G.R. No.

L-30460             March 12, 1929 Plaintiff prays judgment for the sum of P3,300 from the defendants Gregorio
Velasco, Felix del Castillo, Andres L. Navallo and Rufino Manuel, personally as
C. H. STEINBERG, as Receiver of the Sibuguey Trading Company,
members of the Board of Directors, or for the recovery from the defendants S.
Incorporated, plaintiff-appellant,
R. Ganzon, of the sum of P1,000, from the defendant Felix D. Mendaros, P2,000,
vs.
and from the defendant Dionisio Saavedra, P100, and under his second cause of
GREGORIO VELASCO, ET AL., defendants-appellees.
action, he prays judgment for the sum of P3,000, with legal interest against the
Frank H. Young for appellant. board of directors, and costs.
Pablo Lorenzo and Delfin Joven for appellees.
For answer the defendants Felix del Castillo, Rufino Manuel, S. R. Ganzon,
STATEMENT Dionisio Saavedra and Valentin Matias made a general and specific denial.

Plaintiff is the receiver of the Sibuguey Trading Company, a domestic In his amended answer, the defendant Gregorio Velasco admits paragraphs, 1, 2
corporation. The defendants are residents of the Philippine Islands. and 3 of each cause of action of the complaint, and that the shares mentioned
in paragraph 4 of the first cause of action were purchased, but alleges that they
It is alleged that the defendants, Gregorio Velasco, as president, Felix del were purchased by virtue of a resolution of the board of directors of the
Castillo, as vice-president, Andres L. Navallo, as secretary-treasurer, and Rufino corporation "when the business of the company was going on very well." That
Manuel, as director of Trading Company, at a meeting of the board of directors the defendant is one of the principal shareholders, and that about the same
held on July 24, 1922, approved and authorized various lawful purchases already time, he purchase other shares for his own account, because he thought they
made of a large portion of the capital stock of the company from its various would bring profits. As to the second cause of action, he admits that the
stockholders, thereby diverting its funds to the injury, damage and in fraud of dividends described in paragraph 4 of the complaint were distributed, but
the creditors of the corporation. That pursuant to such resolution and on March alleges that such distribution was authorized by the board of directors, "and
31, 1922, the corporation purchased from the defendant S. R. Ganzon 100 that the amount represented by said dividends really constitutes a surplus profit
shares of its capital stock of the par value of P10, and on June 29, 1922, it of the corporation," and as counterclaim, he asks for judgment against the
purchased from the defendant Felix D. Mendaros 100 shares of the par value of receiver for P12,512.47 for and on account of his negligence in failing to collect
P10, and on July 16, 1922, it purchased from the defendant Felix D. Mendaros the accounts.
100 shares of the par value of P10, each, and on April 5, 1922, it purchased from
the defendant Dionisio Saavedra 10 shares of the same par value, and on June Although duly served, the defendant Mendaros did not appear or answer. The
29, 1922, it purchased from the defendant Valentin Matias 20 shares of like defendant Navallo was not served, and the case against him was dismissed.
value. That the total amount of the capital stock unlawfully purchased was
April 30, 1928, the case was tried and submitted on a stipulation of facts, based
P3,300. That at the time of such purchase, the corporation had accounts
upon which the lower court dismissed plaintiff's complaint, and rendered
payable amounting to P13,807.50, most of which were unpaid at the time
judgment for the defendants, with costs against the plaintiff, and absolved him
petition for the dissolution of the corporation was financial condition, in
from the cross-complaint of the defendant Velasco, and on appeal, the plaintiff
contemplation of an insolvency and dissolution.
assigns the following errors:
As a second cause of action, plaintiff alleges that on July 24, 1922, the officers
1. In holding that the Sibuguey Trading Company, Incorporated, could legally
and directors of the corporation approved a resolution for the payment of
purchase its own stock.
P3,000 as dividends to its stockholders, which was wrongfully done and in bad
faith, and to the injury and fraud of its creditors. That at the time the petition 2. In holding that the Board of Directors of the said Corporation could legally
for the dissolution of the corporation was presented it had accounts payable in declared a dividend of P3,000, July 24, 1922.
the sum of P9,241.19, "and practically worthless accounts receivable."
JOHNS, J.:
It is stipulated that on July 24, 1922, the directors of the corporation approved the payment of dividends to its stockholders, in the sum of three thousand
the purchase of stocks as follows: pesos (P3,000), Philippine currency, which payments were made at different
dates, between September 30, 1922, and May 12, 1923, both dates inclusive, at
One hundred shares from S. R. Ganzon for P1,000;
a time when the corporation had accounts less in amount than the accounts
One hundred shares from Felix D. Mendaros at the same price; which purchase receivable, which resolution was based upon the balance sheet made as June
was made on June 29, 1922; another 30, 1922, said balance sheet showing that the corporation had a surplus of
P1,069.41, and a profit on the same date of P2,656.08, or a total surplus amount
