Central Cooperation Exchange, Inc. vs. Enciso

A board of directors may not grant itself per diems, transportation allowances, kilometrage allowances, discretionary funds, or other compensation where the corporation’s by-laws reserve to the stockholders the determination of directors’ compensation; absent stockholder authorization, directors presumptively serve without compensation, and such board resolutions are contrary to the by-laws and not within the board’s power to enact.

Petitioner Central Cooperative Exchange, Inc. (CCE) is the National Federation of Farmers’ Cooperative Marked Association (FACOMA) in the Philippines. Its single major stockholder is the Agricultural Credit and Cooperative Financing Administration (ACCFA), now Agricultural Credit Administration (ACA), a government entity reorganized under the Land Reform Code. Respondent Nicolas T. Enciso was then a member of the Board of Governors of ACCFA and concurrently a member of CCE’s Board of Directors from August 1, 1958 to January 1960. CCE’s By-Laws, Section 8, Article V, provide that the compensation, if any, and per diems for attendance at meetings of the members of the Board of Directors shall be determined by the members at an annual or special meeting of the Exchange called for the purpose; the stockholders’ annual meeting on January 31, 1956 resolved that members of the Board attending CCE board meetings were entitled to actual transportation expenses plus a per diem of P30.00 and actual expenses while waiting.

Central Cooperative Exchange, Inc. (CCE) was the National Federation of Farmers’ Cooperative Marked Association (FACOMA) in the Philippines, with the Agricultural Credit and Cooperative Financing Administration (ACCFA), later the Agricultural Credit Administration (ACA), as its single major stockholder. Nicolas T. Enciso was a member of the Board of Governors of ACCFA and concurrently served as a member of CCE’s Board of Directors from August 1, 1958 to January 1960.

During Enciso’s term, in various meetings, the CCE Board of Directors unanimously adopted several resolutions: (1) on May 28, 1958, Resolution No. 41 granted a kilometrage allowance of P35.00 to every CCE director who uses his own car in attending Board meetings; (2) on July 8, 1958, Resolution No. 52 appropriated P10,000.00 as discretionary fund of the Board of Directors; (3) on July 10, 1958, Resolution No. 49 granted a commutable allowance of P200.00 per month to each CCE director, starting July 1, 1958, in lieu of the regular waiting time per diem and transportation expenses in Manila while attending regular and special Board meetings and committee meetings; (4) on July 24, 1958, Resolution No. 57 amended Resolution No. 49 (FY 1958) and granted each Director a monthly commutable allowance of P200.00 in lieu of waiting time per diem and commutable transportation allowance of P20.00 for attending meetings in Manila; (5) on June 11, 1959, Resolution No. 39 increased the monthly commutable allowance of each CCE Director from P300.00 to P500.00 per month but cancelled the authorized per diems and transportation expenses for FACOMA visitations; and (6) on October 9, 1959, Resolution No. 87 appropriated P10,000.00 as commutable discretionary fund of the Board of Directors.

As shown by the payrolls and petty cash and check vouchers of CCE, Enciso, as director of the Exchange, received as compensation in the form of commutable per diem, per diem for FACOMA visitations, kilometrage allowance, commutable discretionary funds, and representation expenses in the total amount of P10,967.85 for the period 1958 to 1960. Enciso was a member of the Board of Directors from August 1, 1958 up to the end of January 1960, participated in the enactment of the said resolutions, and received sums of money by virtue of the same.

ACCFA took over the management of the affairs of CCE by virtue of a resolution of the latter’s board of directors, and ACCFA removed the general manager of CCE and on January 22, 1960 designated Eugenio V. Mendoza, one of ACCFA’s staff officers, as Officer-in-Charge of CCE. On October 22, 1960, CCE filed a complaint with prayer for a writ of attachment, verified by its Officer-in-Charge, against Enciso for the recovery of P10,967.85, the same having been collected and received by Enciso in violation of Section 8, Article V of CCE’s By-Laws and of the resolution adopted by the stockholders in their annual meeting on January 31, 1956. Upon CCE’s filing of a bond, the lower court issued an Order of Attachment.

