We agree with the lower court that the law requires that notice of When the corporation becomes insolvent, with proceedings
any call for the payment of unpaid subscription should be made not instituted by creditors to wind up and distribute its assets, no call or
only personally but also by publication. This is clear from the assessment is necessary before the institution of suits to collect
provisions of section 40 of the Corporation Law, Act No. 1459, as unpaid balance on subscription. (Poizat Ruling)
amended, which reads as follows: 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 area, Tomas C. Lorenzo, Jr. and his father Tomas, Sr. (now deceased)
effect the release, there must be unanimous consent of the executed a mortgage on their land in Nueva Ecija. Like Manahan,
stockholders of the corporation. The release attempted in the Lorenzos were solidarily liable with COB Group Marketing for its
Resolution No. 17 of 1946 was not valid for lack of a unanimous obligations under the sales agreement.
vote. If found that at least seven stockholders were absent from the
meeting when said resolution was approved. Eventually, it was found put that COB owed Keller about P179,000.
On the same day, May 8 1971, Bax, as a representative of COB, and
In conclusion we hold that under the Corporation Law, notice of call R. Oefeli of Keller signed the conditions for the settlement of COB's
for payment for unpaid subscribed stock must be published, except liability.
when the corporation is insolvent, in which case, payment is
immediately demandable. We also rule that release from such Subsequently, COB, through Bax, executed two additional chattel
payment must be made by all the stockholders. mortgages over its 12 trucks (already mortgaged to Northern
Motors, Inc.) as security for its obligation to Keller. However, the
ES: LIABILITY FOR UNPAID SUBSCRIPTION second mortgages did not become effective because the first
mortgagee, Northern Motors, did not give its consent. But the
G.R. No. L-68097 January 16, 1986 second mortgages served the purpose of being admissions of the
EDWARD A. KELLER & CO., LTD., petitioner-appellant, vs. COB liability COB Group Marketing to Keller.
GROUP MARKETING, INC., et. al. Keller sued on September 16, 1971 COB, its stockholders and the
Edward A. Keller & Co., Ltd. appointed COB Group Marketing as mortgagors, Manahan and Lorenzo.
exclusive distributor of its household products, Brite and Nuvan in HELD:
Panay and Negros, as shown in a sales agreement were agreement
Keller sold on credit its products to COB Group Marketing. We find that the lower courts erred in nullifying the admissions of
liability made in 1971 by Bax as president and general manager of
As security for COB’s credit purchases up to the amount of P35,000, COB Group Marketing and in giving credence to the alleged
one Asuncion Manahan mortgaged her land to Keller. Manahan overpayment computed by Bax.
assumed solidary liability with COB Group.
The lower courts not only allowed Bax to nullify his admissions as to
In July, 1970 the parties executed a second sales agreement the liability of COB Group Marketing but they also erroneously
whereby COB's territory was extended to Northern and Southern rendered judgment in its favor in the amount of its supposed
Luzon. As security for the credit purchases up to P25,000 for that overpayment in the sum of P100,596.72, in spite of the fact that
COB Group Marketing was declared in default and did not file any In the course of time the company became insolvent and went into
counterclaim for the supposed overpayment. the hands of the Philippine Trust Company, as assignee in
bankruptcy; and by it this action was instituted to recover 1/2 of the
There was a conference on COB's liability on May 8 1971. Bax in that stock subscription of the defendant, which admittedly has never
discussion did not present his reconciliation statements to show
been paid.
overpayment. His Exhibits 7 and 8 were an afterthought. He
presented them long after the case was filed. The reason given for the failure of the defendant to pay the entire
subscription is, that not long after the Cooperativa Naval Filipina
Bax admitted that Keller sent his company monthly statements of had been incorporated, a meeting of its stockholders occurred, at
accounts but he could not produce any formal protest against the which a resolution was adopted to the effect that the capital should
supposed inaccuracy of the said statements. He lamely explained be reduced by 50% and the subscribers released from the obligation
that he would have to dig up his company's records for the formal to pay any unpaid balance of their subscription in excess of 50 per
protest. He did not make any written demand for reconciliation of centum of the same. As a result of this resolution it seems to have
accounts. been supposed that the subscription of the various shareholders
As to the liability of the stockholders, it is settled that a had been cancelled to the extent stated; and fully paid certificate
stockholder is personally liable for the financial obligations of a were issued to each shareholders for one-half of his subscription. It
corporation to the extent of his unpaid subscription. does not appear that the formalities prescribed in section 17 of the
Corporation Law (Act No. 1459), as amended, relative to the
ES: DELINQUENCY SUBSCRIPTION reduction of capital stock in corporations were observed, and in
particular it does not appear that any certificate was at any time
G.R. No. L-19761 January 29, 1923
filed in the Bureau of Commerce and Industry, showing such
PHILIPPINE TRUST COMPANY, as assignee in insolvency of "La reduction.
