Lirag Textile Mills v SSS

7/8/2015 G.R.No.L33205

http://www.lawphil.net/judjuris/juri1987/aug1987/gr_l_33205_1987.html 1/6

TodayisWednesday,July08,2015

RepublicofthePhilippinesSUPREMECOURT

Manila

THIRDDIVISION

G.R.No.L33205August31,1987

LIRAGTEXTILEMILLS,INC.,andBASILIOL.LIRAG,petitioners,vs.SOCIALSECURITYSYSTEM,andHON.PACIFICODECASTRO,respondents.

FERNAN,J.:

ThisisanappealbycertiorariinvolvingpurelyquestionsoflawfromthedecisionrenderedbyrespondentjudgeinCivilCaseNo.Q12275entitled"SocialSecuritySystemversusLiragTextileMills,Inc.andBasilioL.Lirag."

Theantecedentfacts,asstipulatedbythepartiesduringthetrial,areasfollows:

1. That on September 4, 1961, the plaintiff [herein respondent Social Security System] and thedefendants [herein petitioners] Lirag Textile Mills, Inc. and Basilio Lirag entered into a PurchaseAgreementunderwhichtheplaintiffagreedtopurchasefromthesaiddefendantpreferredsharesofstock worth ONE MILLION PESOS [P1,000,000.00] subject to the conditions set forth in suchagreement...

2. That pursuant to the Purchase Agreement of September 4, 1961, the plaintiff, on January 31,1962,paid thedefendantLiragTextileMills, Inc. thesumofFIVEHUNDREDTHOUSANDPESOS[P500,000.00]forwhichthesaiddefendantissuedtoplaintiff5,000preferredshareswithaparvalueofonehundredpesos[P10000]pershareasevidencedbystockCertificateNo.128,...

3.Thatfurther inpursuanceof thePurchaseAgreementofSeptember4,1961,theplaintiffpaidtotheLiragTextileMills, Inc. thesumofFIVEUNDREDTHOUSANDPESOS[P500,000.00] forwhichthesaiddefendantissuedtoplaintiff5,000preferredshareswithaparvalueofonehundredpesos[P100.00]pershareasevidencedbyStockCertificateNo.139,...

4. That in accordancewith paragraph 3 of thePurchaseAgreement of September 4, 1961whichprovidesfortherepurchasebytheLiragTextileMills,Inc.ofthesharesofstockatregularintervalsofoneyearbeginningwiththe4thyearfollowingthedateof issue,StockCertificatesNos.128and139weretoberepurchasedbytheLiragTextileMills,Inc.thus:

CERT.No.AMOUNTDATEOFREDEMPTION

128P100,000.00February14,1965

100,000.00February14,1966

100,000.00February14,1967

100,000.00February14,1968

100,000.00February14,1969

139P100,000.00July3,1966

100,000.00July3,1967

100,000.00July3,1968

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100,000.00July3,1969

100,000.00July3,1970

5. That to guarantee the redemption of the stocks purchased by the plaintiff, the payment ofdividends,aswellastheotherobligationsoftheLiragTextileMills,Inc.,defendantsBasilioL.Liragsigned the Purchase Agreement of September 4, 1961 not only as president of the defendantcorporation, but alsoas surety so that should theLiragTextileMills, Inc. fail to performanyof itsobligations in the said Purchase Agreement, the surety shall immediately pay to the vendee theamountsthenoutstandingpursuanttoConditionNo.4,towit:

To guarantee the redemption of the stocks herein purchased, the payment of thedividends,aswellasotherobligationsoftheVENDORherein,theSURETYherebybindshimself jointlyandseverally liablewiththeVENDORsothatshouldtheVENDORfail toperform any of its obligations hereunder, the SURETY shall immediately pay to theVENDEEtheamountsthenoutstanding.'

