Maria Rocio Lumbres vs. Ismael Andaya, et al.

[SEC-SICD * CASE NO. 2220. December 22, 1986.] MARIA ROCIO LUMBRES , petitioners , vs .ISMAEL ANDAYA, ET AL. , respondents . D E C I S I O N This petition is the result of a corporate controversy among family members who are stockholders of the Andaya Realty Corporation, a corporation organized at the instance of the elder Andaya (deceased) and who transferred to the corporation as paid-in capital, practically all his real property in an apparent effort to preserve and keep these property intact for the sake of the now feuding Andaya children. Specifically, the youngest daughter in the family, Maria Andaya Lumbres, is the petitioner while the other children Ismael Andaya, Laura Andaya Guillen, their mother Bernarda Andaya, one Geraldine Bagsit and the corporation itself are the respondents. Citing four causes of action, the petition prays among others: 1. to order respondent corporation to issue certificates of stock; 2. to order respondent Ismael Andaya to distribute the shares of stock of Roque Andaya (deceased) according to the laws of intestacy; 3. to order respondents to make an inventory and appraisal of assets and properties of the corporation; 4. to order respondents to produce all corporate books and records of transactions from 1965 up to December 31, 1981; 5. to order respondent president and treasurer to submit yearly financial statements from 1965-1981; 6. to order respondents to return the assets and properties of the corporation allegedly acquired in contravention of the Corporation Code; llcd 7. to annul the certificates of title in the name of respondents and corporation over those properties acquired in contravention of law. 8. to declare the deeds of assignments and deeds of sale executed by the corporation in favor of the respondents as null and void and in fraud of the stockholders; 9. to declare the resolution passed by respondents ceding the assets and properties of the corporation to the directors null and void; 10. to issue a restraining order enjoining the respondents from meeting as a board to dissolve the corporation, and thereafter to issue a preliminary prohibitory injunction, and fixing a bond of P100,000.00. On their part, the respondents denied most of petitioner's allegations but conceded: a) the right of petitioner to certificates of stock; b) the share due petitioner in the properties and assets of the corporation; c) that they are conversant with the provisions and formalities required by the Corporation Law; The main issues in this case may be narrowed down as follows: 1) What is the extent of the right of complainant in relation to respondents? 2) What are the effects of the several transfers and assignments of rights approved by the board of directors to its members, and the transfers or assignment by the Board to other persons? 3) How may a fair distribution of assets be effected to the members of the corporation at dissolution, considering the series of transfers of properties? There are numerous side issues and sub-issues which may be dwelt upon as they become significant in the resolution of the main issues but we choose to cast aside those that are fait accompli or those that do not aid us in the fair disposition of the case. We have to start with the least contentious aspect of the case: dissolution of Andaya Realty Corporation. The complaint prays of it, and the respondents yield to that possibility. To quote from their answer, page 8, par. 12: "...that whether the corporation be dissolved or should continue to exist is of no moment to herein respondents; the choice can be that of complainant; ..." The complaint, in its par. 59, page 14, temporizes: "...but after the Honorable SEC shall have required the respondents to comply with their duties at law and after preserving and restoring the assets and properties of the corporation in such manner and form as would amply protect the rights of all stockholders thereto, complainant would not object to the dissolution of the corporation; ..." Besides, considering the serious strain in relationship between the parties, compounded by the dissipation of the capital assets, the death of Bernarda Andaya while this case was in progress also reduce the membership to three original directors, and while a new director qualified in the person of Manuel Ozarraga, there seems to be no practical value to continue themselves in business as a corporation. dctai Dissolution, therefore voluntary in this case, would be the ultimate end of this proceedings after observing the basic requirements of law for the protection of the stockholders and the creditors of the corporation, if any. Let us set aside the matter of dissolution, in the meanwhile, as we proceed to the other issues. The authorized capital of the Andaya Realty Corporation is as stated in its articles, as follows: Roque V. Andaya subscribed to 2,493 shares with the money equivalent at P100.00 per share of P249,300.00 .He paid for this total subscription