LIRAG TEXTILE MILLS, INC., AND BASILIO L. LIRAG, PETITIONERS, VS. SOCIAL SECURITY SYSTEM, AND HON. PACIFICO DE CASTRO, RESPONDENTS.

This is an appeal
by certiorari involving purely questions of law from the decision rendered by respondent judge in Civil Case No.
Q-12275 entitled “Social Security System versus Lirag
Tex­tile Mills, Inc. and Basilio L. Lirag.”

The antecedent facts, as
stipulated by the parties during the trial, are as follows:

“1. That on September 4, 1961, the plaintiff [herein
respondent Social Security System] and the defendants [herein petitioners] Lirag Textile Mills, Inc, and Basilio
Lirag entered into a Purchase Agreement under which
the plaintiff agreed to purchase from the said defendant preferred shares of stock worth ONE MILLION PESOS [P1,000,000.00] subject to the
conditions set forth in such agreement; x x x

“2.  That pursuant to the Purchase Agreement of
September 4, 1961, the plaintiff, on January 31, 1962, paid the defendant Lirag Textile Mills, Inc. the sum of FIVE HUNDRED THOUSAND
PESOS [P500,000.00] for which the said defendant issued to plaintiff 5,000
preferred shares with a par value of one hundred pesos [P100.00] per share as evidenced by Stock Certificate No.
128, x x x

“3. That further in pursuance of the Purchase Agreement of
September 4, 1961, the plaintiff paid to the Lirag
Textile Mills, Inc. the sum of
FIVE HUNDRED THOUSAND PESOS [P500,000.00]
for which the said defendant issued to plaintiff 5,000 preferred shares
with a par value of one
hundred pesos [P100.00] per share as evidenced by Stock Certificate No. 139, x x x

“4.  That in accordance with paragraph 3 of the
Purchase Agreement of September 4, 1961 which provides for the repurchase by
the Lirag Textile Mills, Inc. of the shares of stock at
regular intervals of one year beginning with the 4th year following the date of
issue, Stock Certificates Nos. 128 and 139 were to be repurchased by the Lirag Textile Mills, Inc. thus:

“5.     That to
guarantee the redemption of the
stocks purchased by the plaintiff, the payment dividends, as well as the other
obligations of the Lirag textile Mills, Inc., defendants Basilio L. Lirag signed the
Purchase Agreement of September
4, 1961 not only as president of the defendant corporation, but also as surety
so that should the Lirag Textile Mills, Inc. fail to perform any of its obligations
in the said Purchase Agreement, the surety shall immediately pay to the vendee
the amounts then outstanding pursuant to Condition No. 4, to wit:

‘To guarantee the redemption of the stocks herein purchased, the payment of the dividends, as
well as other obligations of the
VENDOR herein, the SURETY hereby binds himself jointly and severally liable
with the VENDOR so that should the VENDOR fail to perform any of its
obligations hereunder, the SURETY shall immediately pay to the VENDEE the
amounts then outstanding.’

“6.   That defendant
corporation failed to redeem Certificates of Stock Nos. 128 and 139 by payment
of the amounts mentioned
in paragraph 4 above;

“7.   That the Lirag Textile Mills, Inc. has not paid dividends in the amounts
and within the period set forth in paragraph
10 of the complaint;*

“8.     That letters of demands have been sent by the
plaintiff to the defendant to redeem the foregoing stock certificates and pay
the dividends set forth in paragraph 10 of the complaint, but the Lirag Textile
Mills, Inc. has not made such redemption nor made such dividend payments;

“9.     That defendant Basilio L. Lirag likewise
received letters of demand
from the plaintiff requiring him to make good his obligation as surety;

“10.   That notwithstanding
such letters of demand to
the defendant Basilio L. Lirag,
Stock Certificates Nos. 128 and 139 issued to plaintff
are still unredeemed and no dividends have been paid on said stock
certificates;

“11.   That paragraph
5 of the Purchase Agreement provides that should the Lirag
Textile Mills, Inc., fail to effect any of the redemptions stipulated therein,
the entire obligation shall immediately become due and demandable and the Lirag Textile Mills, Inc., shall, furthermore, be liable to
the plaintiff in an amount equivalent to twelve per cent [12%] of the amount
then outstanding as liquidated damages;

“12. That the failure of the Lirag
Textile Mills, Inc. to redeem the foregoing certificates of stock and pay
dividends thereon were due to financial reverses, to wit:

[a]           Unrestrained
smug­gling into the country textiles from the United
States and other countries;

[b]           Unrestricted
entry of supposed remnants
which competed with textiles of domestic
produce to the disadvantage and economic prejudice of the latter;