One hundred shares from Felix D. Mendaros at the same price on July 16, 1922; of P3,725.49, and a reserve fund of P2,889.23 for bad and doubtful accounts
Ten shares from Dionisio Saavedra at the same price on June 29, 1922. and depreciation of equipment, thereby leaving a balance of P3,314.72 of net
surplus profit after paying this dividend.
That during such times, the defendant Gregorio Velasco purchased 13 shares for
the corporation for P130; Felix del Castillo — 42 shares for P420; Andres Navallo It is also stipulated at a meeting of the board of directors held on July 24, 1922,
— 15 shares for P150; and the defendant Mendaros — 10 shares for P100. That as follows:
during the time these various purchases were made, the total amount of 6. The president and manager submitted to the Board of Directors his statement
subscribed and paid up capital stock of the corporation was P10,030, out of the and balance sheet for the first semester ending June 30, 1922 and
authorized capital stock 2,000 shares of the par value of P10 each. recommended that P3,000 — out of the surplus account be set aside for
Paragraph 4 of the stipulation also recites: dividends payable, and that payments be made in installments so as not to
effect the financial condition of the corporation. That stockholders having
Be it also admitted as a fact that the time of the said purchases there was a outstanding account with the corporation should settle first their accounts
surplus profit of the corporation above-named of P3,314.72. before payments of their dividends could be made. Mr. Castillo moved that the
Paragraph 5 is as follows: statement and balance sheet be approved as submitted, and also the
recommendations of the president. Seconded by Mr. Manuel. Approved.
That at the time of the repeatedly mentioned various purchases of the said
capital stock were made, the said corporation had Accounts Payable in the total Paragraph 8 of the stipulation is as follows:
amount of P13,807.50 as shown by the statement of the corporation, dated That according to the balance sheet of the corporation, dated June 30, 1923, it
June 30, 1922, and the Accounts Receivable in the sum of P19,126.02 according had accounts receivable in the sum of P12,512.47, due from various contractor
to the books, and that the intention of the Board of Directors was to resell the and laborers of the National Coal Company, and also employees of the herein
stocks purchased by the corporations at a sum above par for each stock, this corporation, which the herein receiver, after his appointment on February 28,
expectation being justified by the then satisfactory and sound financial 1924, although he made due efforts by personally visiting the location of the
condition of the business of the corporation. corporation, and of National Coal Company, at its offices, at Malangas,
It is also stipulated that on September 11, 1923, when the petition for the Mindanao, and by writing numerous letters of demand to the debtors of the
dissolution of the corporation was presented to the court, according to a corporation, in order to collect these accounts receivable, he was unable to do
statement made June 30, 1923, it has accounts payable aggregating P9,41.19, so as most of them were without goods or property, and he could not file any
and accounts receivable for P12,512.47. suit against them that might have any property, for the reason that he had no
funds on hand with which to pay the filing and sheriff fees to Malangas, and
Paragraph 7 of the stipulation recites: other places of their residences.
That the same defendants, mentioned in paragraph 2 of this stipulation of facts From all of which, it appears that on June 30, 1922, the board of directors of the
and in the same capacity, on the same date of July 24, 1922, and at the said corporation authorized the purchase of, purchased and paid for, 330 shares of
meeting of the said Board of Directors, approved and authorized by resolution the capital stock of the corporation at the agreed price of P3,300, and that at
the time the purchase was made, the corporation was indebted in the sum of both Ganzon and Mendaros were formerly directors and resigned before the
P13,807.50, and that according to its books, it had accounts receivable in the board approved the purchase and declared the dividends, and that out of the
sum of P19,126.02. That on September 11, 1923, when the petition was filed for whole 330 shares purchased, Ganzon, sold 100 and Mendaros 200, or a total of
its dissolution upon the ground that it was insolvent, its accounts payable 300 shares out of the 330, which were purchased by the corporation, and for
amounted to P9,241.19, and its accounts receivable P12,512.47, or an apparent which it paid P3,300. In other words, that the directors were permitted to resign
asset of P3,271.28 over and above its liabilities. But it will be noted that there is so that they could sell their stock to the corporation. As stated, the authorized
no stipulation or finding of facts as to what was the actual cash value of its capital stock was P20,000 divided into 2,000 shares of the par value of P10 each,
accounts receivable. Neither is there any stipulation that those accounts or any which only P10,030 was subscribed and paid. Deducting the P3,300 paid for the
part of them ever have been or will be collected, and it does appear that after purchase of the stock, there would be left P7,000 of paid up stock, from which