In his answer, Enciso stated that he was a director of CCE and that the amount of compensation and per diems of the directors was fixed by stockholders in their annual meeting. As affirmative defenses, he averred that: (1) the plaintiff corporation has neither the legal personality to institute the action nor to question the legality of the resolutions enacted by the Board of which he is a member; (2) the plaintiff corporation is guilty of laches; (3) the stockholders had ratified in their General Annual Meetings the acts of the Board of Directors, including the collection of the amounts in question; and (4) under the circumstances, CCE is under estoppel to seek the refund of the amounts involved in the litigation. It was not disputed that during Enciso’s term as a member of the Board of Directors, he collected sums of money by virtue of the resolutions in question.

• Corporate Act and Stockholder Participation: Petitioner argued that the lower court erred in finding and concluding that the present action as filed cannot be deemed a corporate act of appellant corporation and that appellant’s stockholders had nothing to do with the filing of the case.
• Board Resolutions Violative of By-Laws: Petitioner contended that the various resolutions of appellant’s former Board of Directors authorizing and appropriating compensation and/or per diems or allowances for themselves were violative of appellant’s By-Laws and the mandate of the stockholders.
• Illegal Per Se and Not Merely Voidable: Petitioner argued that the Court of Appeals erred in holding that the questioned resolutions are merely voidable and may be ratified by the stockholders because the board resolutions are illegal per se: the directors are not entitled to compensation even without the express reservation of the power to grant the same unto the stockholders; the resolutions were already declared contrary to the By-Laws and not within the power of the board of directors to enact; and the board resolutions were enacted in violation of the express prohibition in the By-Laws, the power having been specifically withheld from the board of directors and reserved to the stockholders, so that the exercise of such withheld power by the board renders the act resulting therefrom illegal and void.
• Estoppel: Petitioner argued that the lower court erred in finding and concluding that appellant is under estoppel to question the aforesaid board resolutions or the payments made to appellee thereunder.
• Prior Demand: Petitioner argued that the lower court erred in finding that a previous demand upon appellee is a prerequisite for the institution of this action.

• Validity Under Stockholder Resolution: Respondent maintained that the questioned resolutions are all valid and legal, as resolved pursuant to Section 8, Article V of the petitioner’s By-Laws by its stockholders on January 31, 1956, that members of the Board of Directors attending the CCE Board Meeting are entitled to actual transportation expenses plus the per diems of P30.00 and actual expenses while waiting; from this resolution, the stockholders intended to allow the members actual transportation expenses and actual expenses while waiting, without limitations.
• Discretionary Funds Not Compensation: Respondent argued that the discretionary funds cannot be considered as compensation because the meaning of the term “compensation” as applied to officers is remuneration in whatever form it may be given, whether it be in salaries and fees, or both combined, whereas the amounts drawn as discretionary funds are actually spent by the directors in carrying negotiations with third persons which are necessary in managing the affairs of the corporation.
• Verification by Officer-in-Charge: Respondent argued that the verification of the complaint by the Officer-in-Charge cannot be considered as in compliance with the legal requirement, because the Officer-in-Charge is not of the category of a General Manager who is the one authorized to use the name of the corporation in filing a suit of this nature.
• Legal Personality and Authority: Respondent averred that the plaintiff corporation has neither the legal personality to institute the action nor to question the legality of the resolutions enacted by the Board of which he is a member.
• Laches: Respondent averred that the plaintiff corporation is guilty of laches.
• Ratification: Respondent averred that the stockholders had ratified in their General Annual Meetings the acts of the Board of Directors, including the collection of the amounts in question.
• Estoppel: Respondent averred that under the circumstances, CCE is under estoppel to seek the refund of the amounts involved in the litigation.