the legal percentage capital requirement of P81,328.75 at incorporation. Bernarda Andaya subscribed to 2,492 shares with a total equivalent of P249,200.00 .She paid her subscription on the legal percentage at P81,328.75 . Laura Andaya-Guillen subscribed to five (5) shares and paid fully for these shares in the sum of P500.00 . Ismael Andaya subscribed to five (5) shares and fully paid for these shares in the sum of P500.00 . Maria Rocio Andaya-Lumbres subscribed to five (5) shares and similarly fully paid for these shares at P500.00 . Total shares subscribed: Name amount amount subscribed paid Roque V. Andaya P249,300.00 P81,328.75 Bernarda E. Andaya 249,200.00 81,328.75 Laura A. Guillen 500.00 500.00 Ismael E. Andaya 500.00 500.00 Maria Rocio A. Lumbres 500.00 500.00 __________ __________ Total P500,000.00 P164,157.50 The amount of paid-up capital for the spouses Andaya were represented by real estate properties appraised at P162,657.50, split equally between them at P81,328.75 each. When Roque Andaya died intestate, he was survived by his wife Bernarda, and the three children, Laura, Ismael and Maria Rocio. The rules of intestacy under Art. 996 of the Civil Code provides: "If a widow or widower and legitimate children or descendants are left, the surviving spouse has in the succession the same shares as that of each of the children." What the Andaya Realty Corporation did was to unilaterally between the heirs divide among themselves in the corporation the holding of Roque V. Andaya amounting to 2,493 shares and credited to themselves each with one of four equal shares. cdll What is the legal procedure in this particular matter? Rule 74 of the Rules of Court (Summary Settlement of Estates) provides: "SECTION 1. Extrajudicial settlement by agreement between heirs . If the decedent left no will and no debts and the heirs are all of age, or the minors are represented by their judicial or legal representatives duly authorized for the purpose, the parties may, without securing letters of administration, divide the estate among themselves as they see fit by means of a public instrument filed in the office of the register of deeds, and should they disagree, they may do so in an ordinary action of partition. If there is only one heir, he may adjudicate to himself the entire estate by means of an affidavit filed in the office of the register of deeds. The parties to an extrajudicial settlement, whether by public instrument or by stipulation in a pending action for partition, or the sole heir who adjudicates the entire estate to himself by means of an affidavit shall file, simultaneously with and as a condition precedent to the filing of the public instrument, or stipulation in the action for partition, or of the affidavit in the office of the register of deeds, a bond with the said register of deeds, in an amount equivalent to the value of the personal property involved as certified to under oath by the parties concerned and conditioned upon the payment of any just claim that may be filed under section 4 of this rule. It shall be presumed that the decedent left no debts if no creditor files a petition for letters of administration within two (2) years after the death of the decedent. The fact of the extrajudicial settlement shall be published in a newspaper of general circulation in the manner provided in the succeeding section; but no extrajudicial settlement shall be binding upon any person who has not participated or had no notice thereof." This requirement of law must be complied with before a partition of the stockholdings of Roque Andaya may be effected among themselves, presenting to the corporation the copy of the public instrument filed in the office of the Register of Deeds as contemplated by Rule 74. Lacking the authority, the division of the stockholdings was premature. It is our observation, however, that Rule 74 of the Rules of Court would refer to the entire estate, and since admittedly in this case, the subscriptions of Roque Andaya in his corporation are only a portion of the entire estate and considering that the Andaya heirs are still contending in the regular courts over their rights to other portions of the estate, there could not be produced for the moment an extrajudicial settlement of the whole estate. Consequently, the appointment or distribution of the Andaya stock subscriptions to his heirs in the corporation would be premature and without proper legal authority. But even if we overlook the technical legal defect, and consider for the moment that the distribution of the holdings to add to that of the heirs was proper, we still have to yield to the fact that what Roque V. Andaya held in the corporation was the right to subscribe to 2,493 shares of stock. He initially paid for his right by delivering at incorporation real property appraised at a value of P81,328.75. With that, he entered into a contract with his own corporation to pay the balance upon call by the board of directors. He could in his