Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-4824
June 30, 1953
LINGAYEN GULF ELECTRIC POWER COMPANY, INC.,
plaintiff-appellant,
vs.
IRINEO BALTAZAR, defendant-appellee.
G.R. No. L-6244
June 30, 1953
LINGAYEN GULF ELECTRIC POWER COMPANY, INC.,
plaintiff-appellee,
vs.
IRINEO BALTAZAR, defendant and appellant.
Manuel L. Fernandez for appellant.
Sofronio C. Quimson and Daniel C. Macaraeg for appellee.
MONTEMAYOR, J.:
These two cases here on appeal stem from the same case that of
civil case No. 10944 of the Court of First Instance of Pangasinan.
From the trial court's decision, plaintiff Lingayen Gulf Electric
Power Company, Inc. appealed directly to this court under G.R.
No. L-4824. Defendant Irineo Baltazar appealed to the Court of
Appeals. By a resolution of that appellate tribunal, the appeal was
certified to this court pursuant to section 17, (5) and (6) of the
Judiciary Act of 1948, and is now listed here under G.R. No. L6344.
The main facts of the case are not disputed, and we are
reproducing and making our own the relation of facts contained in
the decision appealed from.
The plaintiff, Lingayen Gulf Electric Power Company is a domestic
corporation with an authorized capital stock of P300, 000 divided
into 3,000 shares with a par value of P100 per share. The
defendant, Irineo Baltazar appears to have subscribed for 600
shares on account of which he had paid upon the organization of
the corporation the sum of P15, 000. (See Exhibit A, page 2). After
incorporation, the defendant made further payments on account
of his subscription, leaving a balance of P18, 500 unpaid for,
which amount, the plaintiff now claims in this action.
On July 23, 1946, a majority of the stockholders of the
corporation, among them the herein defendant, held a meeting
and adopted stockholders' resolution No. 17. By said resolution, it
was agreed upon by the stockholders present to call the balance
of all unpaid subscribed capital stock as of July 23, 1946, the first
50 per cent payable within 60 days beginning August 1, 1946, and

the remaining 50 per cent payable within 60 days beginning

October 1, 1946. The resolution also provided, that all unpaid
subscription after the due dates of both calls would be subject to
12 per cent interest per annum. Lastly, the resolution provided,
that after the expiration of 60 days' grace which would be on
December 1, 1946, for the first call, and on February 1, 1947, for
the second call, all subscribed stocks remaining unpaid would
revert to the corporation. (See Exhibit F and Exhibit I).
On September 22, 1946, the plaintiff corporation wrote a letter to
the defendant reminding him that the first 50 per cent of his
unpaid subscription would be due on October 1, 1946. The
plaintiff requested the defendant to "kindly advise the company
thru the undersigned your decision regarding this matter." (See
Exhibit 4). The defendant answered on September 25, 1946,
asking the corporation that he be allowed to pay his unpaid
subscription by February 1, 1947. In his answer, the defendant
also agreed that if he could not pay the balance of his subscription
by February 1, 1947, his unpaid subscription would be reverted to
the corporation. (See Exhibit 5).
On December 19, 1947, the defendant wrote another letter to the
members of the Board of Directors of the plaintiff corporation,
offering to withdraw completely from the corporation by selling
out to the corporation all his shares of stock in the total amount of
P23, 000. (See Exhibit 8). Apparently this offer of the defendant
was left unacted upon by the plaintiff.
On April 17, 1948, the Board of Directors of the plaintiff
corporation held a meeting, and in the course of the said meeting
they adopted Resolution No. 17. This resolution in effect set aside
the stockholders resolution approved on June 23, 1946 (Exhibit
D), on the ground that said stockholders' resolution was null and
void, and because the plaintiff corporation was not in a financial
position to absorb the unpaid balance of the subscribed capital
stock. At the said meeting the directors also decided to call 50 per
cent of the unpaid subscription within 30 days from April 17,
1948, the call payable within 60 days from receipt of notice from
the Secretary-Treasurer. This resolution also authorized legal
counsel of the company to take all the necessary legal steps for
the collection of the payment of the call. (See Exhibit E-2).
On June 10, 1949, the stockholders of the corporation held
another meeting in which the stockholders were all present,
either in person or by proxy. At such meeting, the stockholders
adopted resolution No. 4, whereby it was agreed to revalue the
stocks and assets of the company so as to attract outside investors
to put in money for the rehabilitation of the company. The

president was authorized to make all arrangement for such

appraisal and the Secretary to call a meeting upon completion of
the reassessment. (See Exhibit 2).
It was admitted by the defendant that he received notice from the
Secretary-Treasurer of the company, demanding payment of the
unpaid balance of his subscription. It was agreed by the parties
that the call of the Board of Directors was not published in a
newspaper of general circulation as required by section 40 of the
Corporation Law.
On September 28, 1949, the legal counsel of the plaintiff
corporation wrote a letter to the defendant, demanding the
payment of the unpaid balance of his subscription amounting to
P18, 500. Copy of this letter was sent by registered mail to the
defendant on September 29, 1949. (See Exhibit G). The defendant
ignored the said demand. Hence this action.
The defendant, in his answer, disclaims liability to the plaintiff
corporation on the following grounds:
1. That the plaintiffs' action is premature because there was no
valid call; and
2. That granting that there was a valid call, he was released from
the obligation of the balance of his subscription by stockholders'
resolution No. 17 and No. 4.
By way of counterclaim, the defendant also claims from the
plaintiff a reasonable compensation at the rate of P700 per month
as president of the company, for the period from March 1, 1946 to
December 31, 1948.
In the light of the foregoing undisputed facts, the only questions
are as follows:
1. Was the call Exhibit E-2 valid?
2. Was the defendant released from the obligation of the unpaid
balance of his subscription by virtue of stockholders' resolution
Nos. 17 and 4?
3. Is the defendant entitled to compensation as president of the
plaintiff corporation?
In an exhaustive and well prepared decision, Judge M. Mejia of
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
publication; consequently, he dismissed the complaint as
premature. He further held said resolution null and void in so far
as it tried to relieve the defendant from liability on his unpaid
subscription, on the ground that the resolution was not approved
by all the stockholders of the corporation. He also dismissed the
defendant's counterclaim for compensation as president of the
corporation.

Inasmuch as in the two appeals, the assignment of errors are

related to each other, and because they refer to the same case, we
propose to determine both appeals in one single decision.
We agree with the lower court that the law requires that notice of
any call for the payment of unpaid subscription should be made
not only personally but also by publication. This is clear from the
provisions of section 40 of the Corporation Law, Act No. 1459, as
amended, which reads as follows:
SEC. 40. Notice of call for unpaid subscriptions must be either
personally served upon each stockholder or deposited in the post
office, postage prepaid, addressed to him at his place of
residence, if known, and if not known, addressed to the place
where the principal office of the corporation is situated. The
notice must also be published once a week for four successive
weeks in some newspaper of general circulation devoted to the
publication of general news published at the place where the
principal office of the corporation is established or located, and
posted in some prominent place at the works of the corporation if
any such there be. If there be no newspaper published at the
place where the principal office of the corporation is established
or located, then such notice may be published in any newspaper of
general news in the Philippines.
It will be noted that section 40 is mandatory as regards
publication, using the word "must". As correctly stated by the trial
court, the reason for the mandatory provision is not only to assure
notice to all subscribers, but also to assure equality and
uniformity in the assessment on stockholders. (14 C.J. 639).
This rule finds support in authorities on corporation law, such as,
Thompson on Corporations, Vol. 5, 3rd edition, pages 588-590,
from which we make the following quotation:
SEC. 3744. Provisions requiring notice of calls. The governing
statute, charter or by-laws usually require that notice of calls be
given the subscriber or stockholder. If any particular notice or
demand is required by either of these, or by the contract of
subscription, then such notice or demand must be given, and must
be alleged and proved in order to maintain an action for the call.
SEC. 3745. Notice. Compliance with requirements-From what
has preceded it is clear that where any particular form or kind of
notice is required, such form or kind must be given-the
requirement must be complied with. Thus, where the charter
expressly required notice to be given in certain newspapers for a
certain number of days, the corporation must show compliance
with the conditions before recovery on the call. An action is
ordinarily made effective by notice thereof to the subscribers, in

accordance with the by-laws or general regulations of the

corporation in that regard. So, where there are statutory or other
regulations as to the form and sufficiency of the notice, these must
be followed. Thus, where such a notice was required to be signed
by the directors, a notice with the names of the directors signed
by a clerk, was held insufficient. These cases and others proceed
on the theory that where the manner of giving notice is prescribed
by law every condition precedent must be strictly and literally
complied with. (Thompson on Corporations, Vol. 5, 3rd ed.)
This view is shared by Justice Fisher. In his book "The Philippine
Law on Stock Corporations" he says: "Not only must personal
notice be given in one of these manners, but the notice must also
be published once a week, for four consecutive weeks, in some
newspaper." (p. 110.).
We find the citation of authorities made by the plaintiff and
appellant inapplicable. In the case of Velasco vs. Poizat (37 Phil.
805), the corporation involved was insolvent, in which case all
unpaid stock subscriptions become payable on demand and are
immediately recoverable in an action instituted by the assignee.
Said the court in that case:
. . . . it is now quite well settled that when the corporation
becomes insolvent, with proceedings instituted by creditors to
wind up and distribute its assets, no call or assessment is
necessary before the institution of suits to collect unpaid balance
on subscription.
But when the corporation is a solvent concern, the rule is:
It is again insisted that plaintiffs cannot recover because the suit
was not proceeded by a call or assessment against the defendant
as a subscriber, and that until this is done no right of action
accrues. In a suit by a solvent going corporation to collect a
subscription, and in certain suits provided by statute this would be
true . . . (Id.)
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
effect the release, there must be unanimous consent of the
stockholders of the corporation. We quote some authorities:
Subject to certain exceptions, considered in subdivision (3) of this
section, the general rule is that a valid and binding subscription
for stock of a corporation cannot be cancelled so as to release the
subscriber from liability thereon without the consent of all the
stockholders or subscribers. Furthermore, a subscription cannot
be cancelled by the company, even under a secret or collateral
agreement for cancellation made with the subscriber at the time

