Boman Environmental Development Corporation vs. Court of Appeals

A suit by a withdrawing stockholder to enforce a corporate promissory note given as payment for the surrender of his shares is an intra-corporate controversy over which the Securities and Exchange Commission has original and exclusive jurisdiction, because the note flows from an intra-corporate transaction and the corporation’s purchase of its own shares is subject to the regulatory requirements of the Corporation Code, particularly the need for unrestricted retained earnings and a legitimate corporate purpose.

Nilcar Y. Fajilan served as President and a member of the Board of Directors of BEDECO. Desiring to divest his interests due to family considerations, he tendered his resignation and offered to sell all his shares, rights, and interests in the corporation for P300,000 plus the transfer of a company pick-up truck he had been using. The board accepted the offer, accepted his resignation, and agreed to pay the price on a staggered basis, evidenced by a promissory note. Disputes arose when BEDECO failed to make full payment.

• The Offer and Acceptance: On May 7, 1984, private respondent Nilcar Y. Fajilan, then President and a director of petitioner BEDECO, addressed a letter to the board offering to resign effective upon the sale and full payment of his shares and interests, and to sell all his shares, rights, and interests in BEDECO for P300,000 in cash plus the transfer of the company’s Isuzu pick-up truck he had been using.
• Board Resolution and Letter-Agreement: At a board meeting on June 14, 1984, the directors accepted Fajilan’s resignation and approved the purchase of his shares and interests. By letter-agreement dated June 25, 1984, the corporate secretary communicated the board’s acceptance, specifying a P300,000 price (inclusive of unpaid salary, loan, interest, profit sharing, and share in book value as of May 31, 1984) and a staggered payment schedule: P100,000 on July 15, P75,000 on September 15, P62,500 on October 15, and P62,500 on December 15, 1984, plus the Ford Courier pick-up subject to Fajilan assuming its outstanding obligation. Fajilan signed his conformity.
• Promissory Note: Pursuant to the assurance in the letter-agreement, BEDECO executed a promissory note dated July 3, 1984, signed by its new president, Alfredo S. Pangilinan, in the presence of two directors, binding the corporation to pay Fajilan P300,000 according to the same staggered dates.
• Default: BEDECO paid only P50,000 on July 15, 1984, and another P50,000 on August 31, 1984. It defaulted on the remaining P200,000 balance.
• Filing of the Complaint: On April 30, 1985, Fajilan instituted an action in the Regional Trial Court of Makati for collection of the unpaid balance.
• Status of Fajilan as Stockholder: The agreement provided that Fajilan’s resignation would be effective “as soon as my shares and interests thereto are sold and fully paid.” The Court noted that, in the absence of full payment and actual transfer of shares on the corporate books, Fajilan remained a stockholder.

• Intra-corporate Nature: BEDECO maintained that the controversy arose out of intra-corporate relations because it involved the sale of a stockholder’s shares and interests to the corporation itself, a transaction governed by corporate law and within the exclusive original jurisdiction of the SEC under Section 5(b) of P.D. No. 902-A.
• Promissory Note Not Severable: BEDECO argued that the promissory note was inextricably linked to the underlying intra-corporate agreement for the purchase of shares, and the mere issuance of a note did not convert the dispute into an ordinary collection suit.

• Simple Collection Suit: Private respondent Fajilan contended that the action was merely a suit on a promissory note—an ordinary collection case—because no controversy existed regarding the sale of shares or his resignation; those matters had been settled without issue. Thus, regular courts had jurisdiction.
• No Continuing Stockholder-Corporation Dispute: Fajilan argued that the intra-corporate relationship had been terminated upon acceptance of his resignation and the agreement to sell his shares, leaving only a creditor-debtor relationship arising from the promissory note.

• Intra-Corporate Controversy: Whether a suit brought by a withdrawing stockholder against the corporation to enforce payment of the balance due on a corporate promissory note issued as consideration for the surrender of his shares of stock and interests involves an intra-corporate dispute within the exclusive original jurisdiction of the Securities and Exchange Commission.