lifetime have assigned or transferred those rights to 2,493 shares lawfully. His death, however, did not extinguish the obligation. His heirs voluntarily assumed the debt, dividing it equally among themselves. Now, the heirs would owe the corporation the balance of the subscriptions. At the same time, they may enjoy added voting strength, forgetting for the moment the procedural flaw in the acquisition of these rights. The same principle would hold true in the case of the holdings of Bernarda E. Andaya. She was a debtor to the corporation to the extent of the balance of payments to 2,492 shares of stock originally subscribed. When her husband, Roque, died, the board added 203 1/4 shares to her holdings of 2,492 shares in a total now of 2,695 1/4 shares and apportioned these to the holdings of the four surviving heirs. LLjur Thus, to follow as a matter of course the result of such redistribution after the death of Roque Andaya, it would appear that the distribution of stock in the Andaya Realty would be this: Bernarda 2,695 1/4 shares Laura 208 1/4 shares Ismael 208 1/4 shares Maria Rocio 208 1/4 shares On the other hand, leaving as they should be untouched and undivided the shares of Roque V. Andaya in the corporation, the stock distribution would be as in the beginning: Roque 2,493 shares Bernarda 2,492 shares Laura 5 shares Ismael 5 shares Maria Rocio 5 shares It is our considered opinion that until such time that a deed of partition has been effected by the heirs as required by law, after the death of Roque, his stocks may not be distributed, in the meanwhile. To reiterate, entry in the books of the corporation, adding to each his or her share of Roque's stocks was premature and unauthorized. Consequently, the acts of the board and each of the stockholders of the corporation which proceeded from the assumption that his or her shares have increased by so much is without basis, and should be as it is hereby nullified. Now, let us come to the disposition by Bernarda of her stocks during her lifetime. On December 6, 1977, Bernarda assigned her subscription rights to Laura Guillen (Exhibit "11" of respondents). On December 15, 1971, Bernarda also assigned her subscription rights to 200 shares to Laura Guillen (Exhibit "12" of Respondents). These two (2) assignments were carried out in identical private documents we reproduced hereunder, Exhibit "11" for respondents: " ASSIGNMENT OF SUBSCRIPTION TO STOCK "Know All Men By These Presents: "That I, in consideration of TWENTY THOUSAND PESOS (P20,000.00),the receipt whereof is hereby acknowledged, have sold, assigned, transferred and set over and do hereby sell, assign, transfer and set over unto LAURA A. GUILLEN, my right, title and interest as a subscriber to and an incorporator of ANDAYA REALTY CORPORATION, a corporation organized under the laws of the Philippines, to the extent of 200 shares, and I do hereby request and direct said corporation to issue the certificates for said 200 shares to and in the name of said LAURA A. GUILLEN or such other person as she may name. "WITNESS MY HAND this 6th day of December, 1977, City of Butuan, Philippines. "BERNARDA ANDAYA" "signed in the Presence of: "1. Ismael Andaya 2. Susana C. Roma" The documents are correctly captioned and the transfers of subscription rights are valid. However, it appears that the transferor, Bernarda Andaya, could not direct the issuance of stock certificates for the number (total: 400 shares) of shares indicated in the documents, since these shares did not represent fully-paid stocks. Nevertheless, the assignments of rights for purposes of voting may be reflected, after the transfers of rights to Laura, as follows: Roque 2,493 shares Bernarda 2,092 shares Laura 405 shares Ismael 5 shares Maria Rocio 5 shares On the record, it appears that on March 18, 1978 the board also passed a resolution as evidenced by a Secretary's Certificate (Exhibits "13" & "14" for respondents) to show that respondent Ismael was authorized by the board to sell corporate property, particularly lots covered by TCT No. T-1503, TCT No. T-1499, TCT No. T-390 (now T-340 and T-1498). LLpr Complainant's Third Cause of Action dwells lengthily on the series of assignments and transfers from her mother Bernarda to Laura Guillen and from her to the corporation in exchange of corporate assets. Paragraphs 27 to 52, inclusive, make specific issues of these particular transactions, to wit: a) Dec. 15, 1973 a deed of assignment executed by Ismael Andaya to Laura Guillen over Lot No. 3158, under TCT No. T-1503 registered in the name of Andaya Realty Corp. (Exhibit "A" for complainant). Consideration: 375 shares of stock allegedly belonging to assignee. b) March 30, 1978 a deed of assignment executed by Ismael Andaya over Lot No. 3227, under TCT No. T-1449, belonging to the corporation, in favor of Laura Guillen (Exhibit "B" for complainant); Consideration: 50 shares of stock of Andaya Realty held by Laura Guillen; c) March 30, 1978 a deed of assignment executed