6.ThatdefendantcorporationfailedtoredeemcertificatesofStockNos.128and139bypaymentoftheamountsmentionedinparagraph4above

7.That theLiragTextileMills, lnc.hasnotpaiddividends in theamountsandwithin theperiodsetforthinparagraph10ofthecomplaint*

8.Thatlettersofdemandshavebeensentbytheplaintifftothedefendanttoredeemtheforegoingstock certificates and pay the dividends set forth in paragraph 10 of the complaint, but the LiragTextileMills,Inc.hasnotmadesuchredemptionnormadesuchdividendpayments

9.ThatdefendantBasilioL.Liraglikewisereceivedlettersofdemandfromtheplaintiffrequiringhimtomakegoodhisobligationassurety

10.ThatnotwithstandingsuchlettersofdemandtothedefendantBasilioL.Lirag,StockCertificatesNos.128and139issuedtoplaintiffarestillunredeemedandnodividendshavebeenpaidonsaidstockcertificates

11.Thatparagraph5ofthePurchaseAgreementprovidesthatshouldtheLiragTextileMills,Inc.failto effect any of the redemptions stipulated therein, the entire obligation shall immediately becomedueanddemandableandtheLiragTextileMills,Inc.,shall,furthermore,beliabletotheplaintiffinanamountequivalenttotwelvepercent[12%]oftheamountthenoutstandingasliquidateddamages

12.That the failureof theLiragTextileMills, Inc. to redeemthe foregoingcertificatesofstockandpaydividendsthereonwereduetofinancialreverses,towit:

[a]UnrestrainedsmugglingintothecountryoftextilesfromtheUnitedStatesandothercountries

[b]Unrestrictedentryofsupposedremmantswhichcompetedwith textilesofdomesticproducetothedisadvantageandeconomicprejudiceofthelatter

[c]Scarcityofmoneyandtheunavailabilityoffinancingfacilities

[d]Paymentofinterestonmaturedloansextendedtodefendantcorporation

[e] Construction of theMontalban plant of the defendant corporation financed largelythroughreparationbenefits

[f]Laborproblemsoccasionedbythefactthatthedefendantcompanyisfinancial(sic)unabletoimprove,inasubstantialway,theeconomicplightofitsworkersasaresultofwhichtwocostlystrikeshadoccurred,onein1965andanotherin1968and

[g]Theoccurrenceof a firewhichdestroyedmore than1millionworthof rawcotton,paralyzed operations partially, increased overhead costs andwiped out any expectedprofitsthatyear

13. That it has been the policy of the plaintiff to be represented in the board of directors of thecorporationorentitywhichhasobtainedfinancialassistancefromtheSystembeitintermsofloans,mortgages or equity investments. Thus, pursuant to paragraph 6 of the Purchase Agreement ofSeptember4,1961whichprovidesasfollows:

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TheVENDEEshallbeallowedtohavearepresentativeintheBoardofDirectorsoftheVENDORwiththerighttoparticipateinthediscussionsandtovotetherein

14.ThatMessrs.ReneEspina,BernardinoAbesandHeberCatalanwereeachissuedonecommonshareofstockasaqualifyingshare to theirelection to theBoardofDirectorsof theLiragTextilesMills,Inc.

15.ThatMessrs.ReneEspina,BernardinoAbesandHeberCatalan,duringtheirrespectivetenureasmemberoftheBoardofDirectorsoftheLiragTextileMills,Inc.attendedthemeetingsofthesaidBoard,receivedperdiemsfortheirattendancethereininthesamemannerandinthesameamountasanyothermemberof theBoardofDirectors,participated in thedeliberations thereinand freelyexercised their right to vote in such meetings. However, the per diems received by the SSSrepresentativedonotgotothecoffersoftheSystembutpersonallytotherepresentativeinthesaidboardofdirectors.1

ForfailureofLiragTextileMills,Inc.andBasilioL.LiragtocomplywiththetermsofthePurchaseAgreement,theSSS filed an action for specific performance and damages before the then Court of First Instance of Rizal,QuezonCity,prayingthatthereindefendantsLiragTextileMills,Inc.andBasilioL.Liragbeadjudgedliablefor[1]the entire obligation of P1M which became due and demandable upon defendants' failure to repurchase thestocks as scheduled [21 dividends in the amount of P220,000.00 [31 liquidated damages in an amountequivalent to twelve percent (12%) of the amount then outstanding [4] exemplary damages in the amount ofP100,000.00and[5]attorney'sfeesofP20,000.00.

