828 Phil. 710
VELASCO JR., J.:
The Court notes that the grounds relied upon by the movants Virata, Estrella, Ng Wee, Cua and the Cualopings, Reyes, and Wincorp are the same or substantially similar to those raised in their respective petitions at bar. The same have been amply discussed, thoroughly considered, exhaustively threshed out and resolved in Our July 5, 2017 Decision. Said motions for reconsideration, perforce, must suffer the same fate of denial. Meanwhile, the Court deems it necessary to discuss the issues raised by Santos-Tan, who is only now participating in the proceedings, in her plea for reconsideration.
- Motion for Partial Reconsideration[1] filed by Luis Juan L. Virata (Virata);
- Motion for Reconsideration[2] of Mariza Santos-Tan (SantosTan);
- Motion for Reconsideration[3] of Manuel Estrella (Estrella)
- Motion for Partial Reconsideration[4] of Alejandro Ng Wee (Ng Wee);
- Motion for Reconsideration[5] of Simeon Cua, Vicente Cualoping, and Henry Cualoping (Cua and the Cualopings);
- Motion for Reconsideration[6] of Anthony T. Reyes (Reyes); and
- Motion for Reconsideration[7] of Westmont Investment Corporation (Wincorp)
Section 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons.In Our July 5, 2017 Decision, the Court explicated the liabilities of the board directors, thus:
When a director, trustee or officer attempts to acquire or acquire, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been 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.
G.R. No. 221135: The liabilities of Cua and the CualopingsAs regards Santos-Tan, she would likewise be liable in her personal capacity under Section 31 of the Corporation Code.[9] Her liability is no different from that of Cua and the Cualopings. She cannot utilize the separate juridical personality of Wincorp as a shield when she, along with the other board members, approved the credit line application of Power Merge in the amount of P2,500,000,000.00 despite the glaring signs that it would be unable to make good its obligation, to wit:
On the other hand, the liabilities of Cua and the Cualopings are more straightforward. They admit of approving the Credit Line Agreement and its subsequent Amendment during the special meetings of the Wincorp board of directors, but interpose the defense that they did so because the screening committee found the application to be above board. They deny knowledge of the Side Agreements and of Power Merge's inability to pay.
We are not persuaded.
Cua and the Cualopings cannot effectively distance themselves from liability by raising the defenses they did. As ratiocinated by the CA:Such submission creates a loophole, especially in this age of compartmentalization, that would create a nearly fool-proof scheme whereby well-organized enterprises can evade liability for financial fraud. Behind the veil of compartmentalized departments, such enterprise could induce the investing public to invest in a corporation which is financially unable to pay with promises of definite returns on investment. If we follow the reasoning of defendants-appellants, we allow the masterminds and profiteers from the scheme to take the money and run without fear of liability from law simply because the defrauded investor would be hard-pressed to identify or pinpoint from among the various departments of a corporation which directly enticed him to part with his money.Petitioners Cua and the Cualopings bewail that the above-quoted statement is overarching, sweeping, and bereft of legal or factual basis. But as per the records, the totality of circumstances in this case proves that they are either complicit to the fraud, or at the very least guilty of gross negligence, as regards the "sans recourse" transactions from the Power Merge account.
The board of directors is expected to be more than mere rubber stamps of the corporation and its subordinate departments. It wields all corporate powers bestowed by the Corporation Code, including the control over its properties and the conduct of its business. Being stewards of the company, the board is primarily charged with protecting the assets of the corporation in behalf of its stakeholders.
Cua and the Cualopings failed to observe this fiduciary duty when they assented to extending a credit line facility to Power Merge. In PED Case No. 20-2378, the SEC discovered that Power Merge is actually Wincorp's largest borrower at about 30% of the total borrowings. It was then incumbent upon the board of directors to have been more circumspect in approving its credit line facility, and should have made an independent evaluation of Power Merge's application before agreeing to expose it to a P2,500,000,000.00 risk.
Had it fulfilled its fiduciary duty, the obvious warning signs would have cautioned it from approving the loan in haste. To recapitulate: (1) Power Merge has only been in existence for two years when it was granted a credit facility; (2) Power Merge was thinly capitalized with only P37,500,000.00 subscribed capital; (3) Power Merge was not an ongoing concern since it never secured the necessary permits and licenses to conduct business, it never engaged in any lucrative business, and it did not file the necessary reports with the SEC; and (4) no security other than its Promissory Notes was demanded by Wincorp or was furnished by Power Merge in relation to the latter's drawdowns.
It cannot also be ignored that prior to Power Merge's application for a credit facility, its controller Virata had already transacted with Wincorp. A perusal of his records with the company would have revealed that he was a surety for the Hottick obligations that were still unpaid at that time. This means that at the time the Credit Line Agreement was executed on February 15, 1999, Virata still had direct obligations to Wincorp under the Hottick account. But instead of impleading him in the collection suit against Hottick, Wincorp's board of directors effectively released Virata from liability, and, ironically, granted him a credit facility in the amount of P1,300,000,000.00 on the very same day.