• Board’s Power to Grant Compensation: Whether the board of directors of CCE had the power and authority to adopt the resolutions appropriating funds of the corporation for per diems, transportation allowance, and discretionary funds for the members of its Board of Directors.
• Violation of By-Laws and Stockholder Mandate: Whether the various resolutions of CCE’s former Board of Directors authorizing and appropriating compensation and/or per diems or allowances for themselves are violative of CCE’s By-Laws and the mandate of the stockholders.
• Corporate Act and Authority to Sue: Whether the present action as filed can be deemed a corporate act of CCE and whether CCE’s stockholders had anything to do with the filing of the case, including whether the complaint verified by the Officer-in-Charge complied with the legal requirement.
• Estoppel and Laches: Whether CCE is under estoppel or barred by laches to question the board resolutions or the payments made to Enciso thereunder.

• Board’s Power to Grant Compensation: No. The board had no power or authority to adopt the resolutions; under Section 8, Article V of the By-Laws, the compensation and per diems of directors are determined by the stockholders, and directors presumptively serve without compensation.
• Violation of By-Laws and Stockholder Mandate: Yes. The resolutions are contrary to the By-Laws and not within the power of the board to enact, as held in Central Cooperative Exchange, Inc. vs. Tibe, Sr.
• Corporate Act and Authority to Sue: Yes. The Officer-in-Charge took over the functions and duties of the deposed general manager, and the authority to supervise the corporation’s business includes the authority to institute proceedings against accountable persons; even if stockholder authority were necessary, it was corrected by the stockholders’ resolution of May 25, 1962.
• Estoppel and Laches: No. Laches was ruled out; because the board controlled the corporation and would not sue its own members, laches does not begin to attach until the directors cease to be such.

• Board’s Power to Grant Compensation: The By-Laws, Section 8, Article V, expressly reserve to the stockholders the determination of compensation, if any, and per diems for Board members. The January 31, 1956 stockholder resolution allowed actual transportation expenses plus a P30.00 per diem and actual expenses while waiting. The board resolutions went beyond this by granting commutable allowances, kilometrage allowance, discretionary funds, and representation expenses. In Central Cooperative Exchange, Inc. vs. Tibe, Sr., the same resolutions involving the same corporation and another board member under the same circumstances were held contrary to the By-Laws and not within the board’s power. The right of stockholders to determine compensation was explicitly reserved; even without such reservation, directors are not entitled to compensation. Directors presumptively serve without compensation; while they may assign themselves additional duties, they act in excess of authority by voting themselves compensation for such duties. Thus Enciso must refund P10,967.85.
• Violation of By-Laws and Stockholder Mandate: The resolutions are not merely voidable; they are contrary to the By-Laws and outside the board’s power. The power to fix compensation was specifically withheld from the board and reserved to stockholders. The board’s exercise of that withheld power rendered the resulting acts illegal and void. Tibe already resolved almost all the issues, and there is no logical reason why the ruling, which has long become final, should not apply to the instant case.
• Corporate Act and Authority to Sue: The complaint was verified by the Officer-in-Charge, who took over the functions and duties of the deposed general manager. The authority to supervise the business and affairs of the corporation includes the authority to institute proceedings against all accountable persons to protect and preserve assets and prevent dissipation, as cited in In re Winston, 122 Fed. 187. Even granting that stockholder authority was necessary, the lack was corrected by ratification or conformation by the stockholders in their resolution of May 25, 1962, when a meeting was held with a quorum.
• Estoppel and Laches: Laches was ruled out in Tibe. The board of directors under the By-Laws had control of the corporation’s affairs, and it was not expected that the board would sue its members to recover sums voted by and for themselves. Where the corporation was virtually immobilized from commencing suit against its directors, laches does not begin to attach until the directors cease to be such. Thus the corporation was not barred from recovering the amounts.

