RAFAEL J. ROXAS AND THE HEIRS OF EUGENIA V. ROXAS, INC., PETITIONERS, VS. HON. ARTEMIO S. TIPON, IN HIS CAPACITY AS PRESIDING JUDGE OF THE REGIONAL TRIAL COURT OF MANILA, BRANCH…

Roxas versus Tipon

The Case

This is a petition for review on certiorari brought by Rafael Roxas and the Heirs of Eugenia V. Roxas, Inc. against Judge Artemio Tipon, in his capacity as presiding judge of the Regional Trial Court of Manila, and against the private respondents F. U. Juan Corporation and Fernando Juan, minority stockholders of the corporation. The principal action below was a petition for the dissolution of the corporation, filed originally with the Securities and Exchange Commission and later transferred to the Regional Trial Court. In the course of that action the trial court ordered an audit of the corporate books and, when the petitioners refused to cooperate, cited them for indirect contempt. The case matters because it teaches two things a reviewee must hold: first, that a stockholder's right of inspection does not by itself carry an absolute right to compel an independent audit; and second, that a court may itself initiate a charge of indirect contempt without a verified petition, but that such proceedings are extinguished once the order they enforce has become moot.

Procedural History

The private respondents filed an amended petition for dissolution of the corporation before the Securities and Exchange Commission. By virtue of the administrative circular implementing the transfer of jurisdiction from the Commission to the Regional Trial Courts, the case was transferred to the Regional Trial Court of Manila, Branch 46. During the hearing on the application for a temporary restraining order and writ of preliminary injunction, the trial court ordered an audit of the corporate books. The petitioners moved for reconsideration, which was denied. The trial court then designated Financial Catalyst, Inc. as auditor and directed the petitioners to cooperate. The petitioners challenged these orders before the Court of Appeals, which issued a temporary restraining order. When the petitioners still refused to allow the audit, the trial court declared them in contempt and issued a warrant for their arrest; that order too was challenged before the Court of Appeals. The Court of Appeals consolidated the two petitions, found them without merit, dismissed them, and affirmed the trial court's orders. The petitioners' motion for reconsideration was denied, hence this petition for review on certiorari before the Supreme Court. While the petition was pending, the trial court dismissed the principal action for dissolution for lack of jurisdiction, and the petitioners manifested this to the Court.

Facts

The Heirs of Eugenia V. Roxas, Inc. is a registered corporation operating the Hidden Valley Springs Resort. F. U. Juan Corporation and Fernando Juan were stockholders holding four hundred thirty nine thousand six hundred four shares and one share, respectively. In November 1998 they filed an amended petition for dissolution before the Securities and Exchange Commission, alleging that the corporation, through its then president Rafael Roxas, refused to furnish them copies of the minutes of board and stockholder meetings, denied them inspection of the accounts despite demand, failed to comply with reportorial requirements, declared no dividends despite huge profits, and that Roxas had grossly mismanaged the corporation and squandered its funds and assets. The petitioners answered, denying any legal obligation to furnish the documents, asserting compliance with reportorial requirements, explaining that funds were used for rehabilitation and upgrading, and counterclaiming for damages.

After the case was transferred to the Regional Trial Court of Manila, the trial court, during the hearing on the injunctive relief, ordered an audit of the corporate books. It denied reconsideration, reasoning that an audit was the best way to learn the true financial status of the corporation and that the respondents should not fear an audit if they had nothing to hide. The court then designated Financial Catalyst, Inc. as auditor, directed the corporate officers to cooperate, and required the private respondents to deposit fifty thousand pesos to cover expenses, to be taxed as costs against the losing party.

