Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-29780 August 23, 1929
THE GOVERNMENT OF THE PHILIPPINE ISLANDS, plaintiff-appellee,
vs.
ASIA LUMBER CO., INC., defendant-appellant.
H.V. Bamberger for appellant.
Attorney-General Jaranilla for appellee.
STATEMENT
The government alleges that the defendant is a domestic corporation, the capital stock of which at first was P150,000 divided into 1,500 shares of the par value of P100 each, which on November 20, 1922, were increased to P500,000 divided into 5,000 shares of P100 each. That its principal place of business was in the municipality and Province of Iloilo, and that its primary purpose was to engage in the lumber. timber, and saw-mill business. That according to the articles of incorporation P85,000 of its authorized capital stock was subscribed, and the subscribers paid P68,000 of that amount, but that in truth and in fact only P64,000 was actually paid in cash at the time. That on October 12, 1920, its treasurer subscribed to an oath, which was made a part of the articles of incorporation, that P85,000 of the capital stock has been subscribed, and that P68,000 of that amount was actually paid, but that the sum of P64,000 only was actually paid. That about May 9, 1924, Walter A. Smith and the Walter A. Smith Co., Inc., another domestic corporation, purchased the controlling interest of the defendant from its old stockholders, and that in lieu thereof their certificates of stock were issued to and in the name of Walter A. Smith. That after Walter A. Smith, President of the Walter A. Smith Co., Inc., assumed control, he acquired 1,615 new shares of the stock of the defendant which were issued to Walter A. Smith Co., Inc. in payment of the accounts then due from the defendant to Walter A. Smith & Company, and which were later purchased by Walter A. Smith at 50 per cent of their par value. That since then the business of the two companies have been intermingled to the prejudice of the stockholders of the two corporations and their creditors. That from July, 1924, to July 31, 1926, the salaries of the employees have been paid by the defendant only. That the minute book, stock and transfer book have not been kept as required by section 52 of Act No. 1459, known as the Corporation Law. That the machinery and other property were sold to the defendant by some of its officers at exorbitant prices. That it has not sufficient financial strength to continue doing business, and cannot pay its debts. "That no adequate remedy exists whereby the public may be protected from further illegal acts of the respondent corporation, except through the dissolution of the same." That the defendant has misused its franchise, privileges and corporate rights, and forfeited its privileges, powers and franchise. Wherefore, the government prays that an order be issued to the defendant to show cause why judgment should not be entered depriving it of its corporate rights, dissolving the corporation, and for such other and further relief as may be just and equitable.
For answer the defendant made a general and specific denial, and as a special defense alleged that the plaintiff's cause of action has prescribed.
In an exhaustive opinion, the lower court rendered judgment "ousting and depriving the defendant corporation of all its corporate rights, privileges, and franchise, and declaring the dissolution of the defendant, together with costs."
On appeal defendant assigns the following errors :
1. The court erred in finding that Walter A. Smith acquired one hundred sixty-one thousand five hundred pesos (P161,500) worth of stock of the defendant company at fifty (50) per cent of its par value in violation of section 16 of Act No. 1459.
2. The court erred in finding that the facts set out in the finding of fact contained its decision (pp. 22, 23, 24) were sufficient to justify the dissolution of the corporate powers of the defendant.
3. The court erred in ordering the dissolution of the defendant company.
JOHNS, J.:
October 18, 1920, Edward J. Pfleider, J.S. Mohler, R.C. Huggan, C.S. Gilchrist and Thomas N. Powell organized the defendant with an authorized capital stock of P150,000, divided into 1,500 shares of the par value of P100 each. At that time Pfleider was the owner of a tract of land at a place called Asia, on the coast of the Island of Negros, which he leased to the defendant for a period of five years and for such further time "as might be necessary for the cutting of the timber then standing on the land." During the time that Pfleider was the president of the defendant, ha and Gilchrist, a director, sold it an engine and a boiler for the agreed price of P14,000. August 23, 1922, when Ford became president of the corporation, he severely criticised this purchase, claiming that the property was not worth one-half of the amount of the purchase price. As a result of internal strife, Walter A. Smith acquired control of the defendant company, which was then indebted to Walter A. Smith Co., Inc., in the sum of P161,500. By mutual agreement the defendant paid its debts to Walter A. Smith & Company by issuing 1,615 shares of its capital stock to that company which later sold them to Walter A. Smith. At the expiration of the five-year period, Pfleider brought an action against the defendant to terminate the lease, which case is now pending on appeal in this court.
On investigation the defendant found that a large tract of virgin timber land on the plateau back of the Pfleider property "could be tapped if adequate means of transportation could be furnished." As a result detailed plans were made and construction work started, and a mill pond, a new dock and a new railroad were in the course of construction at the time the investigation was made by the Insular Auditor, whose report, together with the complaint of Pfleider, resulted in the commencement of this action.
The Attorney-General frankly concedes that the first assignment of error must be sustained. The evidence shows that the defendant owed Walter A. Smith & Company P161,500 which it could not pay, and that by mutual agreement, the defendant issued 1,615 shares of its capital stock to the Walter A. Smith & Company in full payment of that debt. To say the least, there was nothing wrong about that transaction, and the fact that the Walter A. Smith & Company later sold that stock to Walter A. Smith for 50 per cent of its par value ought not to be charged to the defendant. The engine and the boiler were purchased sometime in the year 1921, and this action was commenced February 12, 1927, as the instigation of Pfleider, who was a party to that alleged fraudulent sale, or about six years after he and Gilchrist made the sale. As a result of its efforts to acquire and open up a new body of timber and the large amount expended for that purpose, the defendant may or may not be insolvent, but assuming, without deciding, that it is, that would not be any legal ground for the government to take away its charter. In such a case it would be far better for the defendant, its stockholders and creditors to wind up its affairs with its corporate charter than without. It appears that the defendant has not kept its minute and stock books in the manner and form in which they should be kept, but even so, that is a matter which can be very easily corrected. In the final analysis, it is very apparent that the government has made itself a party in this case to the internal strife and friction among the stockholders of the defendant, and that in truth and in fact this proceeding was instituted by the government at the instance of Pfleider, who was the former president of the defendant.
For want of any merit in the petition, the judgment of the lower court is reversed, and this proceeding is dismissed, without costs, and with the admonition that the defendant promptly prepare and have its minute book, corporate records, stock and transfer book in all things and respects conform to the Corporation Law. So ordered.
Avanceņa, C.J., Johnson, Street, Villamor, Romualdez, and Villa-Real, JJ., concur.
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