of the subscription, as against persons who subsequently

subscribed or purchased without notice of such agreement. (18
C.J.S. 874).
(3) Exceptions.
In particular circumstances, as where it is given pursuant to a
bona fide compromise, or to set off a debt due from the
corporation, a release, supported by consideration, will be
effectual as against dissenting stockholders and subsequent and
existing creditors. A release which might originally have been held
invalid may be sustained after a considerable lapse of time. (18
C.J.S. 874).
In the present case, the release claimed by defendant and
appellant does not fall under the exception above referred to,
because it was not given pursuant to a bona fide compromise, or
to set off a debt due from the corporation, and there was no
consideration for it.
Another authority:
SEC. 850. Unanimous consent of stockholders necessary to
release subscriber. It may be asserted as the first rule under
this proposition that, after a valid subscription to the capital stock
of a corporation has been made and accepted, there can be no
cancellation or release from the obligation without the consent of
the corporation and all the stockholders; . . . . (2 Thompson on
Corporation, p. 186).
He states the reason for the rule as follows:
SEC. 855. Right to withdraw as against subscribers. A contract
of subscription is, at least in the sense which creates as estoppel,
a contract among the several subscribers. For this reason no one
of the subscribers can withdraw from the contract without the
consent of all the others, and thereby diminish, without the
universal consent, the common fund in which all have acquired an
interest. . . . (2 Thompson on Corporations, p. 194.).
As already found by the trial court, the release attempted in
Resolution No. 17 of 1946 was not valid for lack of a unanimous
vote. If found that at least seven stockholders were absent from
the meeting when said resolution was approved.
Defendant and appellant, however, contends that after dismissing
the complaint for being premature, there was no necessity or
reason for the trial court to go further and say that defendant was
not validly released from the payment for his unpaid subscription.
It must be borne in mind, however, that this was one of the
principal issues involved in the case and the trial court was called
upon to pass upon it, because unless so passed upon and determined, it might decisively affect the case on appeal. Supposing

that on appeal the appellate court decides that the call was valid,
then it would be important to know whether or not in spite of the
validity of the call, defendant was nevertheless not liable because
he had been validly released by a resolution of the corporation. If
that question was not decided by the trial court, and naturally was
not touched upon in the appeal, then the appellate court would
have no occasion to pass upon it, and it might be necessary to
bring another action to determine the point, which means
multiplicity of suits. Moreover, the authority given to the courts to
render judgments for declaratory relief in order to determine the
rights or duties of parties over a certain transaction or under a
certain written instrument, or to remove the uncertainty or
controversy over the same (Rule 66 of the Rules of Court),
justified the trial court in passing upon this question of release.
As regards the compensation of President claimed by defendant
and appellant, it is clear that he is not entitled to the same. The
by-laws of the company are silent as to the salary of the President.
And, while resolutions of the incorporators and stockholders
(Exhibits G-1 and I-1) provide salaries for the general manager,
secretary-treasurer and other employees, there was no provision
for the salary of the President. On the other hand, other
resolutions (Exhibits H-1 and J-3) provide for per diems to be paid
to the President and the directors of each meeting attended, P10
for the President and P8 for each director, which were later
increased to P25 and P15, respectively. This leads to the
conclusions that the President and the board of directors were
expected to serve without salary, and that the per diems paid to
them were sufficient compensation for their services.
Furthermore, for defendant's several years of service as President
and up to the filing of the action against him, he never filed a
claim for salary. He thought of claiming it only when this suit was
brought against him.
In conclusion we hold that under the Corporation Law, notice of
call for payment for unpaid subscribed stock must be published,
except when the corporation is insolvent, in which case, payment
is immediately demandable. We also rule that release from such
payment must be made by all the stockholders.
In view of the foregoing and finding no reversible error in the
decision appealed, the same is hereby affirmed.
No pronouncement as to costs.
Paras, C.J., Pablo, Bengzon, Padilla, Tuason, Reyes, Jugo, Bautista
Angelo and Labrador, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-19893
March 31, 1923
ARNALDO F. DE SILVA, plaintiff-appellant,
vs.
ABOITIZ & COMPANY, INC., defendant-appellee.
Del Rosario and Del Rosario and Andres Jayme for appellant.
Rodriguez and Zacarias for appellee.
ARAULLO, C. J.:
The plaintiff subscribed for 650 shares of stock of the defendant
corporation of the value of P500 each, of which he has paid only
the total value of 200 shares, there remaining 450 shares unpaid,
for which he was indebted to the corporation in the sum of P225,
000, the value thereof. On April 22, 1922, he was notified by the
secretary of the corporation of a resolution adopted by the board
of directors of the corporation on the preceding day, declaring the
unpaid subscriptions to the capital stock of the corporation to
have become due and payable on the following May 31st at the
office thereof, the payment to be made to the treasurer, and
stating that all such shares as may have not been paid then, with
the accrued interest up to that date, will be declared delinquent,
advertised for sale at public auction, and sold on the following
June 16th, for the purpose of paying up the amount of the
subscription and accrued interest, with the expenses of the
advertisement and sale, unless said payment was made before.
The proper advertisement having been published, as announced in
the aforesaid notice, the plaintiff filed a complaint in the Court of
First Instance of Cebu on May 5th of the same year against the
said corporation, wherein, after relating the above-mentioned
facts, he prayed for a judgment in his favor, decreeing that, in
prescribing another method of paying the subscription to the
capital stock different from that provided in article 46 of its bylaws, in declaring the aforesaid 450 shares delinquent, and in
directing the sale thereof, as advertised, the corporation had
exceeded its executive authority, and as a consequence thereof he
asked that a writ of injunction be issued against the said
defendant, enjoining it from taking any further action of whatever
nature in connection with the acts complained of and that it pay
the costs of this suit.
The plaintiff alleged as the grounds of his petition: (1) That,
according to aforesaid article 46 of the by-law of the corporation,

which was inserted in the complaint, all the shares subscribed to

by the incorporation that were not paid for at the time of the
incorporation, shall be paid out of the 70 per cent of the profit
obtained, the same to be distributed among the subscribers, who
shall not receive any dividend until said shares were paid in full;
(2) that in declaring the plaintiff's unpaid subscription to the
capital stock to have become due and payable on May 31st, and in
publishing the aforesaid notice declaring his unpaid shares
delinquent, the defendant corporation has violated the aforesaid
article, which prescribes an operative method of paying for the
shares continuously until their full amortization, thus violating
and disregarding a right of the plaintiff vested under the said bylaws; (3) that the aforesaid acts of the defendant corporation were
in excess of its powers and executive authority and the plaintiff
had no other plain, speedy and adequate remedy in the ordinary
course of law than that prayed for in the said complaint, to
prevent the defendant from taking any further action in
connection with the sale and alienation of the said shares.
A preliminary injunction having been issued against the
defendant, as prayed for by the plaintiff, upon the giving of the
proper bond, and the defendant having been summoned, the latter
filed a demurrer to the complaint on the ground that the facts
alleged therein did not constitute a cause of action, and that even
supposing the plaintiff to have any lawful claim against the
defendant corporation, the special remedy applied for by the
plaintiff was not the most adequate and speedy.
Hearing having been had the court below by an order dated
September 21, 1922, sustained the aforesaid demurrer on the first
ground, giving the plaintiff five days within which to amend his
complaint, but the said period having elapsed without the plaintiff
having amended his complaint, upon motion of the defendant, that
court, by an order dated the 2d of the following month of October,
dismissed the complaint and ordered the dissolution of the
preliminary injunction previously issued, with costs, to which
orders the plaintiff excepted, asking at the same time for the
annulment thereof and a new hearing, which motion was denied
by the lower court. To that ruling the plaintiff also accepted, and
brought the case to this court by the proper bill of exceptions.
Assuming the truth of the facts alleged in the complaint filed
against the herein defendant, as the filling of a demurrer to a
complaint is made on that assumption, the question to be decided
reduces itself to determining whether or not, under the provision
of article 46 of the by-laws of the defendant corporation, the latter
may declare the unpaid shares delinquent, or collect their value

by another method different from that prescribed in the aforecited

article.
Said article reads thus:
ART. 46. The net profit resulting from the annual liquidation shall
be distributed as follows: Ten per cent (10%) for the Board of
Directors and in the manner prescribed in article twenty-six (26)
of these by-laws; ten per cent (10%) for the general manager; ten
per cent (10%) for the reserve fund, and seventy per cent (70%)
for the shareholders in equal parts; Provided, however, That from
this seventy per cent dividend the Board of Directors may deduct
such amount as it may deem fit for the payment of the unpaid
subscription to the capital stock and not pay any dividend to the
holders of the said unpaid shares until they are fully paid;
Provided, further, That when all the shares have been paid in full
as provided in the preceding paragraph, the Board of Directors
may also deduct such amount as it may deem fit for the creation of
an emergency special fund, or extraordinary reserve fund when in
its judgment the same may convenient for the development of the
business of the corporation or for meeting any such contingencies
as may arise from its operation, whenever the distributable
dividend is found, after the foregoing deduction, to be not less
than ten per cent (10%) of the paid up capital stock.
No dividend shall be declared or paid, except when there remains
a net profit after the payment of all the expenses incurred, or
allowances made, by the corporation to carry out the operation of
its business; so that no such dividend may be declared as may
affect the capital of the corporation.
As will be seen from the context of the said article, its first part
specifies the manner in which the net profit from the annual
liquidation should be distributed, fixing a certain per cent for the
board of directors; another for the general manager; another for
the reserve fund, and the remaining 70 per cent to be distributed
in equal parts among the shareholders. But it authorizes or
empowers the board of directors to collect the value of the shares
subscribed to and not fully paid by deducting from the 70 per
cent, distributable in equal parts among the shareholders, such
amount as may be deemed convenient, to be applied on the
payment of the said shares, and not to pay the subscriber until the
same are fully paid up. In no other way can the words "Provided,
however, that from this seventy per cent dividend the board of
directors may deduct such amount as it may deem fit for the
payment, etc." And this is so clear that in that same article the
board of directors is also authorized to create a special emergency
fund or extraordinary reserve fund, when, in its judgment, and in

