Abelardo Espidol, et al. vs. Consolidated Rural Bank, Inc., et al.

[SEC-SICD * CASE NO. 07-97-5705. October 19, 1998.] ABELARDO ESPIDOL, et al. , petitioners , vs .CONSOLIDATED RURAL BANK (CAGAYAN VALLEY),INC.,et al. , respondents . D E C I S I O N Before the Hearing Panel is the petition for Annulment of Executive Committee Resolution No. 97-144 with a prayer for a Temporary Restraining Order and/or Preliminary Injunction filed by Abelardo Espidol, Teresita Talampas, Orlando Ocampo, Herculano Malana Jr.,and Earnest Soberano, as stockholders and/or directors of Consolidated Rural Bank (Cagayan Valley) Inc.,hereinafter referred to as Consolbank. cCaSHA Petitioners alleged that on June 20, 1997, the Executive Committee of Consolbank passed and approved ExCom Resolution No. 07-144 providing for the qualifications and disqualifications of candidates for members of the Board of Directors of the bank Paragraph 12 thereof in particular reads: "12. Candidates who are defendants in criminal cases and/or civil cases for sum of money filed by the Consolbank as well as candidates with past due loans with Consolbank or with other financial institutions or candidates whose acts are declared by the Board as inimical to the interest of the corporation shall be disqualified ." (emphasis supplied) Such a resolution, according to petitioners, is void ab initio and cannot be implemented for the following reasons: 1. Qualifications and/or disqualifications of directors are embodied in the Corporation Code, the bank's by-laws and BSP Rules and Regulations; and 2. It involves acts of ownership, which requires the assent of the stockholders/owners. They further alleged that the said Excom resolution was confirmed by the Board of Directors on July 5, 1997 despite their vigorous objections. Lastly, they asserted that said Resolution will be used by the Board of Directors to disqualify them from the Annual Stockholders' meeting and election of the members of the Board of Directors scheduled on July 26, 1997. Hence, they filed the instant petition on July 11, 1997. A Temporary Restraining Order dated July 25, 1997, effective for a period of twenty (20) days, was issued by Hearing Officer Soller after conducting a summary hearing on July 23, 1997 wherein both parties, represented by their respective counsels, appeared. The TRO restrained and enjoined respondents, their attorneys, representatives and agents from enforcing/implementing ExCom Resolution 97-144 until further order of the Commission. On August 13, 1997, the hearing on the application for a writ of preliminary injunction was held where the parties agreed to the following stipulation of facts so as to dispense with the presentation of witnesses: 1. Resolution No. 97-144 was passed by the ExCom and subsequently approved by the Board of Directors of Respondent Bank; 2. The disqualifications for candidates for Directors embodied in the said resolution are not found in the by-laws of the bank nor were they observed in practice by the bank in the past elections of the members of its Board of Directors; and 3. The Board of Directors adopted the said resolution without introducing the corresponding amendment in the by-laws of the corporation. In their memorandum filed on August 21, 1997, Respondents averred the following points: a) The passage and adoption of ExCom Resolution No 97-144 is not an unlawful or ultra-vires act for it was adopted by the Board of Directors in the exercise of their corporate powers pursuant to Sec. 23 of the Corporation Code; b) The speculation or fear of Petitioners that the said resolution will be used by the Board of Directors to disqualify them from the Annual Stockholders Meeting and election of the Members of the Board of Directors cannot alone justify the issuance of the injunction. Suffice it to say that the stockholders meeting and election of the Board of Directors transpired peacefully on July 26, 1997; and c) Petitioner do not appear to be parties with enough interest to bring the action since it is not stated in the petition that they are candidates for the position of a director in the election. On the other hand, Petitioners' Memorandum dated August 27, 1997 stated that: a) By disqualifying candidates for Directors who are defendants in criminal cases and/or civil cases for sum of money filed by the Consolbank, the resolution in effect "condemns before it hears"; AIDTSE b) By disqualifying candidates with past due loans with Consolbank or with other financial institutions, the resolution is an unreasonable restriction in the absence of a clear statement for the purpose it intends to achieve; and c) By disqualifying candidates whose acts are declared by the Board of Directors as inimical to the interest of the corporation, the resolution confers upon the Board arbitrary and unrestricted power to disqualify or not a candidate aspiring to be a Director. Hearing Officer Soller granted the application for a writ of preliminary injunction in an Order dated April 27, 1998 finding, the questioned resolution contrary to the principle of due process and Sec. 27 of the Corporation Code. Respondents moved to reconsider the order on May 12, 1998 reiterating that the subject resolution cannot be considered as contrary to law or unlawful since the subject resolution has been adopted by the Board of Directors in the exercise of its corporate powers Moreover, they maintained that the questioned resolution intended to protect the corporation itself and would ultimately redound to the benefit of the public. In an Order dated June 26, 1998 the Hearing Officer denied the Motion for Reconsideration. Another order of even date set the Preliminary Conference of the case on August 11, 1998 and required the parties to submit their respective Preliminary Conference Brief not later than August 6, 1998. On August 7,1998, Respondents submitted a Manifestation dated July 30, 1998 stating that "they have decided to voluntarily cease and desist the implementation of ExCom Resolution No 97-144 [the questioned resolution] permanently." On August 11, 1998, during the Preliminary