LiragTextileMills, Inc.andBasilioL.Liragmoved for thedismissalof thecomplaint,butweredenied thereliefsought.Thus, they filed theiranswerwithcounterclaim,denying theexistenceofanyobligationon theirpart toredeem the preferred stocks, on the ground that the SSS became and still is a preferred stockholder of thecorporationsothatredemptionofthesharespurchaseddependeduponthefinancialabilityofsaidcorporation.Insofar as defendantBasilio Lirag is concerned, it was alleged that his liability arises only if the corporation isliableanddoesnotperformitsobligationsunderthePurchaseAgreement.Theyfurthercontendedthatnoliabilityontheirparthasarisenbecauseofthefinancialconditionofthecorporationuponwhichsuchliabilitywasmadetodepend, particularly the nonrealization of any profit or earned surplus. Thus, the other claims for dividends,liquidateddamagesandexemplarydamagesareallegedlywithoutbasis.

After entering into the Stipulation of Facts abovequoted, the parties filed their respective memoranda andsubmittedthecasefordecision.

The lower court, ruling that the purchase agreement was a debt instrument, decided in favor of SSS andsentencedLiragTextileMills, Inc.andBasilioL.LiragtopaySSSjointlyandseverallyP1,000,000.00plus legalinterest until the said amount is fully paid P220,000.00 representing the 8% per annum dividends on thepreferredsharesplus legal interestup to the timeofactualpaymentP146,400.00as liquidateddamagesandP10,000.00asattorney'sfees.ThecounterclaimofLiragTextileMills,Inc.andBasilioL.Liragwasdismissed.

Hence,thispetition.

Petitionersassignthefollowingerrors:

1.ThetrialcourterredindecidingthatthePurchaseAgreementisadebtinstrument

2. Respondent judge erred in holding petitioner corporation liable for the payment of the 8%preferredandcumulativedividendsonthepreferredsharessincethepurchaseagreementprovidesthatsaiddividendsshallbepaidfromthenetprofitsandearnedsurplusofpetitionercorporationandrespondentSSShasadmittedthatduetolossessustainedsince1964,nodividendshadbeenandcanbedeclaredbypetitionercorporation

3.RespondentjudgeerredinsentencingpetitionerstopayP146,400.00inliquidateddamages

4.RespondentjudgeerredinsentencingpetitionerstopayP10,000.00bywayofattorney'sfees

5. Respondent judge erred in sentencing petitioners to pay interest from the time of firing thecomplaint u to the timeof full paymentbothon theP1,000,000.00 investedby respondentSSS inpetitioner's corporation and on the P220,000.00 which the SSS claims as dividends due on itsinvestments

6. Respondent judge erred in holding that petitioner Lirag is liable to redeem the P1,000,000.00worth of preferred shares purchased by respondent SSS from petitioner corporation and the 8%cumulativedividend,itappearingthatLiragwasmerelyasuretyandnotaninsureroftheobligation

7.Respondentjudgeerredindismissingthecounterclaimofpetitioners.

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The fundamental issue in this case iswhether or not thePurchaseAgreement entered intobypetitionersandrespondentSSSisadebtinstrument.

Petitioners claim that respondent SSS merely became and still is a preferred stockholder of the petitionercorporation, the redemption of the shares purchased by said respondent being dependent upon the financialabilityofpetitionercorporation.Petitionercorporation,thus,hasnoobligationtoredeemthepreferredstocks.

Ontheotherhand,respondentSSSclaimsthatthePurchaseAgreementisadebtinstrument,imposinguponthepetitioners the obligation to pay the amount owed, and creating as between them the relation of creditor anddebtor,notthatofastockholderandacorporation.

