Edward F. King vs. Half Way Enterprises, Inc.

[SEC-SICD * CASE NO. 3870. July 20, 1992.] EDWARD F. KING , complainant , vs .HALF WAY ENTERPRISES, INC. , respondent . D E C I S I O N This case arose out of a complaint filed by Edward F. King against Halfway Inn Enterprises, Inc. praying the Commission to order the respondent to pay the complainant the sum of forty five thousand pesos (P45,000.00) representing the latter's allowances covering the period October, 1998 to May: 22, 1989 with interest at the legal rate from October, 1988 up to and until the full amount is paid; to order the respondent to pay complainant the sum of thirty thousand pesos (P30,000.00) as moral damages with interest at the legal rate from October, 1988 up to October, 1989 or up to the time said amount is fully paid; to order the respondent to pay the complainant the sum of twenty five thousand pesos (P25,000.00) for and as attorney's fees and litigation expense with interest at the legal rate, from the date of commencement of this action up to the time the amount is fully paid. AEITDH Hearings were conducted, where both parties presented testimonial as well as documentary evidence. The facts of this case are not controverted. In a meeting held in Half-way Inn on May 7, 1986, the group approved a resolution granting to the members of the Board of Directors, transportation and representation allowances up to P6,000.00 a month each, provided these allowances shall not affect the commission granted to the GM (Exh. A-1).Present during that meeting were Col. Constantino Velasco, Sps. Edward & Josefina, Michael Mcleod and Atty. Macaranas. The actual practice that evolved, however, was that from 1986 up to 1988, the P6,000.00 honoraria was given to each group of stockholders composed of the Velasco group represented by Col. Velasco, the Tiosejos represented by John and Michael Mcleod and the Kings, composed of Spouses Edward and Josefina. The three groups held equity in the corporation in equal share at 1/3 each. the allowances were received by these groups from May of 1986 up to June 1988 when the same board members agreed to suspend the payment of the said monthly allowance because of the construction of the expansion/renovation of the restaurant building. When the restaurant was finally completed, the resumption of the payment of P6,000.00 monthly allowances was brought out during one of the board meetings. The matter was brushed aside by the Chairman of the Board on the ground that it will be studied further, but no decision was made when the allowances will be resumed. LLjur On June 12, 1989, the stockholders of respondent corporation repealed the resolution approved by the Board granting P6,000.00 monthly allowances to each member of the Board of Directors. Meanwhile, on May 22, 1989 complainant and his wife sold their shares in respondent corporation to the wife and two sons of Col. Constancio R. Velasco. Complainant and his wife demanded the payment of forty five thousand (P45,000.00) pesos representing the P6,000.00 monthly allowances for the period from October, 1988 to May 22, 1989. The Corporation refused to pay, hence, this complaint. During the preliminary conference, the issues to be resolved in this case were simplified in this wise: 1) Whether or not the grant of allowances is legal. 2) If the grant is legal, whether or not respondent is obliged to pay complainant's representation and transportation allowances covering the period of October 29, 1988 to May 22, 1989 has sold out his shares in the corporation. Petitioner pose the argument that by the doctrine of estoppel or ratification, respondent corporation Col. Constancio Velasco are now precluded from assailing the validity of the resolution of the board granting the allowances in question. He points out that for two years, the then directors of the respondent corporation, who are themselves then the only stockholders of the said corporation have been receiving and enjoying the monthly transportation and representation allowances of P6,000.00 and nobody complained. Respondent on the other hand. countered that the grant of the allowances in question is illegal, the same being contrary to the provisions of Section 30 of the Corporation Code. Respondent, likewise, takes the alternative stand that if the grant of allowances is legal, respondent is not obliged to pay complainants representation and transportation allowances in that the resolution granting the said P6,000.00 was suspended and there was no decision on the part of the Board when to resume the same; instead, the stockholders repealed the same in a special stockholders meeting held on June 12, 1989; and that the complainant is deemed to have abandoned the same when he sold out his shares in the corporation. Section 30 of the Corporation Code prescribes the manner of providing compensation of directors, stated in this wise: In the absence of any provision in the by-laws fixing their compensation, the directors shall not