Rogelio L. Chan vs. Philips Sweets Manufacturing Co., Inc., et al.

[SEC-SICD * CASE NO. 4359. February 13, 1996.] ROGELIO L. CHAN , complainant , vs . PHILIPS SWEETS MANUFACTURING CO., INC., ET AL. , respondents . D E C I S I O N In his verified complaint dated December 3, 1992, complainant prayed for judgment ordering (a) the recession of the Deed of Assignment (Annex "B") and declaring the same to be without any validity, force or effect, (b) the respondents to return to complainant his 19,500 shares of stock and to cause the revival and reinstatement of the registry of his name as a stockholder of the corporation; (c) respondent Faylay or any and all other officers of the respondent corporation concerned to make available to complainant for inspection, examination and/or copying the records and documents mentioned in paragraph 16 of the complaint, at complainant's expense, as well as to furnish complainant copies of the most recent financial statements; (d) that the respondents be penalized pursuant to the provisions of Section 144 of the Corporation Code; (e) respondents jointly and severally, to pay damages, attorney's fees and litigation expenses; (f) respondents, jointly and severally, to pay to complainant such amount as may be established to be true and correct value of the 19,500 shares of stocks, in the event rescission may not be legally feasible. IEAHca In support thereof, complainant alleged, among other matters, that he is an incorporator and stockholder of respondent Philip Sweets Manufacturing Co., Inc. (respondent corporation, for brevity) owning 19,500 shares of stock with a par value of P10.00 per share; that respondent Antonio Miguel Lim Faylay (respondent Faylay, for brevity), having succeeded in persuading him to sell his aforesaid shares of stock in favor of respondent Faylay's daughters by reason of their blood relationship and a promised proportionate share in the profit out of the proceeds of the contemplated sale of respondent corporation, caused to be prepared a Deed of Assignment dated January 7, 1989 but which the date was altered by respondents to May 7, 1989 without authority from complainant, whereby complainant conveyed his 12,000 shares to respondent Lily L. Lee and 7,500 shares to respondent Rosalina D. Lim for a total consideration of P195,000.00 based on a par value of 10.00 per share; that in payment of the consideration of the assignment including complainant's waiver to 5,500 shares of additional capital stock also valued at P10.00 per share, respondent Faylay drew and issued in favor of complainant ABC Check No. 24779532 postdated December 28, 1989 in the amount of P250,000.00 drawn against respondent corporation's Current Account No. 0241001767, with the Allied Banking Corporation, at its Caloocan Branch; that the aforesaid check was dishonored by the drawee bank when it was presented for payment after its maturity date, in view of the instructions of respondent Faylay to the drawee bank to stop its payment upon his false representations that the same was a lost check; that respondent Faylay has not made good the check and still fails and refuses to comply with the formal demand of complainant's counsel in a letter dated January 2, 1990 to make good the said check within five (5) days from receipt thereof; that for the reasons mentioned above and considering such lack of consideration therefore, not to mention violation of respondent corporation's Articles of Incorporation, the Deed of Assignment (Annex "B") is null and void and did not acquire any force and effect; that individual respondents deliberately understated the actual book value of the subject shares of stock thereby misleading complainant into accepting the grossly inadequate price for the conveyance of his shares; that the stock certificates covering the 19,500 shares of stock have not been signed and conveyed by complainant to respondents Lee and Lim; that individual respondents conspired with each other in unlawfully and without authority causing the cancellation of complainant's name from the stock and transfer book of respondent corporation notwithstanding their full knowledge of the lack of consideration for the Deed of Assignment (annex "B"); and that consequently, complainant suffered mental anguish, fright, serious anxiety, wounded feelings and similar injury by reason of which complainant is entitled to moral. exemplary and actual damages as well as attorney's fees. Respondents corporation and Faylay, in their separate verified answer and amended answer with affirmative and special defenses, respectively, specifically denied the material allegations in the complaint. Respondent corporation averred that complainant had long ceased to be its stockholder; that the cancellation of complainant's name in its Stock and Transfer Book was in pursuance of the documents executed by complainant himself with the marital consent of his wife and other documents submitted as required by existing laws; that complainant is not entitled to damages as he has no cause of action against respondent corporation; that the Securities and Exchange Commission has not acquired jurisdiction over the present action because complainant had long ceased to be its stockholders; and by way of compulsory counterclaim, respondent corporation averred that it is entitled to an award of attorney's fees as it was constrained to engage the professional services of counsel as a consequence of the filing of the present action. For his part, respondent Faylay interposed the defense, among other matters, that the real owner of the shares of stock of respondent corporation which she placed in the name of complainant and her two other sons