When the petitioners refused to allow the audit, the trial court declared Guillermo Roxas, Ma. Eugenia Vallarta, and Rafael Roxas in contempt and issued a warrant for their arrest. The Court of Appeals enjoined the trial court temporarily, but later dismissed the petitions and affirmed the orders, upholding the stockholders' right of inspection under Section 75 of the Corporation Code, defending the audit as an aid to resolving the dissolution issue, and sustaining the contempt proceedings because the petitioners had been given a chance to be heard. Meanwhile, the trial court eventually dismissed the principal action for dissolution for lack of jurisdiction, holding that only the Securities and Exchange Commission could entertain it.

Issues

• Whether or not the trial court's order directing an audit of the corporate books, and the designation of an independent auditor, was valid.
• Whether or not the petitioners were validly cited for indirect contempt, considering that the charge was initiated by the court itself rather than through a verified petition.

Applicable Provisions

Section 3, paragraph (b), of Rule 71 of the Rules of Court defines the act of indirect contempt involved here:

Section 3. Indirect contempt to be punished after charge and hearing. After a charge in writing has been filed, and an opportunity given to the respondent to comment thereon within such period as may be fixed by the court and to be heard by himself or counsel, a person guilty of any of the following acts may be punished for indirect contempt: x x x x (b) Disobedience of or resistance to a lawful writ, process, order or judgment of a court, x x x.

This is the provision under which the petitioners were cited for refusing to obey the audit order.

Section 8 of Rule 71 governs the warrant of arrest issued against them:

Section 8. Imprisonment until order obeyed. When the contempt consists in the refusal or omission to do an act which is yet in the power of the respondent to perform, he may be imprisoned by order of the court concerned until he performs it.

This is the basis for the trial court's issuance of the warrant of arrest to compel compliance with the audit order.

Ruling

On the first issue, the Court held that the validity of the audit had been rendered moot and academic by the dismissal of the principal action for dissolution. The directive for audit and the designation of the auditor were both incidents to the main action and had lost their bearing. The Court explained that an issue becomes moot and academic when it ceases to present a justiciable controversy, so that a determination would be without practical use and value, and there is no actual substantial relief to which the petitioner would be entitled.

On the second issue, the Court held that the indirect contempt charge was validly initiated. It noted that a charge of indirect contempt may be brought in either of two alternative ways: by a verified petition, if initiated by a party; or by an order or formal charge requiring the respondent to show cause, if made by the court itself against which the contempt was committed. The trial court here initiated the charge, directing the petitioners to show cause why they should not be held in contempt. The Court held that it was of no moment that the private respondents may have filed pleadings urging the court to cite the petitioners, because the court acted on the basis of the petitioners' unjustified refusal to abide by its lawful order. No verified petition is required when proceedings are initiated in this manner, and its absence does not affect the procedure adopted. The warrant of arrest was issued pursuant to Section 8 of Rule 71.

Nevertheless, the Court held that the warrant and the contempt proceedings that preceded it were similarly mooted by the dismissal of the main petition for dissolution. Given the mootness of the issues of inspection and audit, the very orders refused to be obeyed, the citation for contempt and its consequences necessarily became moot.

Doctrine

First, a stockholder's right to inspect corporate books and records does not include an absolute right to compel an independent audit; an order for audit is an incident to the principal action and falls with it. Second, a charge of indirect contempt may be initiated either by a verified petition filed by a party, or by an order or formal charge issued by the court itself requiring the respondent to show cause; where the court initiates the charge, no verified petition is required, and the absence of one does not affect the procedure. Third, when the principal action is dismissed and the order said to have been disobeyed becomes moot, the contempt citation and its consequences, including a warrant of arrest issued under Section 8 of Rule 71, are likewise rendered moot.

Disposition

The petition was declared moot and academic, and the warrant of arrest issued by the Regional Trial Court against Guillermo Roxas, Ma. Eugenia Vallarta, and Rafael Roxas was lifted.

Remember This

Memorize this line: a court may initiate indirect contempt on its own without a verified petition, but once the order it seeks to enforce has become moot, the contempt charge and its warrant of arrest fall with it. Examiners use this case to test the two modes of initiating indirect contempt and the effect of mootness on incidental orders.