Ong Yong vs. Tiu

A subscription contract for unissued shares in an existing corporation is a contract between the subscriber and the corporation itself, not with the existing stockholders; therefore, individual stockholders lack legal standing to rescind such agreement. Furthermore, rescission of a subscription agreement is not a legally permissible mode for distributing corporate assets, as it circumvents the Trust Fund Doctrine and the strict procedural requirements for decrease of authorized capital stock or dissolution under the Corporation Code.

First Landlink Asia Development Corporation (FLADC), owned by the Tius, owned the Masagana Citimall in Pasay City but faced foreclosure by the Philippine National Bank (PNB) over a P190 million debt. To prevent foreclosure, the Tius invited the Ongs to invest in FLADC under a Pre-Subscription Agreement providing for equal 50-50 shareholdings, with the Ongs subscribing to 1,000,000 shares for P100 million cash and the Tius subscribing to additional shares through property contributions. The Ongs additionally advanced P70 million to FLADC and lent P20 million to the Tius to settle the PNB debt. After the mall became profitable, disputes arose regarding management positions, issuance of shares for property contributions, and alleged diversion of corporate funds, leading the Tius to unilaterally rescind the agreement.

• In 1994, First Landlink Asia Development Corporation (FLADC), owned by the Tius, faced foreclosure by PNB over a P190 million debt secured by the Masagana Citimall property.
• To prevent foreclosure, the Tius invited the Ongs to invest under a Pre-Subscription Agreement dated August 15, 1994, providing for equal 50-50 shareholdings in FLADC.
• The Ongs subscribed to 1,000,000 shares at P100 par value (P100 million cash), while the Tius subscribed to an additional 549,800 shares through property contributions (a four-storey building and two parcels of land).
• The Ongs paid an additional P70 million to FLADC and lent P20 million to the Tius, totaling P190 million used to settle the PNB debt.
• Disputes arose regarding the Tius' assumption of Vice-President and Treasurer positions, provision of office space, and the Ongs' refusal to issue shares for the Tius' property contributions due to unpaid transfer taxes and lack of deed assignment for one parcel.
• The Tius accused the Ongs of preventing them from assuming corporate positions and managing FLADC funds, while the Ongs accused the Tius of diverting corporate rentals to their MATTERCO account and failing to remit funds.
• On February 23, 1996, the Tius unilaterally rescinded the Pre-Subscription Agreement, leading to the SEC case.
• The Masagana Citimall became highly profitable, with estimated values ranging from P450 million to P1 billion at the time of the Resolution.

• The Pre-Subscription Agreement was a subscription contract under Section 60 of the Corporation Code, meaning it was between the Ongs and FLADC, not between the Ongs and Tius personally; thus, the Tius lacked legal personality to rescind it.
• Rescission would violate the Trust Fund Doctrine because it would result in an unauthorized distribution of corporate assets to stockholders without compliance with the procedures for decrease of capital stock or dissolution under the Corporation Code.
• Specific performance, not rescission, was the proper remedy; any breaches by the Ongs were casual and remediable, not substantial or fundamental.
• Both parties were in pari delicto (mutually guilty of breaches), which legally bars either party from seeking rescission.
• Rescission would unjustly enrich the Tius, allowing them to reclaim a corporation now worth up to P1 billion while returning only the Ongs' original P100 million investment plus interest.
• The motion for reconsideration was not pro-forma as it raised critical legal grounds regarding the Trust Fund Doctrine and corporate procedures that were not squarely passed upon in the prior Decision.

• The motion for reconsideration was pro-forma because it merely reiterated arguments previously raised and rejected, thus not preventing the finality of the February 1, 2002 Decision.
• The Pre-Subscription Agreement contained two components: a shareholders' agreement between the Ongs and Tius, and a subscription contract; the breach of the shareholders' agreement justified rescission of the entire agreement.
• Rescission was proper due to the Ongs' substantial breaches, including preventing the Tius from assuming corporate offices and refusing to credit shares for property contributions.
• Rescission would not result in liquidation but merely restore the parties to the status quo ante through return of their respective cash and property contributions.
• The case was actually a petition to decrease capital stock under Section 38 of the Corporation Code, which does not violate liquidation procedures.
• The Tius were entitled to a writ of execution as the SEC order had become final and executory, and any delay would prejudice their rights.

