Lorenzo Chung, et al. vs. Po Sun To, et al.

[SEC-SICD * CASE NO. 12-94-4948. October 7, 1998.] LORENZO CHUNG, ET AL. , petitioners , vs .PO SUN TO, ET AL. , respondents . D E C I S I O N This is a petition for (1) accounting; (2) declaring the election of the respondents as directors and officers null and void and accordingly ordering the holding of an election; and (3) appointing petitioners as members of an organizing committee for the purpose of calling a general membership meeting for the adoption of By-laws. prcd As part of the preliminary conference, the parties agreed to form a committee consisting of members from petitioners and respondents which shall draft a code of By- laws for the corporation. This, however, did not push through because petitioners themselves failed to submit the names of their representatives to the said committee. Likewise, it is noteworthy that while respondents were given more than sufficient time to present their evidence, they failed to present a single witness nor adduced or offered a single documentary evidence in support of their case, except for a Memorandum. Moreover, petitioners filed a motion to inhibit this Hearing Officer allegedly on ground of partiality in giving respondents additional opportunity and time to present their evidence. This motion had been denied although petitioners again filed a motion for a reconsideration. LexLib While awaiting for respondents opposition to the motion for reconsideration, petitioners again filed a Motion For Early Resolution and Decision of the case, which, in effect a waiver of the motion for reconsideration. Likewise, it appears from the motion for reconsideration that it is just a rehash of the previous motion to inhibit, hence it is likely to be, as it is hereby Denied, hence the resolution of the instant case on the basis solely of the evidence presented by petitioners. From the pleadings and evidence, the following are the relevant facts, to wit: Petitioners and respondents are both members of Friends of Scouting Philippines, Inc. (FSPI for brevity), a non-stock non-profit association which was duly registered with the Securities and Exchange Commission (SEC) on March 3, 1978, with SEC Registration No. 78527 and having its principal office at Suite 322-323 Liberty Hall, 820 Benavidez St., Manila. llcd FSPI has not adopted its By-laws until now. Neither has it filed any General Information Sheet since its incorporation with nor submitted Audited Financial Statements from 1981 to 1995 to the SEC. It did not, likewise, hold any membership meeting ever since. (TSN of June 4, 1997, pp. 12-14 and TSN of Mar. 1997 pp. 17-18). Respondents also admitted in their answer that, as stated in its Articles of Incorporation as one of the purposes, FSPI has the authority and power to receive contributions, gifts, endowments, bequests, legacies, donations, fees or dues, and to invest its funds, monies and properties; or there are only fifteen (15) members of the Board of Directors. Contrary thereto, however, FSPI had elected 17 members of the Board of Directors in 1988, 16 members in 1990, and 20 members in 1992. (TSN, Aug. 13, 1997, p. 28).At present, FSPI has 26 members of the Board of Directors and they in particular, herein respondents who appeared to be as such since November 22, 1993. prcd Prior to herein respondents, nonetheless, petitioner Yu Jin Huat/Tan Jin Huat) was a director from 1978 to 1994 and was acting Secretary General from January 15, 1998 to February 1987. Likewise, petitioner Ty Tiao Hui was the Treasurer from 1988 to 1992 and he was a director from 1978 to 1994. Petitioner Lorenzo Chung, on the other hand, was a director from 1978 to 1980 and from 1988 to 1994. He also was the Secretary General from 1992 to 1994; furthermore, petitioner Victor Aquilino was a director from 1986 to 1994. In other words, all of the petitioners were officers of FSPI prior to the respondents, hence they doubtlessly, knew the circumstances behind the absence of FSPI's By-laws and its non-submission of General Information Sheets and Audited Financial Statements. (TSN, Aug. 13, 1997, DP. 8 to 16) In 1992, respondent Robert Go became the, President of FSPI, until respondent Po Sun To took over as the President on July 30, 1994. On the same day three Vice Presidents were designated namely: Chua Keng Sin, Yao Yee Huat and John de Guzman. The Secretary General was Ricardo (Aug. TSN, June 19, 1996, p. 10). As clearly gleaned from the prayer in the petition, the issues to be resolved are: 1. Whether or not respondents are required to account certain contributions, gifts, endowments, bequests, legacies, donations or fees and certain funds or properties of FSPI during the past two years and/or they be criminally prosecuted for having misappropriated its funds; 2. Whether or not respondents' designation as members of the Board of Directors and as officers of FSPI is a nullity and .an election thereafter be ordered under the supervision of the Commission; and 3. Whether or not petitioners can be appointed as members of the organizing committee which shall work on the adoption of the By-laws and call for and conduct a general membership meeting for the purpose of ratifying the said by-laws. LLpr Relative to the foregoing issues, petitioners alleged that since FSPI has no By-laws nor held any membership meeting, respondents designation as members of the Board and as officers on November 22, 1993 has to be declared as null and void and accordingly an election shall be held under the supervision of the Commission; that since FSPI failed to file with the Commission its audited Financial Statements and General Information Sheets, respondents are liable to account all of the contributions, bequests, gifts, endowments, legacies, donations, fees, funds and properties of the corporation for the last two years. Respondents, on the other hand, contended that the non-filing of the By-laws and/or the non-submission of the General Information Sheets and Audited Financial Statements were attributed to the misfeasance of the petitioners themselves who, for reason that they were the officers of FSPI before the respondents, knew the circumstances behind the said failure. Respondents also argued that petitioners come to court with unclean hands because they themselves violated SEC rules and regulations in FSPI's failure to adopt its By-laws and to comply with SEC reportorial requirements. prLL After a judicious consideration of the foregoing facts of the case and the arguments of both parties the Commission has the following findings, to wit: Relative to the issue on accounting or misappropriation of funds/property petitioners failed to adduce by evidence sufficient factual basis therefor. There are no evidence to show that, during the last two years, respondents had actually received in favor of FSPI certain contributions, legacies bequests donation or fees/dues nor there are