COMMART (PHILS.), INC., JESUS, CORAZON, ALBERTO, AND BERNARD ALL SURNAMED MAGLUTAC, PETITIONERS, VS. SECURITIES & EXCHANGE COMMISSION AND ALICE MAGLUTAC, RESPONDENTS.

Petitioners, in the instant petition for review on certiorari,
seek the reversal of the en banc
Order of the respondent Securities & Exchange Commission dated September
12, 1988 denying the petition for certiorari (SEC-EB 115-117) filed by
the petitioners herein and ordering that the original complaint (SEC Case No.
2673) be remanded to the Securities Investigation and Clearing Department for
further proceeding, for having been rendered in grave abuse of discretion
amounting to lack of or in excess of jurisdiction and in contravention of existing laws and jurisprudence.

Commart (Phils.), Inc., (Commart for short) is a corporation
organized by two brothers, Jesus and Mariano Maglutac, to engage in the
brokerage business for the importation of fertilizers and other
products/commodities.

Jesus T. Maglutac (Jesus for short) ran the company as president,
chairman of the board, and chairman of the executive committee, while Mariano
T. Maglutac (Mariano for short) served as executive vice-president and
vice-chairman of the executive committee until April 1984.

Sometime in June 1984, the two brothers agreed to go their
separate ways, with Mariano being persuaded to sell to Jesus his shareholdings in Commart amounting to 25% of the
outstanding capital stock.  As part of
the deal, a “Cooperative Agreement” was signed, between Commart
(represented by Jesus) and Mariano, in which, among others, Commart ceded to
Mariano or to an “acceptable entity” he may create, a portion of its
business, with a pledge of mutual cooperation for a certain period so as to
enable Mariano to get his own corporation off the ground, so to speak.

Mariano’s wife, Alice M. Maglutac (private respondent herein) who
has been for years a  stockholder and
director of Commart, did not dispose of
her shareholdings, and thus continued as
such even after the sale of Mariano’s equity.

As broker and indentor, Commart’s principal income came from
commissions paid to it in U.S. dollars by foreign suppliers of fertilizers and
other commodities imported by Planters Products, Inc. and other local
importers.

Shortly after the sale of his equity in Commart to Jesus, Mariano
allegedly discovered that for several years, Jesus and his wife Corazon (who
was herself a director) had been siphoning and diverting to their private bank
accounts in the United States and in Hongkong gargantuan amounts sliced off
from commissions due Commart from some foreign suppliers.  Consequently, on August 22, 1989, spouses
Mariano and Alice Maglutac filed a complaint (SEC Case No. 2673) with the
Securities & Exchange Commission (SEC for short) against Jesus T. 
Maglutac, Victor Cipriano,
Clemente Ramos, Carolina de los Reyes, Corazon Maglutac, Alberto Maglutac and
Bernardo Maglutac (Jesus as Chairman and the rests as members of the Board of
Directors of Commart).

In their Complaint, Mariano and Alice Maglutac alleged, among
others, that “Jesus T. Maglutac, by means of secret arrangements with
foreign suppliers, embodied in and evidenced by, correspondences and other
documents discovered just recently, has
been diverting into his private bank accounts and converting to his own
personal benefit and advantage substantial portions of the commission income of the corporation, to the prejudice of the corporation, its
stockholders and its creditors.  (Petition,
Annex B, p. 2; Rollo, p. 20) Thus, complainants prayed, among others, that
judgment be rendered as follows –

“(a)  Ordering respondents Jesus T. Maglutac,
Corazon Maglutac, and Victor Cipriano to account for and to turn over or
deliver to the Corporation the sum of US$2,539,918.97, or its equivalent in
Philippine currency, with legal interest thereon
from the respective dates of misappropriation or, at the very least, from date
of filing of this suit, together with such other and further sums as may be
proved to have likewise been misappropriated by them;

“(b)  Ordering all the respondents, as members of
the Board of Directors,
to take such remedial steps as would protect the corporation from
further depredation of its funds and
property;