by Ismael Andaya (Exhibit "C" for complainant) in favor of Laura Guillen over Lot No. 3218-A, belonging to the corporation; Consideration: 55 shares of stock of Andaya Realty; d) April 24, 1978 deed of absolute sale executed by Ismael Andaya in favor of Laura Guillen over Lot No. 3250, under TCT No. T-390 (now T-340) (Exhibit "D" for complainant); Consideration: P12,316.44. e) October 8, 1980 a deed of assignment of real property executed by Ismael Andaya in favor of Godiardo Guillen (Exhibit "E" for complainant) Lot No. 4095, under TCT No. T-2959; Consideration: past services of Godiardo Guillen as auditor for 11 years, in the amount of P11,000.00 at the rate of P1,000.00 per year. f) Sept. 19, 1980 a deed of absolute sale of real property executed by Bernardo Andaya in behalf of the corporation, in favor of Ismael Andaya (Exhibit "F" for complainant) over Lot No. 3252-A, under TCT No. T-660; Consideration: "for the services rendered by the herein vendee for the corporation and various capacities for the period from 1965 to 1978 ..." g) Sept. 6, 1980 a resolution (Exhibit "G" No. 3, s. 1980, for the complainant);authorizing Laura Guillen to convey and transfer by way of sale in favor of Bernarda Andaya. "a portion of parcels of land registered in the name of the corporation covered by TCT No. T-661 ...;" which is Lot 3252-B-2A and Lot 3252-B-3-A; Consideration: for alleged past services to the corporation; h) Feb. 26, 1979 a deed of assignment of real property executed by Ismael Andaya in favor of Maria Rocio A. Lumbres, (Exhibit "15" of respondents) over Lot 3218-B, covered by TCT No. T-1498; Consideration: 75 shares of stock in the corporation allegedly owned by assignee. Let us now examine each transaction with the end in view of upholding or denying their validity. The assignment of assets in favor of Laura Guillen, one of its directors, as shown in Exhibit "A",suffers from several glaring defects. For one, it intended "to reacquire said stocks and as consideration thereof to assign certain properties owned by the corporation to the assignee;" The reacquisition of share of stockholder is governed by Sec. 16 of the old Corporation Law (Act 1459) as amended by Act No. 2792 and Act 3518 , since Exhibit "A" was executed in 1978 before the new Corporation Code took effect. Sec. 16 provides, in part as follows: "No corporation shall make or declare any dividend except from the surplus profits arising from its business, or distribute its capital stock or property other than actual profits among its members or stockholders until after the payment of its debts and the termination of its existence by limitation or lawful dissolution; ..." Professor Campos, in his "The Purchase of a Corporation of its Own Shares" (Vol. 27 Phil. Law Journal, No. 5, Oct. 1952, pp. 717-718),comments on this, thus: "In resume, a corporation's right to purchase its shares should, as a broad principle, be recognized, subject to the following limitations: "(1) that it be for a legitimate and proper corporate purpose; "(2) that section 16 and/or 28 1/2, when the latter is applicable, be complied with for the protection of creditors; "(3) that there be no undue preference given to selling stockholders to the prejudice of the remaining ones, and "(4) that there be full consideration of its acquisition." It appears clear to us that the transactions of the Andaya Realty Corporation as covered by Exhibits "A","B",and "C" above-enumerated do not satisfy the requirements of law, in points of consideration, purpose and procedure. In all those three assignments, Laura Guillen exchanged a total of 480 supposed shares of stock, for Lot 3158 (118,771 sq. m.);Lot 3227 (area: 1.0021 has.);Lot 3218-A (Area: 11,000 sq. m.).But at the time of the assignments (1973 to 1978),Laura Guillen held only five (5) shares of fully-paid stock valued at P500.00. It is plain that her holdings, assuming that the other legal requisites were present, could not support an adequate consideration for the value of said properties. There was no lawful purpose to the exchange except to satisfy the private needs of one of its directors. A stock corporation is primarily organized for profit. Its capital stock is held in fiduciary trust by the directors for the protection of creditors and benefit of stockholders. Giving away corporate property to one of its members at a clear loss to the corporation was a violation of that trust and in fraud of the other stockholders. The assignments, therefore, to Laura Guillen dated Dec. 15, 1978 (Exhibit "A"),March 30, 1978 (Exhibit "B") and March 30, 1978 (Exhibit "C") are declared without effect. The sale on April 24, 1978 of a corporate property to Laura Guillen of Lot 3250 consisting of 12,592 square meters, is assailed by the complainant as a sale with the fictitious consideration of P12,316.44; that said property was of high commercial value many times over that of the simulated consideration. A portion of the testimony of Mr. Elpidio Lumbres, (t.s.n. Sept. 