HIGINIO ANGELES, JOSE DE LARA AND AGUEDO BERNABE, AS STOCKHOLDERS FOR AND IN BEHALF AND FOR THE BENEFIT OF THE CORPORATION, PARANAQUE RICE MILL, INC., AND THE OTHER STOCKHOLDERS…

The plaintiffs and the defendants are all
stockholders and members of the board of directors of the “Paranaque
Rice Mill, Inc.,” a corporation organized for the purpose of operating
a rice mill in the municipality of Paranaque, Province of Rizal. On
September 6, 1932, a complaint entitled “Higinio Angeles, Jose de Lara,
Aguedo Bernabe, as stockholders, for and in behalf of the corporation,
Paranaque Rice Mill, Inc., and other stockholders of said corporation
who may desire to join, plaintiffs, vs. T’eodorico B. Santos,
Estanislao Mayuga, Apolonio Pascual, and Basilisa Rodriguez,
defendants” was filed with the Court of First Instance of Rizal. After
formal allegations relative to age and residence of the parties and the
due incorporation of the Paranaque Rice Mill, Inc., the complaint avers
substantially the following: (a) That the plaintiffs are
stockholders and constitute the minority and the defendants are also
stockholders and constitute the majority of the board of directors of
the Paranaque Rice Mill, Inc.; (b) that at an extraordinary
meeting held on February 21, 1932, the stockholders appointed an
investigation committee of which the plaintiff Jose de Lara was
chairman and the stockholders Dionisio Tomas and Aguedo Bernabe were
members, to investigate and determine the properties, operations, and
losses of the corporation as shown in the auditor’s report
corresponding to the year 1931, but the defendants, particularly
Teodorico B. Santos, who was the president of the corporation, denied
access to the properties, books and records of the corporation which
were in their possession ; (c) that the defendant Teodorico B.
Santos, in violation of the by-laws of the corporation, had taken
possession of the books, vouchers, and corporate records as well as of
the funds and income of the Paranaque Rice Mill, Inc., all of which,
according to the by-laws, should be under the exclusive control and
possession of the secretary-treasurer, the plaintiff Aguedo Bernabe; (d)
that the said Teodorico B. Santos, had appropriated to his own benefit
properties, funds, and income of the corporation in the sum of P10,000;
(e) that Teodorico B. Santos, for the purpose of illegally
controlling the affairs of the corporation, refused to sign and issue
the corresponding certificate of stock for the 600 fully paid-up shares
of the plaintiff, Higinio Angeles, of the total value of P15,000; (f)
that notwithstanding written requests made in conformity with the
by-laws of the corporation of three members of the board of directors
who are holders of more than one-third of the subscribed capital stock
of the corporation, the defendant Teodorico B. Santos as president of
the corporation refused to call a meeting of the board of directors and
of the stockholders; (g) that in violation of the by-laws of
the corporation, the defendants who constitute the majority of the
board of directors refused to hold ordinary monthly meetings of the
board since March, 1932; (h) that Teodorico B. Santos as
president of the corporation, in connivance with his co-defendants, was
disposing of the properties and records of the corporation without
authority from the board of directors or the stockholders of the
corporation and without making any report of his acts to the said board
of directors or to any other officer of the corporation, and that, to
prevent any interference with or examination of his arbitrary, acts, he
arbitrarily suspended plaintiff Jose de Lara from the office of general
manager to which office the latter had been lawfully elected by the
stockholders; and (i) that the corporation had gained about
P4,000 during the first half of the year 1932, but that because of the
illegal and arbitrary acts of the defendants not only the funds but
also the books and records of the corporation are in danger of
disappearing.

The complaint prays: (a) That after the filing of the
bond in an amount to be fixed by the court, Melchor de Lara of
Paranaque, Rizal, be appointed receiver of the properties, funds, and
business of the Paranaque Rice Mill, Inc., as well as the books and
records thereof, with authority to continue the business of the
corporation; (b) that the defendant Teodorico B. Santos be
ordered to render a detailed accounting of the properties, funds and
income of the corporation from the year 1927 to date; (c) that
the said defendant be required to pay to the corporation the amount of
P10,000 and other amounts which may be found due to the said
corporation as damages or for any other cause; (d) that said defendant be ordered to sign the certificate of stock subscribed to and paid by the plaintiff Higinio Angeles; and (e)
that the members of the board of directors of the Paranaque Rice Mill,
Inc., be removed and an extraordinary meeting of the stockholders
called for the purpose of electing a new board of directors.