[c]           Scarcity of
money and the unavailability financing facilities;

[d]           Payment of interest on matured
loans extended to defendant corporation;

[e]           Construction
of the Montalban plant of the defendant corporation financed largely
through reparation benefits;

[f]            Labor
problems occa­sioned by the fact that the defendant company is financial (sic)
unable to improve, in a substantial way, the economic plight of its workers as a result of which two
costly strikes had occurred,
one in 1965 and another in
1968; and

[g]           The
occurrence of a fire which
destroyed more than P1 million worth of raw cotton, paralyzed operations
partially, increased overhead costs and wiped out any expected profits that year;

“13. That it has been the policy of the plaintiff to be
represented in the board of directors of the corporation or entity which has
obtained financial assistance from the System be it in terms of loans,
mortgages or equity
investments.  Thus, pursuant to paragraph
6 of the Purchase Agreement September
4, 1961 which provides as follows:

‘The VENDEE shall be allowed to have a representative in the Board of Directors of the VENDOR
with the right to participate in the discussions and to vote therein;’

“14.   That Messrs. Rene Espina,
Bernardino Abes and Heber Catalan were each issued
one common share of stock as a qualifying share to their election to the Board
of Directors of the Lirag Textile Millis, Inc.;

“15.   That Messrs. Rene Espina, Bernardino Abes and Heber
Catalan, their respective tenure as member of the Board of Directors of the Lirag Textile Mills, Inc. attended the  meetings of the said Board, received per diems
for their attendance therein in the same manner and in the same amount as any other member of the Board of Directors, participated
in the deliberations therein and freely exercised their right to vote in such
meetings.   However, the per diems
received by the SSS representative do not go to the coffers of the System but
personally to the representative in the said board of directors.”^[1]

For failure of Lirag Textile Mills,
Inc. and Basilio L. Lirag
to comply with the terms of the Purchase Agreement, the SSS filed an action for
specific performance and damages before the then Court of First Instance of Rizal, Quezon City, praying that
therein defendants Lirag Textile Mills, Inc. and Basilio L. Lirag be adjudged
liable for [1] the entire obligation of P1 M which became due and demandable
upon defendants’ failure to repurchase the stocks as scheduled; [2] dividends
in the amount of P220,000.00; [3] liquidated damages in an amount equivalent to
twelve percent (12%) of the amount then outstanding; [4] exemplary damages in
the amount of P100,000.00 and
[5] attorney’s fees of P20,000.00.

Lirag Textile Mills, Inc. and Basilio L. Lirag moved for the
dismissal of the complaint, but were denied the relief sought.  Thus, they filed their answer with
counterclaim, denying the existence of any obligation on their part to redeem the preferred stocks, on the ground that the SSS
became and still is a preferred stockholder of the corporation so that
redemption of the shares purchased depended upon the financial ability of said
corporation.  Insofar as defendant Basilio Lirag is concerned, it
was alleged that his liability arises only if the corporation is liable and
does not perform its obligations under the Purchase Agreement.  They further contended that no liability on
their part has arisen because of the financial condition of the corporation
upon which such liability was made to depend, particularly the non-realization
of any profit or earned surplus.  Thus,
the other claims for dividends, liqui­dated damages and exemplary damages
are allegedly without basis.

After entering into the
Stipulation of Facts above-quoted, the parties filed their respective memoranda
and submitted the case for decision.

The lower court, ruling
that the purchase agreement was a debt instrument, decided in favor of SSS and
sentenced Lirag Textile Mills, Inc. and Basilio L. Lirag to pay SSS
jointly and severally P1,000.000.00
plus legal interest until the
said amount is fully paid; P220,000.00 representing the 8% per annum
dividends on the preferred shares plus legal interest up to the time of actual
pay­ment; P146,400.00 as liquidated damages; and P10,000.00 as attorney’s fees. 
The counterclaim of Lirag Textile Mills, Inc.
and Basilio L. Lirag was
dismissed.  Hence, this petition.

