Mariano R.S. Lim, et al. vs. Marciano Chiong

[SEC-SICD * CASE NO. 2563. November 25, 1987.] MARIANO R.S. LIM, BALTAZAR C. LIM AND TION SUY ONG , complainants , vs .MARCIANO CHIONG , respondent . D E C I S I O N In its Petition dated January 3, 1984, petitioners Mariano R.S. Lim, Baltazar C. Lim and Tion Suy Ong, seeks the intercession of the Commission, praying among others, for the accounting of all the funds and property of COTABATO HARDWARE CO.,INC. allegedly misappropriated by herein respondent, Marciano Chiong; restitution of the misappropriated funds; and reconveyance to the corporation of the shares of stock acquired by respondent from Mr. Cheong Tu Boh to be treated as treasury shares for purposes of liquidation of the assets of the corporation. The aforesaid prayers have for its bases the following allegations contained in the complaint, to wit: 1. That complainants are all stockholders of Cotabato Hardware Co. Inc. complainant Tion Suy Ong being the President at the time of its dissolution on March 20, 1982, and-collectively constituting the majority of the capital stock of the corporation, the only other stockholder and director being the herein respondent, who was the Vice-President and General Manager for several years and at the time of the dissolution of the corporation on March 20, 1982; 2. That respondent, as such Vice-President and General Manager and as sole signatory/indorser to the checks of the corporation, from 1981 to 1982, appropriated for his own funds belonging to the corporation amounting to P575,593.10 more or less, allegedly through clever manipulation of the books of accounts of double entries, fictitious refunds of cylinder deposits, forgery of signatures on vouchers, withdrawals for imaginary expenditures and borrowings; 3. That respondent purportedly purchased in his own name and for his benefit the entire shareholdings of CHEONG TU BOH equal to one-fifth (1/5) of the entire shares of the capital stock issued and outstanding of the corporation, allegedly using corporate funds as consideration thereof; 4. That through manipulation of corporate books, respondent made it appear that the corporation has been consistently losing in its hardware business in order to justify its dissolution and to pave the way for him to establish a hardware business in the name of his son but for his sole benefit, which hardware business was eventually established following the dissolution of the corporation; 5. That respondent has appropriated equipments, furnitures and goodwill of Cotabato Hardware Co. Inc. without consideration thereof, and has incurred indebtedness in the amount of P60,655.81 and has not paid for the same to this date. LexLib For his part, herein respondent filed its Answer dated March 15, 1984, made a general and specific denial of each and all the allegations of the complaint for each and all of the paragraphs of the complaint, and as special defense, alleged: 1. That during his tenure as Vice-President and General Manager, the corporate funds have regularly been accounted for, noted and approved by the Board of Directors where complainants were all directors by way of duly audited monthly and annual financial statements submitted by respondent, coupled by the fact that corporate fund handling was closely monitored by complainants' representative who was the cashier of the corporation; 2. That respondent purchased shareholdings from Cheong Tu Boh comprising 1/5 of the entire capital stock of the corporation in his personal capacity, by means of personal funds, and not from corporate funds as alleged by the complainants; 3. That the company's book of accounts was ably being handled by a bookkeeper chosen and trusted by the stockholders and directors, including herein complainants, reflecting no alleged double entries, fictitious refunds, forged signatures, imaginary transactions, as averred by complainants; 4. That after the closure of the corporation's hardware business, respondent and his family pulled out of Cotabato City and moved to Cebu City for personal security reasons. Subsequently, respondent's son moved back to Cotabato City and established a sole proprietorship hardware business which is an entirely new business legitimately entered into by respondent's son; 5. That respondent admitted that he had acquired some equipment and furnitures of the corporation after its dissolution but was made in aid of liquidation process and with prior arrangement with complainants through its representative, cashier Alfredo Lim, that its actual value, P20,000.00 shall be deducted from respondent's liquidating dividends or share in the net assets of the dissolved corporation. Corollary thereto, respondent raised as affirmative defenses that complainants, as individual stockholders, have no cause of action against respondent because the claim asserted thereto pertains to the corporation as a juridical entity and not to any individual stockholder as therein complainant; that complaint is premature as no prior demand was made on respondent to render accounting; and that complainants are estopped from demanding another accounting, as no objections were made to the monthly and yearly statements of accounts and acquiescence on corporate fund handling for several years that respondent has been a general manager. Preliminary conference were had on 11 July 1984 where both counsels submitted each of their special power of attorney as an authority for the latter to enter into stipulations/admission of facts, except one pertaining to Mr. Baltazar C. Lim, one of the petitioners herein, including possible avenues for an amicable settlement between the contending parties. No amicable settlement was ever reached, preliminary conference proceeded accordingly, and, consequently, issues were