Weuphold the lower court's finding that thePurchaseAgreement is, indeed, a debt instrument. Its terms andconditionsunmistakablyshowthatthepartiesintendedtherepurchaseofthepreferredsharesontherespectivescheduled dates to be an absolute obligation which does not depend upon the financial ability of petitionercorporation. This absolute obligation on the part of petitioner corporation is mademanifest by the fact that asuretywasrequiredtoseetoitthattheobligationisfulfilledintheeventoftheprincipaldebtor'sinabilitytodoso.The unconditional undertaking of petitioner corporation to redeem the preferred shares at the specified datesconstitutesadebtwhichisdefined"asanobligationtopaymoneyatsomefixedfuturetime,oratatimewhichbecomesdefiniteandfixedbyactsofeitherpartyandwhichtheyexpresslyorimpliedly,agreetoperforminthecontract.2

Astockholdersinksorswimswiththecorporationandthereisnoobligationtoreturnthevalueofhissharesbymeans of repurchase if the corporation incurs losses and financial reverses, much less guarantee suchrepurchasethroughasurety.

Asprivate respondent rightly contends, if theparties intended it [SSS] to bemerely a stockholder of petitionercorporation,itwouldhavebeensufficientthatPreferredCertificatesNos.128and139wereissuedinitsnameasthe preferred certificates contained all the rights of a stockholder aswell as certain obligations on the part ofpetitionercorporation.However, thepartiesdid in factexecute thePurchaseAgreement,at thesame time thatthepetitionercorporation issueditspreferredstocktotherespondentSSS.ThePurchaseAgreementservestodefinetherightsandobligationsofthepartiesandtoestablishfirmlytheliabilityofpetitionersincaseofbreachofcontract.TheCertificatesofPreferredStockserveasadditionalevidenceoftheagreementbetweentheparties,though theprecise termsandconditions thereofmustbe read togetherwith, and regardedasqualifiedby thetermsandconditionsofthePurchaseAgreement.

TherightsgivenbythePurchaseAgreementtorespondentSSSarerightsnotenjoyedbyordinarystockholders.Thisfactcouldonlyleadtotheconclusionmadebythetrialcourtthat:

The aforementioned rights specially stipulated for the benefit of the plaintiff [respondent SSS]suggesteloquentlyanintentiononthepartoftheplaintiff[respondentSSS]tofacilitatealoantothedefendant corporation upon the latter's request. In order to afford protection to the plaintiff whichotherwise is provided by means of collaterals, as the plaintiff exacts in its grants of loans in itsordinarytransactionsofthiskind,asitislookeduponmoreasalendinginstitutionratherthanasaninvestingagency,thepurchaseagreementsuppliedtheseprotectiverightswhichwouldotherwisebefurnishedbycollateralstotheloan.Thus,themembershipintheboardistohaveawatchdogintheoperation of the business of the corporation, so as to insure againstmismanagement whichmayresult in losses not entirely unavoidable since payment for purposes of redemption aswell as thedividendsisexpresslystipulatedtocomefromprofitsand/orsurplus.Sucharightisneverexactedbyanordinarystockholdermerelyinvestinginthecorporation.3

Moreover, the PurchaseAgreement provided that failure on the part of petitioner to repurchase the preferredshares on the scheduled due dates renders the entire obligation due and demandable,with petitioner in sucheventuality liable to pay 12% of the then outstanding obligation as liquidated damages. These features of thePurchaseAgreement,takencollectively,clearlyshowtheintentofthepartiestobeboundthereinasdebtorandcreditor,andnotascorporationandstockholder.

Petitioners' contention that it is beyond the power and competence of petitioner corporation to redeem thepreferredsharesorpay theaccrueddividendsdue to financial reverses cannot serveas legal justification fortheirfailuretoperformunderthePurchaseAgreement.ThePurchaseAgreementconstitutesthelawbetweenthepartiesandobligationsarisingexcontractumustbefulfilledinaccordancewiththestipulations.4Besides, itwaspreciselythiseventualitythatwassoughttobeavoidedwhenrespondentSSSrequiredasuretyfortheobligation.

Thus, it follows thatpetitionerBasilioL.Liragcannotdeny liability forpetitionercorporation'sdefault.Assurety,BasilioL.LiragisboundimmediatelytopayrespondentSSStheamountthenoutstanding.