case all the shares subscribed to have been fully paid, the same is
convenient for the development of the business of the corporation
or for meeting any such contingencies as my arise from its
operation, applying said 70 per cent of the profit on the payment
of the shares that may have not been fully paid, provided that the
distributable dividend remaining after the deduction to be made
for the creation of the said special emergency fund or
extraordinary reserve fund is not less than 10 per cent of the
capital actually paid. So that it is discretionary on the part of the
board of directors to do whatever is provided in the said article
relative to the application of a part of the 70 per cent of the profit
distributable in equal parts on the payment of the shares
subscribed to and not fully paid, and to the creation of a special
emergency fund or extraordinary reserve fund; and the fact itself
that said special fund may not be created when the dividend
appearing to be distributable, after deducting from the said 70 per
cent the amount to be applied on the payment of the unpaid
subscription, is less than 10 per cent of the capital actually paid,
shows that it is the board of directors and not the delinquent
subscriber that may and must judge and decide whether or not
such value must be paid out of a part of the 70 per cent of the
profit distributable in equal parts among the shareholders, as
provided in the first part of the said article. It lies therefore,
within the discretion of the board of directors to make use of such
authority.
If the board of directors does not wish to make, or does not make,
use of said authority it has two other remedies for accomplishing
the same purpose. As was said by this court in the case of Velasco
vs. Poizat (37 Phil., 802):
The first and most special remedy given by the statute consists in
permitting the corporation to put the unpaid stock for sale and
dispose of it for the account of the delinquent subscriber. In this
case the provisions of sections 38 to 48, inclusive, of the
Corporation Law are applicable and must be followed. The other
remedy is by action in court concerning which we find in section
49 the following provision:
"Nothing in this Act prevent the directors from collecting, by
action in any court of proper jurisdiction, the amount due on any
unpaid subscription, together with accrued interest and costs and
expenses incurred."
In the instant case the board of directors of the defendant
corporation elected to avail itself of the first of said two remedies,
and, complying strictly with the provisions of sections 37 to 49,

inclusive, of the aforesaid Corporation Law, which is binding upon

it and its stockholders. it being an artificial entity created by
virtue of that same law (sec. 2), the board of directors made use of
the discretionary power granted to it by that law and declared
that payment of plaintiff's subscription to 450 shares which had
not been paid by him was due, and that said shares were
delinquent, and performed all the other acts subsequent to said
declaration that are mentioned in the complaint, as it did not
deem it advantageous to the corporation to apply on the payment
of said shares, as was authorized by the by-law, a part of the profit
that was, or might have been realized, and was distributable
among the stockholders in equal parts, as to the existence of
which profit no allegation is made in the complaint, or to enforce
payment of such shares by bringing in court the proper action
against the debtor or delinquent stockholders. It is, however,
alleged by the appellant that the by-law of the corporation being
of the nature of a contract between it and its stockholders or
members, and article 46 of the by-laws of the said corporation
providing an operative method for the payment of stock
subscriptions continuously until the full amortization thereof,
application cannot be made in the present case of the provisions
above cited of the Corporation Law for the purpose contemplated
by the defendant, as the provision of said article must prevail
against that law.
Admitting that the provision of article 46 of the said by-laws
maybe regarded as a contract between the defendant corporation
and its stockholders , yet as it is only to the board of directors of
the corporation that said articles gives the authority or right to
apply on the payment of unpaid subscriptions such amount of the
70 per cent of the profit distributable among the shareholders in
equal parts as may be deemed fit, it cannot be maintained that the
said article has prescribe an operative method for the payment of
said subscription continuously until their full amortization, or,
what would be the same thing, that said article has prescribe that
sole and exclusive method for that purpose, for, in the first place,
the adoption of that method for the purpose of collecting the value
of subscriptions due and unpaid lies, according to said article,
within the discretion of the board of directions, that is, it is
subject to this condition, and this can in no way be reconciled with
the idea of method, which implies something fixed as a rule or
permanent standard, and not variable at the will of somebody and
according to the circumstances; and, in the second place, in
connection with the provision of the said article relative to the
aforesaid discretionary power of the board of directors to adopt

that method, there is also the discretionary power granted the

same board of directors to avail itself, for the same purpose, to
either of the two remedies prescribed in sections 38 to 49,
inclusive, of the aforecited Corporation Law.
In the instant case, the defendant corporation, through its board
of directors, made use of its discretionary power, taking
advantage of the first of the two remedies provided by the
aforesaid law. On the other hand, the plaintiff has no right
whatsoever under the provision of the above cited article 46 of the
said by-laws to prevent the board of directors from following, for
that purpose, any other method than that mentioned in the said
article, for the very reason that the same does not give the
stockholders any right in connection with the determination of the
question whether or not there should be deducted from the 70 per
cent of the profit distributable among the stockholders such
amount as may be deemed fit for the payment of subscriptions due
and unpaid. Therefore, it is evident that the defendant corporation
has not violated, nor disregarded any right of the plaintiff
recognized by the said by-laws, nor exceeded its authority in the
discharge of its executive functions, nor abused its discretion
when it performed the acts mentioned in the complaint as grounds
thereof, and, consequently, the facts therein alleged do not
constitute a cause of action.
For the foregoing, the orders appealed from are affirmed, with the
costs of both instances against the appellant. So ordered.
Street, Malcolm, Avancea, Ostrand, Johns, and Romualdez, JJ.,
concur.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-27872
February 25, 1928
THE NATIONAL EXCHANGE CO., INC., plaintiff-appellee,
vs.
I. B. DEXTER, defendant-appellant.
Ross, Lawrence & Selph and Antonio T. Carrascoso, Jr., for
appellant.
Lucio Javillonar for appellee.
STREET, J.:
This action was instituted in the Court of First Instance of Manila
by the National Exchange Co., Inc., as assignee (through the
Philippine National Bank) of C. S. Salmon & Co., for the purpose

of recovering from I. B. Dexter a balance of P15, 000, the par

value of one hundred fifty shares of the capital stock of C. S.
Salmon & co., with interest and costs. Upon hearing the cause the
trial judge gave judgment for the plaintiff to recover the amount
claimed, with lawful interest from January 1, 1920, and with costs.
From this judgment the defendant appealed.
It appears that on August 10, 1919, the defendant, I. B. Dexter,
signed a written subscription to the corporate stock of C. S.
Salmon & Co. in the following form:
I hereby subscribe for three hundred (300) shares of the capital
stock of C. S. Salmon and Company, payable from the first
dividends declared on any and all shares of said company owned
by me at the time dividends are declared, until the full amount of
this subscription has been paid.
Upon this subscription the sum of P15, 000 was paid in January,
1920, from a dividend declared at about that time by the company,
supplemented by money supplied personally by the subscriber.
Beyond this nothing has been paid on the shares and no further
dividend has been declared by the corporation. There is therefore
a balance of P15, 000 still paid upon the subscription.
As the case reaches this court the sole question here presented
for consideration is one of law, namely, whether the stipulation
contained in the subscription to the effect that the subscription is
payable from the first dividends declared on the shares has the
effect of relieving the subscriber from personal liability in an
action to recover the value of the shares. The trial court held, in
effect, that the stipulation mentioned is invalid.
In discussing this problem we accept as sound law the proposition
propounded by the appellant's attorneys and taken from
Fletcher's Cyclopedia as follows:
In the absence of restrictions in its character, a corporation, under
its general power to contract, has the power to accept
subscriptions upon any special terms not prohibited by positive
law or contrary to public policy, provided they are not such as to
require the performance of acts which are beyond the powers
conferred upon the corporation by its character, and provided
they do not constitute a fraud upon other subscribers or
stockholders, or upon persons who are or may become creditors
of the corporation. (Fletcher, Cyc. Corp., sec. 602, p. 1314.)
Under the American regime corporate franchises in the Philippine
Islands are granted subject to the provisions of section 74 of the
Organic Act of July 1, 1902, which, in the part here material, is
substantially reproduced in section 28 of the Autonomy Act of
August 29, 1916. In the Organic Act it is among other things,

declared: "That all franchises, privileges, or concessions granted

under this Act shall forbid the issue of stock or bonds except in
exchange for actual cash or for property at a fair valuation equal
to the par value of the stock or bonds so issued; . . . ." (Act of
Congress of July 1, 1902, sec. 74.)
Pursuant to this provision we find that the Philippine Commission
inserted in the Corporation Law, enacted March 1, 1906, the
following provision: ". . . no corporation shall issue stock or bonds
except in exchange for actual cash paid to the corporation or for
property actually received by it at a fair valuation equal to the par
value of the stock or bonds so issued." (Act No. 1459, sec. 16 as
amended by Act No. 2792, sec. 2.)
The prohibition against the issuance of shares by corporations
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
statutory law of the Philippine; Islands; and it would seem that our
lawmakers could scarcely have chosen language more directly
suited to secure absolute equality stockholders with respect to
their liability upon stock subscriptions. Now, if it is unlawful to
issue stock otherwise than as stated it is self-evident that a
stipulation such as that now under consideration, in a stock
subscription, is illegal, for this stipulation obligates the subscriber
to pay nothing for the shares except as dividends may accrue
upon the stock. In the contingency that dividends are not paid,
there is no liability at all. This is a discrimination in favor of the
particular subscriber, and hence the stipulation is unlawful.
The general doctrine of corporation law is in conformity with this
conclusion, as may be seen from the following proposition taken
from the standard encyclopedia treatise, Corpus Juris:
Nor has a corporation the power to receive a subscription upon
such terms as will operate as a fraud upon the other subscribers
or stockholders by subjecting the particular subscriber to lighter
burdens, or by giving him greater rights and privileges, or as a
fraud upon creditors of the corporation by withdrawing or
decreasing the capital. It is well settled therefore, as a general
rule, that an agreement between a corporation and a particular
subscriber, by which the subscription is not to be payable, or is to
be payable in part only, whether it is for the purpose of pretending
that the stock is really greater than it is, or for the purpose of
preventing the predominance of certain stockholders, or for any
other purpose, is illegal and void as in fraud of other stockholders
or creditors, or both, and cannot be either enforced by the
subscriber or interposed as a defense in an action on the
subscription. (14 C. J., p. 570.)