synthesized to forestall further divergence of views by the proponents, to wit: Whether or not the herein respondent became an equity owner of two-fifths (2/5) of the capital stock of COTABATO HARDWARE, INC. or only one-fifth (1/5) as claimed by complainants; and Whether or not herein respondent acted in breach of trust as General Manager of COTABATO HARDWARE, INC. from 1978 to 1982. Subsequently, respondent filed on March 11, 1985 an Urgent Petition for Appointment of Receiver for the corporation alleging inter alia, that the corporation was formally dissolved on March 20, 1982; that the dissolved corporation has remaining assets which include uncollected and/or judicially pending money claim in the approximate amount of P700,000.00; that the corporation is a judgment debtor in a labor suit (MOLE RAB XII Case No. 37-82);and that said assets have not yet been liquidated among the stockholders and other parties-in-interest for the reason that the parties herein, who comprised the Board of Directors and the stockholders of the corporation, have so far omitted or failed, partly on account of strained personal relationship, to provide appropriate resolution for the mode or manner of corporate liquidation. dctai Likewise, in an Omnibus Motion dated March 11, 1985, respondent sought relief laying stress, among others, that said petition, which has for its ultimate purpose the complete liquidation of the assets of said corporation under the supervision and control of the Commission, be treated as respondents' counterclaim; that Cotabato Hardware Co. Inc. be impleaded as party to the case in view of its direct and substantial interest in the subject matter hereof; and that the Omnibus Motion and the Urgent Petition to which it relates be resolved immediately and ex-parte because of the extreme urgency of the relief prayed for and the impossibility of having said incidents heard on notice before the crucial day of March 20, 1985, the last day of statutory three-year period of liquidation of Cotabato Hardware Co. Inc. Convinced and finding merits in the aforesaid contentions of the respondent, Order dated March 15, 1985 was issued by the Commission directing that the assets of the dissolved Cotabato Hardware, Co. Inc. be placed under receivership for the purpose of liquidation under the control and supervision of the Commission, appointing Mrs. Aurora E. Montoya as receiver to effect the complete and proper liquidation of said assets pursuant to Section 7, Rule 59 of the Rules of Court. The corporation, Cotabato Hardware Co. Inc. was likewise impleaded as necessary party in the case. The proponents concluded their respective stand with the submission of their formal offer of evidence, including rebuttal thereof, for final consideration of the Commission. After a careful consideration of the records brought to the Commission, of the evidence adduced pro and con during the trial of the case and a careful consideration of the law applicable to such facts, we have arrived at the following conclusions: Firstly, as pivoted during the termination of preliminary conference of the case, the crux is whether or not respondent Marciano Chiong is the holder of two-fifths (2/5) of the capital stock of Cotabato Hardware Co. Inc. or only one-fifth (1/5) as herein claimed by the complaints. To this, the complainants contended that respondent purchased in his own name and for his benefit the entire shareholdings of Cheong Tuh Boh equal to one fifth (1/5) of the entire shares of the capital stock issued and outstanding of the corporation, allegedly using corporate funds as consideration thereof. Respondent, on the other hand, controverted the same alleging that the shareholdings purchased from Cheong Tu Boh comprising one-fifth (1/5) of the entire capital stock of the corporation was not made from corporate funds, but by means of personal funds in his personal capacity, supporting the same with his Exhibits 1 to 23 representing what the collectively called "Cheong Tu Boh Shares" consisting of 1,296 shares or one-fifth (1/5) of the capital stock of the corporation to show that said shares have been sold, endorsed and delivered to the herein respondent and as proof that the latter is the present owner thereof as registered with the company's Stock and Transfer Book. Despite rebuttal thereof, said exhibits were admitted by the Commission as part of respondents' evidence. Likewise, aside from his original standing as holder of one-fifth (1/5) of the capital stock of the corporation, respondent bolstered his stand with Exhibits 28 to 31 which are the several checks paid by respondent on four (4) installments, all of which came from the respondents' personal funds, payable to the order of Cheong Tu Boh. No contrary evidence were presented thereof to establish an adverse stand against the respondent that the same were paid from company's funds, except complainants' Exhibits A, B, C, D which are company's checks admittedly used by the respondents to partly pay for Cheong Tu Boh shares, checks which were later on replaced with respondents' cash at the very same time they were issued. Besides, complainants knew of the subject sales transactions between respondent and Cheong Tu Boh, through the company's cashier and complaints' representative, Mr. Alfredo Lim, by reason of TCBT Managers' Check No. 640481 dated April 2, 1979, payable to the order of Lim Siao Tong in the amount of P60,000.00 (Exhibit 33),indicating that at the very time that respondent bought Cheong Tu Boh shares, another group of shares, which are Lim Siao Tong Shares were also sold to Alfredo Lim said check signified that respondent borrowed money from the Bank and used the same to buy this particular Manager's Check for the account and benefit of Alfredo Lim. Evidence