On the date of the filing of the complaint, September 6, 1932, the court issued an ex parte
order of receivership appointing Melchor de Lara as receiver of the
corporation upon the filing of a bond of P1,000 by the
plaintiffs-appellees. The bond of the receiver was fixed at P4,000.

Upon an urgent motion of the defendants-appellants setting forth
the reasons why Melchor de Lara should not have been appointed
receiver, and upon agreement of the parties, the trial court, by order
of September 13, 1932, appointed Benigno Agco, as receiver, in lieu of
Melchor de Lara. About a month later, or on October 14, 1932, the
court, after considering the memoranda filed by both parties, revoked
its order appointing Agco as receiver.

On July 12, 1933, the defendants-appellants presented their amended
answer to the complaint, containing a general and specific denial, and
alleging as special defense that the defendant Teodorico B. Santos
refused to sign the certificate of stock in favor of the plaintiff
Higinio Angeles for 600 shares valued at P15,000, because the board of
directors decided to give Higinio Angeles only 320 shares of stock
worth P8,000. The answer contains a counterclaim for P5,000 alleged to
have been suffered by the corporation due to the alleged illegal and
malicious procurement by the plaintiffs of an ex parte order
of receivership. . Damages in the amount of P2,000 are also alleged to
have been suffered by the defendants by reason of the failure of
theplaintiffs to present their grievances to the board of directors
before going to court. The amended answer sets forth, furthermore, a
cross-complaint against the plaintiffs, and in behalf of the Paranaque
Rice Mill, Inc., based on the alleged failure of the plaintiff Higinio
Angeles to render a report of his administration of the corporation
from February 14 to June 30, 1928, during which time the corporation is
alleged to have had accrued earnings of approximately P3,000. In both
the counterclaim and crosscomplaint Paranaque Rice Mill, Inc. is joined
as party defendant.

On July 24, 1934, the plaintiffs-appellees renewed their petition for the appointment of a receiver pendente lite
alleging, among other things, that defendant Teodorico B. Santos was
using the funds of the corporation for purely personal ends; that said
Teodorico B. Santos was managing the funds of the corporation in a
manner highly prejudicial to the interests of the corporation and its
stockholders; that said defendant did not render any account of his
management or of the condition of the business of the corporation; that
since 1932 said defendant called no meeting of the board of directors
or of the stockholders thus enabling him to continue holding, without
any election, the position of president and, finally, that of manager;
and that, without the knowledge and consent of the stockholders and of
the board of directors, the said defendant installed a small rice mill
for converting rice husk into “tiqui-tiqui”, the income of which was never turned over or reported to the treasurer of the corporation.

The defendants-appellants objected to the petition for the
appointment of a receiver on the ground, among others, that the court
had no jurisdiction over the Paranaque Rice Mill, Inc., because it had
not been included as party defendant in this case and that, therefore,
the court could not properly appoint a receiver of the corporation pendente lite.

After hearing both parties, the trial court, by order of October
31, 1934, appointed Emilio Figueroa, as receiver of the corporation,
after giving a bond in the amount of P2,000. An urgent motion for the
reconsideration of this order, filed by counsel for the
defendants-appellants on November 3, 1934, was denied by the court on
November 7, 1934.

On November 8, 1934, the trial court, having heard the case on its
merits, rendered a decision, the dispositive part of which is as
follows:

“Por todo lo expuesto, el Juzgado falia este asunto:

“1. Ordenando al demandado Teodorico B. Santos a rendir cuenta
detallada de las propiedades, fondos e ingresos de la corporation
Paranaque Rice Mill, Inc., desde el ano 1931 hasta la fecha;

“2.
Condenando a dicho demandado a pagar a la corporation Paranaque Rice
Mill, Inc., cualesquiera cantidad o cantidades que resultare en deber a
dicha corporacidn; de acuerdo con dicha rendition de cuentas;

“3. Declarando al demandante Higinio M. Angeles con derecho a tener expedido a su nombre 600 acciones por valor par de P15,000.

“4. Destituyendo a los demandados de su cargo como directores de la
corporaci6n hasta la nueva eleccion por los accionistas que se
convocara una vez firme esta sentencia; y

“5. Condenando a los demandados a pagar las costas.”