4, 1985, pp. 6, 7) attests that a 10-door apartment stands on Lot 3250 which added presumably to its commercial value. This fact was confirmed by Ismael Andaya in his testimony (t.s.n. Jan. 24, 1985, p. 35). The value of Lot 3250 itself is quite evident in Exhibit "Y" of the complainant, which is TCT No. T-340 in the name of Andaya Realty Corp. This lot was mortgaged on April 27, 1977 with the Bank of the Philippine Islands, Butuan Branch by the spouses Godiardo and Laura Guillen for the amount of ONE HUNDRED SIXTY THOUSAND (P160,000.00) PESOS. Taking judicial notice of the standard practice that banks always undervalue real properties for the purpose of mortgage, it is safe to assume that the property is worth more than its loan value. The same Lot 3250 is classified as commercial-residential under Tax Declaration No. 17-01-0053 of the City Assessor of Butuan, with an assessed value of P89,540.00 and a market value of P218,460.00 for the year 1980. The question, therefore, on whether the sale benefited the corporation admits only to a negative answer. LLpr The consideration of P12,316.44 or a little less than P1.00 per square meter, for the sale of Lot 3250, appears to us as highly unconscionable as to amount to a lack of consideration. The consideration is attacked as fictitious and simulated. The proof of actual consideration being paid, if adequate, would have been the official receipt of the Andaya Realty, but none was presented by respondents. The sale itself by the corporation to one of its directors fulfills no valid business purpose. We therefore declare the sale of Lot 3250 by the corporation to Laura Guillen as void for want of consideration and of no valid business purpose resulting in undue dissipation of corporate assets to the detriment of other stockholders and unnecessary risk to creditors of the corporation. "The general rule is that contracts intra vires entered into by the board of directors are binding upon the corporation and that the courts will not interfere unless such contracts are so unconscionable and oppressive as to amount to a wanton destruction of the rights of the minority." INGERSOLL V. MALABON SUGAR CO.,G.R. No. 27770, December 31, 1927, 53 PHIL 745 (1927). Lot 3250 is now registered in the name of LAURA GUILLEN under TCT No. T-3138 (Exhibit "Y-1" of the complainant).Laura Guillen or her successor-in-interest is directed to reconvey to the corporation said lot. On September 6, 1980, a resolution was passed by the board of Andaya Realty (Res. No. 3 Series 1980; EXHIBIT "G").This resolution authorizes Laura Guillen "to convey, cede and/or transfer by way of sale unto and in favor of BERNARDA E. ANDAYA in consideration of her above-said services of a portion of parcels of land registered in the name of the corporation, covered by TCT T-661, ..." (Exh. "G",ibid.). EXHIBIT "G" itself is not a document of sale or cession of property, although it is notarized. It is a resolution of authority granted to Laura Guillen as secretary of the corporation, "to sign all documents, papers and/or deed necessary or proper for purposes of said transfer ..." We are not shown any deed conveying the property to Bernarda on the strength of the board's authority granted to Laura, which could be the operative act of disposition. On September 6, 1980 the board passed Res. No. 1 series of 1980, (EXHIBIT "17" of respondents) authorizing the treasurer, Bernarda Andaya to sell to Ismael Andaya Lot No. 3252-A of the corporation "in consideration of his above-said services". The resolution does not specify the services nor the period they were rendered. Presumably, it refers to his being vice-president-director in the beginning and later, as president-director up to 1980. Nor does the resolution state the rate of compensation for said services. Subsequently, on September 19, 1980, EXHIBIT "F" was executed, a "Deed of Absolute Sale" over Lot 3252-A in favor of Ismael Andaya in which was specified that the consideration was for services rendered by him for the corporation "for the period covered from 1965-1978". On October 6, 1980 the board of Andaya Realty passed a resolution authorizing the president, Ismael Andaya "to convey, cede and/or transfer by way of assignment unto and in favor of Godiardo Guillen in consideration of his above-said services a parcel of land registered in the name of the corporation, covered by TCT T-1501 ...". On October 8, 1980, a deed of assignment of real property (EXHIBIT "E") was executed by Ismael Andaya in favor of Godiardo Guillen, husband of Laura Guillen, as compensation for his services as accountant for eleven (11) years up to 1978, by virtue of said resolution of October 6, 1986. In all three (3) instances of providing for compensation, the common fact is that: a) the compensation refers to past services; b) the compensation were in kind, in corporate real properties. In the case of Godiardo Guillen, he was an officer and not a director of the corporation. The by-laws of the Andaya