will show that these transactions are duly reflected on the company's books of accounts, closely monitored by the complaining stockholders' representative and company's cashier, Mr. Alfredo Lim, corroborated by the credible testimonies of the corporate book keeper at the trial on the merits of the case, likewise refuting complainants' allegations of double entries in the financial records, including alleged fictitious refunds, forged signatures, and imaginary transactions as part of complainants' charges of misappropriation of company's funds. Acting on the basis of records and other credible documentary evidence submitted by the contending parties, this Commission finds merit, either in fact or in law, to justify respondents' stand of being a holder of two-fifths (2/5) of the entire capital stock of the corporation, giving due weight to the absence of a contrary evidence to support complainants' stand against the respondent, coupled by the fact that validity of such sales transactions between respondent and Cheong Tu Boh was never put in question by the company except allegations of the use of corporate funds therefor. We are therefore inclined to agree with the contention of the respondent on this point pursuant to the doctrine of free transferability of corporate shares (Santamaria v. Hongkong and Shanghai Bank, G.R. No. L-2808, August 31, 1951, 80 Phil. 780 (1951). An eminent American jurist once stated: "Stock in a corporation is not merely property. It also creates a personal relationship analogous otherwise than technically to a partnership. ...There seems to be no greater objective to restraining the right of stockholder choosing one's associates in a corporation than in a firm." (Barrett v. King, et. al.,83 NE 934 (1802). Further, the continuity of this harmonious relation in the corporation contributes in no small way to the welfare of the corporation (Lambert v. Fox, G.R. No. 7991, January 29, 1914, 26 Phil. 588). A stockholder must exhaust all available intra-corporate remedies before he can bring a derivative suit against any stockholder of a corporation. "But, in addition to the existence of grievances, which call for this kind of relief, it is equally important that before a shareholder is permitted in his own name to institute and conduct a litigation which usually belongs to the corporation, he should show to the satisfaction of the court that he has exhausted all the means within his reach to obtain within the corporation itself, the redress of his grievances, or action in conformity to his wishes. He must make an earnest, not a simulated effort, with the managing body of the corporation, to induce remedial action on their part, and this must be made apparent to the court. ...And he must show a case, if this is not done, where it could not be done, or it was not reasonable to require it." (Pascual v. Orozco, G.R. No. L-5174, March 17, 1911, 19 Phil. 82, at 92-93, citing Hawes v. Oakland, 104 U.S. 26 L. Ed. 1881). The complainant stockholders in this instant case no less than admitted non-resorting to exhaustion of intra-corporate disputes till after the stages of liquidation of the corporation came, manifesting in an instance admittedly that the respondent has been running the corporation without interference whatsoever from their part, despite the established fact that the respondent has been in the position of the General Manager of the corporation for no less than ten (10) years (Exh. "JJJJ' ).For had the complainants resorted to the elementary procedure of making an objection and demand accounting of corporate funds, they could have been informed, specifically so when their representative cashier, Mr. Alfredo Lim testifying otherwise, of the sale of Cheong Tu Boh's one fifth (1/5) equity shares to the herein respondent. "...or as a stockholder participated in the proceedings of the meeting and made no objections to the same until after the meeting had adjourned ...because he is estopped." (Smith v. Knauss, 52 Utah 614, 176 Pac. 621). The present action being a suit for equitable relief (Seva v. Alfred Berwin Co., G.R. No. 24321, January 11, 1926, 48 Phil 580), complainants should have come to court with equity. Again, as earlier synthesized, the next pivotal issue is whether or not respondent acted in breach of trust as General Manager of Cotabato Hardware, Inc. from 1978 to 1982. This issue revolves on the alleged misappropriation of corporate funds by the respondent, manipulations of corporate books to justify alleged eventual dissolution of the corporation, and accounting of all funds and assets of Cotabato Hardware Co. Inc.,with the resultant effect of the parties praying for the relief of the appointment of a receiver to undertake liquidation of the corporation at the close of the proceedings. Complainants alleged, among others, that they are all stockholders of the corporation, complainant Tion Suy Ong being the president at the time of its dissolution on March 20, 1982, and collectively constituting the majority of the capital stock of the corporation, the only stockholder and director being the herein respondent, who was the Vice-President and General Manager for several years and at the time of the dissolution of the corporation on said date of March 20, 1982; that respondent, as Vice-President and General Manager and as sole signatory/indorser to the company's checks, from 1981 to 1982, appropriated for his own use funds belonging to the corporation amounting to P575,593.10 more or less, allegedly through some manipulations and deceptive acts; and that respondent made it appear, through manipulation of corporate books, that the corporation has been consistently losing in its business to justify its dissolution and to pave the way for him to establish a hardware