The rule thus stated is supported by a long line of decisions from

numerous courts, with little or no diversity of opinion. As stated in
the headnote to the opinion of the Supreme Court of United States
in the case of Putnan vs. New Albany, etc. Railroad Co. as
reported in 21 Law. ed., 361, the rule is that "Conditions attached
to subscriptions, which, if valid, lessen the capital of the company,
are a fraud upon the grantor of the franchise, and upon those who
may become creditors of the corporation, and upon unconditional
stockholders."
In the appellant's brief attention is called to the third headnote to
Bank vs. Cook (125 Iowa, 111), where it is stated that a collateral
agreement with a subscriber to stock that his subscription shall
not be collectible except from dividends on the stock, is valid as
between the parties and a complete defense to a suit on notes
given for the amount of the subscription. A careful perusal of the
decision will show that the rule thus broadly stated in the
headnote is not justified by anything in the reported decision; for
what the court really held was that the making of such promise by
the agent of the corporation who sold the stock is admissible in
evidence in support of the defense of fraud and failure of
consideration. Moreover, even if the decision had been to the
effect supposed, the rule announced in the headnote could have
no weight in a jurisdiction like this where there is a statutory
provision prohibiting such agreements.
We may add that the law in force in this jurisdiction makes no
distinction, in respect to the liability of the subscriber, between
shares subscribed before incorporation is effected and shares
subscribed thereafter. All like are bound to pay full value in cash
or its equivalent, and any attempt to discriminate in favor of one
subscriber by relieving him of this liability wholly or in part is
forbidden. In what is here said we have reference of course
primarily to subscriptions to shares that have not been previously
issued. It is conceivable that the power of the corporation to make
terms with the purchaser would be greater where the shares
which are the subject of the transaction have been acquired by
the corporation in course of commerce, after they have already
been once issued. But the shares with which are here concerned
are not of this sort.
The judgment appealed from must be affirmed, and it is so
ordered, with costs against the appellant.
Malcolm, Ostrand, Johns, Romualdez and Villa-Real, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-39861
March 21, 1934
BONIFACIO LUMANLAN, plaintiff-appellee,
vs.
JACINTO R. CURA, ET AL., defendants.
DIZON & CO., INC., ETC., appellant.
Leoncio M. Aranda and Gregorio M. Baaga for appellant.
Lagman and Santos for appellee.
GODDARD, J.:.
This is an appeal from a decision of the Court of First Instance of
Tarlac, the dispositive part of which reads as follows:
Por las consideraciones expuestas, el Juzgado falla este asunto
condenando a Dizon y Cia., Inc., a acreditar en sus libros como
pago de las obligaciones de Bonifacio Lumanlan la suma de P11,
840, ordenando a la misma entidad que inmediatamente expida
los certificados de accion equivalente a la mencionada suma;
declarando perpetuo y absoluto el interdicto prohibitorio expedido
contra los demandados; condenando a la Dizon y Cia,. Inc., al
pago de la suma de P2, 000 a favor del demandante, y se condena
a los demandados al pago de las costas del juicio. En cuanto a los
daos y perjuicios reclamados por el demandante, no habiendo
este probado los mismos, el Juzgado no puede accederlos.
The appellant, Dizon & co., Inc., assigns twenty-three errors as
having been committed by the trial court.
The appellant is a corporation duly organized under the laws of
the Philippine Islands with its central office in the City of Manila.
The plaintiff-appellee Bonifacio Lumanlan, on July 31, 1922,
subscribed for 300 shares of stock of said corporation at a par
value of P50 or a total of P15, 000. Julio Valenzuela, Pedro Santos
and Francisco Escoto, creditors of this corporation, filed suit
against it in the Court of First Instance of Manila, case No. 37007,
praying that a receiver be appointed, as it appeared that the
corporation at that time had no assets except credits against those
who had subscribed for shares of stock. The court named Tayag as
receiver for the purpose of collecting, said subscriptions. As
Bonifacio Lumanlan had only paid P1, 500 of the P15, 000, par
value of the stock for which he subscribed, the receiver on August
30, 1930, filed a suit against him in the Court of First Instance of
Manila, civil case No. 37492, for the collection of P15, 109, P13,
500 of which was the amount he owed for unpaid stock and P1,

609 for loans and advances by the corporation to Lumanlan. In

that case Lumanlan was sentenced to pay the corporation the
above-mentioned sum of P15, 109 with legal interest thereon from
August 30, 1930, and costs. Lumanlan appealed from this
decision. Pending this appeal, with the permission of the court,
the creditors, some of the directors and the majority of the
stockholders held several meetings in which it was agreed in
substance that subscribers for the capital stock who were in
default should pay the creditors; Lumanlan was designated to pay
the debt of the corporation to Julio Valenzuela, one of the
petitioners in case No. 37007; at that time the corporation owed
Valenzuela the sum of P8,000 plus interest thereon at the rate of
12 per cent per annum from March 17, 1928. Lumanlan agreed to
assume this obligation and in turn the corporation agreed that if
Lumanlan would dismiss his appeal in case No. 37492 the
corporation would collect only 50 per cent of the amount
subscribed by him for stock, provided that in case the 50 percent
was insufficient to pay Valenzuela he should pay an additional
amount which should not exceed the amount of the judgment
against him in that case. In view of this agreement Lumanlan
withdrew his appeal and paid Valenzuela the sum of P11, 840
including interest and thereby was subrogated in place of
Valenzuela. The petitioning creditors having been paid the
amounts owed to them by the corporation asked that the receiver
be dismissed and the court granted this. Disregarding this
agreement and notwithstanding the payment made by Lumanlan
to Valenzuela, the corporation on May 5, 1932, asked for the
execution of the sentence in case No. 37492 and by virtue of an
order of execution the provincial sheriff levied upon two parcels of
land belonging to Lumanlan described in certificate of title No.
901 of the Province of Tarlac. Lumanlan brought this case to
collect from Dizon & Co., Inc., and to prevent the sheriff from
selling the two parcels of land. Pending the result of this case the
sheriff was enjoined from proceeding with the sale. In the
promissory note given by the corporation to Valenzuela the former
obligated itself to pay Valenzuela the sum of P8,000 with interest
at 12 per cent per annum and, upon failure to pay said sum and
interest when due, 25 per cent of the principal as expenses of
collection and judicial costs in case of litigation.
By virtue of these facts Lumanlan is entitled to a credit against
the judgment in case No. 37492 for P11, 840 and an additional
sum of P2, 000, which is 25 per cent on the principal debt, as he
had to file this suit to collect, or receive credit for the sum which
he had paid Valenzuela for and in place of the corporation, or a

total of P13, 840. This leaves a balance due Dizon & co., Inc., of
P1, 269 on that judgment with interest thereon at 6 per cent per
annum from August 30, 1930.
It appears from the record that during the trial of the case now
under consideration, the Bank of the Philippine Islands appeared
in this case as assignee in the "Involuntary Insolvency of Dizon &
Co., Inc. That bank was appointed assignee in case No. 43065 of
the Court of First Instance of the City of Manila on November 28,
1932. It is therefore evident that there are still other creditors of
Dizon & Co., Inc. This being the case that corporation has a right
to collect all unpaid stock subscriptions and any other amounts
which may be due it. It is established doctrine that subscriptions
to the capital of a corporation constitute a fund to which the
creditors have a right to look for satisfaction of their claims and
that the assignee in insolvency can maintain an action upon any
unpaid stock subscription in order to realize assets for the
payment of its debts. (Philippine Trust Co. vs. Rivera, 44 Phil.,
469, 470.)
. . . the Corporation Law clearly recognizes that a stock
subscription is a subsisting liability from the time the subscription
is made, since it requires the subscriber to pay interest quarterly
from that date unless he is relieved from such liability by the bylaws of the corporation. The subscriber is as much bound to pay
the amount of the share subscribed by him as he would be to pay
any other debt, and the right of the company to demand payment
is no less incontestable. (Velasco vs. Poizat, 37 Phil., 802, 805.)
In view of the above conclusions it is not necessary to discuss the
other questions raised by the parties in this case. The judgment of
the trial court is modified in accordance with the above and Dizon
& Co., Inc., is ordered to credit Bonifacio Lumanlan with the sum
of P13, 840 against the judgment for P15, 109, in case No. 37492
of the Court of First Instance of Manila; to issue to Bonifacio
Lumanlan 300 shares of its capital stock upon payment by him of
the sum of P1, 269 with interest thereon at 6 per cent per annum
from August 30, 1930. The preliminary injunction issued in this
case is hereby dissolved for the purpose of enabling Dizon & Co.,
Inc., to ask for a new order of execution in case No. 37492, Court
of First Instance of Manila, for the sum of P1,269 with interest
thereon as stated above. Without pronouncement as to costs.
Malcolm, Villa-Real, Hull, and Imperial, JJ., concur.
Republic of the Philippines
SUPREME COURT

Manila
EN BANC
G.R. No. L-19441
March 27, 1923
FUA CUN (alias Tua Cun), plaintiff-appellee,
vs.
RICARDO SUMMERS, in his capacity as Sheriff ex-oficio of
the
City
of
Manila,
and
the
CHINA
BANKING
CORPORATION, defendants-appellants.
Araneta and Zaragoza for appellants.
Canillas and Cardenas for appellee.
OSTRAND, J.:
It appears from the evidence that on August 26, 1920, one Chua
Soco subscribed for five hundred shares of stock of the defendant
Banking Corporation at a par value of P100 per share, paying the
sum of P25, 000, one-half of the subscription price, in cash, for
which a receipt was issued in the following terms:
This is to certify, That Chua Soco, a subscriber for five hundred
shares of the capital stock of the China Banking Corporation at its
par value of P100 per share, has paid into the Treasury of the
Corporation, on account of said subscription and in accordance
with its terms, the sum of twenty-five thousand pesos (P25,000),
Philippine currency.
Upon receipt of the balance of said subscription in accordance
with the terms of the calls of the Board of Directors, and
surrender of this certificate, duly executed certificates for said
five hundred shares of stock will be issued to the order of the
subscriber.
It is expressly understood that the total number of shares
specified in this receipt is subject to sale by the China Banking
Corporation for the payment of any unpaid subscriptions, should
the subscriber fail to pay the whole or any part of the balance of
his subscription upon 30 days' notice issued therefor by the Board
of Directors.
Witness our official signatures at Manila, P. I., this 25th day of
August, 1920.
(Sgd.) MERVIN WEBSTER
Cashier
(Sgd.) DEE C. CHUAN
President
On May 18, 1921, Chua Soco executed a promissory note in favor
of the plaintiff Fua Cun for the sum of P25, 000 payable in ninety
days and drawing interest at the rate of 1 per cent per month,
securing the note with a chattel mortgage on the shares of stock
subscribed for by Chua Soco, who also endorsed the receipt above