Cooperativa Naval Filipina," plaintiff-appellee, vs. MARCIANO
The trial judge, therefore held that the resolution relied upon the
RIVERA, defendant-appellant.
defendant was without effect and that the defendant was still liable
It appears that in 1918, Cooperativa Naval Filipina was duly for the unpaid balance of his subscription.
incorporated with a capital of P100,000, divided into oP1,000 shares
ISSUE: WON the trial judge is correct.
of a par value of P100 each. Among its incorporators was Mariano
Rivera, who subscribed for 450 shares representing a value of HELD: YES.
Subscription to the capital of a corporation constitute a fund to obligated himself to pay to the treasurer of the corporation or its
which creditors have a right to look for satisfaction of their claims assign the sum of P10,000 on instalment basis.
and that the assignee in insolvency can maintain an action upon any
unpaid stock subscription in order to realize assets for the payment On July 10, 1926 Alberto Miranda "assigned," mortgaged, or
of its debts. A corporation has no power to release an original transferred in lieu of cash for the benefit and to the credit of the
subscriber to its capital stock from the obligation of paying for his Tarlac Rice Mill Company a parcel of land.
shares, without a valuable consideration for such release; and as He likewise appointed Evaristo Magbag (President), Eusebio R.
against creditors a reduction of the capital stock can take place only Cabrera, Marcos P. Puno (Vice-Presidents), and C. M. Dizon to be his
in the manner an under the conditions prescribed by the statute or attorneys-in-fact for the purpose of obtaining, securing or soliciting
the charter or the articles of incorporation. Moreover, strict credit against the aforesaid property in an amount not to exceed
compliance with the statutory regulations is necessary. P10,000 in accordance with his subscription contract, to increase
In the case before us the resolution releasing the shareholders from the capital of the corporation.
their obligation to pay 50 per centum of their respective On February 19, 1927 the aforesaid attorneys-in-fact, acting on
subscriptions was an attempted withdrawal of so much capital from behalf of said corporation and Alberto Miranda, borrowed P10,000
the fund upon which the company's creditors were entitled from Mariano Tablante. They jointly and severally guaranteed the
ultimately to rely and, having been effected without compliance payment of this sum; and mortgaged to Mariano Tablante the
with the statutory requirements, was wholly ineffectual. aforementioned parcel of land to secure the payment of the PN.
G.R. No. L-35961 December 2, 1932 The sum of P10,000 obtained from Mariano Tablante was retained
ROMANA MIRANDA, in her capacity as judicial administratrix of by the corporation. When the PN became due, Alberto Miranda
the intestate estate of Alberto Miranda, plaintiff-appellant, vs. 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
THE TARLAC RICE MILL CO., INC., defendant-appellee.
retro to Vicente Panlilio for P10,000, and paid Mariano Tablante.
On June 8, 1926 Alberto Miranda executed a written contract Alberto Miranda died on May 24, 1930.
whereby he subscribed for 100 shares of the capital stock of a
corporation for the purpose of operating a rice mill in Tarlac, said Tarlac Rice Mill eventually ceased to do business from the year
1928, but the other stockholders have not paid for their shares in
corporation to be known as Tarlac Rice Mill Company, Inc., that the
par value of each share was P100; and that Alberto Miranda accordance with their subscription agreement, and 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 said firm is to be organized." Under the circumstances, it seems to
corporation violated the terms of the power of attorney in us that it would be a strained construction of the power of attorney,
mortgaging the land on February 19, 1927 for P10,000, because the taking into consideration the whole document, to hold that the
only sum then due and payable by Alberto Miranda to the officers of the corporation acting as attorneys-in-fact- of Alberto
corporation was P3,000, and that when the remaining instalments Miranda were authorized to mortgage or convey the land for only
of the stock subscription became due, Alberto Miranda was under the amount then due from Alberto Miranda in accordance with the
no obligation to pay them, because the corporation had already subscription agreement.