• Intra-Corporate Controversy: The suit was an intra-corporate controversy cognizable exclusively by the SEC. The entire transaction—from Fajilan’s offer to sell his shares and interests, to the board’s acceptance and the issuance of the promissory note—arose from intra-corporate relations. All signatories to the agreement and the promissory note were stockholders at the time of execution. Furthermore, under the express terms of his offer, Fajilan’s resignation was to take effect only upon full payment for his shares; absent full payment and actual transfer on the corporate books, he remained a stockholder. The dispute thus continued to be between a stockholder and the corporation. The promissory note did not alter the character of the controversy because it merely evidenced the corporation’s obligation to pay for the shares. The corporation’s purchase of its own shares is governed by Sections 41 and 122 of the Corporation Code, which require that there be unrestricted retained earnings to cover the purchase and that the purchase be for a legitimate corporate purpose. These provisions are deemed written into the agreement under the principle that existing law forms part of every valid contract. The SEC exercises exclusive supervision, control, and regulatory jurisdiction to ensure that payment to the stockholder does not constitute an unlawful distribution of corporate assets in preference over creditors, consistent with the trust fund doctrine.

• Intra-corporate controversy under P.D. No. 902-A — Section 5(b) of P.D. No. 902-A vests the SEC with original and exclusive jurisdiction over controversies arising out of intra-corporate relations between a stockholder and the corporation. A dispute rooted in a transaction that originates from the stockholder-corporation relationship—such as the sale of shares by a stockholder to the corporation—falls within this jurisdiction, even if the action is framed as a collection suit on a promissory note.
• Existing law forms part of every contract — Without need for express stipulation, provisions of law affecting the subject matter or validity of a contract are deemed incorporated into it. Sections 41 and 122 of the Corporation Code, which restrict a corporation’s purchase of its own shares to instances where unrestricted retained earnings exist and the purchase serves a legitimate corporate purpose, are thus written into a corporation’s agreement to buy a stockholder’s shares.
• Trust fund doctrine — The capital stock, property, and assets of a corporation are held in trust for the payment of corporate creditors. Creditors are preferred over stockholders in the distribution of corporate assets. Consequently, any disposition of corporate funds for the purchase of its own shares that prejudices creditors is void. The SEC must ensure that such payment is consistent with the trust fund doctrine.

• “Fajilan’s offer to resign as president and director ‘effective as soon as my shares and interests thereto (sic) are sold and fully paid’ … implied that he would remain a stockholder until his shares and interests were fully paid for, for one cannot be a director or president of a corporation unless he is also a stockholder thereof. The fact that he was replaced as president of the corporation did not necessarily mean that he ceased to be a stockholder considering how the corporation failed to complete payment of the consideration for the purchase of his shares of stock and interests in the goodwill of the business. There has been no actual transfer of his shares to the corporation. In the books of the corporation he is still a stockholder.” — This passage establishes the continuing stockholder status, anchoring SEC jurisdiction.
• “Fajilan’s suit against the corporation to enforce the latter’s promissory note or compel the corporation to pay for his shareholdings is cognizable by the SEC alone which shall determine whether such payment will not constitute a distribution of corporate assets to a stockholder in preference over creditors of the corporation.” — The core jurisdictional principle and the reason the SEC’s regulatory oversight is essential.
• “These provisions of the Corporation Code should be deemed written into the agreement between the corporation and the stockholders even if there is no express reference to them in the promissory note. The principle is well settled that an existing law enters into and forms part of a valid contract without need for the parties’ expressly making reference to it.” — The rule that integrates statutory restrictions into private agreements.

• Steinberg vs. Velasco, 52 Phil. 953 — Cited to support the trust fund doctrine’s application: creditors may assume that corporate assets will not be used to purchase the corporation’s own stock while debts remain unpaid.
• Lakas ng Manggagawang Makabayan vs. Abiera, 36 SCRA 437 — Cited for the principle that existing law enters into and forms part of a valid contract without need for express reference.

• Section 5(b), P.D. No. 902-A, as amended — Defines the original and exclusive jurisdiction of the SEC over controversies arising out of intra-corporate relations between stockholders and the corporation. Applied to vest jurisdiction over Fajilan’s collection suit because the underlying transaction was between a stockholder and the corporation for the purchase of his shares.
• Section 41, Corporation Code — Grants a stock corporation the power to acquire its own shares for a legitimate corporate purpose, provided it has unrestricted retained earnings to cover the shares. Deemed written into the share purchase agreement, requiring SEC oversight to verify compliance.
• Section 122, Corporation Code — Prohibits any distribution of corporate assets except upon lawful dissolution and after payment of debts, except through decrease of capital stock or as otherwise allowed by the Code. Reinforces the trust fund doctrine and the need for SEC scrutiny.

Narvasa, Cruz, Gancayco, and Medialdea, JJ., concurred.