mentioned and delivered it to the mortgagee. The plaintiff

thereupon took the receipt to the manager of the defendant Bank
and informed him of the transaction with Chua Soco, but was told
to await action upon the matter by the Board of Directors.
In the meantime Chua Soco appears to have become indebted to
the China Banking Corporation in the sum of P37,731.68 for
dishonored acceptances of commercial paper and in an action
brought against him to recover this amount, Chua Soco's interest
in the five hundred shares subscribed for was attached and the
receipt seized by the sheriff. The attachment was levied after the
defendant bank had received notice of the facts that the receipt
had been endorsed over to the plaintiff.
Fua Cun thereupon brought the present action maintaining that
by virtue of the payment of the one-half of the subscription price
of five hundred shares Chua Soco in effect became the owner of
two hundred and fifty shares and praying that his, the plaintiff's,
lien on said shares, by virtue of the chattel mortgage, be declared
to hold priority over the claim of the defendant Banking
Corporation; that the defendants be ordered to deliver the receipt
in question to him; and that he be awarded the sum of P5,000 in
damages for wrongful attachment.
The trial court rendered judgment in favor of the plaintiff
declaring that Chua Soco, through the payment of the P25, 000,
acquired the right to two hundred and fifty shares fully paid up,
upon which shares the plaintiff holds a lien superior to that of the
defendant Banking Corporation and ordering that the receipt be
returned to said plaintiff. From this judgment the defendants
appeal.
Though the court below erred in holding that Chua Soco, by
paying one-half of the subscription price of five hundred shares, in
effect became the owner of two hundred and fifty shares, the
judgment appealed from is in the main correct.
The claim of the defendant Banking Corporation upon which it
brought the action in which the writ of attachment was issued,
was for the non-payment of drafts accepted by Chua Soco and had
no direct connection with the shares of stock in question. At
common law a corporation has no lien upon the shares of
stockholders for any indebtedness to the corporation (Jones on
Liens, 3d ed., sec. 375) and our attention has not been called to
any statute creating such lien here. On the contrary, section 120
of the Corporation Act provides that "no bank organized under
this Act shall make any loan or discount on the security of the
shares of its own capital stock, nor be the purchaser or holder of
any such shares, unless such security or purchase shall be

necessary to prevent loss upon a debt previously contracted in

good faith, and stock so purchased or acquired shall, within six
months from the time of its purchase, be sold or disposed of at
public or private sale, or, in default thereof, a receiver may be
appointed to close up the business of the bank in accordance with
law."
Section 35 of the United States National Banking Act of 1864
contains a similar provision and it has been held in various
decisions of the United States Supreme Court that a bank
organized under that Act can have no lien on its own stock for the
indebtedness of the stockholders even when the by-laws provide
that the shares shall be transferable only on the books of the
corporation and that no such transfer shall be made if the holder
of the shares is indebted to the corporation. (Jones on Liens, 3d
ed., sec. 384; First National Bank of South Bend vs. Lanier and
Handy, 11 Wall., 369; Bullard vs. National Eagle Bank, 18 Wall.,
589; First National Bank of Xenia vs. Stewart and McMillan, 107
U.S., 676.) The reasons for this doctrine are obvious; if banking
corporations were given a lien on their own stock for the
indebtedness of the stockholders, the prohibition against granting
loans or discounts upon the security of the stock would become
largely ineffective.
Turning now to the rights of the plaintiff in the stock in question,
it is argued that the interest held by Chua Soco was merely an
equity which could not be made the subject of a chattel mortgage.
Though the courts have uniformly held that chattel mortgages on
shares of stock and other choses in action are valid as between
the parties, there is still much to be said in favor of the
defendants' contention that the chattel mortgage here in question
would not prevail over liens of third parties without notice; an
equity in shares of stock is of such an intangible character that it
is somewhat difficult to see how it can be treated as a chattel and
mortgaged in such a manner that the recording of the mortgage
will furnish constructive notice to third parties. As said by the
court in the case of Spalding vs. Paine's Adm'r. (81 Ky., 416), in
regard to a chattel mortgage of shares of stock:
These certificates of stock are in the pockets of the owner, and go
with him where he may happen to locate, as choses in action, or
evidence of his right, without any means on the part of those with
whom he proposes to deal on the faith of such a security of
ascertaining whether or not this stock is in pledge or mortgaged
to others. He finds the name of the owner on the books of the
company as a subscriber of paid-up stock, amounting to 180
shares, with the certificates in his possession, pays for these

certificates their full value, and has the transfer to him made on
the books of the company, thereby obtaining a perfect title. What
other inquiry is he to make, so as to make his investment certain
and secure? Where is he to look, in order to ascertain whether or
not this stock has been mortgaged? The chief office of the
company may be at one place to-day and at another tomorrow. The
owner may have no fixed or permanent abode, and with his notes
in one pocket and his certificates of stock in the other the one
evidencing the extent of his interest in the stock of the
corporation, the other his right to money owing him by his debtor,
we are asked to say that the mortgage is effectual as to the one
and inoperative as to the other.
But a determination of this question is not essential in the present
case. There can be no doubt that an equity in shares of stock may
be assigned and that the assignment is valid as between the
parties and as to persons to whom notice is brought home. Such
an assignment exists here, though it was made for the purpose of
securing a debt. The endorsement to the plaintiff of the receipt
above mentioned reads:
For value received, I assign all my rights in these shares in favor
of Mr. Tua Cun.
Manila, P. I., May 18, 1921.
(Sgd.) CHUA SOCO
This endorsement was accompanied by the delivery of the receipt
to the plaintiff and further strengthened by the execution of the
chattel mortgage, which mortgage, at least, operated as a
conditional equitable assignment.
As against the rights of the plaintiff the defendant bank had, as we
have seen, no lien unless by virtue of the attachment. But the
attachment was levied after the bank had received notice of the
assignment of Chua Soco's interests to the plaintiff and was
therefore subject to the rights of the latter. It follows that as
against these rights the defendant bank holds no lien whatever.
As we have already stated, the court erred in holding the plaintiff
as the owner of two hundred and fifty shares of stock; "the
plaintiff's rights consist in an equity in five hundred shares and
upon payment of the unpaid portion of the subscription price he
becomes entitled to the issuance of certificate for said five
hundred shares in his favor."
The judgment appealed from is modified accordingly, and in all
other respects it is affirmed, with the costs against the appellants
Banking Corporation. So ordered.
Araullo, C.J., Street, Malcolm, Avancea, Villamor, Johns, and
Romualdez, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-16236
June 30, 1965
IRINEO S. BALTAZAR, plaintiff-appellee,
vs.
LINGAYEN
GULF
ELECTRIC
POWER,
CO.,
INC.,
DOMINADOR C. UNGSON, BRIGIDO G. ESTRADA, MANUEL
L. FERNANDEZ, BENEDICTO C. YUSON and BERNARDO
ACENA, defendants-appellants.
G.R. No. L-16237
June 30, 1965
MARVIN O. ROSE, plaintiff-appellee,
vs.
LINGAYEN GULF ELECTRIC CO., INC., DOMINADOR, C.
UNGSON, BRIGIDO G. ESTRADA, MANTEL L. FERNANDEZ,
BENEDICTO C. YUSON and BERNARDO C. ACENA,
defendants-appellants.
G.R. No. L-16238
June 30, 1965.
IRINEO S. BALTAZAR and MARVIN O. ROSE, plaintiffsappellees,
vs.
BERNARDO ACENA, defendant-appellant.
Primicias and Del Castillo for plaintiffs-appellees.
Manuel L. Fernandez and Brigido G. Estrada for and in their own
behalf as defendants-appellants.
PAREDES, J.:
In Civil Case G.R. No. L-16236 (CFI No. 13211), Irineo S. Baltazar,
filed the complaint against Lingayen Gulf Electric Power Co., Inc.,
Dominador C. Ungson, Brigido G. Estrada, Manuel L. Fernandez,
Benedicto C. Yuson and Bernardo Acena.
In Civil Case G.R. No. L-16237 (CFI No. 13212), Marvin O. Rose
filed the complaint against the same defendants.
In Civil Case G.R. No. L-16238 (CFI No. 13340), Baltazar and Rose
filed their complaint against Bernardo Acena alone.
The Lingayen Gulf Electric Power Co., Inc., hereinafter referred to
as Corporation, was doing business in the Philippines, with
principal offices at Lingayen, Pangasinan, and with an authorized
capital stock of P300.000.00 divided into 3,000 shares of voting
stock at P100.00 par value, per share. Plaintiffs Baltazar and Rose
were among the incorporators, having subscribed to 600 and 400

shares of the capital stock, or a total par value of P60, 000.00 and
P40.000.00, respectively. It is alleged that it has always been the
practice and procedure of the Corporation to issue certificates of
stock to its individual subscribers for unpaid shares of stock. Of
the 600 shares of capital stock subscribed by Baltazar, he had fully
paid 535 shares of stock, and the Corporation issued to him
several fully paid up and non-assessable certificates of stock,
corresponding to the 535 shares. After having made transfers to
third persons and acquired new ones, Baltazar had to his credit,
on the filing of the complaint 341 shares fully paid and nonassessable. He had also 65 shares with par value of P6, 500.00,
for which no certificate was issued to him. Of the 400 shares of
stock subscribed by Rose, he had 375 shares of fully paid stock,
duly covered by certificates of stock issued to him. The
respondents Ungson, Estrada, Fernandez and Yuson were small
stockholders of the Corporation, all holding a total number of fully
paid-up shares of stock, of not more than 100 shares, with a par
value of P10, 000.00 and the defendant Acena, was likewise an
incorporator and stockholder, holding 600 shares of stock, for
which certificate of stock were issued to him and as such, was the
largest individual stockholder thereof. Defendants Ungson,
Estrada, Fernandez and Yuzon, constituted the majority of the
holdover seven-member Board of Directors of the Corporation, in
1955, two (2) of said defendants having been elected as members
of the Board in the annual stockholders' meeting held in May
1954, largely on the vote of their co-defendant Acena, while the
other two (2) were elected mainly on the vote of the plaintiffs and
their group of stockholders. Let the first group be called the
Ungson group and the second, the Baltazar group.
The date of the annual stockholders' meeting of the Corporation
had been fixed, under its by-laws, on the first Tuesday of February
of every year, but for one reason or another, the meeting was to be
held on May 1, 1955, principally for the purpose of electing new
officers and Board of Directors for the calendar year 1955. In
connection with said meeting since January 1, 1955, there was a
realignment effected, and the fight for control of the management
and property of the corporation was close and keen. The total
number of fully paid-up shares held by stockholders of one group,
was almost equal the number of fully paid-up shares held by the
other group.
The Ungson group (specially defendant Acena), which had been in
complete control of the management and property of the
Corporation since January 1, 1955, in order to continue retaining
such control, over the objection oil three majority members of the