business in the name of his son but for his sole benefit, which hardware business was eventually established following the dissolution of the corporation. In specifically denying the foregoing charges, respondent averred that during his tenure of office as Vice-President and General Manager of Cotabato Co. Inc.,corporate funds were regularly accounted for, noted and approved by the Board of Directors where all the complainant stockholders are directors, by way of duly audited monthly and annual financial statements, coupled by the fact that his corporate fund handling was closely watched and monitored by complainants' representative, who was the cashier of the corporation. These rebutting allegations of the respondent. were amply supported by the audited financial statements for the years 1979, 1980, 1981 and 1982, made and given to all the stockholders of the corporation, evidences submitted to belie complainants' allegations of no report of financial loss for the corporation and alleged misrepresentation committed by the respondent on the profitability status of the corporation (Exhibits 34, 35, and 36).Respondent, likewise, added supportive evidence on this with the letter of Mr. Alfredo Lim, cashier of the corporation, which is in the nature of an acknowledgment of the shortage of P93,512.77 he incurred (Exhibit 37) showing that the only shortage discovered during respondents' tenure as Vice-President and General Manager was the one incurred by Mr. Alfredo Lim, representative of complainant Tion Suy Ong and the other Zamboanga stockholders. LibLex Moreover, complainants failed to establish the alleged appropriation for respondents' own use funds belonging to the corporation amounting of P575,593.10, more or less, allegedly through some manipulation of corporate books and other deceptive acts. These are not properly borne out by the records, for the evidences, testimonial or documentary, showed otherwise giving due weight to testimonies given by the principal witnesses, particularly Mr. Alfredo Lim, cashier and complainants' representative and the corporate bookkeeper. Established facts on record are not reflective of the alleged misappropriation committed by herein respondent, specifically so when the annual/monthly reports on the financial standing of the corporation have been made and given to all the stockholders, including herein complainants (Exhibits 34, 35, 36) and, as earlier stated, closely watched and monitored by the complainants' representative, Mr. Alfredo Lim. This might be on the alleged use of corporate funds on the purchase of Cheong Tu Boh's shares, but again, the same, as earlier pointed out, are properly supported by evidence in favor of the respondent showing indeed that in the said sales transaction, corporate funds were not utilized by the respondent. (Exhibits A to D; Exhibits 28 to 31; and Exhibit 33). We do not think, however, that the proven facts sustain an adverse finding against the herein respondent for, upon principle, reason and authority, we are clearly convinced that upon the admitted facts of the present case, respondent is not responsible for the alleged breach of trust as a responsible officer of the corporation from 1978 to 1982 in the absence of clear evidence to sustain complainants' allegations. This line of reasoning might be extended further but we deem it unnecessary to declare that the complainants are entitled to the relief demanded on this aspect of the case in accordance with the prayers of the complaint. "Persons acting publicly as officers of a corporation are presumed to be rightfully in office, until the contrary is shown." (Beardsley vs. Johnson, 121 N.Y. 224, 2 Fletcher 55). It only remains now to deal with the Order dated March 15, 1985, granting respondent motion for receivership with the ample powers therein enumerated for the preservation pendente lite and for liquidation process, of the corporation's assets and in discharge of its power and duty to preserve itself. From the great concern of damage and prejudice expressed by the parties due to the alleged remaining assets of the corporation, specifically the money claims against third persons amounting to P700,000.00 more or less and other assets for liquidation, the Commission finds that under the facts and circumstances of record, it is but fair and just that said Order of the Commission appointing a receiver be implemented forthwith, in accordance with its terms, as follows: "For that purpose, this Commission hereby names, appoints and constitutes, MRS. AURORA E. MONTOYA of Cotabato City, as Receiver of the assets of the corporation for the benefit of its stockholders, creditors and other parties-in-interest, to effect the complete and proper liquidation of said assets and to perform such duties, powers and functions as provided by Section 7, Rule 59 of the Rules of Court as well as those which this Commission may direct from time to time . . . ." ACCORDINGLY, decision is hereby rendered: a. Dismissing the instant complaint of Mariano R.S. Lim, Baltazar C. Lim and Tion Suy Ong against herein respondent, Marciano Chiong, for lack of merit; b. Directing the appointed receiver, MRS. AURORA E. MONTOYA, by virtue of Order of this Commission dated March 15, 1985 to proceed immediately with the implementation of said Order of this Commission for the eventual liquidation of all the remaining assets of the dissolved COTABATO HARDWARE CO. INC., and perform such duties, powers and functions as provided by Section 7, Rule 59 of the Rules of Court as well as those which this Commission may direct from time to time; and ordering the parties herein to perform only caretaker acts in the Corporation pending final completion of the liquidation. SO ORDERED. cdll (SGD.) NAPOLEON M. TUMAMAO Hearing Officer