Andres Garcia, et al. vs. Carlos C. Teves, Sr., et al.

[SEC-SICD * CASE NO. 1813. November 18, 1985.] ANDRES GARCIA, ET AL. , complainants , vs . CARLOS C. TEVES, SR., ET AL. , respondents . D E C I S I O N Suit commenced by complainants Andres Garcia, John Mesina and Lazaro Kavinto against respondents Carlos C. Teves, Sr., Carlos M. Teves, Jr. and Delfin Lachica praying, among others, that respondents be divested of their respective positions as President, Vice President and Controller of Explo Industries Corporation, that the corresponding criminal penalties be imposed upon respondents for their fraudulent, illegal and unwarranted acts and manipulations of the books and records of the corporation, as well as of its books of account and financial records; and that an audit and examination of the books of accounts, corporate records and bank accounts of the corporation be ordered conducted by SEC examiners. LLphil The complainants alleged that they are incumbent directors of Explo Industries Corporation, a corporation duly organized and existing under and by virtue of the laws of the Philippines formerly with principal office and place of business at 27 EDSA, Guadalupe, Makati, Metro Manila; that from the incorporation and organization of Explo Industries Corporation up to January 1979, respondent Carlos C. Teves, Sr. was a director and the President of the corporation while respondent Carlos M. Teves, Jr. was the Vice-President, and respondent Delfin Lachica was the Controller; that during the same period, the three (3) respondents were interested with and directly in charge and had control of the management and administration of the company's business operations, as well as the handling and operation of the company's finances and bank accounts, as President, Vice-President and Controller, respectively; that Explo Industries Corporation was, as provided for in its Charter engaged in the manufacture, sale and/or distribution of explosives, ammunitions and other related products and was supplying the needs and requirements of the Armed Forces of the Philippines, after having been approved and accredited as such suppliers by the Office of the President in compliance with existing laws; that the corporation was given supply contracts for the sale and delivery of explosives and its related materials, for which it received commission from local as well as foreign suppliers which rendered the business quite profitable; that respondents, in gross violation and willful breach of trust and confidence reposed in them by the stockholders and in connivance with each other, committed the following unwarranted, fraudulent and illegal acts: a. operated and conducted the business operations and finances of the corporation as if it were completely the personal domain of the President, respondent Carlos C. Teves, Sr.; b. refused to convene the Board of Directors to any regular or special meeting, notwithstanding the repeated requests of herein complainants; c. dissipated and misappropriated the funds of the corporation for their own personal use and benefit by means of illegal and unauthorized withdrawals of funds without supporting vouchers and disbursement receipts; and by appropriating for themselves huge salaries and bonuses, and unauthorized expense accounts; d. deliberately preparing and rendering false, misleading and fraudulent accounting, which were not properly supported by corresponding receipts, vouchers and statements, and completely disregarding the generally-accepted rules, and procedure in proper accounting and auditing; that respondents in connivance with each other and without the knowledge of herein complainants, organized and operated in April, 1978 another corporation, KORPHIL Industries, Inc. which is similar and in direct competition with Explo Industries Corporation; that as a result of these illegal, fraudulent and unwarranted acts of respondents, Explo Industries Corporation was completely mismanaged and its funds and bank accounts dissipated to the extent that in January 1979, notwithstanding the profitability of its business, respondents closed the operations of the company; that notwithstanding the demands of complainants, respondents have refused and failed and still refuse and fail to render a true and complete accounting of the funds and finances of the corporation, and that respondents also refused and failed and still refuse and fail to submit to the Board of Directors and the stockholders the corporate books and records, as well as, its books of accounts and financial statements, for verification and examination in complete disregard of the latter's rights under the corporation law. Respondents in their answer vehemently denied the allegations of the complainants and raised special and affirmative defenses that it is only complainant Andres Garcia who has remained as stockholder and on the early part of 1977, he ceased to be a director for having abandoned the company, and that complainant Garcia personally knows that the other complainants have sold their respective shares to respondent Carlos