was complainant's mother, Lim Huy Long, who decided to convey the said shares to her nieces, Lily L. Lee and Rosalina S. Lim, with the acquiescence of her sons; that accordingly, complainant executed on the 15th day of December, 1989 at Malabon, Metro-Manila a Deed of Assignment attached to the Amended Answer of respondent Faylay as Annex "2-Faylay" with the marital consent of his wife Luisa Lim and in the presence of two (2) witnesses, whereby, for a consideration of P195,000.00 complainant assigned and absolutely conveyed in favor of Lily L. Lee 12,000 shares and Rosalina S. Lim 7,500 shares of his shareholdings totaling 19,500 shares in respondent corporation with a par value of P10.00 per share covered by Certificates of Stock Nos. 8 and 16, and irrevocably constituted and appointed said Assignees as his attorney-in-fact authorized to transfer the stock on the book of said corporation with full power of substitution; that simultaneously on said date of December 15, 1989, respondent Faylay issued in behalf of her two daughters, three (3) postdated Allied Banking Corporation Checks in the amount of P250,000.00 each payable to the order "CASH" which he delivered to Lim Huy Long; that respondent Faylay asked the drawee bank to stop the payment of the first check due on December 28, 1989 after having been informed by Lim Huy Long that she could not locate her checks; that respondent Faylay issued a check postdated January 15, 1990 also in the amount of P250,000.00 which he delivered to Lim Huy Long as a replacement of the alleged lost check; that the two checks for P250,000.00 each appeared to have been cashed and deposited with complainant's account with Bank, Libertad Branch; that after the cancelled checks were returned to respondent Faylay as paid, he settled the corresponding capital gains tax, documentary stamps and certification fees; that thereafter, respondent Faylay presented and registered the Deed of Assignment and Certificates of Stock Nos. 8 and 16 issued to, and duly endorsed by complainant and the same were cancelled on July 10, 1990 and new ones were issued to respondent Lily L. Lee and Rosalina S Lim; that several checks also issued and delivered by respondent Faylay to Lim Huy Long appeared to have been deposited and credited to complainant's bank account with Philtrust Bank, Libertad Branch, Pasay City; and since complainant's claim or demand has been paid, this Honorable Commission has no jurisdiction over the action as complainant had long ceased to be stockholder of respondent corporation. The preliminary conference was terminated on April 29, 1993 And as stated in the Order dated June 4, 1993, the issues to be traversed by this Hearing Officer are as follows: 1) Whether or not the assignment by complainant of the 19,500 shares of stock in favor of the assignees is valid and binding?; HDcaAI 2) Whether or not the 19,500 shares of stocks which the complainant is claiming should be returned to him?; 3) Whether or not there was sufficient consideration for the assignment of said shares of stock?; 4) Whether or not the complainant be afforded the right to inspect, examine, and copy the records and documents of the corporation particularly the financial statements?; 5) Whether or not the complainant or the respondents are entitled for damages, attorney's fees and cost of the suit?; and 6) Whether or not the certificate of stock covering the said shares were delivered and duly endorsed by the complainant to the respondents assignees? Simply stated, the pivotal issue presented for resolution as deemed in the Order of June 4, 1993 quoted above is whether or not the circumstances of the case warrant rescission of the Deed of Assignment as prayed for by complainant. Complainant maintained that the Deed of Assignment in question is null and void and did not acquire any force and effect for lack of consideration due to failure of respondent Faylay to make good the check for P250,000.00 and for violation of respondent corporation's Articles of Incorporation. On the other hand, respondents asserted that complainant's claim has been paid since respondent Faylay issued a replacement check in the amount of P250,000.00 which was paid by the bank. From the evidence on record, it appears that respondent corporation was incorporated in the Philippines and was issued Certificate of Incorporation No. 78584 (Exh. "A") on March 6, 1978 under the name of Philip Sweets Manufacturing Co., Inc. with an authorized capital stock of P15,000,000.00 divided into 1,500,000.00 shares with a par value of P10.00 each share. The incorporators named in the Articles of Incorporation (Exh. "A-1") of respondent corporation included respondent Faylay, and his relatives, among them, complainant Rogelio Chan, who is respondents Faylay's nephew. It is undisputed that sometime in 1989, complainant voluntarily entered into an agreement with respondents Lily Lee and Rosalina Lim to sell and convey his entire shareholdings in respondent corporation. That agreement between the parties captioned "Deed of Assignment" was a perfected contract of absolute sale wherein complainant assigned, sold, transferred and conveyed absolutely 12,000 shares to respondent Lily Lee and 7,500 shares to respondent Rosalina Lim. It specifically provided that "FOR AND IN CONSIDERATION of the sum of ONE HUNDRED NINETY FIVE THOUSAND (P195,000.00) PESOS, Philippine Currency, paid to me by and receipt of which I hereby acknowledge and confess from, LILY L. LEE and ROSALINA S. LIM, I, ROGELIO CHAN, . . ., do hereby assign, sell, transfer and convey absolutely . . . my shareholdings totalling NINETEEN THOUSAND FIVE HUNDRED (19,500) shares of PHILIP SWEETS MANUFACTURING