“(c) 
Declaring rescinded or annulled
the disposition of complainant Mariano T. Maglutac’s shares of stock to
respondent Jesus T. Maglutac and ordering the restoration to the former of all
his executive positions with all the rights and privileges thereunto appertaining;
or, in the alternative, ordering that said complainant be paid the equivalent
of one-fourth of the actual market value of
COMMART’s present assets including goodwill, taking into consideration also the
total sums misappropriated by
respondents Jesus T. Maglutac, Corazon Maglutac, and Victor Cipriano which
rightfully belonged to COMMART; and

“(d) 
Ordering respondents to pay
complainants attorney’s fees
equivalent to twenty (20%) per cent of the total amounts awarded and recovered,
plus such further sums as may be proved to have been incurred as and by way of litigation expenses.” (pp. 24-25, Rollo)

In response to the aforementioned Complaint, two Motions to
Dismiss were filed.  The records reveal
that:

“(a)  On October 17, 1984, Albert and Bernard Maglutac
moved to dismiss on the ground that Mariano Maglutac has no capacity to sue and
the complaint states no cause of action against them.

“(b)  On October 20, 1984, Jesus & Corazon
Maglutac likewise moved to dismiss on the ground that respondent Commission
does not have jurisdiction over the
nature of the suit.”

These motions were opposed by complainants Alice and Mariano
Maglutac.  While said incidents were pending, complainants filed an Amended
Complaint whereby Commart was impleaded as party complainant and praying that
Commart be placed under receivership and the properties of Jesus & Corazon
Maglutac and Victor Cipriano be attached. 
It is alleged in the Amended Complaint that complainant Commart is the
corporation in whose behalf and for whose
benefit this derivative suit is brought; that complainant Alice M. Maglutac is a minority stockholder in good
standing of Commart while her husband complainant Mariano T. Maglutac was,
likewise, until June 25, 1984 or thereabouts, a stockholder of Commart.

Motions to dismiss said Amended Complaint were also filed by
present petitioners and were also duly opposed by complainants Mariano and his
wife.

On May 10, 1985 Commart filed a Manifestation/Notice of
Dismissal, manifesting that “it withdraws and dismisses the action taken
in its behalf by complainants Mariano T. Maglutac and Alice M. Maglutac against
all respondents.” (Petition, Annex E, p. 3; Rollo, pp. 42-44)

This was opposed by complainants on the ground, among other
doctrines, that in a derivative suit the
corporation is not allowed to be an active participant and has no
control over the suit against the real defendants; that the suing shareholder
has the right of control.

On May 27, 1985, the Hearing Panel issued an Order denying all
the motions to dismiss as well as the so called manifestation/notice of
dismissal on the finding inter alia that –

“Respondents maintain that the present action is basically one
for annulment/rescission of sale with alternative prayer for reinstatement of employment
status; that the action is not a derivative suit considering that the nature of
the action is one for annulment and the fact that complainant Mariano Maglutac being a non-stockholder is not
qualified to institute a derivative suit; that the action does not in anyway make mention of an actionable wrong
against respondents Albert and Bernard Maglutac, Clemente Ramos and Carolina de
los Reyes.

“By way of opposition, complainants alleged that the instant
action should be characterized as
a minority stockholders’ derivative suit; that complainant Alice Maglutac is
not merely a nominal party but a
real party in interest; that Mariano T.
Maglutac’s rights as a stockholder have been injured through the machinations
and maneuvering of respondent Jesus Maglutac; that the prayer for
rescission or annulment of contract is
merely the logical consequence of the exercise of jurisdiction by this
Commission.

“Respondents’ contention that the Commission has no
jurisdiction over the subject matter or the
nature of the action is devoid of merit. 
It is a cardinal principle in legal procedure that what determines the subject matter or
the nature of the action are the facts alleged in the complaint as constituting the cause of action.  A perusal of the complaint, as well as, the
amended complaint would show that the action is one for
“mismanagement”, for the complainants alleged, inter alia that ‘x x x respondent Jesus T. Maglutac, by means
of secret arrangements with foreign suppliers embodied’ in, and evidenced by, correspondences and other documents
discovered just recently, has been diverting into his private bank accounts and
coverting to his own personal benefit and advantage substantial portions of the commission income of the
corporation, to the prejudice of the corporation, its stockholders
and its creditors and enumerated immediately therefter the alleged specific
acts of mismanagement.  Viewed therefrom, the Commission has jurisdiction.”  (pp.127-128, Rollo)

On June 18, 1985 Commart filed a motion for reconsideration and
on August 29, 1985, Jesus and Corazon Maglutac also filed a similar motion to
have the Order of May 27, 1985 reconsidered and set aside.  These motions were duly opposed by Mariano
and Alice Maglutac.