Realty provides in its Sec. 6, Art. IV, as follows: "All officers shall receive salary or compensation as may be fixed by the Board of Directors." Exhibit "16" of the respondent shows that the Board has fixed the compensation at P1,000.00 a year for 11 years, or P11,000.00 and this is the amount that Godiardo Guillen is entitled to. The complainant makes issue of the value of LOT 4095, with an area of TWENTY THOUSAND FOUR HUNDRED FORTY-ONE SQUARE METERS, given as compensation to Godiardo Guillen, alleging that the property is worth much more than what Guillen was entitled to. What is the evidence on this point? Exhibit "W" is Tax Declaration No. 025-0248 of the City Assessor of Butuan over Lot No. 4095. On its back, marked Exhibit "U-2-b",the market value is shown to be P85,855.00 in 1981. The assessed value, which is always lower than the market value is P25,760.00. We consider this as sufficient proof that the corporate property given to Godiardo Guillen is far in excess of the compensation which is due him. We, therefore, hold that the corporation suffered a loss to the extent of the excess in value of the property that Godiardo Guillen received. It may not be the fault of Godiardo Guillen to be ceded with property worth more than P11,000.00 because the board specified the property to be ceded to him. The loss of the corporation may be blamed upon the voting directors who passed the resolution, namely, Ismael Andaya, Laura Guillen and Bernarda Andaya who should have exercised even ordinary diligence in protecting the interests of the corporation. On the other hand, as auditor and accountant of the corporation, Godiardo Guillen has a duty to the corporation not to hold or acquire any interest adverse to it. Thus, Sec. 31 of the New Corporation Code provides, viz: " ...when a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation in respect of any matter reposed in him in confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation." As an officer of Andaya Realty, in his capacity as auditor and accountant, Godiardo Guillen cannot avoid knowing the values of the assets of the corporation. When he accepted the compensation of P11,000.00 for eleven (11) years, he knew also that he was entitled to only that. Knowing, by reason of his duties and position, that the property ceded to him was worth much more, he should have advised the board of the fact. Since he did not, he became a party to the negligence which resulted in depriving the corporation the excess in value of his rightful compensation. We therefore hold that Lot 4095 be resold to the corporation for the price of P11,000.00. "EXHIBIT "17" of respondents shows that on September 6, 1980, the board of Andaya Realty, with the following directors attending: Bernarda Andaya, Ismael Andaya and Laura Guillen, passed a Resolution No. 1, series of 1980 authorizing Bernarda to sell to Ismael Andaya LOT NO. 3252-A, consisting of 2,979 square meters in consideration of "above-said services". EXHIBIT "F" of complainant shows that the text of the "Deed of Absolute Sale" executed by Bernarda Andaya over LOT 3252-A in favor of Ismael Andaya on September 19, 1980. cdll What is the law on the compensation of directors of a corporation? Section 30, of the New Corporation Code provides: "SECTION 30. Compensation of directors . In the absence of any provision in the by-laws fixing their compensation, the directors shall not receive any compensation, as such directors, except for reasonable per diems; provided, however, that any such compensation (other than per diems) may be granted to directors by the vote of the stockholders representing at least a majority of the outstanding capital stock at a regular or special stockholders' meeting. In no case shall the total yearly compensation of directors, as such directors, exceed ten (10) percent of the net income before income tax of the corporation during the preceding year." The general rule is that directors shall not receive compensation, except for reasonable per diems. The exception provided under Sec. 30, infra, is when it is so provided in the by-laws, or, when a resolution granting them compensation is approved by the vote of the stockholders representing at least a majority of the outstanding capital stock at a regular or special stockholders' meeting. Do the by-laws of Andaya Realty fix a compensation for its directors? Section 5, Article III of the by-laws of the Andaya Realty Corporation provides: "SECTION 5. Compensation . Directors shall receive such compensation for their services as may be fixed from time to time by the stockholders." The above-preceding provision allows directors to be compensated for their services when this compensation is fixed by the stockholders at a regular or special stockholders meeting. Since the by-laws allow compensation to directors, the next question is whether the Andaya Realty Corporation stockholders have met in a regular or special meeting to approve by a vote required by law to provide for