This only goes to show that even if Cua and the Cualopings are not guilty of fraud, they would nevertheless still be liable for gross negligence in managing the affairs of the company, to the prejudice of its clients and stakeholders. Under such circumstances, it becomes immaterial whether or not they approved of the Side Agreements or authorized Reyes to sign the same since this could have all been avoided if they were vigilant enough to disapprove the Power Merge credit application. Neither can the business judgment rule apply herein for it is elementary in corporation law that the doctrine admits of exceptions: bad faith being one of them, gross negligence, another. The CA then correctly held petitioners Cua and the Cualopings liable to respondent Ng Wee in their personal capacity.
G.R. No. 221109: The liability of Manuel Estrella
To refresh, Estrella echoes the defense of Tankiansee, who was exempted from liability by the trial court. He claims that just like Tankiansee, he was not present during Wincorp's special board meetings where Power Merge's credit line was approved and subsequently amended. Both also claimed that they protested and opposed the board's actions. But despite the parallels in their defenses, the trial court was unconvinced that Estrella should be released from liability. Estrella appealed to the CA, but the adverse ruling was sustained.
We agree with the findings of the courts a quo.
The minutes of the February 9, 1999 and March 11, 1999 Wincorp Special Board Meetings were considered as damning evidence against Estrella, just as they were for Cua and the Cualopings. Although they were said to be unreliable insofar as Tankiansee is concerned, the trial court rightly distinguished between the circumstances of Estrella and Tankiansee to justify holding Estrella liable.
For perspective, Tankiansee was exempted from liability upon establishing that it was physically impossible for him to have participated in the said meetings since his immigration records clearly show that he was outside the country during those specific dates. In contrast, no similar evidence of impossibility was ever offered by Estrella to support his position that he and Tankiansee are similarly situated.
Estrella submitted his departure records proving that he had left the country in July 1999 and returned only in February of 2000. Be that as it may, this is undoubtedly insufficient to establish his defense that he was not present during the February 9, 1999 and March 11, 1999 board meetings.
Instead, the minutes clearly state that Estrella was present during the meetings when the body approved the grant of a credit line facility to Power Merge. Estrella would even admit being present during the February 9, 1999 meeting, but attempted to evade responsibility by claiming that he left the meeting before the "other matters," including Power Merge's application, could have been discussed.
Unfortunately, no concrete evidence was ever offered to confirm Estrella's alibi. In both special meetings scheduled, Estrella averred that he accompanied his wife to a hospital for her cancer screening and for dialogues on possible treatments. However, this claim was never corroborated by any evidence coming from the hospital or from his wife's physicians. Aside from his mere say-so, no other credible evidence was presented to substantiate his claim. Thus, the Court is not inclined to lend credence to Estrella's self-serving denials.
Neither can petitioner Estrella be permitted to raise the defense that he is a mere nominee of John Anthony Espiritu, the then chairman of the Wincorp board of directors. It is of no moment that he only had one nominal share in the corporation, which he did not even pay for, just as it is inconsequential whether or not Estrella had been receiving compensation or honoraria for attending the meetings of the board.
The practice of installing undiscerning directors cannot be tolerated, let alone allowed to perpetuate. This must be curbed by holding accountable those who fraudulently and negligently perform their duties as corporate directors, regardless of the accident by which they acquired their respective positions.
In this case, the fact remains that petitioner Estrella accepted the directorship in the Wincorp board, along with the obligations attached to the position, without question or qualification. The fiduciary duty of a company director cannot conveniently be separated from the position he occupies on the trifling argument that no monetary benefit was being derived therefrom. The gratuitous performance of his duties and functions is not sufficient justification to do a poor job at steering the company away from foreseeable pitfalls and perils. The careless management of corporate affairs, in itself, amounts to a betrayal of the trust reposed by the corporate investors, clients, and stakeholders, regardless of whether or not the board or its individual members are being paid. The RTC and the CA, therefore, correctly disregarded the defense of Estrella that he is a mere nominee. (citations omitted, emphasis added)
Authorities, great in number, are one in the idea that "ratification by a corporation of an unauthorized act or contract by its officers or others relates back to the time of the act or contract ratified, and is equivalent to original authority;" and that "[t]he corporation and the other party to the transaction are in precisely the same position as if the act or contract had been authorized at the time." The language of one case is expressive: "The adoption or ratification of a contract by a corporation is nothing more nor less than the making of an original contract. The theory of corporate ratification is predicated on the right of a corporation to contract, and any ratification or adoption is equivalent to a grant of prior authority." (emphasis added)And in University of Mindanao, Inc. v. Bangko Sentral ng Pilipinas,[11] We have discussed that:
Implied ratification may take the form of silence, acquiescence, acts consistent with approval of the act, or acceptance or retention of benefits. However, silence, acquiescence, retention of benefits, and acts that may be interpreted as approval of the act do not by themselves constitute implied ratification. For an act to constitute an implied ratification, there must be no acceptable explanation for the act other than that there is an intention to adopt the act as his or her own. x x x (emphasis added)In the case at bar, it can be inferred from the attendant circumstances that the Wincorp board ratified, if not approved, the Side Agreements. Guilty of reiteration, Virata's prior transactions with Wincorp is recorded in the latter's books. The Wincorp directors are chargeable with knowledge of the surety agreement that Virata executed to secure the Hottick obligations to its investors. However, instead of enforcing the surety agreement against Virata when Hottick defaulted, the Wincorp board approved a resolution excluding Virata as a party respondent in the collection suit to be filed against Hottick and its proprietors. What is more, this resolution was approved by the movant-directors on February 9, 1999, the very same day Virata's credit line application for Power Merge in the maximum amount of P1,300,000,000.00 was given the green light.