his appointment on February 28, 1924, the receiver made a diligent effort to deduct P3,000 paid in dividends, there would be left P4,000 only. In this
collect them, and that he was unable to do so, and it also appears from the situation and upon this state of facts, it is very apparent that the directors did
minutes of the board of directors that the president and manager not act in good faith or that they were grossly ignorant of their duties.
"recommended that P3,000 — out of the surplus account to be set aside for
Upon each of those points, the rule is well stated in Ruling Case Law, vol. 7, p.
dividends payable, and that payments be made in installments so as not to
473, section 454 where it is said:
effect the financial condition of the corporation."
General Duty to Exercise Reasonable Care. — The directors of a corporation are
If in truth and in fact the corporation had an actual bona fide surplus of P3,000
bound to care for its property and manage its affairs in good faith, and for a
over and above all of its debt and liabilities, the payment of the P3,000 in
violation of these duties resulting in waste of its assets or injury to the property
dividends would not in the least impair the financial condition of the
they are liable to account the same as other trustees. Are there can be no doubt
corporation or prejudice the interests of its creditors.
that if they do acts clearly beyond their power, whereby loss ensues to the
It is very apparent that on June 24, 1922, the board of directors acted on corporation, or dispose of its property or pay away its money without authority,
assumption that, because it appeared from the books of the corporation that it they will be required to make good the loss out of their private estates. This is
had accounts receivable of the face value of P19,126.02, therefore it had a the rule where the disposition made of money or property of the corporation is
surplus over and above its debts and liabilities. But as stated there is no one either not within the lawful power of the corporation, or, if within the
stipulation as to the actual cash value of those accounts, and it does appear authority of the particular officer or officers.
from the stipulation that on February 28, 1924, P12,512.47 of those accounts
And section 458 which says:
had but little, if any, value, and it must be conceded that, in the purchase of its
own stock to the amount of P3,300 and in declaring the dividends to the Want of Knowledge, Skill, or Competency. — It has been said that directors are
amount of P3,000, the real assets of the corporation were diminished P6,300. It not liable for losses resulting to the corporation from want of knowledge on
also appears from paragraph 4 of the stipulation that the corporation had a their part; or for mistake of judgment, provided they were honest, and provided
"surplus profit" of P3,314.72 only. It is further stipulated that the dividends they are fairly within the scope of the powers and discretion confided to the
should "be made in installments so as not to effect financial condition of the managing body. But the acceptance of the office of a director of a corporation
corporation." In other words, that the corporation did not then have an implies a competent knowledge of the duties assumed, and directors cannot
actual bona fide surplus from which the dividends could be paid, and that the excuse imprudence on the ground of their ignorance or inexperience; and if
payment of them in full at the time would "affect the financial condition of the they commit an error of judgment through mere recklessness or want of
corporation." 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
It is, indeed, peculiar that the action of the board in purchasing the stock from
exercise proper care and diligence, but ordinary skill and judgment. As he is
the corporation and in declaring the dividends on the stock was all done at the
bound to exercise ordinary skill and judgment, he cannot set up that he did not
same meeting of the board of directors, and it appears in those minutes that the
possess them.
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.

The amount involved in this case is not large, but the legal principles are
important, and we have given them the consideration which they deserve.

The judgment of the lower court is reversed, and (a), as to the first cause of
action, one will be entered for the plaintiff and against the defendant S. R.
Ganzon for the sum of P1,000, with legal interest from the 10th of February,
1926, and against the defendant Felix D. Medaros for P2,000, with like interests,
and against the defendant Dionisio Saavedra for P100, with like interest, and
against each of them for costs, each on their primary liability as purchasers of
stock, and (b) against the defendants Gregorio Velasco, Felix del Castillo and
Rufino Manuel, personally, as members of the board of directors of the
Sibuguey Trading Company, Incorporated, as secondarily liable for the whole
amount of such stock sold and purchased as above stated, and on the second
cause of action, judgment will be entered (c) for the plaintiff and jointly and
severally against the defendants Gregorio Velasco, Felix del Castillo and Rufino
Manuel, personally, as members of the board of directors of the Sibuguey
Trading Company, Incorporated, for P3,000, with interest thereon from
February 10, 1926, at the rate of 6 per cent per annum, and costs. So ordered.

Johnson, Street, Malcolm, Ostrand, Romualdez and Villa-Real, JJ., concur.