evidence to show that they misappropriated the funds or properties of FSPI. In fact, petitioners had not shown they themselves had contributed or paid something. In short, there is nothing for the respondents to account. prcd The only relevant fact established by evidence is that one of the purposes of FSPI in its Articles of Incorporation is its authority and power to receive contributions, gifts, endowments, bequests, legacies, donations, fees or dues, and to invest its funds, monies or properties. This authority or power, however, is not sufficient factual basis to require respondents to account something which they did not actually received or misappropriated. Similarly, a mere failure to comply with SEC reportorial requirements, such as non-submission of Audited Financial Statements or General Information Sheet. from 1981 to 1995 is not sufficient basis to require respondents to render an accounting for nothing. Such failure is a mere ground for the cancellation of corporate franchise or imposition of penalties therefore. While it is being ruled that there is no basis for accounting, respondents as well as petitioners themselves (by their being previous officers) nonetheless are not exempt from the legal mandate of preparing and, upon request, furnishing the members of FSPI and/or of filing with the SEC a yearly Audited Financial Statements corresponding to the years that they were officers. cIACaT Section 75 of the Corporation Code provides the legal basis therefor, such as: "Within ten (10) days from receipt of a written request of any stockholder or member, the corporation shall ,furnish to him its most recent financial statement, which shall include a balance sheet as of the end of the last taxable year, showing in reasonable details its assets and liabilities and the result of its operation. At the regular meetings of stockholders or members, the board of directors or trustees shall present to such stockholders or members a financial report of the operation of the corporation for the preceding year which shall include financial statements duly signed and certified by an independent certified public accountant." In the exercise of its regulatory and supervisory power over corporations registered with it, the SEC requires them to file their yearly Audited Financial Statements with corresponding penalties for non-compliance therewith. In the case at bar, however, there is again no allegation or showing that petitioners had made a written demand to respondents for the latter to furnish them a copy of the latest financial statement, hence, it still follows that petitioners have no cause of action in so far as provision for a Financial Statement is concerned. The Commission, nonetheless reminds respondents of their duties as officers of FSPI to comply with the requirements of Section 75 to the Corporation Code and of SEC rules and regulations relative to reportorial requirements. As regards the validity of respondents' alleged designation as members of the Board of Directors and as officers, the same cannot be simply declared as void on the sole basis that FSPI has no by-laws. In other words, the absence of By-laws does not invalidate or affect corporate acts such as consummation of contract with third persons, the election of officers and appointment of officials and employees nor result to the termination of corporate existence. (Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines, 1979 Ed.,Vol. 3, p. 337) Under Sec. 6 of PD 902-A the only effect of a failure to adopt by-laws is merely a ground for revocation of a franchise and such failure does not automatically divest a corporation of its legal corporate existence nor affects corporate acts. (Bible Apostolic Church of the Phil., petitioner v. James D. Child et al., respondents, SEC Case No. 1445, Sept. 3, 1981, SEC Opinion dated October 1, 1965, Messrs. Raquiza, Llacar and Associates ). In fact, by-laws may be waived by a continued disregard thereof by the parties for whose benefit they were enacted (28 Am. Jur.,2d pp. 703-704),which waiver equally applies to herein petitioners who also previously elected themselves or acted as members of the Board of Directors and as officers of FSPI despite the absence of By-laws. While absence of By-laws does not affect the validity of corporate acts, the Commission will not allow FSPI's in holding subsequent elections of its board members and officers in the absence of By-laws and hereby directs that FSPI should adopt one for its own before holding another election in the future. By-laws are of extreme necessity to a corporate organization and operation. In fact, a corporation cannot formally organize itself or act for the purposes of its creation without first adopting its code of by-laws (Bagley vs. Eno Oil Co., 201 Pa 78 50 A 760, 56 LRA 184) because its office is to regulate the conduct and define the duties of the members towards the corporation and among themselves (Federal Services Finance Corp. v. Bishop Nat. Bank of Hawaii at Honolulu, 190 Fed. 442) Accordingly, therefore, the Commission cannot, under the circumstances, likewise direct in the meantime the holding of an election at any given time but to advise the parties herein to include in the By-laws to be adopted certain provisions relative to the alleged election which petitioners wanted to call and hold in the interim. With regard to the third issue, it has been the continued stand of the Commission to create a committee, consisting of representatives from both parties, which shall be tasked of drafting FSPI's by-laws and of calling and conducting a meeting for the adoption and ratification of said by-laws. WHEREFORE, judgment is hereby rendered as follows: 1. Dismissing the case in so far as the reliefs for accounting and declaring the nullity of respondents' election/designation as members of the Board Directors and as officers of FSPI for insufficiency of evidence and lack of merit; 2. Requiring FSPI, by herein respondents to comply with the provisions of Section 75 of the Corporation Code and with the reportorial requirements of the Securities and Exchange Commission, particularly the timely filing of its General Information Sheet and Audited Financial Statements. For this purpose, the Supervision and Monitoring Department (SMD) is hereby requested to take the necessary action on this matter. 3. Requiring FSPI to adopt its code of by-laws prior to the holding of any election of the members of its Board of Directors and officers. For this purpose, parties herein are directed to form a particular committee, consisting of four (4) members (two from every party) and an independent chairman chosen by agreement of both parties, which has the tasks of drafting the FSPI's By-laws and calling and conducting a general membership meeting for the ratification of the same. No pronouncement as to costs of suits. SO ORDERED. (SGD.) PAULINO Q. GALLEGOS Hearing Officer