On November 21, 1934, the defendants-appellants, moved for
reconsideration of the decision and at the same time prayed for the
dismissal of the case, because of defect of parties defendant.

On December 6, 1934, the Paranaque Rice Mill, Inc., thru counsel
for the defendants, entered a special appearance for the sole purpose
of objecting to the order of the court of October 31, 1934, appointing
a receiver, on the ground that the Paranaque Rice Mill, Inc., was not a
party to the proceedings. And on December 8, 1934, the defendants
excepted to the decision of the trial court and moved for a new trial
on the ground that the evidence presented was insufficient to justify
the decision and that said decision was contrary to law. The motions
for reconsideration and new trial and the special appearance were, by
separate orders bearing date of December 19, 1934, denied by the trial
court. The case was finally elevated to this court by bill of
exceptions.

The defendants-appellants submit the following assignment of errors:

“1. The lower court erred in holding that it has
jurisdiction to appoint a receiver of the corporation, Taranaque Rice
Mill, Inc., on October 31, 1934.

“2. The lower court erred
in overruling the motion of the defendants to include the defendant
corporation as party defendant and in holding that it is not a
necessary party.

“3. The lower court erred in not granting a motion for a new trial because there is a defect of party defendant.

“4. The lower court erred in not dismissing the case because a necessary defendant was not made a party in the case.

“5. The lower court erred in ordering the defendant Teodorico B. Santos
to render a detailed accounting of the properties, funds and income of
the corporation Taranaque Rice Mill, Inc., from the year 1931 to this
date.

“6. The lower court erred in condemning the defendant
Teodorico B. Santos to pay the corporation whatever sum or sums which
may be found owing to said corporation, in accordance with the said
accounting to be done by him.

“7. The lower court erred in
ordering the destitution of the defendants from their office as members
of the board of directors of the corporation, until the new election of
the stockholders which shall be held once the decision has become final.

“8. The lower court erred in declaring that Higinio Angeles is entitled
to have in his name 600 shares of stock of the par value of P15,000.

“9. The lower court erred in overruling and denying appellants’ motion
for the reconsideration and the dismissal of the case dated November
21, 1934.

“10. The lower court erred in denying the motion of these appellants for new trial.”

In their discussion of the first, second, third, and fourth
assignments of error, the defendants-appellants vigorously assert that
the’ Paranaque Rice Mill, Inc., is a necessary party in this case, and
that not having been made a party, the trial court was without
jurisdiction to appoint a receiver and should have dismissed the case.

There is ample evidence in the present case to show that the
defendants have been guilty of breach of trust as directors of the
corporation and the lower court so found. The board of directors of a
corporation is a creation of the stockholders and controls and directs
the affairs of the corporation by delegation of the stockholders. But
the board of directors, or the majority thereof, in drawing to
themselves the powers of the corporation, occupies a position of
trusteeship in relation to the minority of the stock in the sense that
the board should exercise good faith, care and diligence in the
administration of the affairs of the corporation and should protect not
only the interests of the majority but also those of the minority of
the stock. Where a majority of the board of directors wastes or
dissipates the funds of the corporation or fraudulently disposes of its
properties, or performs ultra vires acts, the court, in the
exercise of its equity jurisdiction, and upon showing that
intracorporate remedy is unavailing, will entertain a suit filed by the
minority members of the board of directors, for and in behalf of the
corporation, to prevent waste and dissipation and the commission of
illegal acts and otherwise redress the injuries of the minority
stockholders against the wrongdoing of the majority. The action in such
a case is said to be brought derivatively in behalf of the corporation
to protect the rights of the minority stockholders thereof (7 R. C. L.,
pars. 293 and 294, and authorities therein cited; 13 Fletcher, Cyc. of
Corp., pars. 593, et seq., and authorities therein cited).

It is well settled in this jurisdiction that where corporate
directors are guilty of a breach of trust—not of mere error of judgment
or abuse of discretion—and intracorporate remedy is futile or useless,
a stockholder may institute a suit in behalf of himself and other
stockholders and for the benefit of the corporation, to bring about a
redress of the wrong inflicted directly upon the corporation and
indirectly upon the stockholders. An illustration of a suit of this
kind is found in the case of Pascual vs. Del Saz Orozco (19
Phil., 82), decided by this court as early as 1911. In that case, the
Banco Espanol-Filipino suffered heavy losses due to fraudulent
connivance between a depositor and an employee of the bank, which
losses, it was contended, could have been avoided if the president and
directors had been more vigilant in the administration of the affairs
of the bank. The stockholders constituting the minority brought a suit
in behalf of the bank against the directors to recover damages, and
this over the objection of the majority of the stockholders and the
directors. This court held that the suit could properly be maintained.