Board, in the regular meeting of the Board of Directors, held on

January 30, 1955, passed three (3) resolutions (Exhs. A, B, C).
Resolution No. 2 (Exh. A), declared all watered stocks issued to
Acena, Baltazar, Rose and Jubenville, "of no value and
consequently cancelled from the books of the Corporation.
Resolution No. 3 (Exh. B) resolved that "... all unpaid
subscriptions should bear interest annually from the year of
subscription on the basis of quarterly payment, and any or all
payments already made on said unpaid subscriptions should be
credited to pay interest first, then the capital debt after all
interest is fully paid.
All shares of stock issued to and in favor of any stockholder or
stockholders of the Lingayen Gulf Electric Power Co., Inc., on
account of payments on unpaid subscriptions without the interest
thereon accrued and collectible having been fully paid from the
date of subscription as required by the Corporation Law, shall be
declared of no value and cancelled from its books, and if the
payments already made exceeded the interest accrued and
collectible by virtue of the provision of law and the previous
resolution of its board of directors, the excess should be applied to
the payment of the unpaid subscription. For this purpose, the
accountant of the corporation is directed to make and report the
proper computation of the interest.
Resolution No. 4 (Exh. C) resolved that "any and all shares of
stock of the Lingayen Gulf Electric Power Co., Inc., issued as fully
paid-up to stockholders whose subscription to a number of shares
have been declared delinquent with the accrued interest on the
unpaid thereof per Resolution No. 42, S. 1954, of the Board of
Directors which has been duly published in the "Manila
Chronicle," are hereby incapacitated to utilize or avail of the
voting power until such delinquency with the accrued interest is
fully paid up as indicated in Resolution No. 3, S. 1955.
On the authority of these resolutions, the Ungson group was
threatening and procuring to expel and oust the plaintiffs and
their companion stockholders, for the ultimate purpose of
depriving them of their right to vote in the said annual
stockholders' meeting scheduled for May 1, 1955.
In their complaint, Baltazar and Rose prayed that a writ of
preliminary injunction be issued against the defendants, enjoining
them to desist and refrain from carrying out the objects and
purposes of the three resolutions aforestated, and commanding
them to allow plaintiffs and companions to vote in the
stockholders' meeting, on May 1, 1955, their fully paid up shares
of stocks, as evidenced by stock certificates issued to them and

outstanding on the stock book of the defendant Corporation, on or

before January 30, 1955, to declare said three resolutions illegal
and invalid, and to pay plaintiffs the sum of P10,000.00 each, as
damages. On April 29, 1955, the trial court, after due hearing,
issued Preliminary Injunction, as prayed for.
The defendants, in their answers, allege that during the years that
plaintiffs and their allies were in control of the Corporation, no
serious effort was attempted to retrieve it from its financial
collapse, caused by accumulated indebtedness and by poor and
inefficient management, resulting in losses of big sums of money
from vicious manipulation of funds, nepotism, unconscionable
grant of big salaries and allowances, illegal payments,
unaccounted funds of Caltex business and sales department store,
etc.; that during the time the management was in the hands of
plaintiffs (Rose, as manager); attempts were made to release
themselves from liability of their unpaid subscriptions; that the
three resolutions were merely functional instruments to bolster
the faith in the assets of the defendant Corporation and did not
deprive the plaintiffs of their property without due process of law;
that the issuance of a writ of injunction for the purpose of
arresting the holding of the election of the Board, was beyond the
jurisdiction of the court. They set up counterclaims. They prayed
that the resolutions be declared legal and valid, thus invalidating
the "watered stocks" of plaintiffs, if not paid, and disqualifying the
delinquent subscribers, among whom were the plaintiffs, from
voting totally or partially, their subscriptions; to order plaintiffs to
pay the defendant Corporation first, the interest due and payable
quarterly at 6% per annum from January 11, 1946 to December
31, 1954, on their liability under their delinquent subscriptions,
out of the installment made therein; to pay defendant entity
damages under the counterclaims and expenses for the
enforcement of the collection; and that after complete payment of
the interests and the balance of their unpaid subscriptions, the
defendant Corporation should issue the shares of stock to
plaintiffs for their full subscription. Plaintiffs filed their answer to
defendants'
counterclaims,
with
counterclaims
against
defendants. On August 8, 1955, the lower court issued an order
dismissing plaintiffs' counterclaims against Acena, Ungson and
Fernandez "without prejudice to filing the proper separate actions
therefor by the parties." Consequently, and as heretofore
mentioned, Baltazar and Rose filed Case No. 13340 (supra).
The following tentative amicable settlement, dated September 13,
1958, formulated and entered into by some of the parties and

their respective attorneys, before presiding Judge Jesus P. Morfe,

in the three cases, was submitted:
1. As to the so-called water stocks P30,000.00 each of the holders
of said stock, namely, Irineo Baltazar, Marvin Rose, and Bernardo
Acena, will return to the corporation P3,500 each of said stocks,
thereby retaining P6,500 worth of stocks to be considered as valid
for each under this compromise;
2. With respect to Dr. Bernardo Acena, of the certificates of stock
allegedly representing, his profit, he will return to the corporation
P3,500 of said share of stock and retain P7,500 worth thereof ;
3. With respect to the interest on unpaid balance of subscription it
is agreed that the subscribers with unpaid subscription be given
the opportunity to pay in two installments, the first installment to
cover one-half of the unpaid balance to be paid in three months,
and the second installment will be for the remaining unpaid half
payable in another three months, from the time of the approval of
this agreements, with the understanding that those who comply
with this arrangement will not pay interest on the balance of their
subscription, for the date of incorporation up to the grant of
franchise on February 24, 1948, which shall be deemed as
condoned, and from 1948 they will pay only as interest 3%
compounded annually, it being understood that failure of any
subscriber to pay any of the installment here provided will subject
the stockholders concerned to the provision of the corporation law
of the payment of 6% interest compounded quarterly.
4. All claims and counterclaims other than those covered by the
preceding paragraph of stipulation will be deemed dismissed
without prejudice, in all these three cases;
5. All the resolutions of the Board and the stockholders involved in
these instant cases will be deemed modified in accordance with
this agreement.
On February 20, 1959, the lower court rendered a decision,
approving the agreement and requiring the parties to comply with
the same, and dissolved the writ of preliminary injunction, with
costs. The pertinent portions of the decision are:
In view of the agreement of the parties transcribed above, this
Court is called upon to decide whether or not any of the
agreements of the parties as above transcribed is contrary to law
or public policy. First, as regards pars. 1 and 2, of said agreement,
the legal capacity of the parties to sue and be sued carries with it
the power to enter into an amicable settlement of pending
litigations and to expressly or impliedly make admissions of facts;
and they could, therefore, agree and recognize as fully paid for

and valid the shares of stocks mentioned in said paragraphs of

their agreement, which agreement must be held valid and binding
among the parties, and even as against their persons who have no
proof that said agreement was entered into in fraud of creditors.
The next question for decision is whether or not a corporation may
validly condone interest on unpaid subscriptions to its capital
stock. The fact that our Corporation Law authorizes provisions in
the by-laws of a corporation different from that set out in Sec. 37
of said law, shows that the provision of said law is to interest of
unpaid stock subscriptions is merely directory, so that a
corporation may fix a different interest rate, or condone the
payment of interest altogether if such condonation would, as in
the instant cases, serve as inducement for early payment of stock
subscriptions. The condonation and reduction of interest agreed
upon in par. 3 of the aforequoted agreement is, therefore, valid in
the absence of proof that said agreement was entered into in
fraud of creditors.
In connection with par. 5 of the aforequoted agreement, in
relation to par. 3 thereof, this, Court is of the opinion, and so
holds, that the periods of time allowed for making payments under
par. 3 of said agreement, must be counted from date of receipt of
a copy of this decision by counsel of the parties, this decision
constituting the final approval of said agreement, and as to
stockholders who are not parties to these cases, from date of
notice of the said time extension. The extension of time to pay, as
granted in par. 3 of the repealing previous declaration of
delinquency of the corresponding shares of stock, and all
subscribed shares of stock, except those ordered to be returned as
provided in pars. 1 and 2 of said agreement, will therefore be
entitled to vote until once again declared delinquent after the
expiration of the periods of time set out in par. 3 of said
agreement.
Defendants on March 14, 1959 filed a motion for reconsideration,
alleging that the decision was partly against the spirit and
intention of the parties to the agreement and portions of the
decision, carried "prejudicial eventualities," and asking that the
same be amended in the sense that "the payment of obligations of
delinquent incorporators has been reduced by the agreement as
stated in paragraphs 3 and 5" of said agreement; that delinquent
stocks cannot be voted until fully paid in accordance with the
agreement and that if the plaintiffs in the above entitled cases
could not pay in full their obligations within the periods stated in
the agreement, the resolutions of delinquency would automatically
stand.

On March 18, 1959, plaintiffs, in cases Nos. 13211 and 13212,

filed a petition for immediate execution and for preliminary
injunction and/or mandamus, praying that a writ be issued,
ordering the defendants, as controlling majority of hold-over
board of directors, to hold immediately the long delayed
stockholders' meeting, and to allow the plaintiffs and all the
stockholders, with still unpaid subscriptions, to vote all their
stocks and subscriptions at said stockholders' meeting, as
directed in the decision.
On March 25, 1959, the Court issued an amending decision,
pertinent portions of which are hereunder reproduced
... . After hearing the parties in extensive oral argument, this
Court agrees with the defendants that par. 5 of the compromise
agreement of the parties, dated September 13, 1958,
contemplates a modification and not a repeal of the resolutions of
the Board of Directors and of the Stockholders referred to in said
agreement. The question is, therefore, to what extent has said
resolutions been modified? Considering that the primary intention
of each of said resolutions was to effect an early collection of
unpaid balance of stock subscriptions and interest thereon, and
the moving consideration for a compromise settlement of the
instant cases is likewise the early collection of the obligations of
stockholders of the defendant corporation, the extension of time
to pay, as granted in par. 3 of said agreement, was clearly
intended to cover not only the accrued interest but also the
unpaid stock subscription of the stockholders, for to hold
otherwise would be to defeat the primary purpose of early
collection of said obligations. Considering the same paramount
intention of said resolution, and of the aforesaid compromise
agreement, it likewise follows that the extension of time to pay
and the reduction of interest embodied in the said agreement
must apply to all stockholders similarly situated.
Regarding the right to vote, this Court likewise agrees with the
defends its that the facts considered during the negotiations for
settlement effected by the parties in the Chambers of the
presiding judge do not warrant repeal of the declaration of
delinquency and complete restoration of voting rights until full
payment of the unpaid stock subscriptions and interest within the
time and to the extent mentioned in par. 3 of the aforesaid
compromise agreement. To rule otherwise would be to encourage
non-payment of the balance of stock subscriptions and thus defeat
the paramount intention of the compromise agreement. Stated
differently, this Court now holds that the extension of time to pay,
as granted in par. 3 of the aforesaid compromise agreement, has