ceased to do business, and it had taken no steps to compel the
other stockholders to pay for the shares for which they had It can hardly be contended that the power of attorney
subscribed. contemplated that the property should be mortgaged three times,
that is, each time that an instalment became due. We are inclined
HELD: to the view that it was the intention of the parties that the property
should be mortgaged immediately for a sum not to exceed P10,000,
It is true that when the property was mortgaged on February 19, not only for the purpose of paying the subscription agreement of
1927 the amount due from Alberto Miranda in accordance with the Alberto Miranda, but also for the purpose, as stated in the power of
subscription agreement was only P3,000, and it is likewise true that attorney, of increasing the capital of the corporation, not the capital
it does not appear from the evidence that any call was issued by the
stock, in order to carry out the purposes for which it was to be
directors for the payment of any subscriptions. organized.
The fact that Alberto Miranda agreed on June 8, 1926 to pay the This view of the matter is confirmed by the subsequent conduct of
amount of his subscription installments on certain fixed dates did the parties. Although the corporation retained the full amount of
not, of course prevent him from authorizing the officers of the
the loan obtained from Mariano Tablante, and Alberto Miranda had
corporation as his attorneys-in-fact to pay his subscription prior to to pay that obligation, he never sought, so far as the record shows,
the dates fixed in the subscription agreement. In one paragraph of to recover from the corporation any part of the sum of P10,000. As
the power of attorney it is stated that the attorneys-in-fact of we have already stated, the mortgage was executed on February 19,
Alberto Miranda are authorized to mortgage or convey the property 1927; it was satisfied by Alberto Miranda on July 19, 1929, and he
in any way convenient to them in the amount not to exceed lived until May 24, 1930. It does not appear that he ever sought to
P10,000 in accordance with the subscription contract, but the evade the satisfaction of the mortgage by alleging that his
phrase "in accordance with the subscription contract" is followed by attorneys-in-fact exceeded their authority in mortgaging the
the following words "for or to increase the capital of the said Tarlac property on February 19, 1927 for P10,000. On the contrary he
Rice Mill Company, Inc., in order to carry out the purposes for which repaid to Mariano Tablante the amount which the officers of the
corporation had borrowed. The fact that he at no time sought to but an action by the administratrix of a stockholder to recover what
recover from the corporation any part of the sum borrowed by the was paid in to the corporation by the stockholder. It does not
officers of the corporation in his name certainly tends to show that appear from the evidence whether or not the corporation has any
he acquiesced in the action taken by them. The phrase "in debts. Neither the fact that the corporation has ceased to do
accordance with the subscription contract" found in the power of business nor the fact that the other stockholders have not been
attorney probably was intended to mean "in pursuance of the required to pay for their shares in accordance with their
subscription agreement", that is, it referred to the obligation, and subscription agreement justifies us in ordering the corporation to
had no particular reference to the dates when the different return to the plaintiff the amount paid in by Alberto Miranda. If the
installments were to be paid. directors have failed to perform their duty with respect to the other
stockholders, the law provides a remedy therefor.
Section 38 of the Corporation Law provides that the board of
directors of every corporation may at any time declare due and G.R. No. L-19893 March 31, 1923
payable to the corporation unpaid subscriptions to the capital stock
and may collect the same with interest accrued thereon or such ARNALDO F. DE SILVA, plaintiff-appellant, vs. ABOITIZ &
percentage of said unpaid subscriptions as it may deem necessary. COMPANY, INC., defendant-appellee.
