Fordson Parts and Supply, Inc., et al. vs. Samuel Uy, et al.

[SEC-SICD * CASE NO. 3694. June 8, 1992.] FORDSON PARTS AND SUPPLY, INC., and AGUSTIN UY, ET AL. , complainants , vs . SAMUEL UY, ET AL. , respondents . D E C I S I O N This refers to the complaint for an accounting of all the funds and assets of Fordson Parts and Supply, Inc. (FORDSON, for brevity), from 1986 to the present and for the examination of all its corporate records showing all business transactions, with prayer for preliminary injunction/creation of a management committee and damages. ESTaHC The individual complainants accused the respondents of conspiring with one another to cheat complainant stockholders of their interest and FORDSON of its assets when, in a premeditated move to wrest control of FORDSON, respondent Samuel Uy, a stockholder, acquired almost all the shares of a certain Gregorio Uy, thus enabling Samuel Uy to own almost 50% of all the shares of FORDSON and to become President of the corporation in 1986. In support of their accusation, the complainants alleged, among others, that on January 10, 1989, respondents convened themselves to hold a stockholders' meeting without prior notice to the complainants and without a quorum as the complainant held 50% of the outstanding shares of FORDSON; that in the said meeting, the respondents, including complainant Agustin Uy who was elected in his absence, were elected directors and at the Board's meeting, respondents Samuel Uy was elected Chairman and President of FORDSON; that with the evident bad faith, respondents with two (2) dummies organized Ford Tractor Parts and Supply, Inc. (FORD TRACTOR, for brevity), registered it with the Securities and Exchange Commission and officially established in the same address and the same store as FORDSON, both corporation having an identical line of business; and that FORD TRACTOR is an empty shell with no assets of its own, which was organized solely to gobble up and usurp the business of FORDSON. Complainants sought to examine the corporate records and books of FORDSON but the respondents unlawfully and unjustly denied them such right. Hence, the complainant. Respondents filed a motion to dismiss which was amended and filed on January 22, 1990 on the following grounds: prcd I The complainants are not-the real parties in interest or, if they are, their claims have already been extinguished. II The Honorable Commission has not acquired jurisdiction over the instant case for failure of the complainant to pay the correct amount of filing fee. III Assuming that the correct filing fee has been paid, nonetheless, the same should also be dismissed insofar as Ramon Gutierrez is concerned because the same is moot and academic. On March 5, 1990, the said amended motion to dismiss was denied for lack of merit. On even date, complainants' application for writ of preliminary prohibitory mandatory injunction against the respondents has been denied but their application for the creation of a management committee has been granted not because the application is meritorious but because the respondents' counsel, Ramon D. Gutierrez, who is also a respondent in this case did not dispute not controvert the evidence presented by the complainants. On May 21, 1990, a new law firm entered its appearance for respondents Samuel Uy, Dominga Uy and Marina Uy, which on May 24, 1990, filed an ex-parte urgent motion to suspend the filing of respondents' responsive pleadings which on July 1990 was denied by this Hearing Officer. On July 27, 1990, respondents filed an urgent motion to vacate orders both dated March 5, 19990 and to allow respondents to present their evidence on the following grounds: I Respondents were prevented from presenting their evidence in the case at bar due to accident and excusable negligence which unjustly deprived them of their day in court. II Respondents have valid and meritorious defenses which if allowed to be presented will surely change the resolution of this Honorable Hearing Officer and vacate the orders both dated March 5, 1990. In support thereof, the new counsel argued, faulting former counsel for the respondents Ramon D. Gutierrez for his biases and partiality, being himself a respondent which resulted in his failure to present the evidence for the other respondents. The respondents' counsel also alleged that the legal services of Ramon D. Gutierrez focused principally to his own self rather than the interest of all the respondents who deserved his services. He pleaded for justice and liberality which was denied the respondents contending that the setting aside of the order sought to vacated would abort possible miscarriage of justice. On September 25, 1990, the motion to reconsider the order denying the amended motion to dismiss was denied but the motion to reconsider the order creating a management committee was granted thereby allowing the respondent to present their evidence. In their answer to the complaint, respondents