the effect of lifting the previous declaration of delinquency

effective as of full payment of the balance of said stock
subscriptions and interest within the periods of time mentioned in
par. 3 of said compromise agreement.
In view of the uncertainty brought about by the motion for
reconsideration and the motion for execution aforementioned, it
would be unjust to count the periods of time mentioned in the
aforesaid compromise agreement from the date of receipt of the
original decision of this Court in these cases. The extension of
time to pay should, therefore, be counted from receipt by counsel
for the parties of a copy of this amending decision, and from
receipt by the other stockholders of notice of said extension of
time; and the injunction in the instant case should be deemed in
force for the duration of said extension of time to pay.
WHEREFORE, the decision of this Court rendered in these cases
on February 20, 1959 is hereby modified in the manner set out
above, maintaining said decision in all other respects.
On April 4, 1959, plaintiffs filed a motion for reconsideration
and/or new trial, praying that the amending decision dated March
25, 1959, be reconsidered and/or further clarified. On July 16,
1959, the trial court reversed its amending decision in an order,
the relevant parts thereof follow:
WHEREFORE, by way of amendment to both the original and
amending decisions of this Court in the instant case, this Court
hereby expressly rules that all shares of the capital stock of the
defendant corporation covered by fully paid capital stock shares
certificates are entitled to vote in all meetings of the stockholders
of this corporation, and Resolutions Nos. 2, 3 and 4 (Exhs. C, C-1
and C-2) of defendant's corporation's Board of Directors are
hereby nullified insofar as they are inconsistent with this ruling.
The extensions of time to pay, referred to in par. 3 of the
settlement agreement of the parties, will start to run from the
date of receipt by counsel for the parties of a copy of this Order,
and from receipt by the other stockholders of notice of said
extension of time.
The injunction granted in the instant case is hereby dissolved, and
the injunction bond filed by the plaintiffs is hereby cancelled and
released.
Defendants on August 14, 1959 perfected their appeal against the
above ruling, on purely questions of law. Plaintiffs-appellees did
not file any brief, manifesting that they were relying on their
arguments contained in their motion for reconsideration, dated
April 4, 1959 filed with the trial court. (pp. 213 to 218, rec. on

appeal) and on the reasons set forth in the trial court's order,
dated July 16, 1959, third decision (pp. 219 to 230 R.A.).
Pending decision, the parties were required to show cause why
the cases should not be dismissed for having become moot or
academic, in view of the fact that the appellees, taking advantage
of the decision of the trial court, "had paid all other delinquencies
and interest thereon," but the appellants manifested that these
cases should be decided on the issues raised, to determine, once
and for all, the voting rights of the other delinquent subscribers,
in the election of the company's Board of Directors which had
been suspended since May 1, 1955, because of the litigation.
The questions posted in the appeal, in view of the above facts
would, therefore, be:
1. If a stockholder, in a stock corporation, subscribes to a certain
number of shares of stock, and he pays only partially, for which he
is issued certificates of stock, is he entitled to vote the latter,
notwithstanding the fact that he has not paid the balance of his
subscription, which has been called for payment or declared
delinquent?
2. If a stockholder subscribes to a certain number of shares of
stock and makes partial payment only and declared delinquent as
to the rest, with interest, should previous payments on account of
the capital, be first applied to interest, thus diminishing the voting
power of the shares of stock already paid? In other words, if the
entire subscribed shares of stock are not paid, will the paid shares
of stock be deprived of the right to vote, until the entire
subscribed shares of stock are fully paid, including interest?
3. Has estoppel or waiver, by virtue of the settlement agreement,
set in?
Defendants-appellants claim that resolution No. 4 (Exh. C-2),
withdrawing or nullifying the voting power of all the aforesaid
shares of stock is valid, notwithstanding the existence of partial
payments, evidenced by certificates duly issued therefor. They
invoke the ruling laid down by the Court in the Fua Cun v.
Summers case (44 Phil, 705, March 27, 1923) pertinent portion of
which states:
In the absence of special agreement to the contrary, a subscriber
for a certain number of shares of stock does not, upon payment of
one-half of the subscription price, become entitled to the issuance
of certificates for one-half of the number of shares subscribed for;
the subscriber's right consists only in equity entitling him to a
certificate for the total number of shares subscribed for by him
upon payment of the remaining portion of the subscription price.

The cited case connotes the principle that a partial payment of a

subscription does not entitle the stockholder to a certificate for
the total number of shares subscribed by him; his right consists
only in equity to a certificate of the total number of shares
subscribed for, upon payment of the remaining portion of the
subscription price. In other words, it is contended, as in the
present case, that if Baltazar subscribed to 600 shares of stock in
a single subscription, and he merely paid for 300 shares, for
which he was given fully paid certificates for 300 shares, he
cannot vote said 300 shares, in any meeting of the Corporation,
until he shall have paid the remaining 300 shares of stock. The
saving clause in the quoted pronouncement, "in the absence of
special agreement to the contrary," reveals that the doctrine is not
mandatory, but merely directory, which is not violative of law, the
rigor of the pronouncement may be relaxed. The plaintiffsappellees seem to sustain an adverse concept, postulating that
once a stockholder has subscribed to a certain number of shares,
although he has made partial payments only, but is issued a
certificate for the paid-up shares of stock, he is entitled to vote the
whole number of shares subscribed by him, paid or not, until the
said unpaid shares shall have been called for payment or declared
delinquent.
The cases at bar do not come under the aegis of the principle
enunciated in the Fua Cun v. Summers case, because it was the
practice and procedure, since the inception of the corporation, to
issue certificates of stock to its individual subscribers for unpaid
shares of stock and gave voting power to shares of stock fully
paid. And even though no agreement existed, the ruling in said
case, does not now reflect the correct view on the matter, for
better than an agreement or practice, there is the law, which
renders the said case of Fua Cun-Summers, obsolescent.
Section 37 of the Corporation Law, as amended by Act No. 3518,
approved on March 1, 1929, six (6) years after the promulgation
of the Fua-Summers case (decided in 1923), provides:
SEC. 37. ... . No certificate of stock shall be issued to a subscriber
as fully paid up until the full par value thereof, or the full
subscription in the case of no par stock, has been paid by him to
the corporation. Subscribed shares not fully paid up may be voted
provided no subscription is unpaid and delinquent.
The law just quoted was originally section 36 of the Corporation
Law of 1906, which reads as follows:
SEC. 36. ... . No certificate of stock shall be issued to a subscriber
as fully paid up until the full par value thereof has been paid by

him to the corporation. Subscribed shares not fully paid up may

be voted provided no subscription is unpaid and delinquent.
As may readily be seen, said Section 37 makes payment of the
"par value" as prerequisite for the issuance of certificates of par
value stocks, and makes payment of the "full subscription" as
prerequisite for the issuance of certificates of no par value stocks.
No such distinction was contained in section 36 of our
Corporation Law of 1906, corresponding to section 37 now. The
present law could have simply provided that no certificate of par
value and no par value stock shall be issued to a subscriber, as
fully paid up, until the full subscription has been paid by him to
the corporation, if full payment of subscription were intended is
the criterion in the issuance of certificates, for both the par value
and no par value stocks. Stated in another way, the present law
requires as a condition before a shareholder can vote his shares,
that his full subscription be paid in the case of no par value stock;
and in case of stock corporation with par value, the stockholder
can vote the shares fully paid by him only, irrespective of the
unpaid delinquent shares. As well-observed by the trial court, a
corporation may now, in the absence of provisions in their by-laws
to the contrary, apply payment made by, subscribers-stockholders,
either as: "(a) full payment for the corresponding number of
shares of stock, the par value of each of which is covered by such
payment; or (b) as payment pro-rata to each and all the entire
number of shares subscribed for" (amended decision). In the cases
at bar, the defendant-corporation had chosen to apply payments
by its stockholders to definite shares of the capital stock of the
corporation and had fully paid capital stock shares certificates for
said payments; its call for payment of unpaid subscription and its
declaration of delinquency for non-payment of said call affecting
only the remaining number of shares of its capital stock for which
no fully paid capital stock shares certificates have been issued,
"and only these have been legally shorn of their voting rights by
said declaration of delinquency" (amended decision).
The third paragraph of the settlement agreement relates to
interest on the unpaid balance of subscription to the capital stock.
The second paragraph of resolution No. 3 (Exh. C-1), unilaterally
declared as of no value and cancelled all capital stock shares
certificates issued as fully paid up, upon payments made by
stockholders, when interests on unpaid subscription from date of
subscription were not previously and/or then and there paid.
Defendants-appellants, invoking Art. 1253 NCC (Art. 1173 of the
Old Civil Code) which provides that "if the debt produces interest,
payment of the principal shall not be deemed to have been made

until the interests have been covered," and relying on an opinion

of the Securities and Exchange Commission, claim that said
unilateral nullification and/or cancellation of previously issued
capital stock shares certificates was valid. This provision of law
only applies in the absence of verbal or written agreement, to the
contrary (8 Manresa, p. 317); it is likewise merely directory, and
not mandatory. (Art. 1252 NCC). In the present case, the
defendant-corporation had applied the payments made by the
stockholders to the full par value of the shares of stock subscribed
by them, instead of the accepted interest, as shown by the capital
stock shares certificate issued for the payments made, and the
stockholders had accepted such certificates issued for such
payments. This being the case, the said application of payments
must be deemed to have been agreed upon by the Corporation
and the stockholders, and the same cannot now be changed
without the consent of the stockholders concerned. The
Corporation Law and the by-laws of the defendant Corporation do
not contain any provision, prohibiting the application of
stockholders' payments to the full par value of a corporation's
capital stock, ahead of the payment of accrued interest for unpaid
subscriptions. It would, therefore, result that a corporation may,
upon request of an interested stockholder, as his option, apply
payment by them to the full par value of shares of capital leaving
its collection later of the accrued interest on unpaid subscriptions,
and that once such option has been exercised and the
corresponding stock certificates have been issued, the corporation
cannot, by a unilateral act, legally nullify and cancel the capital
stock certificates so issued.
It is finally argued by defendants-appellants that the plaintiffsappellees waived, under the agreement heretofore quoted, the
right to enforce the voting power they were claiming to exercise,
and upon the principle of estoppel, they are now prohibited from
insisting on the existence of such power, ending with the
exhortation, that "they should lie upon the bed they helped built,
for a lasting peace in the interest of the corporation." It should,
however, be stated as heretofore exposed, that certain clauses of
the agreement are contrary to law and public policy and would
cause injury to plaintiffs-appellees and other stockholders
similarly situated. Estoppel cannot be predicated on acts which
are prohibited by law or are against public policy (Benguet Cons.
Mining Co. v. Pineda, 52 Off. Gaz. 1961, L-7231, March 28, 1956;
Eugenio v. Perdido L-7083, May 19, 1955; III Rep. of the
Philippines Digest, p. 269-270).