receive any compensation, as such directors except reasonable per diem. Provided, however, that any such compensation other than per diem may be granted to directors by vote of stockholders representing at least a majority of the outstanding capital stock at a regular or special stockholder's 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. aHcDEC From the foregoing provision, the general rule is that directors cannot receive remuneration for their services as such directors, except for reasonable per diem. This rule, however, admits of an exception, such that, when said directors render services to the corporation in a capacity other than as a director, pursuant to a contract with the corporation, or when they render extraordinary or unusual services not properly incidental to their office and are rendered outside of their regular duties; "if such services are performed by a director or other officer at the request of the board of directors, with the understanding that they are to be paid for, the law will imply a promise, in the absence of any special agreement, to pay what they are reasonably worth" (Ballantine, p. 188) In the instant case, the allowances/honoraria in question were granted as some sort of transportation allowance or representation allowance to compensate the efforts of the stockholders/board members in trying to get customers or business for the corporation, (TSN, 27 May 1991, pp. 10-11). It would seem then that the compensation in question is for services rendered to the corporation other than as a director, and as such the case involves dealings or contracts of directors with their corporation (Agbayani, Commercial Laws of the Phils., 262) under Section 32 of the Corporation Code, which provides: SECTION 32. Dealings of Directors, trustees or officers with the corporation . A contract of the corporation with one or more of its directors or trustees or officers is voidable, at the option of such corporation, unless all the following conditions are present: 1. That the presence of such directors or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting; 2. That the vote of such director or trustee was not necessary for the approval of the contract; 3. That the contract is fair and reasonable under the circumstances; and 4. That in the case of an officer, the contract has been previously authorized by the board of directors. Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract with a director or trustee, such contract may be ratified by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members in a meeting called for the purpose; provided, that full disclosure of the adverse interest of the directors or trustees involved is made at such meeting. Provided, however, that the contract is fair and reasonable under the circumstances. Applying the conditions above set forth to case at bar, we find that while the agreement to get customers or business for the corporation is "fair and reasonable under the circumstances",and a full disclosure of the adverse interest of the directors or trustees involved was apparently made, still the first condition required to be present is wanting because Minutes of the Meeting of the Board of Directors held on May 7, 1986 (Exh. 5) shows that present during the meeting were: Col. Constancio Velasco Mr. John Mcleod representing Henry Tiosejo Mr. Mike Mcleod representing Grace Tiosejo Mr. Edward King Mrs. Josefina King implying that the only members of the board present at the said meeting were Col. Constancio Velasco, Mr. Edward King and Mrs. Josefina B. King. the presence of John and Mike Mcleod does not effect any legal implication since it is basic that members of the board of directors cannot be represented by proxy. It is evident that a quorum was obtained only when the presence of complainant is counted, indicating that the first condition was not obtained. Therefore, a ratification by the requisite number of stockholders, which is two thirds (2/3) of the outstanding capital stock at a meeting called for the purpose must be made to validate the agreement. Records of the case, however, do not show any ratification made by the stockholders holding 2/3 of the outstanding capital stock at a meeting duly called for the purpose. Instead of ratifying, all the stockholders opted to repeal the resolution granting the allowance to the members of the board of directors (Exh. 3) hence the agreement was voided by the stockholders and no rights accrued therefrom. Further, since it is basic that members of the board cannot act by proxy, then it is evident that a quorum was obtained only when the presence of complainant is counted, hence said agreement was not valid. The grant of the allowance not being made in consonance with law, then respondent is not obliged to pay complainant's claims. cdll Prescinding from the foregoing discussions, the instant complaint should be, as it is hereby DISMISSED of lack of merit. SO ORDERED. (SGD.) KIRTH S. BANSUELO Hearing Officer