admitted certain allegations and denied generally and specifically material averments in the complaint and by way of special and affirmative defenses, respondents alleged, among others, that complainant FORDSON and complainant Agustin Uy have no personality and cause of action to institute the present complaint that FORDSON is improperly impleaded as a complainant since it is only the board of directors which can do so that this Honorable Commission has no competence to take cognizance of the present case for want of jurisdiction; that the herein complainants are estopped from instituting the present case by virtue of laches citing jurisprudence; that complainant Agustin Uy has no personality to file and institute the present case since he has already sold his shares in FORDSON, thus on the latter part of 1987, Agustin Uy approached his nephew, respondent Samuel Uy and requested for an amount of money in the sum of P4 million as he urgently needed the funds for his company, Oriental Food Processing Corporation (ORIENTAL, for brevity). Agustin Uy offered the sale of all his shares in FORDSON to Samuel Uy which sale was finalized at a lower price of P3.7 million to be paid in several installments in cash and checks. Agustin Uy was given the right to buy back or pay in full the said amount with interest thereon. Agustin Uy also agreed that upon receipt of the P3.7 million, all his beneficial ownership, including voting rights will be transferred to Samuel Uy; that the foregoing transaction was not reduced in writing there being no need for it because it is usual and normal practice among Chinese, citing Article 1315 of the new Civil Code which provides: "ARTICLE 1315. Contracts are perfected by mere consent and from the moment the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all the consequences which, according to their nature, may be in keeping with good faith, usage and law." as an exception to the rule referred to as "statute of frauds"; that Samuel Uy paid Agustin Uy the amount of P3.7 million pesos in cash and manager's check as evidenced by Metrobank deposit slips which per instruction of Agustin Uy were made payable to ORIENTAL, a company owned by him as Annexes "1" to "6" of the answer; that to consummate the other side of the transaction, Agustin Uy issued postdated checks representing the buy-back amount as Annexes "1" to "12" of the answer; that the first postdated check was dishonored when deposited, and the other checks were stopped payment, hence, Agustin Uy's failure to repurchase his shares automatically transferred all his shares to Samuel Uy; that when FORD TRACTOR was incorporated on June 5, 1989, Agustin Uy was no longer a stockholder of FORDSON; that FORD TRACTOR was organized and incorporated due to the damage of the business reputation and credit standing of FORDSON caused by the "kiting" activities of complainant Agustin Uy who took undue and improper advantage of his position then as a major stockholder/officer of FORDSON for the benefit of ORIENTAL; that Agustin Uy does not have the right to demand the inspection of corporate records of FORDSON because he is no longer a stockholder and that Agustin Uy has never made any request written or oral, to examine the corporate records of FORDSON. Respondents also interposed counterclaim for moral and exemplary damages and attorney's fees. In their reply and answer to counterclaim, complainants depicted respondents' special and affirmative defenses as mere concoction allegedly in their desperate attempt to escape from liability under the law. Complainants also denied that respondents are entitled to damages and attorney's fees they claim for being baseless and unwarranted. cTESIa The ensuing proceedings attended by protracted hearings dealt not only on the application for the issuance of a writ of preliminary injunction and appointment/creation of a management committee but also on the merits of the case with tacit approval of the contending parties. Both parties adduced testimonial and documentary evidence in support of their respective theory. A careful evaluation of the arguments of the contending parties, as well as the evidence adduced both testimonial and documentary will show that the principal issue to be resolved in the above-entitled case is whether or not complainant Agustin Uy has the legal personality to institute the said case which can be determined only after resolving the issue of whether or not the shares of stock of Agustin Uy in FORDSON should be considered as already sold to and owned by respondent Samuel Uy. There is no; dispute that complainant Agustin Uy through his corporation ORIENTAL, received P3.7 million from the respondent through FORDSON, as reflected in the deposit slip for cash and manager's checks (Exhs. "1" to "6"), during the month of December 1987. However, it is the contention of respondent Samuel Uy that the total sum represents the payment for the purchase of the complainants' shares