WHEREFORE, the order of the trial court of July 16, 1959, (1)
Expressly ruling "that all shares of the capital stocks of the
defendant corporation covered by fully paid capital stock shares of
certificates are entitled to vote in all meetings of the stockholders
of this corporation and resolutions Nos. 2, 3 and 4 (Exhs. C, C-1
and C-2) of defendant corporation's Board of Directors are hereby
nullified insofar as they are inconsistent with this ruling"; and (2)
Dissolving the injunction granted in the cases and releasing the
injunction bond filed by the plaintiffs-appellees, is correct and the
same should be, as it is hereby affirmed. Costs taxed against the
defendants- appellants.
Bengzon , C.J., Bautista Angelo, Concepcion, Reyes, J.B.L., Dizon,
Regala and Zaldivar, JJ., concur.
Makalintal, J., concurs in the result.
Barrera and Bengzon, J.P., JJ., took no part.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-28120
November 25, 1976
RICARDO A. NAVA, petitioner-appellant.
vs.
PEERS MARKETING CORPORATION, RENATO R. CUSI and
AMPARO CUSI, respondents-appellees.
Rolando M. Medalla, for appellant.
Jose Y. Montalvo, for appellees.
AQUINO, J:
This is a mandamus case, Teofilo Po as an incorporator subscribed
to eighty shares of Peers Marketing Corporation at one hundred
pesos a share or a total par value of eight thousand pesos. Po paid
two thousand pesos or twenty-five percent of the amount of his
subscription. No certificate of stock was issued to him or, for that
matter, to any incorporator, subscriber or stockholder.
On April 2, 1966 Po sold to Ricardo A. Nava for two thousand
pesos twenty of his eighty shares. In the deed of sale Po
represented that he was "the absolute and registered owner of
twenty shares" of Peers Marketing Corporation.
Nava requested the officers of the corporation to register the sale
in the books of the corporation. The request was denied because
Po has not paid fully the amount of his subscription. Nava was
informed that Po was delinquent in the payment of the balance

due on his subscription and that the corporation had a claim on

his entire subscription of eighty shares which included the twenty
shares that had been sold to Nava.
On December 21, 1966 Nava filed this mandamus action in the
Court of First Instance of Negros Occidental, Bacolod City Branch
to compel the corporation and Renato R. Cusi and Amparo Cusi,
its executive vice-president and secretary, respectively, to register
the said twenty shares in Nava's name in the corporation's
transfer book.
The respondents in their answer pleaded the defense that no
shares of stock against which the corporation holds an unpaid
claim are transferable in the books of the corporation. After
hearing, the trial court dismissed the petition. Nava appealed on
the ground that the decision "is contrary to law ". His sole
assignment of error is that the trial court erred in applying the
ruling in Fua Cun vs. Summers and China Banking Corporation,
44 Phil. 705 to justify respondents' refusal in registering the
twenty shares in Nava's name in the books of the corporation.
The rule enunciated in the Fua Cun case is that payment of onehalf of the subscription does not entitle the subscriber to a
certificate of stock for one-half of the number of shares
subscribed.
Appellant Nava contends that the Fua Cun case was decided
under section 36 of the Corporation Law which provides that "no
certificate of stock shall be issued to a subscriber as fully paid up
until the full par value thereof has been paid by him to the
corporation". Section 36 was amended by Act No. 3518. It is now
section 37. Section 37 provides that "no certificate of stock shall
be issued to a subscriber as fully paid up until the full par value
thereof, or the full subscription in case of no par stock, has been
paid by him to the corporation".
The issue is whether the officers of Peers Marketing Corporation
can be compelled by mandamus to enter in its stock and transfer
book the sale made by Po to Nava of the twenty shares forming
part of Po's subscription of eighty shares, with a total par value of
P8,000 and for which Po had paid only P2,000, it being admitted
that the corporation has an unpaid claim of P6,000 as the balance
due on Po's subscription and that the twenty shares are not
covered by any stock certificate.
Apparently, no provision of the by-laws of the corporation covers
that situation. The parties did not bother to submit in evidence the
by-laws nor invoke any of its provisions. The corporation can
include in its by-laws rules, not inconsistent with law, governing

the transfer of its shares of stock (Sec. 137 , Act No. 1459;
Fleischer vs. Botica Nolasco Co., 47 Phil. 583, 589).
We hold that the transfer made by Po to Nava is not the
"alienation, sale, or transfer of stock" that is supposed to be
recorded in the stock and transfer book, as contemplated in
section 52 of the Corporation Law.
As a rule, the shares which may be alienated are those which are
covered by certificates of stock, as shown in the following
provisions of the Corporation Law and as intimated in Hager vs.
Bryan, 19 Phil. 138 (overruling the decision in Hager vs. Bryan, 21
Phil. 523. See 19 Phil. 616, notes, and Hodges vs. Lezama, 14
SCRA 1030).
SEC. 35.
The capital stock of stock corporations shall be
divided into shares for which certificates signed by the president
or the vice-president, countersigned by the secretary or clerk and
sealed with the seal of the corporation, shall be issued in
accordance with the by-laws. Shares of stock so issued are
personal property and may be transferred by delivery of the
certificate indorsed by the owner or his attorney in fact or other
person legally authorized to make the transfer. No transfer,
however, shall be valid, except as between the, parties, until the
transfer is entered and noted upon the books of the corporation so
as to show the names of the parties to the transaction, the date of
the transfer, the number of the certificate, and the number of
shares transferred.
No share of stock against which the corporation holds any unpaid
claim shall be transferable on the books of the corporation.
SEC. 36.
(re voting trust agreement) ...
The certificates of stock so transferred shall be surrendered and
cancelled, and new certificates therefor issued to such person or
persons, or corporation, as such trustee or trustees, in which new
certificates it shall appear that they are issued pursuant to said
agreement.
(Emphasis supplied).
(In the case of nonstock corporations a membership certificate is
usually issued. Lee E. Won vs. Wack Wack Golf & Country Club,
Inc., 104 Phil. 466; Wack Wack Golf & Country Club, Inc. vs. Won,
L-23851, March 26, 1976, 70 SCRA 165).
As prescribed in section 35, shares of stock may be transferred by
delivery to the transferee of the certificate properly indorsed.
"Title may be vested in the transferee by delivery of the certificate
with a written assignment or indorsement thereof" (18 C.J.S. 928).
There should be compliance with the mode of transfer prescribed
by law (18 C.J.S. 930). The usual practice is for the stockholder to

sign the form on the back of the stock certificate. The certificate
may thereafter be transferred from one person to another. If the
holder of the certificate desires to assume the legal rights of a
shareholder to enable him to vote at corporate elections and to
receive dividends, he fills up the blanks in the form by inserting
his own name as transferee. Then he delivers the certificate to the
secretary of the corporation so that the transfer may be entered in
the corporation's books. The certificate is then surrendered and a
new one issued to the transferee. (Hager vs. Bryan, 19 Phil. 138,
143-4).
That procedure cannot be followed in the instant case because, as
already noted, the twenty shares in question are not covered by
any certificate of stock in Po's name. Moreover, the corporation
has a claim on the said shares for the unpaid balance of Po's
subscription. A stock subscription is a subsisting liability from the
time the subscription is made. The subscriber is as much bound to
pay his subscription as he would be to pay any other debt. The
right of the corporation to demand payment is no less
incontestable. (Velasco vs. Poizat, 37 Phil. 802; Lumanlan vs.
Cura, 59 Phil. 746).
A corporation cannot release an original subscriber from paying
for his shares without a valuable consideration (Philippine
National Bank vs. Bitulok Sawmill, Inc.,
L-24177-85, June 29, 1968, 23 SCRA 1366) or without the
unanimous consent of the stockholders (Lingayen Gulf Electric
Power Co., Inc. vs. Baltazar, 93 Phil 404).
Under the facts of this case, there is no clear legal duty on the
part of the officers of the corporation to register the twenty shares
in Nava's name, hence, there is no cause of action for mandamus.
Nava argues that under section 37 a certificate of stock may be
issued for shares the par value of which have already been paid
for although the entire subscription has not been fully paid. He
contends that Peers Marketing Corporation should issue a
certificate of stock for the twenty shares, notwithstanding that Po
had not paid fully his subscription for the eighty shares, because
section 37 requires full payment for the subscription, as a
condition precedent for the issuance of the certificate of stock,
only in the case of no par stock.
Nava relies on Baltazar v Lingayen Gulf Electric Power Co., Inc.,
L-16236-38, June 30, 1965, 14 SCRA 522, where it was held that
section 37 "requires as a condition before a shareholder can vote
his shares that his full subscription be paid in the case of no par
value stock; and in case of stock corporation with par value, the

stockholder can vote the shares fully paid by him only, irrespective
of the unpaid delinquent shares".
There is no parallelism between this case and the Baltazar case. It
is noteworthy that in the Baltazar case the stockholder, an
incorporator, was the holder of a certificate of stock for the shares
the par value of which had been paid by him. The issue was
whether the said shares had voting rights although the
incorporator had not paid fully the total amount of his
subscription. That is not the issue in this case.
In the Baltazar case, it was held that where a stockholder
subscribed to a certain number of shares with par value and he
made a partial payment and was issued a certificate for the shares
covered by his partial payment, he is entitled to vote the said
shares, although he has not paid the balance of his subscription
and a call or demand had been made for the payment of the par
value of the delinquent shares.
As already stressed, in this case no stock certificate was issued to
Po. Without stock certificate, which is the evidence of ownership
of corporate stock, the assignment of corporate shares is effective
only between the parties to the transaction (Davis vs. Wachter,
140 So. 361).
The delivery of the stock certificate, which represents the shares
to be alienated, is essential for the protection of both the
corporation and its stockholders (Smallwood vs. Moretti, 128 So.
2d 628).
In view of the foregoing considerations, the trial court's judgment
dismissing the petition for mandamus is affirmed. Costs against
the petitioner-appellant.
SO ORDERED.
Fernando (Chairman), Barredo, Antonio and Concepcion, Jr., JJ.,
concur.