De Silva vs. Aboitiz & Company, Inc.

A corporate by-law authorizing the board of directors to deduct from distributable dividends amounts for payment of unpaid stock subscriptions is discretionary, not mandatory, and does not preclude the board from exercising statutory remedies under the Corporation Law—such as declaring shares delinquent and selling them at public auction—to collect unpaid subscriptions.

Arnaldo F. De Silva was a stockholder of Aboitiz & Company, Inc., having subscribed to 650 shares at P500 each but paid for only 200. The relationship between the parties was governed by the corporation's by-laws and the Corporation Law then in force. Article 46 of the corporation's by-laws allocated net profits and contained a proviso authorizing the board of directors to deduct from the 70% dividend distributable among shareholders such amounts as it deemed fit for payment of unpaid subscriptions. The Corporation Law, sections 38 to 49, separately provided procedures for collecting unpaid subscriptions through delinquent share sale at public auction and through court action.

Arnaldo F. De Silva subscribed for 650 shares of stock in Aboitiz & Company, Inc. at P500 per share. He paid for only 200 shares, leaving 450 shares unpaid, for which he owed the corporation P225,000. On April 22, 1922, the corporation's secretary notified him of a resolution adopted by the board of directors the preceding day, declaring all unpaid subscriptions to the capital stock due and payable on May 31, 1922, at the corporation's office, with payment to be made to the treasurer. The notice further stated that any shares remaining unpaid by that date, with accrued interest, would be declared delinquent, advertised for public auction, and sold on June 16, 1922, to cover the subscription amount, accrued interest, and expenses of advertisement and sale, unless payment was made beforehand.

The proper advertisement having been published as announced, De Silva filed a complaint in the Court of First Instance of Cebu on May 5, 1922, seeking a judgment decreeing that the corporation had exceeded its executive authority by prescribing a method of collecting unpaid subscriptions different from that provided in Article 46 of its by-laws, declaring the 450 shares delinquent, and directing their sale as advertised. He prayed for a writ of injunction enjoining the corporation from taking further action and for costs. A preliminary injunction was issued upon the posting of the proper bond.

The defendant corporation filed a demurrer on the grounds that the facts alleged did not constitute a cause of action and that the remedy sought was not the most adequate and speedy. The lower court sustained the demurrer on the first ground on September 21, 1922, giving the plaintiff five days to amend. De Silva did not amend within the prescribed period, and on October 2, 1922, the court dismissed the complaint, dissolved the preliminary injunction, and awarded costs. His motion for annulment and new hearing was denied, and he brought the case to the Supreme Court by bill of exceptions.

• Exclusive Method of Payment: Petitioner argued that Article 46 of the by-laws prescribed an operative method for payment of stock subscriptions continuously until full amortization, and that the corporation violated this provision by declaring his shares delinquent and directing their sale at public auction through a different method.
• By-laws as Contract: Petitioner maintained that the by-laws constituted a contract between the corporation and its stockholders, and that Article 46's provision must prevail over the provisions of the Corporation Law regarding collection of unpaid subscriptions.
• Excess of Authority: Petitioner contended that the corporation's acts in declaring the unpaid subscription due and advertising the shares for sale were in excess of its powers and executive authority, and that he had no other plain, speedy, and adequate remedy in the ordinary course of law except the injunction sought.

• No Cause of Action: Respondent argued through its demurrer that the facts alleged in the complaint did not constitute a cause of action.
• Inadequate Remedy: Respondent maintained that even if the plaintiff had a lawful claim against the corporation, the special remedy of injunction applied for was not the most adequate and speedy.

• By-laws vs. Corporation Law: Whether Article 46 of the corporation's by-laws prescribed the sole and exclusive method for collecting unpaid stock subscriptions, thereby precluding the board of directors from exercising its statutory remedies under the Corporation Law.
• Board's Discretion: Whether the provision in Article 46 authorizing deduction from dividends for payment of unpaid subscriptions was mandatory or discretionary upon the board of directors.
• Cause of Action: Whether the facts alleged in the complaint constituted a cause of action warranting the issuance of an injunction.

• By-laws vs. Corporation Law: No. The by-law provision did not prescribe an exclusive method of collection; the Corporation Law independently provided the board with alternative remedies including public auction sale and court action, which the by-laws could not restrict.
• Board's Discretion: The provision was discretionary, not mandatory. The language "may deduct such amount as it may deem fit" vested discretion in the board, which is incompatible with the concept of a fixed or exclusive method.
• Cause of Action: No. The corporation did not violate or disregard any right of the plaintiff under the by-laws, nor exceed its authority, so the facts alleged did not constitute a cause of action.