This power of the directors is absolute and cannot be limited by the De Silva subscribed for 650 shares of stock of Aboitiz of the value of
subscription contract, but this does not mean that the directors may P500 each. He only paid for the value of 200 shares, for which he
not rely on the subscription contract if they see fit to do so. became indebted to the corporation in the amount of P255,000,
No call is necessary when a subscription is payable, not upon call or representing the unpaid value of his subscription. The secretary of
demand by the directors or stockholders, but immediately, or on the corporation notified him of the resolution passed by its Board,
declaring the unpaid subscriptions to have become due and
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 demandable. The resolution also stated that all such shares which
subscriber to pay the subscription or instalment thereof as soon as remain unpaid will be declared delinquent, and will be advertised
it is due, without any call or demand, and, if he fails to do so, an for sale at public auction. De Silva thus filed a complaint in the CFI
action may be brought at any time. against the corporation, asking the court to enjoin the corporation
from holding such sale. He said that the corporation exceeded its
When this action was filed on September 2, 1930, the last of the authority, as he said that its By-laws stated that the unpaid shares
instalments had already become payable in accordance with the shall be paid out of the 70% of the profit obtained, which shall be
subscription agreement. it must be borne in mind that this is not an distributed among the subscribers, who shall not receive any
action by the corporation to recover on a subscription agreement, dividend until the shares are paid in full. Further, he contends that
the By-laws provide an operative way of paying for the shares method than that mentioned in the law, for the very reason that the
continuously until their full amortization. The CFI dismissed the law does not give stockholders any right in connection with the
case. determination of the question whether or not there should be
deducted from the 70% of the profit distributable among the
ISSUE: Whether the corporation may declare the unpaid shares stockholders such amount as may be deemed fit for the payment of
delinquent and/or collect their value by another method different subscriptions due and unpaid.
from that prescribed in the By-laws.
G.R. No. 51765 March 3, 1997
In the By-laws, it is stated that the directors are authorized to create
a special emergency fund or extraordinary reserve fund, when, in its REPUBLIC PLANTERS BANK, petitioner, vs. HON. ENRIQUE A.
judgment, and in case all the shares subscribed to have been fully AGANA, SR., as Presiding Judge, Court of First Instance of Rizal,
paid. The directors are given the discretion to do whatever is stated Branch XXVIII, Pasay City, ROBES-FRANCISCO REALTY &
in the By-laws relative to the application of the 70% profit. They DEVELOPMENT CORPORATION and ADALIA F. ROBES,
may decide whether or not such profit shall be used to pay for the respondents.
unpaid subscriptions.
On September 18, 1961, RFRD secured a loan from Republic
If the Board of Directors does not wish to make use of such Planters Bank in the amount of P120,000.00. Instead of giving the
authority, it has 2 other remedies for accomplishing the purpose, as legal tender totaling to the full amount of the loan, which is
enunciated in Velasco v Poizat: : 1) to sell the stock for the account P120,000.00, the bank lent such amount partially in the form of
of the delinquent subscriber, and 2) to bring a legal action against money and partially in the form of stock certificates, each for 400
him for the amount due. shares with a par value of P10.00 per share, or for P4,000.00 each,
for a total of P8,000.00. Said stock certificates were in the name of
In this case, BoDs elected to avail themselves of the first remedy Adalia F. Robes and Carlos F. Robes, who subsequently, however,
granted to it by law, and declared that payment of De Silva’s
endorsed his shares in favor of Adalia F. Robes.
subscription to 450 shares which had not been fully paid by him was
due, and that said shares were delinquent, and performed all the Said certificates of stock bear the following terms and conditions:
other acts subsequent to said declaration, as it deemed it
disadvantageous to the corporation to apply a part of the profit The Preferred Stock shall have the following rights, preferences,
realized or to be realized to the payment of his subscription. De qualifications and limitations, to wit:
Silva has no right to prevent the Board from following, any other
1. Of the right to receive a quarterly dividend of One Per upon before any dividends at all are paid to the holders of common
Centum (1%), cumulative and participating. xxx xxx xxx stock. There is no guaranty, however, that the share will receive
any dividends.