The contention of the defendants in the case at bar that the
Paranaque Rice Mill, Inc., should have been brought in as a necessary
party and the action maintained in its name and in its behalf directly
states the general rule, but not the exception recognized by this court
in the case of Everett vs. Asia Banking Corporation (49 Phil,
512, 527). In that case, upon invocation of the general” rule by the
appellees there, this court said:

“Invoking the well-known rule that shareholders
cannot ordinarily sue in equity to redress wrongs done to the
corporation, but that the action must be brought by the board of
directors, the appellees argue—and the court below held—that the
corporation Teal & Company is a necessary party plaintiff and that
the plaintiff stockholders, not having made any demand on the board to
bring the action, are not the proper parties plaintiff. But, like most
rules, the rule in question has its exceptions. It is alleged in the
complaint and, consequently, admitted through the demurrer that the
corporation Teal & Company is under the complete control of the
principal defendants in the case, and, in these circumstances it is
6bvious that a demand upon the board of directors to institute action
and prosecute the same effectively would have been useless, and the law
does not require litigants to perform useless acts. (Exchange Bank of
Wewoka vs. Bailey, 29 Okla., 246; Fleming and Hewins vs. Black Warrior Copper Co., 15 Ariz., 1; Wickersham vs. Crittenden, 106 Cal,, 329; Glenn vs. Kittanning Brewing Co., 259 Pa., 510; Hawes vs. Contra Costa Water Company, 104 U. S., 450.)”

The action having been properly brought and by the lower court
entertained it was within its power, upon proper showing, to appoint a
receiver of the corporation pendente lite (sees. 173, 174, et seq.
Code of Civil Procedure): The appointment of a receiver upon
application of the minority stockholders is a power to be exercised
with great caution. But this does not mean that the rights of the
minority stockholders may be entirely disregarded, and where the
necessity has arisen, the appointment of a receiver for a corporation
is a matter resting largely in the sound discretion of the trial court.
Counsel for appellants argue that the appointment of a receiver pendente lite
in the present case has deprived the corporation, Paranaque Rice Mill,
Inc., of its property without due process of law. But it is too plain
to require argument that the receiver was precisely appointed to
preserve the properties of the corporation. The receivership in this
case shall continue until a new board of directors shall have been
elected and constituted in accordance with law and the by-laws of the
corporation.

The first, second, third, and fourth assignments of error are, therefore, overruled.

The appellants contend in their fifth and sixth assignments of
error that the lower court erred in ordering the defendant, Teodorico
B. Santos, to render a detailed accounting of the properties, funds and
income of the corporation, Paranaque Rice Mill, Inc., from the year
1931 and in condemning him to pay “the corporation whatever sum or sums
which may be found owing to said corporation, in accordance with the
said accounting to be done by him.” We note that the lower court in its
decision not only orders the defendant Santos to account for the
properties and funds of the corporation, but it also and at the same
time adjudges him to pay an undetermined amount which is made to depend
upon the result of such accounting. The accounting order was probably
intended by the lower court to be filed with it in this proceeding.
This requirement will delay the final disposition of the case and we
are of the, opinion that this accounting should better be filed with
the new board of directors whose election has been ordered by the lower
court. The decision of the lower court in this respect is therefore
modified so that the defendant Santos shall render a complete
accounting of all the corporate properties and funds that may have come
to his possession during the period mentioned in the judgment of the
lower court to the new board of directors to be elected by the
stockholders.

In the seventh assignment of error, the appellants contend that the
lower court erred in ordering the removal of the defendants from their
offices as members of the board of directors of the corporation. The
Corporation Law, as amended, in sections 29 to 34, provide for the
election and removal of the directors of a corporation. Our Corporation
Law (Act No. 1459, as amended), does not confer expressly upon the
courts the power to remove a director of a corporation. In some
jurisdictions, statutes expressly provide a more or less summary method
for the confirmation of the election and for the a motion of the
directors of a corporation. This is true in New York, New Jersey,
Virginia and other states of the American Union. There are abundant
authorities, however, which hold that if the court has acquired
jurisdiction to appoint a receiver because of the mismanagement of
directors these may thereafter be removed and others appointed in their
place by the court in the exercise of its equity jurisdiction (2
Fletcher, Cyc. of Corp., ftn. sec. 358, pp. 118 and 119). In the
present case, however, the properties arid assets of the corporation
being amply protected by the appointment of a receiver and in view of
the statutory provisions above referred to, we are of the opinion that
the removal of the directors is, under the circumstances, unnecessary
and unwarranted. The seventh assignment of error is, therefore,
sustained.