Petitioners assign the following errors:

1.      
The trial court erred in
decid­ing that the Purchase Agree­ment is a debt instrument;

2.      
Respondent judge erred in
hold­ing petitioner corporation lia­ble for the payment of the 8% preferred and
cumulative divi­dends on the preferred shares since the purchase agreement
provides that said dividends shall be paid from the net profits and earned surplus
of petitioner corporation and respondent SSS has admitted that due to losses
sustained since 1964, no dividends had been and can be declared by petitioner
corporation;

3.      
Respondent judge erred in
sen­tencing petitioners to pay P146,400.00 in liquidated da­mages;

4.       Respondent judge erred in sen­tencing petitioners to pay P10,000.00
by way of attorney’s fees;

5.       Respondent judge erred in sen­tencing petitioners to pay in­terest
from the time of filing the complaint up to the time of full payment both on
the P1,000,000.00 invested
by res­pondent SSS in petitioner’s corporation and on the P220,000.00 which the
SSS claims as divi­dends due on its investments;

6.       Respondent judge erred in
holding that petitioner Lirag is liable to redeem the
P1,000.000.00 worth of preferred shares purchased by respondent SSS from
petitioner corporation and the 8% cumulative dividend, it appear­ing that Lirag was merely a surety and not an insurer of the
obligation;

7.       Respondent judge erred in
dismissing the counterclaim of petitioners.

The fundamental issue in this case is whe­ther or not the
Purchase Agreement entered into by petitioners and respondent SSS is a debt
instrument.

Petitioners claim that respondent SSS merely became and still is
a preferred stockholder of the petitioner corporation, the redemption of the
shares purchased by said respondent being dependent upon the financial ability
of petitioner corporation.  Petitioner
corporation, thus, has no obligation to redeem the preferred stocks.

On the other hand, respondent SSS claims that the Purchase
Agreement is a debt instrument, imposing upon the petitioners the obligation to
pay the amount owed, and creating as between them the relation of creditor and
debtor, not that of a stock­holder and a corporation.

We uphold the lower court’s finding that the Purchase Agreement
is, indeed, a debt instrument.  Its terms and conditions unmistakably
show that the parties intended
the repurchase of the preferred shares on the respective scheduled dates to be
an absolute obligation which does not de­pend upon the financial ability of
petitioner corporation.  This absolute
obligation on the part of petitioner corporation is made manifest by the fact that a surety was required to
see to it that the obligation is fulfilled in the event of the principal
debtor’s inability to do so.  The uncon­ditional
undertaking of petitioner corporation to redeem the preferred shares at the
specified dates constitutes a debt which is defined “as an obli­gation to pay money at some fixed future time, or at a time which becomes definite and fixed by acts of either party and which they
expressly or impliedly, agree to perform in the contract.^[2]

A stockholder sinks or swims
with the cor­poration and there is no obligation to return the value of his
shares by means of repurchase if the corporation incurs losses and financial
reverses, much less guarantee such repurchase through a surety.

As private respondent rightly contends, if the parties intended
it [SSS] to be merely a stockholder of petitioner corporation, it would have
been sufficient that Preferred Certificates Nos. 128 and 139 were issued in its
name as the preferred certificates contained all the rights of a stockholder as
well as certain obligations on the part of petitioner corporation.  However, the parties did in fact execute the
Purchase Agreement, at the same time that the peti­tioner corporation issued
its preferred stock to the respondent SSS. 
The Purchase Agree­ment serves to define the rights and obliga­tions of
the parties and to establish firmly the liability of petitioners in case of
breach of contract.  The Certificates of
Preferred Stock serve as additional evidence of the agreement between the
parties, though the pre­cise terms and conditions thereof must be read together
with, and regarded as qualified by, the terms and conditions of the Purchase
Agree­ment.

The rights given by the Purchase Agree­ment to respondent SSS are
rights not en­joyed by ordinary stockholders. 
This fact could only lead to the conclusion made by the trial court
that:

“The aforementioned rights specially stipulated for the
benefit of the plaintiff [respondent SSS] suggest eloquently an intention on
the part of the plaintiff [respondent SSS] to facilitate a loan to the
defendant corporation upon the latter’s request.  In order to afford protection to the
plaintiff which otherwise is provided by means collaterals, as the plaintiff
exacts in its grants of loans in its ordinary transactions of this kind, as it
is looked upon more as a lending institution rather than as an investing
agency, the purchase agreement supplied these protective rights which would
otherwise be furnished by collaterals to the loan.  Thus, the membership in the board is to have
a watchdog in the operation of the business of the corporation, so as to insure
against mismanagement which may result in losses not entirety unavoidable since
payment for purposes of redemption as well as the dividends is expressly
stipulated to come from profits and/or surplus. 
Such a right is never exacted by an ordinary stockholder merely
investing in the corporation.”^[3]

Moreover, the Purchase Agreement provided that failure on the
part of petitioner to repur­chase the preferred shares on the scheduled due
dates renders the entire obligation due and demandable, with petitioner in such
eventuality lia­ble to pay 12% of the then outstanding obligation as liquidated
damages.  These features of the Purchase
Agreement, taken collectively, clearly show the intent of the parties to be bound therein as debtor and
creditor, and not as corporation and stockholder.