directors' compensation. There seems to be no evidence that the stockholders of Andaya have been called to a regular or special stockholders' meeting, much less to approve a resolution fixing directors' compensation. What we have in evidence is EXHIBIT "17" of respondents which is the "Minutes of the Special Meeting of the Board of Directors of the Andaya Realty Corporation Held at its Main Office, Butuan City, Sept. 6, 1980 at 7:00 P.M." Since the law (Sec. 30, Corporation Code) requires a majority vote of the outstanding capital stock, it has to be done in a stockholders' meeting. This was not done in any given year by the corporation. There was therefore no basis for the compensation to the services of Ismael Andaya and Bernarda Andaya. Furthermore, we believe that even if there is a resolution of the board in this case fixing the compensation of a director as provided in the corporate by-laws, the same resolution can only have prospective effect. "In Grichton vs. Webb Press Co. (67 LRA 76; 104 Am. St. Rep. 500),it was ruled that resolutions of the board of directors fixing salaries could have operation for the future, and that there could not be any retroactive increase of salaries or voting of "back pay".What the law guards against is the misapplication of corporate funds which is necessarily prejudicial to the stockholders. It follows that the giving of retroactive effect to the increase in Herrera's salaries and to the designation with pay of Torres as administrator of the Club's real estate (administrator de fincas can neither be entertained. (Araneta vs. Heirero, CA-G.R. No. 26922-R, Feb. 26, 1963; 59 P.G. 8397; 3 Court of Appeals Reports 570)." We need not dwell on the merits of the contention by complainants of the unconscionability of the consideration vis-a-vis the value of the property (LOT 3252-A) as reflected in Exhibits "CC","CC-1","CC-2","V","V-1","V-2","V-3","V-4" and the rate of compensation for the position which has not been fixed anyway. The legal impediment cited above would suffice to nullify the sale of LOT 3252-A as compensation for Ismael Andaya, and we hereby nullify it, being without authority of law. Ismael Andaya is directed to return to the corporation LOT NO. 3252-A. In the matter of the same and transfer to Bernarda Andaya of LOT No. 3252-B-1 and 3252-B-2, for the same grounds adduced in the transfer to Ismael Andaya, same is also declared null and void. The heirs of Bernarda Andaya and their successors-in-interest are directed to restore the possession and ownership of LOT 3252-B-1 and LOT 3252-B-2 to the Andaya Realty Corporation. The evidence presented in this case support these other findings: a) The admitted failure to submit yearly financial reports to the Commission; b) The failure to observe regular board and stockholdings' meeting is required by the by-laws of the corporation; c) The failure to keep and preserve minutes of meetings of the board; d) The unlawful mortgaging of corporate properties to guarantee the personal loans of directors, particularly of Ismael Andaya and Laura Guillen, although these loans have been fully paid at the time this case was filed. e) The Andaya Realty was doing only nominal business as a realty company; f) There were more dispositions of corporate properties to the members than were sold in the business to other persons; LibLex IN VIEW OF ALL THE FOREGOING PREMISES, this Commission considers that it would be most expeditious for the parties involved in this case, to treat this present complaint as a petition for arbitration and to prepare the corporation for dissolution within the purview of Section 104 of the Corporation Code, and herewith issues the following orders, to wit: 1) The board of directors of Andaya Realty Corporation is hereby directed to suspend its operations or business pending further orders from the Commission; 2) The incumbent president Ismael Realty Corporation is hereby directed; (a) to submit within fifteen (15) days from notice, a detailed report to this Commission from the time he took over, detailing an updated inventory of corporate property and of the financial and administrative operations of the corporation up to the date of this order; (b) to convene the board of directors or stockholders meeting upon call of the Commission: 3) A provisional director is hereby created for the Andaya Realty Corporation, whose name shall be proposed jointly by the present president of the Corporation and the complainant within 15 days, from receipt hereof, and whose qualifications shall be as provided by the second paragraph of Section 104, ibid. OTHER ORDERS shall issue from the Commission as the need arises or as applied for by the president or the complainant for the approval of the Commission; until such time when the corporation and its members are prepared for the process of dissolution. SO ORDERED. (SGD.) BERNARDO T. ESPEJO Hearing Officer (SGD.) ENRIQUE L. FLORES, JR. (SGD.) ANTERO F. L. VILLAFLOR, JR. Hearing Officer Hearing Officer