Under the eighth assignment of error, the appellants argue that the
lower court erred in deciding that the plaintiff Higinio Angeles is
entitled to the issuance in his name of a certificate covering 600
shares of stock of the total par value of P15,000. A review of the
evidence, oral and documentary, relative to the number of shares of
stock to which Higinio Angeles is entitled, shows that Higinio Angeles
brought in P15,000 partly in money and partly in property, for 600
shares of stock. The very articles of incorporation signed by all the
incorporators, among whom are the defendants, show that Higinio Angeles
paid P5,600 on account of his subscription amounting to P10,000, The
amount of P5,600 is the value of Angeles’ cinematograph building in
Bacoor, Cavite, which he transferred to the municipality of Paranaque
where the same was reconstructed for the use of the corporation. The
receipts signed by the Philippine Engineering Company and the testimony
of Higinio Angeles and Aguedo Bernabe (secretary-treasurer of the
corporation) show that Higinio Angeles paid with his own funds the sum
of P2,750 to the Philippine Engineering Co. as part of the purchase
price of the rice mill bought for the corporation. Angeles’ paid a
further sum of P2,397.99 to the Philippine Engineering Company. It also
appears that for the installation of the rice mill, the construction of
a camarin, and the cement paving (cementacion) of
the whole area of two camarines, and for the excavation of a well for
the use of the rice mill, the plaintiff Higinio Angeles paid with his
own funds the amount of P7,431.47. Adding all these sums together we
have a total of P18,179.46. At a meeting of the board of directors on
December 27, 1931, which meeting was convoked by Angeles, it seemed to
have been agreed that Angeles was to be given shares of stock of the
total par value of P15,000. Angeles wanted to have P16,000 worth of
stock to hiscredit for having made the disbursements mentioned above,
but he finally agreed to accept 600 shares worth only P15,000. The
certificate of stock, however, was not issued as disagreement arose
between him and the defendant Santos. We, therefore, find no error in
the decision of the lower court ordering the issuance of a certificate
for 600 shares of stock of the total par value of P15,000 to Higinio
Angeles.

It is unnecessary to consider the ninth and tenth assignments of error.

In view of the foregoing, we hold:

(1) That the action in the present case was properly instituted by
the plaintiffs as stockholders for and in behalf of the corporation
Paranaque Rice Mill, Inc., and other stockholders of the said
corporation;

(2) That the lower court committed no reviewable error in appointing a receiver of the corporation pendente lite;

(3) That the lower court committed no error in ordering an election
of the new board of directors, which election shall be held within
thirty days fromthe date this decision becomes final;

(4) That Teodorico B. Santos shall render an accounting of all the
properties, funds and income of the corporation which may have come
into his possession to the new board of directors;

(5) That the receiver, Emilio Figueroa, shall continue in office
until the election and qualification of the members of the new board of
directors;

(6) That upon the constitution of the new board of directors, the
said receiver shall turn over all the properties of the corporation in
his possession to the corporation, or such person or persons as may be
duly authorized by it; and

(7) That Higinio Angeles, or his successor in interest, is entitled
to 600 shares of stock at the par value of P15,000 and the lower court
committed no error in ordering the issuance of the corresponding
certificate of stock.

On June 10,1937, counsel for the plaintiffs-appellees filed a
motion making it appear of record that Higinio Angeles, one of the
plaintiffs and appellees, died on May 4, 1937 and that one of his
daughters, Maura Angeles y Reyes, had been granted letters of
administration as evidenced by the document attached to the motion as
Exhibit A, and praying that said Maura Angeles y Reyes be substituted
as one of the plaintiffs and appellees in lieu of Higinio Angeles,
deceased. This motion is hereby granted.

Defendants-appellants shall pay the costs in both instances. So ordered.

Avancena, C. J., Villa-Real, Abad Santos, Imperial, Diaz, and Conception, JJ., concur.