• By-laws vs. Corporation Law: Article 46's first part allocated net profits among directors (10%), general manager (10%), reserve fund (10%), and shareholders (70%). The proviso authorized the board to deduct from the 70% dividend such amount as it deemed fit for payment of unpaid subscriptions. The Court found this language permissive ("may deduct"), not mandatory. The Corporation Law (sections 38–49) provided two independent remedies: (1) sale of delinquent shares at public auction, and (2) court action to collect the amount due. The board elected the first remedy and complied strictly with the statutory procedure. Because the corporation was an artificial entity created by virtue of the same law (section 2), the Corporation Law's provisions were binding upon it and its stockholders, and the by-laws could not override statutory remedies.
• Board's Discretion: The Court reasoned that the word "may" in the proviso—"the Board of Directors may deduct such amount as it may deem fit"—was inherently discretionary. This was confirmed by the second proviso, which similarly used "may also deduct" for creating an emergency fund, and by the condition that the emergency fund could not be created if the distributable dividend after deduction fell below 10% of paid-up capital. The fact that the board, not the delinquent subscriber, was to judge whether deductions should be made demonstrated that the provision was not a fixed method but a discretionary option. A "method" implies something fixed as a rule or permanent standard, not variable at the will of somebody and according to circumstances.
• Cause of Action: Because Article 46 gave the board, not the stockholders, the authority to determine whether to apply dividends toward unpaid subscriptions, the plaintiff had no right under the by-laws to prevent the board from following any other collection method. The corporation therefore did not violate any right of the plaintiff, did not exceed its authority, and did not abuse its discretion in performing the acts complained of. The complaint consequently failed to state a cause of action.

• Discretionary Nature of Dividend-Deduction Provisions — A by-law provision authorizing the board of directors to deduct from distributable dividends amounts for payment of unpaid subscriptions is discretionary upon the board, not mandatory, where the language used is "may deduct such amount as it may deem fit." Such a provision does not prescribe an exclusive method of collection and cannot preclude the board from exercising statutory remedies available under the Corporation Law. The Court applied this doctrine by holding that the board's election to declare shares delinquent and sell them at auction—rather than applying dividends—was a valid exercise of its discretion under both the by-laws and the Corporation Law.
• Statutory Remedies for Unpaid Subscriptions — Under the Corporation Law, a corporation has two remedies for collecting unpaid subscriptions: (1) declaring the shares delinquent and selling them at public auction pursuant to sections 38–48, and (2) filing a court action under section 49. These remedies are available independently of any by-law provision authorizing deduction from dividends. The Court relied on Velasco vs. Poizat to confirm that the board properly availed itself of the first remedy.
• By-laws as Contract; Limits of Construction — While by-laws may be regarded as a contract between the corporation and its stockholders, a by-law provision that grants discretionary authority to the board of directors cannot be construed as prescribing a fixed, exclusive method that limits the board's statutory powers. The Court applied this principle by rejecting the plaintiff's argument that Article 46 established a sole and exclusive payment method that prevailed over the Corporation Law.

• "The first and most special remedy given by the statute consists in permitting the corporation to put the unpaid stock for sale and dispose of it for the account of the delinquent subscriber. In this case the provisions of sections 38 to 48, inclusive, of the Corporation Law are applicable and must be followed. The other remedy is by action in court" — This passage, quoting Velasco vs. Poizat, articulates the two statutory remedies available to a corporation for collecting unpaid subscriptions, establishing the legal framework within which the board's discretion operates.
• "it cannot be maintained that the said article has prescribe an operative method for the payment of said subscription continuously until their full amortization, or, what would be the same thing, that said article has prescribe that sole and exclusive method for that purpose" — This passage states the ratio decidendi: that the by-law provision did not establish an exclusive method of payment because the board's discretion to apply dividends is incompatible with the concept of a fixed method.
• "the plaintiff has no right whatsoever under the provision of the above cited article 46 of the said by-laws to prevent the board of directors from following, for that purpose, any other method than that mentioned in the said article" — This passage defines the limits of the stockholder's rights under the by-laws and confirms that the complaint failed to state a cause of action.

• Velasco vs. Poizat, 37 Phil. 802 — Cited as controlling authority for the proposition that the Corporation Law provides two remedies for collecting unpaid subscriptions: public auction sale of delinquent shares (sections 38–48) and court action (section 49). The Court followed this ruling to confirm that the board's election of the public auction remedy was proper and statutory.

• Article 46, By-laws of Aboitiz & Company, Inc. — Governed distribution of net profits: 10% for the board of directors, 10% for the general manager, 10% for the reserve fund, and 70% for shareholders. Authorized the board to deduct from the 70% dividend such amount as it deemed fit for payment of unpaid subscriptions, and to create an emergency fund when all shares were fully paid. The Court interpreted the proviso as discretionary, not mandatory, based on the permissive language "may deduct."
• Sections 38–48, Corporation Law — Provided the procedure for declaring unpaid shares delinquent and selling them at public auction. The Court found that the board complied strictly with these provisions in declaring De Silva's 450 shares delinquent and advertising them for sale.
• Section 49, Corporation Law — Provided the alternative remedy of court action for collecting unpaid subscriptions, together with accrued interest and costs. Cited as the second statutory remedy available to the corporation, confirming that the by-laws could not restrict the board to only one method.
• Section 2, Corporation Law — Defined corporations as artificial entities created by virtue of the Corporation Law. Cited to support the conclusion that the Corporation Law's provisions were binding on the corporation and its stockholders, and that by-laws could not override statutory remedies.

Street, Malcolm, Avanceña, Ostrand, Johns, and Romualdez, JJ., concurred.