Bayla vs. Silang Traffic Co., Inc.

A contract denominated as an "Agreement for Installment Sale of Shares" entered into by an existing corporation is a contract of sale, not a subscription to capital stock, and thus the rule prohibiting a corporation from releasing an original subscriber from the obligation to pay is inapplicable. Forfeiture of installment payments for failure to pay does not automatically occur without judicial or extrajudicial demand unless the contract expressly provides that demand is not necessary.

Silang Traffic Co., Inc. was organized and incorporated in 1927. Eight years later, on March 30, 1935, the corporation entered into "Agreements for Installment Sale of Shares" with several individuals, including the petitioners, to sell unissued shares of stock at a stipulated price payable in quarterly installments over five years. The validity of the corporation's sale of these shares was subsequently challenged in a separate civil case by other parties claiming a preferred right to buy the shares.

On March 30, 1935, Silang Traffic Co., Inc., a corporation organized in 1927, entered into identical "Agreements for Installment Sale of Shares" with several individuals, including Sofronio T. Bayla, Venancio Toledo, Josefa Naval, and Paz Toledo. Under these agreements, the individuals promised to pay the purchase price of specified shares of stock in quarterly installments over five years with 6% interest on deferred payments. The contract stipulated that if the purchaser failed to pay any installment when due, the shares would revert to the seller and the payments already made would be forfeited in favor of the seller, who could take possession without resorting to court proceedings.

The petitioners paid several installments on their respective shares: Bayla paid P360 for 8 shares, Venancio Toledo P375 for 8 shares, Josefa Naval P675 for 15 shares, and Paz Toledo P675 for 15 shares. The validity of the sale of these shares was challenged in a separate civil case by other parties claiming a preferred right to purchase the shares.

On August 1, 1937, the board of directors of Silang Traffic Co., Inc. passed a resolution annulling the prior approval for the sale of the unissued shares and authorizing the refund of the amounts paid by the purchasers, including the petitioners, for the good of the corporation and to terminate the pending civil case. The petitioners demanded the refund of their payments pursuant to this resolution. However, the corporation refused, arguing that the petitioners' shares had already automatically reverted and their payments forfeited due to their failure to pay the installment due on or before July 31, 1937. The corporation further contended that the August 1, 1937 resolution was revoked by a subsequent board resolution dated August 22, 1937.

• Right to Refund: Petitioners argued that they were entitled to a refund of the amounts they paid based on the board resolution of August 1, 1937, which authorized the rescission of the sale and the refund of payments for the good of the corporation.

• Automatic Forfeiture: Respondent corporation contended that the petitioners' shares had automatically reverted to the corporation and their payments forfeited when they failed to pay the installment due on or before July 31, 1937, without the necessity of demand.
• Revocation of Resolution: Respondent argued that the August 1, 1937 resolution authorizing the refund was revoked and canceled by a subsequent board resolution dated August 22, 1937.
• Inapplicability of Resolution: Respondent claimed the August 1, 1937 resolution was not applicable to the petitioners because their shares had already reverted and payments forfeited prior to the resolution's approval.

• Nature of the Contract: Whether the agreement between the corporation and the petitioners was a subscription to capital stock or a contract of sale of shares of stock.
• Validity of Rescission: Whether the board resolution of August 1, 1937, authorizing the rescission of the sale and refund of payments, was valid.
• Necessity of Demand for Forfeiture: Whether the failure to pay an installment automatically resulted in the forfeiture of payments and reversion of shares without the necessity of demand from the seller.

• Nature of the Contract: Yes, it is a contract of sale. The agreement was entered into after incorporation and was denominated as an "Agreement for Installment Sale of Shares," indicating an independent agreement to buy shares at a stipulated price.
• Validity of Rescission: Yes, the resolution was valid. As a contract of sale, the rule prohibiting a corporation from releasing a subscriber from their obligation did not apply, and the rescission was agreed upon by the parties.
• Necessity of Demand for Forfeiture: No, forfeiture did not automatically occur. The contract did not expressly provide that demand was unnecessary, and the inclusion of an interest clause indicated that automatic forfeiture was not intended.

• Nature of the Contract: The Court examined the terms of the agreement and the intention of the parties. The agreement was titled "Agreement for Installment Sale of Shares," the corporation was described as "seller," and it was executed in 1935, long after the corporation's organization in 1927. A subscription is the mutual agreement of subscribers to take and pay for stock, whereas a purchase is an independent agreement to buy shares at a stipulated price. Because it was a sale, the provisions of the Corporation Law regarding calls for unpaid subscriptions and the rule against releasing original subscribers were inapplicable.
• Validity of Rescission: Since the contract was one of sale, there was no legal impediment to its rescission by agreement of the parties. The rescission was made for the good of the corporation and to terminate pending litigation. The petitioners apparently agreed to the rescission by demanding the refund. Other purchasers mentioned in the resolution benefited from it, and denying the petitioners the same benefit would be unjust discrimination. The attempted revocation on August 22, 1937, was invalid because it was not agreed to by the petitioners.
• Necessity of Demand for Forfeiture: The Court applied Article 1100 of the Civil Code, which states that persons obliged to deliver or do something are not in default until the creditor demands fulfillment, unless the obligation or law expressly provides otherwise, or the time of performance was the principal inducement for the contract. The contract did not expressly state that demand was unnecessary for forfeiture. Furthermore, the provision for interest on deferred payments suggested that the parties did not intend automatic forfeiture upon non-payment.

• Distinction between subscription and sale of shares — A subscription is the mutual agreement of subscribers to take and pay for the stock of a corporation, while a purchase is an independent agreement between the individual and the corporation to buy shares of stock at a stipulated price. The distinction matters because rules regarding calls for unpaid subscriptions and the prohibition against releasing original subscribers do not apply to a contract of purchase of shares.
• Necessity of demand for default — Under Article 1100 of the Civil Code, a debtor is not in default until the creditor judicially or extrajudicially demands fulfillment, unless the obligation or law expressly provides that demand is not necessary, or the designation of the time of performance was the principal inducement for the creation of the obligation.

• "A subscription, properly speaking, is the mutual agreement of the subscribers to take and pay for the stock of a corporation, while a purchase is an independent agreement between the individual and the corporation to buy shares of stock from it at a stipulated price." — This passage defines the controlling distinction between subscription and sale applied by the Court to characterize the contract.
• "The contract did not expressly provide that the failure of the purchaser to pay any installment would give rise to forfeiture and cancellation without the necessity of any demand from the seller; and under article 1100 of the Civil Code persons obliged to deliver or do something are not in default until the moment the creditor demands of them, judicially or extrajudicially the fulfilment of their obligation..." — This articulates the ratio decidendi for the ruling on the invalidity of the automatic forfeiture.

• Salmon, Dexter & Co. vs. Unson, 47 Phil. 649 — Cited for the proposition that a subscription to stock in an existing corporation is, as between the subscriber and the corporation, simply a contract of purchase and sale.
• Velasco vs. Poizat, 37 Phil. 802 — Cited by the trial court for the rule that a corporation has no legal capacity to release an original subscriber from the obligation to pay; the Supreme Court found this rule inapplicable because the contract was a sale, not a subscription.

• Article 1100, Civil Code — Applied to determine that a debtor is not in default until demand is made, unless demand is expressly waived by the contract or law, or the time of performance was the principal inducement. The Court used this to invalidate the automatic forfeiture.
• Sections 37-50, Corporation Law — Mentioned as provisions regarding calls for unpaid subscriptions and assessment of stock, which the Court held do not apply to a purchase of stock.

Chief Justice Yulo, and Justices Moran, Paras, and Bocobo concurred.