2. That such preferred shares may be redeemed, by the
system of drawing lots, at any time after two (2) years from the date Under the old Corporation Law in force at the time the contract
of issue at the option of the Corporation. . . . between the petitioner and the private respondents was entered
into, it was provided that "no corporation shall make or declare any
On January 31, 1979, private respondents proceeded against dividend except from the surplus profits arising from its business, or
petitioner and filed a Complaint anchored on private respondents' distribute its capital stock or property other than actual profits
alleged rights to collect dividends under the preferred shares in among its members or stockholders until after the payment of its
question and to have petitioner redeem the same under the terms debts and the termination of its existence by limitation or lawful
and conditions of the stock certificates. dissolution." Similarly, the present Corporation Code provides that
On September 7, 1979, the trial court rendered the herein assailed the board of directors of a stock corporation may declare dividends
decision in favor of private respondents, ordering petitioner to pay only out of unrestricted retained earnings. The Code substituted the
private respondents the face value of the stock certificates as phrase "unrestricted retained earnings," which may be a more
redemption price, plus 1% quarterly interest thereon until full precise term, in place of "surplus profits arising from its business" in
payment. the former law. Thus, the declaration of dividends is dependent
upon the availability of surplus profit or unrestricted retained
HELD: This petition is meritorious. earnings, as the case may be. Preferences granted to preferred
stockholders, moreover, do not give them a lien upon the property
A preferred share of stock is one which entitles the holder thereof
of the corporation nor make them creditors of the corporation, the
to certain preferences over the holders of common stock. The
right of the former being always subordinate to the latter. Dividends
preferences are designed to induce persons to subscribe for shares
are thus payable only when there are profits earned by the
of a corporation.
corporation and as a general rule, even if there are existing profits,
The most common forms of preferred shares may be classified into the board of directors has the discretion to determine whether or
two: (1) preferred shares as to assets; and (2) preferred shares as to not dividends are to be declared. Shareholders, both common and
dividends. The former is a share which gives the holder thereof preferred, are considered risk takers who invest capital in the
preference in the distribution of the assets of the corporation in business and who can look only to what is left after corporate debts
case of liquidation; the latter is a share the holder of which is and liabilities are fully paid.
entitled to receive dividends on said share to the extent agreed
Redeemable shares, on the other hand, are shares usually compel or refuse the redemption of its stock. Furthermore, the
preferred, which by their terms are redeemable at a fixed date, or terms and conditions set forth therein use the word "may". “May"
at the option of either issuing corporation, or the stockholder, or denotes discretion, and cannot be construed as having a mandatory
both at a certain redemption price. A redemption by the effect.
corporation of its stock is, in a sense, a repurchase of it for
cancellation. 18 The present Code allows redemption of shares even The redemption of said shares cannot be allowed. As pointed out by
if there are no unrestricted retained earnings on the books of the the petitioner, the Central Bank made a finding that said petitioner
has been suffering from chronic reserve deficiency, and that such
corporation. This is a new provision which in effect qualifies the
general rule that the corporation cannot purchase its own shares finding resulted in a directive by then Gov. G.S. Licaros of the
except out of current retained earnings. 19 However, while Central Bank, to the President and Acting Chairman of the Board of
redeemable shares may be redeemed regardless of the existence of the petitioner bank prohibiting the latter from redeeming any
unrestricted retained earnings, this is subject to the condition that preferred share, on the ground that said redemption would reduce
the corporation has, after such redemption, assets in its books to the assets of the Bank to the prejudice of its depositors and
cover debts and liabilities inclusive of capital stock. Redemption, creditors. Redemption of preferred shares was prohibited for a just
therefore, may not be made where the corporation is insolvent or if and valid reason. The directive issued by the Central Bank Governor
such redemption will cause insolvency or inability of the corporation was obviously meant to preserve the status quo, and to prevent the
to meet its debts as they mature. financial ruin of a banking institution that would have resulted in
adverse repercussions, not only to its depositors and creditors, but
We come now to the merits of the case. The petitioner argues that also to the banking industry as a whole. The directive, in limiting the
it cannot be compelled to redeem the preferred shares issued to exercise of a right granted by law to a corporate entity, may thus be
the private respondent. We agree. considered as an exercise of police power.