CO., INC., . . ." (Exhibits "B", "2") Moreover, there can be no doubt that control and possession over the Certificates of Stock (Exhs. "Q" and "R") covering the 19,500 shares of stock assigned were given to the respondents-assignees and in fact, in the agreement itself, complainant irrevocably constituted and appointed the said assignees as his attorney-in-fact authorized to transfer the stock on the books of the corporation with full power of substitution. On the basis of this authority, respondent Faylay paid the corresponding capital gains tax and documentary stamps on the sale, and after a Certificate Authorizing Registration (Exhs. "N"; "N-1") was issued by the Bureau of Internal Revenue, the Secretary of the respondent corporation cancelled the aforesaid Certificates of Stock and transferred in the books of the corporation the shares of stock in question in the name of the assignees. Delivery was therefore complete at this point pursuant to R which provides that "the thing sold shall be understood as delivered when it is placed in the control and possession of the vendee.'' Such real delivery (traditio) is the act that transfer the real right of ownership. Under Article 1496 of the Civil Code, "(T)he ownership of the thing sold is acquired by the vendee from the moment it is delivered to him in any of the ways specified in Articles 1497 to 1501, or in any other manner signifying an agreement that the possession is transferred from the vendor to the vendee." That payment of the price in any form was not yet effected is immaterial to the transfer of the right of ownership. In a contract of sale, the non-payment of the price is a resolutory condition which extinguished the transaction that for a time existed and discharges the obligations created thereunder. This even on the assumption that respondents failed to make good the dishonored check (Exh. "J"; Exh. "3"), such failure to pay the consideration would not have the effect converting the agreement into one without cause or consideration. It would merely result in default on the part of respondents-assignees at most, and accord to the complainant the right to demand rescission upon judicial or notarial demand (Ocampo vs. Court of Appeals, G.R. No. 97442, June 30, 1994, Citing De la Cruz vs. Legaspi, G.R. No. L-8024, November 29, 1955, 98 Phil. 43 [1955]). It is a general rule that in every contract which contains reciprocal obligations, the right to rescind is always implied under Article 1191 of the Civil Code in case one of the parties fail to comply with his obligations (Lim vs. Court of Appeals, G.R. No. 85733, February 23, 1990). However, the right to rescind pursuant to Article 1191 is not absolute. Rescission will not be permitted for slight or casual breach of the contract (Gimenez vs. Court of Appeals, G.R. No. 92171, March 13, 1991). In the instant case, complainant claims that the breach is so substantial as to justify rescission, not only because respondent Faylay failed to make good the check for P250,000.00 but also because respondents violated Article Seventh of the Articles of Incorporation of respondent corporation. IHCESD After a careful review of the evidence on record and the transcripts of stenographic notes of the testimonies of the witnesses, this Hearing Officer is not persuaded that the circumstances obtaining in the case have assumed such character as so substantial and fundamental as to warrant rescission for non-performance and violation of Article Seventh of the Articles of Incorporation of respondent corporation. It is fully established that payment of the shares of stock has to be taken from the three (3) postdated Allied Banking Corporation (ABC) checks which respondent Faylay issued in behalf of the aforenamed assignees on December 15, 1989 at the instance of complainant's mother, Lim Huy Long who claims to be the real owner of the shares of stock of respondent corporation which she placed in the names of the complainant and her two (2) other sons (Ernesto Chan and Amado Chan). This fact as admitted by complainant that he was never in possession of the Certificates of Stock No. 8 (Exh "Q") and 16 (Exh. "R") covering the 19,500 shares of stock in question which contained his endorsement, with the marital consent of his wife, suggests that complainant merely held the shares of stock in question in trust for the benefit of his mother Lim Huy Long. The three (3) postdated ABC Checks in the amount of P250,000.00 each payable to the order of "CASH" delivered to and received by the said Lim Huy Long with the knowledge of complainant and his brothers, are described as follows: Exh. No. ABC Check No. Dates Amounts J, "3" 24779532 December 28, 1989 P250,000.00 4 24779537 January 9, 1990 250,000.00 5 24779542 February 6, 1990 250.000.00 A few days after receiving the above-described three (3) postdated checks, Lim Huy Long (mother of the complainant) informed respondent Faylay that the checks were missing and she could not locate the same, and so respondent Faylay asked the drawee bank to stop the payment of the first check due on December 28, 1989, and then issued ABC Check No. 24735360 postdated January 15, 1990 in the amount of P250,000.00 (Exh. "3-A") as replacement of the first check due on December 28, 1989. This check was also delivered to and received by Lim Huy Long. Records further show that the aforestated first three (3) postdated checks (Exhs. "3" "4" and "5") were subsequently found in the possession of the complainant Rogelio L. Chan who negotiated all the checks and subsequently were paid (Exhs. "4-A" "4-B" "5-a" and "5-b") except ABC Check No. 24779532 dated December 28, 1989 which was dishonored due to "Stop Payment" order of respondent Faylay. However, ABC Check No. 24735360 dated January 15, 1990 in the sum of P250,000.00 (Exh. "3-A") which was issued as replacement of the dishonored ABC Check No 24779532 (Exh "3"). was proven to have been negotiated and paid (Exh. "3-b") for the benefit of the complainant and his mother Lim Huy Long. Respondent Faylay adequately explained the reason for the dishonor of the check (Exh. "J" "3"). He testified that he made a "stop payment" on said check upon information made by complainant's mother that the said check together with the other checks he issued and delivered to Lim Huy Long were missing. He further stated that he later issued a replacement check (Exh. "3-A") which he delivered to Lim Huy Long. The foregoing testimony of respondent Faylay was corroborated by no less than Lim Huy Long (mother of the complainant) who confirmed receipt of the said checks from respondents Faylay as well as the replacement check but she claimed that complainant borrowed the checks and did not return them to her any more and this prompted her to inform respondent that the checks were missing. This Hearing Officer has studied at length the testimony of Lim Huy Long and he has not found any material flaw therein which would cause the slightest doubt either in its truth or as to her credibility. Neither can this Hearing Officer sustain complainant's claim that respondents violated Article Seventh of the Articles of Incorporation of respondent corporation which requires a stockholder desiring to sell his shares of stock to first offer the same to the stockholders of record, who shall have the option to purchase the shares within thirty (30) days from receipt of the notification from the Secretary. Article 7 of the Articles of Incorporation of Philip Sweets Manufacturing Co., Inc. (Exh. A-1) reads: "Except in cases of disposition by will or descent or donation or transfer of shares to direct descendants, the subscription and ownership of any and all shares of stock in the corporation are made and taken subject to the following terms and conditions. "A stockholder desiring to sell holdings of shares shall first notify the Secretary of the corporation of his intention to do so in writing, quoting his selling price therefore. The Secretary shall, within five (5) days from actual receipt thereof, notify all stockholders of record as of the date, in writing, to exercise their option to purchase said shares within thirty (30) days from the date of the receipt of the notification from the Secretary, provided however, that should there be two or more stockholders desiring to purchase said shares, the sale shall be made in proportion to the respective holdings of the purchasing stockholders in the corporation on the date of the offer. In case of failure by the stockholders or any of them to exercise the foregoing option, said shares may be sold to the persons other than actual stockholders for a price which shall not be less than that offered to the stockholders. xxx xxx xxx. A transfer or conveyance made in violation of the above terms and conditions shall be null and void and shall not be transferable in the books of the corporation." acAIES It must be observed that the aforesaid Article imposes upon a stockholder desiring to sell holdings of shares of stock to first notify the Secretary of the corporation of his intention to do so in writing, quoting his selling price therefor. Incidentally, complainant presented no evidence to prove that he notified the Secretary of respondent corporation in writing of his intention to sell the said shares of stock. On the other hand, Atty. Vicente V. Ocampo, who was presented by complainant as an adverse party witness, and who testified that he has been the Secretary of respondent corporation since its inception in 1978 up to the present, confirmed that he did not receive any notice from complainant about the latter's intention to sell his shares of stock. Complainant is now under estoppel on this issue because the violation of Article Seven of the said Articles of Incorporation is attributable to his own omission to notify the Secretary of respondent corporation of his intention to sell the shares of stock in question. It would be the height of injustice to make respondents-assignees suffer for the consequences of complainant's own omission. The foregoing disquisition's render unnecessary any discussion on the other issues raised by the parties. The complainant having failed to prove his cause of action, his claim for damages is denied. For insufficiency of evidence, respondent corporation's claim for damages is likewise denied due course. As regards respondent Faylay's claim for damages, the same is likewise denied. This Hearing Officer is of the belief that it has not been sufficiently established that the complaint Mr. Rogelio L. Chan filed was intended merely to harass and place respondent Faylay in disrepute as complainant apparently was pursuing a cause of action he sincerely believed was meritorious. The fact that he has failed does not necessarily mean that he was acting in bad faith. The mere filing of a complaint against a person, while it may cause him some anxiety, is not per se evidence of ill will on which a claim for damages may be based. A contrary rule would discourage peaceful recourse to the courts of justice and induce resort to methods less than legal, and perhaps even violent. (People's Financing Corp. vs. Court of Appeals, G.R. No. 80791, December 4, 1990). WHEREFORE, premises considered, the above-entitled case as well as counterclaims should be, as they are hereby DISMISSED. SEDaAH SO ORDERED. (SGD.) ELPIDIO S. SALGADO Hearing Officer