BOMAN ENVIRONMENTAL VS CA CASE DIGEST
vs.
HON. COURT OF APPEALS and NILCAR Y. FAJILAN, respondents.
- Respondent Fajilan offered in writing to resign as President and Member of the Board of Directors of petitioner, Boman Environmental Development Corporation (BEDECO), and to sell to the company all his shares, rights, and interests plus the transfer to him of the company's Isuzu pick-up truck which he had been using.
- Fajilan's resignation as president was accepted and new officers were elected. Fajilan's offer to sell his shares back to the corporation was approved, and to assure of the payment, the company executed a promissory note.
However, BEDECO defaulted in paying. Fajilan filed a complaint in the RTC for collection of that balance from BEDECO but was dismissed.
His motion for reconsideration of that order having been denied, Fajilan filed a petition for certiorari in the Intermediate Appellate Court. In its decision, the Appellate Court characterized the case as a suit for collection of a sum of money as Fajilan "was merely suing on the balance of the promissory note" which BEDECO failed and refused to pay in full.
Whether the SEC has jurisdiction over intra-corporate disputes
- YES. This case involves an intra-corporate controversy because the parties are a stockholder and the corporation. Fajilan's suit against the corporation to enforce the latter's promissory note or compel the corporation to pay for his shareholdings is cognizable by the SEC alone which shall determine whether such payment will not constitute a distribution of corporate assets to a stockholder in preference over creditors of the corporation. The SEC has exclusive supervision, control and regulatory jurisdiction to investigate whether the corporation has unrestricted retained earnings to cover the payment for the shares, and whether the purchase is for a legitimate corporate purpose as provided in Sections 41 and 122 of the Corporation Code, which reads as follows:
SEC. 41. Power to acquire own shares.—A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose or purposes, including but not limited to the following cases: Provided, That the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired;
1. To eliminate fractional shares arising out of stock dividends;
2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; and
3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code,
Sec. 12. Corporate liquidation. ...
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Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities.
- These provisions of the Corporation Code should be deemed written into the agreement between the corporation and the stockholders even if there is no express reference to them in the promissory note. The principle is well settled that an existing law enters into and forms part of a valid contract without need for the parties' expressly making reference to it.
- The requirement of unrestricted retained earnings to cover the shares is based on the trust fund doctrine which means that the capital stock, property and other assets of a corporation are regarded as equity in trust for the payment of corporate creditors. The reason is that creditors of a corporation are preferred over the stockholders in the distribution of corporate assets. There can be no distribution of assets among the stockholders without first paying corporate creditors. Hence, any disposition of corporate funds to the prejudice of creditors is null and void. "Creditors of a corporation have the right to assume that so long as there are outstanding debts and liabilities, the board of directors will not use the assets of the corporation to purchase its own stock.