Teves, Sr. The facts established by the evidence presented by complainants and respondents are the following: LLpr Complainants Andres Garcia, John Mesina and Lazaro Kavinta and respondent Carlos C. Teves, Jr., were classmates at the Philippine Air Force Flying School. During their reunion, another former classmate Brigadier General Bernardo Espiritu, Jr., who was then the Deputy Chief of Staff on Material Development of the Armed Forces of the Philippines, brought up the idea of their grouping together to undertake the manufacture of hand grenades and that the only project available for the self-reliance program of the Armed Forces of the Philippines was the manufacture of plastic and cost iron hand- grenades. Explo Industries Corporation was then organized after it was formally indorsed by the Office of the President, and later on, its Articles of Incorporation was approved by the Securities and Exchange Commission. The paid-up capital of P500,000.00 was personally borrowed by Col. Carlos C. Teves, Sr. from Filipinas Bank and Trust Company. The actual paid-up capital of complainants Garcia, Mesina and respondent Carlos C. Teves, Sr. was P26,000.00 each while complainant Kavinta's was only P21,000.00. In 1977, complainants John Mesina and Lazaro Kavinta sold their respective shareholdings to respondent Carlos C. Teves, Sr. and executed deeds of assignment in favor of the latter. Owing to lack of operating capital brought about by complainants' failure to make good their commitment to pay the balance of their paid-up capital, they abandoned Explo Industries Corporation and its operations were stopped. Hence, in November 1979, a complaint was filed against herein respondent allegedly for mismanagement of the corporation and misappropriation of its funds. The only principal issue is whether or not respondents are guilty of mismanagement. Evidence presented on one hand by Col. Andres Garcia, namely, exhibits "1" and "1-a" (Balance Sheet 1977), exhibits "1-b", "1-c", "1-d", "1-e" and '"1-f" (Income Statements from January to November 30, 1977, Summary of Cash Disbursements and Schedules A, B and C and evidence presented, on the other hand, by respondent Delfin Lachica, namely exhibits "7", "7-A" and "7-B" i.e., Balance Sheet, Income Statement and Schedule of Liabilities are unanimous in showing that there was no income realized from operation of the business or from any source from the time of incorporation to the time the company ceased operation on December 31, 1978. During the interim years 1976, 1977 and 1978 there were accumulated expenses incurred totalling P899,689.45 and reflected as deficit in the Balance Sheet dated December 31, 1978 as exhibits "7", "7-A" and "7-B" will show. Expenses and disbursements as verified by counsels per exhibits "16", "17", "18", "19", "19-a", "20", "20-a", "21", "21-a", "22" and "22-a" were generally considered bonafide payments. As early as December 1976, capital contributions by stockholders entrusted to the Treasurer and later released to Col. Carlos C. Teves for Makati office and Camp Aquino office expenses in the amount of P54,850.65 were practically used up. The cash required in maintaining both offices until the end of 1978 were advanced from Col. Carlos C. Teves, own personal money and hence considered company liability to him. However, the majority or the expenses still remained unpaid and were recorded in the books as payables amounting to P869,892.56 (see exhibits "7" and "7-B"). Because of the fact that the Treasurer never personally reported to the office except during Board meetings and never coordinated with the accountant Delfin Lachica on matters of financial and accounting recordings, the accountant was left with no alternative but to record only transactions which can fully be supported and substantiated by receipts, invoices and other evidential proofs. The capital contribution of incorporators amounting to P99,851.08 as earlier alleged by the Treasurer consists of the following: Col. Andres J. Garcia P26,087.77 Col. Carlos C. Teves 26,087.77 Capt. John Mesina 26,087.77 Col. Lazaro Kavinta 21,587.77 Total Contribution P99,851.08 ========= Despite the repeated requests of the accountant to the Treasurer for the opportunity to reconcile with her the records, the requests were never granted. As a consequence thereof, only P54,850.65 could be accounted for, although sometime in December, 1976 the Treasurer had already declared all the paid up capital as fully expended. Only the records in the possession of the Treasurer can best reconcile the difference between P99,851.08 as claimed by her and P54,850.65 recorded by the accountant as paid up capital in the books. Based on the facts therefor, how the money or capital contribution was spent may be briefly explained as follows: I. Capital Contribution from Stockholders P54,850.65 II. Operating Expenses: (Deficit Oct. 1976 up to Dec. 31, 1978) P899,689.45 Add: Net Assets (exhibit 7 Bal. Sheet) 25,053.76 Total Expenses/ Deficit & Net Assets P924,743.21 Deduct: III. Total Liabilities 869,892.56 (Exhibit "7-B") Stockholders' Contri- bution