Conference of the case, Counsel for Respondent confirmed the above manifestation. Both parties agreed to a judgment on the pleadings by virtue of the above manifestation They were required to submit their respective memoranda within fifteen (15) days, after which the case is deemed submitted for decision. The writ of preliminary injunction was issued on August 19, 1998, a day after petitioners posted an injunction bond in the amount of Fifty Thousand Pesos (P50,000.00) issued by The Mercantile Insurance Co. Inc. and likewise approved by the Commission. On August 21, 1998, Respondents filed a Memorandum in support of its Manifestation dated July 30, 1998 alleging that: "With the foregoing manifestation, no issue in controversy remains to be resolved No other relief need be granted All that is needed is approve defendants' [respondents] manifestation as reiterated by them in Paragraph 4 hereof." Petitioners, on the other hand, in their Manifestation dated August 21, 1998, adopted their earlier Memorandum dated August 27, 1997 submitted in connection with their application for a writ of preliminary injunction as their memorandum in the main case. The Hearing Panel finds the petition meritorious. However, our findings are limited to paragraph 12 of ExCom Resolution No. 97-144, there being no challenge pose by petitioners to the validity of the other parts of the Resolution and a cursory reading of these parts reveals no provision of doubtful validity. Section 35 of the Corporation Code authorizes the Executive Committee to act on such specific matters within the competence of the Board of Directors, as may be delegated to it in the by-laws or on a majority vote of the Board of Directors. However the same section specifically excluded the amendment or repeal of by-laws or the adoption of new by-laws from the authority given to the Executive Committee. The qualifications duties and compensation of directors or trustees, officers and employees are provided in the by-laws of the corporation (Sec 47, Corporation Code) In the same manner, the disqualifications of directors, if any, must also be indicated in the by-laws It therefore follows that if there are additional qualifications and/or disqualifications of directors the corporation would like to impose, the by-laws must consequently be amended to reflect such changes. The by-laws can only be amended or repealed by a majority vote of the board of directors, and the owners of at least a majority of the outstanding capital stock at a regular or special meeting duly called for the purpose. However, this power may be delegated to the board of directors by the owners of two-thirds (2/3) of the outstanding capital stock. (Sec. 58, Corporation Code) Paragraph 12 of ExCom Resolution No 07-144 provides for the qualifications and disqualifications of candidates for members of the Board of Directors of Consolbank As such, it amounts to an amendment of the by-laws which the Executive Committee is not authorized to do. Being an ultra vires act of the Executive Committee, the same is void. The questioned ExCom Resolution was subsequently confirmed/approved by the Board of Directors of Consolbank. Such confirmation and approval may be considered as a ratification by the board of the said resolution, including paragraph 12 thereof Nonetheless, said paragraph may not be considered as a valid amendment to the by-laws since the records of the case do not indicate that the power to amend the by-laws has been delegated to the Board of Directors by the required number of the stockholders. Hence, paragraph 12 of ExCom Resolution No 07-144 is null and void despite the ratification of the Board of Directors for being beyond the powers given to the Board. Assuming arguendo that the Board of Directors was delegated the power to amend the By-laws and their approval/confirmation of the said resolution serves as ratification of the same, the validity of Paragraph 12 of the Resolution will still fall for being contrary to the basic tenets of the constitutional right to the due process of law (Section 1, Article III, 1987 Constitution). SHIETa Due process of law, simply put, is a "law which hears before it condemns; which proceeds upon inquiry, and renders judgment after" (Raquiza vs. Bradford, G.R. No. L-44, September 13, 1945, 75 Phil 50) By disqualifying candidates who are defendants in criminal cases and/or civil cases for sum of money filed by the Consolbank as well as candidates with past due loans with Consolbank or with other financial institutions, the resolution in effect, to quote petitioners, "condemns before it hears", and thus violates the stockholders' right to due process. Moreover, the right to be a candidate to the Board of Directors is an essential right of a stockholder. Being a property right, its exercise cannot be denied without sufficient justification. A thorough perusal of the records of the case show that Respondents have not presented any rationale for the propriety of the disqualifications contained in paragraph 12 of the said Resolution except for the vague reason that "it is intended to protect the corporation itself" (page 3, Memorandum for the Defendants dated August 21, 1997) For being violative of the constitutional right to due process, paragraph 12 of ExCom Resolution No. 97-144 must be struck down. WHEREFORE, premises considered, the petition is hereby GRANTED insofar as paragraph 12 of ExCom Resolution No 97-144 is concerned. Paragraph 12 of ExCom Resolution No 97-144 is declared NULL AND VOID for being an ultra vires act of the Executive Committee and of the Board of Directors as well as for being contrary to law. Accordingly, the Writ of Preliminary Injunction earlier issued is now made PERMANENT, perpetually enjoining Respondents from enforcing and implementing the same. Respondents' Manifestation dated July 30, 1998 stating that "they have decided to voluntarily cease and desist the implementation of ExCom Resolution No. 97-144, permanently" is DULY NOTED. SO ORDERED. (SGD.) JUANITO B. ALMOSA, JR . Hearing Officer (SGD.) SUZETTE L. LEGISLADOR-LOPE Z Hearing Officer