Petitioners’ contention that it is beyond the power and
competence of petitioner corporation to redeem the preferred shares or pay the
accrued dividends due to financial reverses can not serve as legal justification
for their failure to per­form under the Purchase Agreement.  The Purchase Agreement constitutes the law
between the parties and obligations arising ex contractu must be ful­filled in accordance with
the stipulations.^[4]
Besides, it was precisely this eventuality that was sought to be avoided when
respondent SSS re­quired a surety for the obligation.

Thus, it follows that petitioner Basilio
L. Lirag cannot deny liability for petitioner
corporation’s default.  As surety, Basilio L. Lirag is bound
immediately to pay respondent SSS the amount then outstanding.

“The obligation of a surety differs from that of a guarantor in that the surety insures the debt, whereas the
guarantor merely insures solvency
of the debtor; and the surety undertakes to pay if the principal does not pay, whereas
a guarantor merely binds itself to pay if the principal is unable to pay.^[5]

On the liability of petitioners to pay 8% cumulative dividend, We
agree with the observa­tion of the lower court that the dividends stipulated by
the parties served evidently as interests.^[6]
The amount thereof was fixed at 8% per annum and was not made to depend upon or
to fluctuate with the amount of profits or surplus realized, a clear indication
that the parties intended to give a sure and fixed earnings on the principal
loan.  The fact that the dividends were
supposed to be paid out of net profits and earned surplus, of which there were
none, does not excuse petitioners from the payment thereof, again for the reason
that the undertaking of petitioner Basilio L. Lirag as surety, included the payment of dividends and
other obligatons then outstanding.

The award of the sum of P146,400.00 in liquidated damages
representing 12% of the amount then outstanding is correct, considering that
petitioners in the stipulation of facts admitted having failed to fulfill their
obligations under  the Purchase
Agreement.  The grant of liquidated
damages in the amount stated is expressly provided for in the Purchase
Agreement in case of contractual breach.

The pronouncement of the lower court for the payment of interests
on both the unredeemed shares and unpaid dividends is also in order.  Per stipulation of facts, petitioners did not
deny the fact of non-payment of dividends nor their failure to purchase the
preferred shares.  Since these in­volve
sums of money which are overdue, they are bound to earn legal interest from the
time of demand, in this case, judicial, i.e., the time of filing the action.

Petitioner Basilio L. Lirag is precluded from denying his liability under the
Purchase Agree­ment.  After his firm
representation to “pay imme­diately to the VENDEE the
amounts then outstanding” evidencing his commitment as SURETY, he
is estopped from denying the same.  His signature in the agree­ment carries with
it the official imprimatur as petitioner corporation’s president, in his
personal capacity as majority stockholder, as surety and as solidary
obligor.  The essence of his obligation
as surety is to pay immediately without qualification
whatsoever if petitioner corporation does not pay.  To have another interpretation of petitioner Lirag’s liability as surety would vio­late the integrity of
the Purchase Agreement as well as the clear and unmistakable intent of the
parties to the same.

WHEREFORE, the decision in Civil Case No. Q-12275 entitled
“Social Security System vs. Lirag Textile Mills,
Inc. and Basilio L. Lirag”
is hereby affirmed in toto.  Costs against peti­tioners.

SO ORDERED.

Gutierrez, Jr., Feliciano, Bidin, and Cortes, JJ., concur.

* Defendants Lirag Textile
Mills, Inc. and Basilio Lirag
under Condition 2 of the Purchase Agreement obligated them­selves to pay on the
ONE MILLION PESOS [P1,000,000.00]
Preferred Shares cumulative dividends of Eight Percent [8%] thereon per annum
out of the net profits and earned surplus of the defendant corporation, to wit:

“2.  The shares of stock shall earn pre­ferred cumulative dividend of EIGHT PERCENT [8%] per annum out of the
net profits and earned surplus of the VENDOR before any dividend is declared
upon the common shares of stock of the VENDOR. 
x x x“

Thus, under
paragraph 10 of the complaint, it was alleged that “defendants as of July 3, 1966 had an overdue account
with the plaintiff in the amount of TWO HUNDRED TWENTY THOUSAND PESOS
[P220,000.00] representing dividends on the preferred shares x x x” [p. 28, Rollo].

^[1]
Annex “D”, Petition, pp. 53-57, Rollo

^[2]
Eliot v. Fiscal Court
of Pike County,
36 S.W. (2d) 619, 621, 237 Ky 797, underscoring
supplied

^[3]
pp. 66-67, Rollo

^[4]
Art. 1159, Civil Code

^[5]
Manila Surety and Fidelity Co., v. Batu
Construction Co., 53 O.G. 8836

^[6]
p. 62, Rollo