of stock in FORDSON by respondent Samuel Uy. Upon the other hand, complainant Agustin Uy has long been paid back. After a thorough and painstakingly study of the records of the case, the issues and evidence adduced by the parties, this Hearing Officer is most inclined to sustain the theory of the respondents. While it is true, as alleged by the complainant, that there is no written instrument to prove the alleged sale of the shares of stocks in question transferring all the shares of the complainant Agustin Uy in FORDSON in favor of respondent Samuel Uy, such proof is not in fact necessary to consummate the sale of shares. As correctly stated by respondent Ramon D. Gutierrez in his reply memorandum, the transfer of shares to Samuel Uy was effective and legal in accordance with law and jurisprudence, citing the New Civil Code which provides: "ARTICLE 1315. Contracts are perfected by mere consent, and from that moment the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all the consequences which, according to their nature may be in keeping with good faith, usage and law." Hence the sale of the shares of stock between the complainant and respondent, though not reduced in writing is considered perfected and consummated thus vesting title thereto in favor of respondent Samuel Uy when he intended repurchase never took place as when the first check, Exh. "7" had been dishonored by the drawee bank for reason of "DAIF" and the stopping of payment of the other five (5) checks, Exh. "8" to "12". Complainants' contention that the sale in question should be in writing or at least evidenced by an indorsement in blank of the shares of stock involved under the statute of frauds, does not sit well with Art. 1403, 2(d) because the full consideration therefore has been received by the complainant and such receipt indeed constitutes ratification of the contract which has already been perfected. This Hearing Officer could not also disregard the practice in Chinese community where members thereof generally do things or transact business verbally on the basis of word of honor considering that both parties belong to the community. This practice never disputed by the complainants. The fact that other transactions involving shares of FORDSON between Agustin Uy and Samuel Uy and their relatives were reduced in writing, it does not necessary follow that other transactions of the same or similar nature need or should be in writing for their validity. On the alleged exchanges of checks between ORIENTAL and FORDSON which according to the complainant is a normal business practice, this Hearing Officer is more than convinced that the amount of P3.7 million cannot be considered as mere accommodation as there is none whatsoever to show that there were other instances when cash or the equivalent of cash ever changed hands between the said corporations. aSCDcH In the face of the evidence regarding the sophisticated "kiting" activities of the complainant ORIENTAL consisting of the alleged "not unusual exchanged of checks" between ORIENTAL and FORDSON, these checks cannot be considered as representing accommodations or loans that actually involve real money which transpired between FORDSON and ORIENTAL. It would appear that the complainant was in "kiting" activities when both corporations of which the complainant was the controlling stockholder, exchanged checks. Such exchanges of checks were "kiting" activities of ORIENTAL, a matter which was established by the Metropolitan Bank and Trust Co. (METROBANK) Inter-office Letter, Exh. "33". To better understand "kiting" is to know its meaning as defined on page 246 of the book "a Dictionary for Accountants" by Eric L. Kohler, which reads: "The act of drawing and cashing an unrecorded check on one bank followed shortly by a covering deposit in the form of an unrecorded check on another bank that will in turn be covered by a check drawn on a third bank; the process may go on indefinitely among several banks. The time taken for checks to clear, through the banking system is thus taken advantage of in order to cover an unauthorized borrowing or theft of money." Considering that the alleged exchanges of checks between ORIENTAL and FORDSON do not actually involved real money but constitute "kiting" activities of the complainant and not mere accommodation, this Hearing Officer has no other alternative but to consider the argument of the respondents that complainant Agustin Uy has sold all his shares of stock in FORDSON to respondent Samuel Uy. While there appears to be more doubt that the complainant ceased to be a stockholder of FORDSON upon his inability to repurchase his shares of stock in FORDSON from respondent Samuel Uy, even just for the sake of setting at ease the minds of the parties, this Hearing Officer hereby renders its ruling on such other arguments, to wit: 1. Complainants' question of why the respondent would pay P3.7 million for shares of stock clearly worth not more