• Directors presumptively serve without compensation — Directors of corporations are presumed to serve without compensation. Even if they assign themselves additional duties, they act in excess of authority by voting themselves compensation for such additional duties. Applied: Enciso and the board could not grant themselves per diems, allowances, and discretionary funds absent stockholder authorization.
• Board power limited by by-laws; stockholder reservation — Where the by-laws reserve to stockholders the determination of directors’ compensation and per diems, the board has no power to enact resolutions granting itself such compensation. The board’s exercise of a power specifically withheld and reserved to stockholders renders the act contrary to the by-laws and not within the board’s power. Applied: the resolutions were contrary to Section 8, Article V and the January 31, 1956 stockholder resolution.
• Laches does not run against a corporation immobilized by its board — Where the board of directors controls the corporation and would not sue its own members to recover sums voted by and for themselves, laches does not begin to attach against the corporation until the directors cease to be such. Applied: CCE was not barred from suing Enciso.
• Authority of officer-in-charge/general manager to sue — The authority to supervise the business and affairs of a corporation includes the authority to institute proceedings against all accountable persons to protect and preserve assets and prevent dissipation. Applied: the Officer-in-Charge who took over the deposed general manager’s functions could verify and file the complaint.
• Ratification by stockholders — Even if stockholder authority were necessary to institute the suit, the lack of authority was corrected by ratification or conformation by the stockholders in their resolution of May 25, 1962, adopted in a meeting with quorum. Applied: the action could proceed.

• "holding that the questioned resolutions (Nos. 35, 52, 49, 57 and 87) are contrary to the By-Laws of the federation and, therefore, not within the power of the board of directors to enact." — The Court adopted the Tibe ruling as the controlling precedent, establishing that the board resolutions were outside the board’s authority.
• "the right of the stockholders to determine the compensation of the Board of Directors was explicitly reserved and even without said reservation, the directors are not entitled to compensation." — This states the core by-law interpretation: the power to fix director compensation belongs to stockholders, and directors are not entitled to compensation absent authorization.
• "directors of corporations presumptively serve without compensation so that while the directors, in assigning themselves additional duties acted within their power, they nonetheless acted in excess of their authority by voting for themselves compensation for such additional duties." — This is the canonical formulation of the presumption against director compensation and the limit on self-dealing by the board.
• "where the corporation was virtually immobilized from commencing suit against its directors, laches does not begin to attach against the corporation until the directors cease to be such." — This defines the laches rule applied to prevent the corporation from being barred from recovering funds from its own directors.

• Central Cooperative Exchange, Inc. vs. Tibe, Sr., G.R. No. L-27972, June 30, 1970; 33 SCRA 596-597 [1970] — Controlling precedent. The same corporation, same resolutions, and another board member under the same circumstances were involved; the ruling held the resolutions contrary to the By-Laws and not within the board’s power, and ruled out laches. The Court applied it to Enciso.
• In re Winston, 122 Fed. 187 — Cited for the proposition that the authority to supervise the business and affairs of a corporation includes the authority to institute proceedings against all accountable persons to protect and preserve assets and prevent dissipation.

• Section 8, Article V, CCE By-Laws — Provides that the compensation, if any, and per diems for attendance at meetings of the members of the Board of Directors shall be determined by the members at an annual or special meeting of the Exchange called for the purpose. Applied: the board had no authority to fix its own compensation; the power was reserved to stockholders.
• Stockholders’ resolution, January 31, 1956 — Resolved that members of the Board of Directors attending CCE board meetings are entitled to actual transportation expenses plus a per diem of P30.00 and actual expenses while waiting. Applied: this did not authorize the additional commutable allowances, kilometrage allowance, discretionary funds, and representation expenses granted by the board.
• Stockholders’ resolution, May 25, 1962 — Ratification or conformation by the stockholders, adopted in a meeting with quorum, of the institution of the suit. Applied: even if stockholder authority were necessary, the lack was corrected.

Yap, C.J.; Melencio-Herrera, J.; Padilla, J.; and Sarmiento, J., concur.