It must be remembered that the special meeting of Wincorp's board of directors was conducted on February 9 and March 11 of 1999, while the Credit Line Agreement and its Amendment were entered into on February 15 and March 15 of 1999, respectively. But as indicated in Power Merge's schedule of drawdowns, Wincorp already released to Power Merge the sum of P1,133,399,958.45 as of February 12, 1999, before the Credit Line Agreement was executed. And as of March 12, 1999, prior to the Amendment, P1,805,018,228.05 had already been released to Power Merge.To emphasize, there were clear warning signs that Power Merge would not have been able to pay the almost P2.5 billion face value of its promissory notes. To Our mind, the Wincorp board of directors' approval of the credit line agreement, notwithstanding these telltale signs and the above outlined circumstances, establishes the movant-directors' liability to Ng Wee. For if these do not attest to their privity to Wincorp's fraudulent scheme, they would, at the very least, convincingly prove that the movant directors are guilty of gross negligence in managing the company affairs. The movant-board directors should not have allowed the exclusion of Virata from the collection suit against Hottick knowing that he is a surety thereof. As revealed by their subsequent actions, this was not a mere error in judgment but a calculated maneuver to defraud its investors. Hence, the Court did not err when it ruled that Sec. 31 of the Corporation Code must be applied, and the separate juridical personality of Wincorp, pierced.
The fact that the proceeds were released to Power Merge before the signing of the Credit Line Agreement and the Amendment thereto lends credence to Virata's claim that Wincorp did not intend for Power Merge to be strictly bound by the terms of the credit facility; and that there had already been an understanding between the parties on what their respective obligations will be, although this agreement had not yet been reduced into writing. The underlying transaction would later on be revealed in black and white through the Side Agreements, the tenor of which amounted to Wincorp's intentional cancellation of Power Merge and Virata's obligation under their Promissory Notes. In exchange, Virata and Power Merge assumed the obligation to transfer equity shares in UPDI and the tollway project in favor of Wincorp. An arm's length transaction has indeed taken place, substituting Virata and Power Merge's obligations under the Promissory Notes, in pursuance of the Memorandum of Agreement and Waiver and Quitclaim executed by Virata and Wincorp. Thus, as far as Wincorp, Power Merge, and Virata are concerned, the Promissory Notes had already been discharged.
No further pleadings or motions will be entertained.
- Motion for Partial Reconsideration filed by Luis Juan L. Virata;
- Motion for Reconsideration of Mariza Santos-Tan;
- Motion for Reconsideration of Manuel Estrella;
- Motion for Partial Reconsideration of Alejandro Ng Wee;
- Motion for Reconsideration of Simeon Cua, Vicente Cualoping, and Henry Cualoping;
- Motion for Reconsideration of Anthony T. Reyes; and
- Motion for Reconsideration of Westmont Investment Corporation.
A corporation is an artificial entity created by operation of law. It possesses the right of succession and such powers, attributes, and properties expressly authorized by law or incident to its existence. It has a personality separate and distinct from that of its stockholders and from that of other corporations to which it may be connected. As a consequence of its status as a distinct legal entity and as a result of a conscious policy decision to promote capital formation, a corporation incurs its own liabilities and is legally responsible for payment of its obligations. In other words, by virtue of the separate juridical personality of a corporation, the corporate debt or credit is not the debt or credit of the stockholder. This protection from liability for shareholders is the principle of limited liability.[2] (Citations omitted)It is well-settled that the juridical personality of a corporation may be removed or its corporate veil pierced when the corporation is just an alter ego of a person or of another corporation. When the corporation becomes a shield for fraud, illegality or inequity committed against third persons, the corporate veil will, as a result, be disregarded for the interest of justice.[3]
"Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may so validly attach, as a rule, only when -Section 31 of the Corporation Code provides that:
'1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons;
'2. He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto;
'3. He agrees to hold himself personally and solidarily liable with the corporation; or
'4. He is made, by a specific provision of law, to personally answer for his corporate action.'"[7]
Sec. 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons.In the present case, nowhere in the records does it appear that the granting, extending and approving of the Credit Line Agreement and the Amendment to the Credit Line Agreement is a patently unlawful act of the corporation. In fact, the granting and approval of the same falls within the function and purpose of Wincorp as an investment house. Thus, the mere approval of Cua, the Cualopings, Santos-Tan and Estrella of the said. credit. line agreements cannot be equated to knowingly assenting or approving a patently unlawful act of the corporation. Neither can it be equated to bad faith, fraud nor gross negligence.
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 which has been 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. (Emphasis ours)