The trial court ruled that on the question of the redemption by the The respondent judge also stated that since the stock certificate
defendant of said preferred shares of stock, the very wordings of granted the private respondents the right to receive a quarterly
the terms and conditions in said stock certificates clearly allows the dividend of One Per Centum (1%) cumulative and participating, it
same. What respondent judge failed to recognize was that while the "clearly and unequivocably (sic) indicates that the same are
stock certificate does allow redemption, the option to do so was "interest bearing stocks" or stocks issued by a corporation under an
clearly vested in the petitioner bank. The redemption therefore is agreement to pay a certain rate of interest thereon. As such,
clearly the type known as "optional". Thus, except as otherwise plaintiffs (private respondents herein) become entitled to the
provided in the stock certificate, the redemption rests entirely with payment thereof as a matter of right without necessity of a prior
the corporation and the stockholder is without right to either declaration of dividend." There is no legal basis for this observation.
Both Sec. 16 of the Corporation Law and Sec. 43 of the present to Manning, McDonald and Simmons. Because of this, the BIR
Corporation Code prohibit the issuance of any stock dividend issued assessments on Manning, McDonald and Simmons for
without the approval of stockholders, representing not less than 2/3 deficiency income tax for 1958. Manning et al, opposed this
of the outstanding capital stock at a regular or special meeting duly assessment but the BIR still found them liable. Manning et al.
called for the purpose. These provisions underscore the fact that appealed to the CTA, which absolved them from any liability.
payment of dividends to a stockholder is not a matter of right but a
matter of consensus. Furthermore, "interest bearing stocks", on Held: The manifest intention of the parties to the trust agreement
was, in sum and substance, to treat the 24,700 shares of Reese as
which the corporation agrees absolutely to pay interest before
dividends are paid to common stockholders, is legal only when absolutely outstanding shares of Reese's estate until they were fully
construed as requiring payment of interest as dividends from net paid. Such being the true nature of the 24,700 shares, their
declaration as treasury stock dividend in 1958 was a complete
earnings or surplus only.
nullity and plainly violative of public policy. A stock dividend, being
CLASSES OF SHARES: TREASURY SHARES one payable in capital stock, cannot be declared out of outstanding
corporate stock, but only from retained earnings.
G.R. No. L-28398 August 6, 1975
A stock dividend always involves a transfer of surplus (or profit) to
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. JOHN L. capital stock. A stock dividend is a conversion of surplus or
MANNING, W.D. McDONALD, E.E. SIMMONS and THE COURT OF undivided profits into capital stock, which is distributed to
TAX APPEALS, Respondents. stockholders in lieu of a cash dividend.
Quick Summary:
Facts: Reese, the majority stockholder of Mantrasco, executed a
 1952 - Mantrasco had an authorized capital stock of P2.5M
trust agreement between him, Mantrasco, Ross, Selph, carrascoso &
divided into 25,000 common shares. 24,700 of these shares
Janda law firm and the minority stockholders, Manning, McDonald
are owned by Julius Reese while the rest, at 100 each, are
and Simmons. Said agreement was entered into because of Reese’s
owned by Manning, McDonald & Simmons.
desire that Mantrasco and Mantrasoc’s 2 subsidiaries, Mantrasco
 February 29, 1958 - a trust agreement was executed
Guam and Port Motors, to continue under the management of
between Reese, Mantrasco, Ross, Selph, carrascoso & Janda
Manning, McDonald and Simmons upon his [Reese] death. When
law firm, Manning, McDonald and Simmons. Said
Reese died, Mantrasco paid Reese’s estate the value of his shares.
agreement was entered into because of Reese’s desire that
When said purchase price has been fully paid, the 24,700 shares,
Mantrasco and Mantrasoc’s 2 subsidiaries, Mantrasco
which were declared as dividends, were proportionately distributed
Guam and Port Motors, to continue under the management  Thus, BIR examiners concluded that the distribution of
of Manning, McDonald and Simmons upon his [Reese] Reese's shares as stock dividends was in effect a distribution
death. of the "asset or property of the corporation as may be
 October 19, 1954 - Reese died. However, the projected gleaned from the payment of cash for the redemption of
transfer of his shares in the name of Mantrasco could not said stock and distributing the same as stock dividend."
be immediately effected for lack of sufficient funds to cover  April 14, 1965 - Commissioner of Internal Revenue issued
the initial payment on the shares. notices of assessment for deficiency income taxes to
 February 2, 1955 - after Mantrasco made a partial payment Manning, McDonald & Simmons for the year 1958.
of Reese's shares, the certificate for the 24,700 shares in  Manning, McDonald & Simmons opposed said assessments.