Acting on the Motion for Reconsideration, the Hearing Panel
issued on November 12, 1985, an Order modifying its previous order “by dismissing this
case insofar as Mariano T. Maglutac is concerned” but affirming the said
order “in all other respects.” (Annex F to Petition, pp. 46, 49, Rollo)

Not satisfied with such modification present petitioners as
respondents in SEC Case No. 2673 went to the SEC en banc on a
petition for certiorari, prohibition and mandamus with prayer for
preliminary injunction.  They
contend – (a) that the Hearing Panel
acted with grave abuse of discretion in not dismissing the case for failure of Alice Maglutac to exhaust intra-corporate
remedies, and (b) that grave abuse was likewise committed in not dismissing the
case on the ground that the complaint did not show clearly that Alice Maglutac
was a stockholder at the time the questioned
transaction occurred.

On September 12, 1988, the Commission en banc
issued an Order denying the aforesaid petition and remanding the case to the
Securities Investigation and Clearing Department for further proceedings.  It ruled (a) that exhaustion of intra-corporate remedy before filing suit “may be dispensed with where it is clear
that it is unavailable or futile” as was the case here.  (p. 2, Order of Sept. 12, 1988, Annex A to
Petition) citing Everett v. Asia Banking Corp., 49 Phil. 512, and Republic Bank
v. Cuaderno, 19 SCRA 671, and (b) that the mere allegation in the complaint
that complainant is still a stockholder of Commart “is sufficient to vest
jurisdiction to this Commission” but complainant must prove at the time of
reception of evidence that she was also a stockholder at the time the acts
complained of occurred.  (Id., p. 3)

“Although complainant Alice Maglutac failed to exhaust an
intra-­corporate remedy before filing this case, the said condition precedent
may be dispensed with where it is clear that it unavailable or futile.  Thus
it was held that:

‘Where the board of directors in a corporation is under the
complete control of the principal defendants in the case and it is obvious that
a demand upon the board of directors to institute an action and prosecute the
same effectively would be useless, the action may be brought by one or more of
the stockholders without such demand (Everett v. Asia Banking Corp., 49 Phil.
512; Republic Bank v. Cuaderno, et al., No. L-22399, March 30,
1967).’

“A stockholder can file a derivative suit provided there is an
allegation in the complaint that she is such at the time the acts complained of
occurred, and at the time the suit is brought (Hawes v. Oakland, 14 Otto [104 U.S.], 450, 456; S.C. 5972, 13 Fletcher 345,
cited in Alvendia.  The Law of Private
Corporations in the Philippines, First Ed., p. 361).  The requirement that said facts be pleaded is
merely procedural although the necessity of the existence of these facts in
order to give rise to the right of action is substantive
(Pascual v. Del Saz Orozco, 19 Phil. 97). 
And equity considerations warrant the liberal interpretation of the
rules of procedure to the end that technicalities should not stand in the way of equitable relief (Vol. I, Francisco, Civil Procedure, 2nd
ed., p. 157, 1973 ed.).  Mere allegation therefore that
complainant is still a stockholder of Commart is sufficient to vest
jurisdiction to this Commission. 
Complainant must however prove at the time of reception of evidence that
she was also a stockholder at the time
the acts complained of occurred.” (pp. 10-­11, Memorandum by public
respondent)

Hence, this petition.

The petitioners invoke two grounds for reversal of the Order
under review thereby raising these two
issues, to wit:

1. Did the Securities and Exchange Commission err and/or commit
“grave abuse of discretion” in denying the petition for certiorari
and remanding the case for further proceedings despite the so-called
“notice of dismissal” filed
by Commart?