used in acquisition of assets & operating expenses 54,850.65 Balance of Stockholders Contribution P========= The remaining company assets were liquidated to answer for unpaid rents and other liabilities. The various evidence of this case clearly show that the accusations were based on mere conjecture. Complainants miserably failed in even establishing that Explo Industries Corporation had business with other firms. The truth which had been magnified in this case is that the respondents could not be guilty of mismanagement nor misappropriation. Respondent Delfin Lachica had nothing to do with management because his job consisted merely of recording the necessary expenses of the company and keeping its books, (p. 64 TSN August 6, 1982). In other words, he was a mere employee of the company who did his job professionally. Respondent Carlos C. Teves, Jr. was never implicated by the complainants when Andres Garcia and Lazaro Kavinta gave their testimonies. It just proves one thing: he is obviously innocent of the charges leveled against him by the complainants. For his part, respondent Carlos C. Teves, Sr. had practically worked alone in order to acquire the necessary training for his employees and establish good public relations with Korean Explosives Corporation which in turn would assist Explo Industries Corporation in the hand-grenade project of the Armed Forces of the Philippines. He made sacrifices not only in terms of time but also money (P30,000.00 in 1977) which he advanced to the company for the purpose of giving the company a better chance to get the said hand-grenade project. However, during the last meeting of the Board of Directors in 1977, respondent Carlos Teves, Sr. requested the complainants to pay the balance of their "paid-up" capital. Instead of supporting him, they decided to abandon their own company and started blaming Carlos Teves, Sr. for everything that they did not like. Up to the end of 1978 when he stopped the company's operations, his total advances amount to P117,000.00, more or less. (p. 59 TSN November 29, 1982). Out of the three complainants, only two (2) of them, namely, Andres Garcia and Lazaro Kavinta testified. The other, John Mesina, did not do so. This is worth the attention of this Commission since the shareholdings of John Mesina were sold to respondent Carlos C. Teves, Sr. A deed of assignment (Exhibit "25") was executed by John Mesina for a consideration of P10,000.00 which was entrusted to Andres Garcia (p. 40 TSN November 29, 1982). The credibility of complainant Lazaro Kavinta had been shattered into pieces when he contradicted himself on important matters. Like John Mesina, complainant Lazaro Kavinta sold his shareholdings to Carlos Teves, Sr. A deed of assignment (Exhibit "23" ) was executed but he denied having received a single centavo as payment. However, as part of the consideration which he received from Carlos Teves, Sr., he acquired ownership of the latter's Vauxhall car, by registering it in his name (p. 33 TSN August 3, 1981). And to prove payments of Kavinta's investment in the amount of P21,000.00 he turned over all the receipts of his investment in Explo Industries Corporation to Carlos C. Teves, Sr. Said receipts have been marked as Exhibits "27", "27-a" up to "27-c". LibLex Complainant Andres Teves could not deny that in 1977, the shareholdings of Mesina and Kavinta were already sold to Carlos Teves, Sr. In the deed of assignment executed by Mesina, his name appeared as witness. Furthermore, his contention that the shares of Kavinta were never offered to him is preposterous considering that his letter (Exhibit "24") proved otherwise. Col. Andres Garcia wanted to impress upon this Commission that he was the one who, as Chairman of the Board, personally followed up the "hand-grenade project" with the Armed Forces. As if really knowledgeable about the said project, he blamed Col. Carlos Teves, Sr. for not getting it. According to him, Col. Teves did not want to sub-contract it and the company loss the opportunity to immediately get 30% of the total contract price (P50 million) from the Armed Forces of the Philippines. The above testimony of Col. Garcia would have been convincing to this Commission had it not for the appearance of Brigadier General Bernardo Espiritu, Jr., the Deputy Chief of Staff on Material Development of the AFD. It was General Espiritu's office which handled the "hand-grenade project". According to him, it was only Col. Teves who followed up the "hand-grenade project" and contrary to the statement given by Col. Garcia, General Espiritu testified that in the event the contract is awarded to them, the downpayment to be paid by Armed Forces was between 20% to 35% of the cost of delivery per year and not the whole contract cost. (pp. 14-19, TSN November 15, 1982). Evidence adduced, therefore, clearly show that respondents are not guilty of mismanagement. Wherefore, judgment is hereby rendered in favor of respondents as against complainants by dismissing the complaint. LLphil SO ORDERED. (SGD.) EMMANUEL R. SISON Hearing Officer