than P4.00 million is not considered by this Hearing Officer impressive enough to render untenable the argument of the respondents. It is an established practice that assets of a corporation are valued in the financial statements, particularly the balance sheet, at acquisition costs. Besides, the value of a corporation's shares of stock vary depending on its business standing, profitably and some other factors. Furthermore, what is wrong if respondent Samuel Uy has bargained to pay less for the shares of stock of complainant Agustin Uy. They are relatives, belonging to the Chinese Community and Agustin Uy was in dire need of cash. 2. As regards the establishment of FORD TRACTOR, this Hearing Officer sustains the validity of the arguments of the respondents that the "kiting" activities of complainant Agustin Uy has damaged the credit standing and reputation of FORDSON and hence, the need to put up another corporation to avoid a cloud suspicion. Besides, FORD TRACTOR was established when complainant Agustin Uy was no longer a stockholder of FORDSON. As correctly pointed out by respondent Samuel Uy, as the majority stockholder of FORDSON, if there was any prejudice by the incorporation of FORD TRACTOR, he is the first one to be affected. 3. On the alleged selling of spare parts belonging to FORDSON under the invoice of FORDSON TRACTOR on the basis of the purchases made by witness Ramil Bustinero as per Exhs. "C", "C-1" and "C-2", there is no evidence that these spare parts indeed belong to or form part of the inventory of FORDSON. On the contrary, those parts were bought by FORDSON TRACTOR from its supplier per the Annexes of Exh. "18". Furthermore, it would help to consider the credibility of the principal parties in the light of their testimonies during the hearing of the case. In point is Agustin Uy's allegation that ORIENTAL is a very solvent corporation is not supported by evidence. In fact its balance sheets from 1986 to 1989, Exhs. "31", "31-B", "31-D" and "31-F", show dismal figured for its cash on hand and in banks. This could probably be one of the reasons Agustin Uy resorted to "kiting" activities and his inability to fund checks, Exhs. "7" to "12" in the amount of P3.7 million issued by Agustin Uy to repurchase his shares of stocks in FORDSON from Samuel Uy. Other inconsistencies in Agustin Uy's testimony were noted which need not be mentioned in detail especially those involving transactions with Pantranco. It should be mentioned here, however, that Agustin Uy testified during the hearing on May 22, 1991 (TSN, pp. 26-28) that the dishonor of his check by the drawee bank for DAIF constitutes an oversight of the bank. He also testified during the said hearing that he can obtain credit in million pesos by mere telephone call from different banks (TSN, p. 9). All these statements were not borne out by evidence and were meant only to portray him as an honorable man with a high degree of credibility. These were belied by the fact that his company is not solvent as he said it is. The post dated checks issued by him to repurchase the shares in FORDSON either bounced for DAIF or stopped payment for obvious reasons. Inasmuch as complainant Pacita Tan Sioc Tan is the spouse of complainant Agustin Uy, and complainant Jose Zapata is a mere nominee of the same complainant, Agustin Uy (TSN, hearing of April 16, 1991, pp. 17-18), their rights and interest in the above entitled case have to be considered as inextricably linked and intertwined with Agustin Uy. As regards co-respondent Ramon D. Gutierrez, this Hearing Officer does not see any need to discuss at length the merits of the above entitled case regarding him. Suffice it to say that having divested himself of his share in FORDSON consisting of only five (5) shares as early as May 2, 1989, when he assigned said shares in favor of Juliet Salandanan (Exh. "1", Gutierrez), hence there was no more intra-corporate relationship existing between the complainants and respondent Gutierrez. His lack of interest in the corporation was never disputed by the complainant. In the light of the foregoing and considering the fact that Agustin Uy ceased to be a stockholder of FORDSON when he sold all his shares to respondent Samuel Uy and no repurchase took place, the complaint of the complainant that the stockholders' meeting of January 8, 1989 was void since there was no quorum and that their rights to inspect the books of FORDSON was violated are devoid of basis, both in fact and in law. Consequently, the complainants lost their right to demand for an accounting of the funds and assets of FORDSON, and to examine all its corporate records. WHEREFORE, the instant complaint is hereby DISMISSED, with cost against the complainants. The complainants are hereby ordered to pay the respondents the sum of P150,000.00 as moral damages and P100,000.00 as exemplary damages and P100,000.00 for reasonable attorney's fees. prcd SO ORDERED. (SGD.) MANUEL P. PEREA Hearing Officer