Reese's name was cancelled and a new certificate was BIR still held them liable for these assessments.
issued in the name of Mantrasco. Also, new certificate was  CTA: absolved Manning, McDonald & Simmons from any
endorsed to the law firm of Ross, Selph, Carrascoso and liability on the ground that their respective 1/3 interest in
Janda, as trustees for and in behalf of Mantrasco. Mantrasco remained the same before and after the
 December 22, 1958 - a resolution was passed during a declaration of stock dividends and only the number of
special meeting of Mantrasco stockholders. shares held by each of them changed.
 November 25, 1963 - entire purchase price of Reese's
interest in Mantrasco was finally paid in full by Mantrasco. Issues:
 May 4, 1964 - trust agreement was terminated and the 1. WON the shares are treasury shares [NO]
trustees delivered to Mantrasco all the shares which they
were holding in trust. 2. WON Manning, McDonald & Simmons should pay for
 September 14, 1962 - BIR ordered an examination of deficiency income taxes [YES]
Mantrasco’s books. This examination disclosed that:
1. as of December 31, 1958 the 24,700 shares declared as
1. Treasury shares are stocks issued and fully paid for and re-
dividends had been proportionately distributed to Manning,
acquired by the corporation either by purchase, donation, forfeiture
McDonald & Simmons, representing a total book value or
or other means. Treasury shares are therefore issued shares, but
acquisition cost of P7,973,660
being in the treasury they do not have the status of outstanding
2. Manning, McDonald & Simmons failed to declare the said shares. Consequently, although a treasury share, not having been
stock dividends as part of their taxable income for the year 1958 retired by the corporation re-acquiring it, may be re-issued or sold
again, such share, as long as it is held by the corporation as a
treasury share, participates neither in dividends, because dividends directly subsidize their purchase of said interests and by making it
cannot be declared by the corporation to itself, nor in the meetings appear that they have not received any income from those firms
of the corporation as voting stock, for otherwise equal distribution when, in fact, by the formal declaration of non-existent stock
of voting powers among stockholders will be effectively lost and the dividends in the treasury they secured to themselves the means to
directors will be able to perpetuate their control of the corporation, turn around as full owners of Reese’s shares.
though it still represents a paid-for interest in the property of the
corporation.  Manning, McDonald & Simmons, using the trust instrument
as a convenient technical device, bestowed unto
In this case, such essential features of a treasury share are lacking in themselves the full worth and value of Reese's corporate
the former shares of Reese. holdings with the use of the very earnings of the companies.
 Such package device, obviously not designed to carry out
The manifest intention of the parties to the trust agreement was, in
the usual stock dividend purpose of corporate expansion
sum and substance, to treat the 24,700 shares of Reese as
reinvestment but exclusively for expanding the capital base
absolutely outstanding shares of Reese's estate until they were fully
of Manning, McDonald & Simmons in Mantrasco, cannot be
paid. Such being the true nature of the 24,700 shares, their
allowed to deflect their responsibilities toward our income
declaration as treasury stock dividend in 1958 was a complete
tax laws.
nullity and plainly violative of public policy. A stock dividend, being
 All these amounts are subject to income tax as being a flow
one payable in capital stock, cannot be declared out of outstanding
of cash benefits to Manning, McDonald & Simmons.
corporate stock, but only from retained earnings.
Commissioner’s assessment is erroneous
Nature of a stock dividend
 Commissioner should not have assessed the income tax on
 A stock dividend always involves a transfer of surplus (or
the total acquisition cost of the alleged treasury stock
profit) to capital stock.
dividends in 1 lump sum.
 A stock dividend is a conversion of surplus or undivided
 The record shows that the earnings of Mantrasco over a
profits into capital stock, which is distributed to
period of years were used to gradually wipe out the
stockholders in lieu of a cash dividend.
holdings of Reese.
2. The ultimate purpose which the parties to the trust  Consequently, those earnings should be taxed for each of
agreement aimed to realize is to make Manning, McDonalds & the corresponding years when payments were made to
Simmons the sole owners of Reese’s interest in Mantrasco by Reese’s estate on account of his 24,700 shares.
utilizing the periodic earnings of Mantrasco and its subsidiaries to