Theobligationofasuretydiffersfromthatofaguarantorinthatthesuretyinsuresthedebt,whereastheguarantormerelyinsuressolvencyofthedebtorandthesuretyundertakestopayiftheprincipal

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doesnotpay,whereasaguarantormerelybindsitselftopayiftheprincipalisunabletopay.5

Ontheliabilityofpetitionerstopay8%cumulativedividend,Weagreewiththeobservationofthelowercourtthatthedividendsstipulatedbythepartiesservedevidentlyasinterests.6Theamountthereofwasfixedat8%perannumandwasnotmade todependuponor to fluctuatewith theamountofprofitsorsurplus realized,aclear indication that thepartiesintendedtogiveasureandfixedearningsontheprincipalloan.Thefactthatthedividendsweresupposedtobepaidoutofnetprofitsandearnedsurplus,ofwhichtherewerenone,doesnotexcusepetitionersfromthepaymentthereof,againfor the reason that the undertaking of petitioner Basilio L. Lirag as surety, included the payment of dividends and otherobligationsthenoutstanding.

TheawardofthesumofP146,400.00inliquidateddamagesrepresenting12%oftheamountthenoutstandingiscorrect,consideringthatpetitionersinthestipulationoffactsadmittedhavingfailedtofulfilltheirobligationsunderthePurchaseAgreement.ThegrantofliquidateddamagesintheamountstatedisexpresslyprovidedforinthePurchaseAgreementincaseofcontractualbreach.

Thepronouncementofthelowercourtforthepaymentofinterestsonboththeunredeemedsharesandunpaiddividends isalso inorder.Perstipulationof facts,petitionersdidnotdeny the factofnonpaymentofdividendsnor their failure topurchase thepreferredshares.Since these involvesumsofmoneywhichareoverdue, theyareboundtoearnlegalinterestfromthetimeofdemand,inthiscase,judicial,i.e.,thetimeoffilingtheaction.

PetitionerBasilio L. Lirag is precluded fromdenying his liability under thePurchaseAgreement.After his firmrepresentationto"payimmediatelytotheVENDEEtheamountsthenoutstanding"evidencinghiscommitmentasSURETY, he is estopped from denying the same. His signature in the agreement carries with it the officialimprimaturaspetitionercorporation'spresident,inhispersonalcapacityasmajoritystockholder,assuretyandassolidaryobligor.Theessenceofhisobligationassuretyistopayimmediatelywithoutqualificationwhatsoeverifpetitionercorporationdoesnotpay.Tohaveanother interpretationofpetitionerLirag's liabilityassuretywouldviolatetheintegrityofthePurchaseAgreementaswellastheclearandunmistakableintentofthepartiestothesame.

WHEREFORE,thedecisioninCivilCaseNo.Q12275entitled"SocialSecuritySystemvs.LiragTextileMills,Inc.andBasilioL.Lirag"isherebyaffirmedintoto.Costsagainstpetitioners.

SOORDERED.

Gutierrez,Jr.,Feliciano,BidinandCortes,JJ.,concur.

Footnotes

*DefendantsLiragTextileMillsInc.andBasilioLiragunderCondition2ofthePurchaseAgreementobligatedthemselvestopayontheONEMILLIONPESOS[P1,000,000.00]PreferredSharescumulativedividendsofEightPercent[8%]thereonperannumoutofthenetprofitsandearnedsurplusofthedefendantcorporation,towit:

2.ThesharesofstockshallearnpreferredcumulativedividendofEIGHTPERCENT[8%]perannumoutofthenetprofitsandearnedsurplusoftheVENDORbeforeanydividendisdeclareduponthecommonsharesofstockoftheVENDOR.XXX

Thus,underparagraph10ofthecomplaint,itwasalleged

that"defendantsasofJuly3,1966hadanoverdueaccount

withtheplaintiffintheamountofTWOHUNDREDTWENTY

THOUSANDPESOS[P220,000.001representingdividendson

thepreferredshares..."[p.28,Rollo].

1Annex"D,"Petition,pp.5357,Rollo.

2Eliotv.FiscalCourtofPikeCounty,36S.W.(2d)619,621,237Ky797,underscoringsupplied.

3Pp.6667,Rollo.

4Art.1159,CivilCode.

5ManilaSuretyandFidelityCo.v.BatuConstructionCo.,53O.G.8836.

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6P.62,Rollo.

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Lirag Textile Mills v SSS