2. Did the Securities and Exchange Commission err and/or commit
“grave abuse of discretion” in its handling of the “conflict of
interest issue?” (Petition, p. 6; Rollo, p. 81)

We find the petition devoid of merit.

The complaint in SEC
Case No. 2673, particularly paragraphs 2 to
9 under First Cause of Action,
readily shows that it avers the diversion
of corporate income into the private bank accounts of petitioner Jesus T. Maglutac and his
wife.  Likewise, the principal relief
prayed for in the complaint is the recovery of a sum of money in favor of
the corporation.  This
being the case, the complaint is definitely a derivative suit.  Consequently, the SEC correctly held that the
case was a minority stockholder’s derivative suit and correctly sustained the
hearing panel’s denial – insofar as Alice Maglutac was concerned – of the
motions to dismiss it.

A derivative suit has been the principal defense of the minority
shareholder against abuses by the majority. 
It is a remedy designed by
equity for those situations where the management, through fraud, neglect of
duty, or other cause, declines to take the proper and necessary steps to assert
the corporation’s rights.  Indeed, to
grant to Commart the right of withdrawing or dismissing the suit, at the
instance of majority stockholders and directors who themselves are the persons
alleged to have committed breaches of
trust against the interest of
the corporation, would be to emasculate the right of minority stockholders to
seek redress for the corporation.  To consider the Notice of Dismissal filed by
Commart as quashing the complaint filed by Alice
Maglutac in favor of the corporation would be to defeat the very nature and function
of a derivative suit and render the right to institute the action illusory.

In any case, the suit is for the benefit of Commart itself, for a
judgment in favor of the complainants will necessarily mean recovery by the
corporation of the US$2.5 million alleged to have been diverted from its
coffers to the private bank accounts of its top managers and directors.  Thus, the prayer in the Amended Complaint is for
judgment ordering respondents Jesus
and Corazon Maglutac, as well as Victor Cipriano, “to account for and to
turn over or deliver to the Corporation” the aforesaid sum, with legal
interest, and “ordering all
the respondents, as members of the Board of Directors to take such remedial steps as would protect the corporation from further
depredation of the funds and property.” (pars. [a] & [b], Annex 2, Comment)

On the ‘conflict of interest’ issue, petitioners allege that
private respondent Alice Maglutac “is a majority stockholder of M. M.
International Sales, a business rival/competitor of Commart and holds only less
than one percent (1%) of the entire shareholdings
of Commart.” According to petitioners, this being the case it is easier to
believe that this so called derivative suit was filed because it is to the best
interest of the company where she
has a bigger and substantial interest, which in this case is M. M. International Sales, Inc.

In disposing of this contention respondent SEC ruled that
jurisdiction cannot be made to depend upon the pleas and defenses set up by a
defendant in a motion to dismiss or answer, otherwise jurisdiction should
become dependent
almost entirely upon the defendant (citing Cardenas v. Camus, infra). 
But it left the door open to a further consideration of the issue
by stating that complainant’s ownership of majority stocks of a rival
corporation could not at this stage of the proceedings, defeat complainant’s
claims:

“Jurisdiction of the court cannot be made to depend upon the
pleas or defenses pleaded by the defendant in his motion to dismiss or answer,
for were we to be governed by such
rule, the question of jurisdiction would depend almost entirely upon the
defendant (Cardenas v. Camus, 5 SCRA 639). 
Respondents’ assertion in their motion to dismiss of complainant’s ownership of the majority stocks of a rival corporation,
could not at this stage of the proceedings, defeat complainant’s claim.” (pp. 83-84, Rollo)

In
other words, no real prejudice has been inflicted upon petitioners’
right to be heard on this matter raised by them, since the same can still be
looked into during the hearing of a derivative suit on the merits.  There was, therefore, neither error nor grave
abuse of discretion in the decision of the Securities & Exchange Commission
not to dismiss the case but to remand it instead to the Hearing Panel for further
proceedings.

WHEREFORE, for lack of merit, this Petition is DISMISSED.  Costs against petitioners.

SO ORDERED.

Melencio-Herrera, (Chairman), Padilla, and Regalado, JJ., concur.

Sarmiento, J., on leave.