• Procedural:
  • Whether the motions for reconsideration filed by the Ongs are pro-forma and fail to prevent the finality of the Decision dated February 1, 2002.
  • Whether the Tius are entitled to the issuance of a writ of execution pending resolution of the motions for reconsideration.
• Substantive Issues:
  • Whether the Tius possess the legal personality or standing to rescind the Pre-Subscription Agreement in their personal capacities.
  • Whether rescission is the proper remedy given that both parties are allegedly in pari delicto.
  • Whether rescission of the subscription agreement violates the Trust Fund Doctrine and the procedures for distribution of corporate assets under the Corporation Code.
  • Whether the case constitutes a valid petition to decrease authorized capital stock under Section 38 of the Corporation Code.

• Procedural:
  • The motions for reconsideration are not pro-forma despite reiterating previous arguments, as they raise valid grounds that were not squarely passed upon and clearly resolved in the prior Decision, particularly regarding the Trust Fund Doctrine and corporate dissolution procedures.
  • The motion for issuance of a writ of execution is denied as moot in view of the grant of reconsideration and reversal of the Decision sought to be executed.
• Substantive:
  • The Tius, in their personal capacities, cannot rescind the Pre-Subscription Agreement because it was a subscription contract for unissued shares between the Ongs and FLADC alone, not between the Ongs and Tius; under Article 1311 of the Civil Code, only parties to a contract may sue for its cancellation.
  • Even assuming the Tius had standing, rescission is improper because it would effectively result in the unauthorized distribution of corporate capital assets, violating the Trust Fund Doctrine and Sections 38, 41, and 122 of the Corporation Code, which permit distribution only through decrease of capital stock, redemption of shares, or lawful dissolution.
  • The case cannot be treated as a petition to decrease capital stock because it never complied with the statutory requirements of a majority board vote, approval by two-thirds of outstanding capital stock, and submission of a revised treasurer's affidavit.
  • The unilateral rescission by the Tius of the Pre-Subscription Agreement is declared null and void, and the petition for confirmation of rescission is dismissed for lack of merit.

• Trust Fund Doctrine — Capital stock subscriptions constitute a fund to which creditors have a right to look for satisfaction of their claims; corporate capital can only be distributed to stockholders in three instances: (1) amendment of the Articles of Incorporation to reduce authorized capital stock, (2) purchase of redeemable shares by the corporation, and (3) lawful dissolution and liquidation after payment of debts. The Court applied this doctrine to hold that rescission of a subscription agreement is not a legally sanctioned mode for distributing corporate assets.
• Business Judgment Rule — Courts will not interfere with contracts intra vires entered into by the board of directors unless such contracts are unconscionable and oppressive; courts are not in the business of business. The Court applied this principle to refuse ordering FLADC to file a petition for decrease of capital stock, recognizing that such structural decisions belong to the stockholders and directors.
• Relativity of Contracts (Article 1311, Civil Code) — Contracts take effect only between the parties, their assigns and heirs, and cannot be enforced against or by one who is not a party. The Court applied this to determine that the Tius were not real parties-in-interest to the subscription contract between the Ongs and FLADC.
• Piercing the Veil of Corporate Fiction — The separate juridical personality of a corporation may be disregarded only when it is used as a cloak or cover for fraud, illegality, or injustice. The Court found no basis to pierce FLADC's veil to identify it with the Tius.
• Pari Delicto — When both parties to a contract are mutually guilty of breaching their reciprocal obligations, neither may seek rescission. The Court noted that while both parties committed breaches, the Tius' violations (diverting corporate funds) were comparatively more serious than the Ongs' violations.

• "Subscriptions to the capital stock of a corporation constitute a fund to which the creditors have a right to look for the satisfaction of their claims."
• "Courts are not in the business of business, and the laissez faire rule or the free enterprise system prevailing in our social and economic set-up dictates that it is better for the State and its organs to leave business to the businessmen..."
• "The Tius... stood to be rewarded with a bonanza of anywhere between P450 million to P900 million in assets (from an investment of only P45 million which was nearly foreclosed by PNB), to the extreme and irreparable damage of the Ongs, FLADC and its creditors."
• "It would be totally against all rules of justice, fairness and equity to deprive the Ongs of their interests on petty and tenuous grounds."
• "Rescission is certainly not one of them, specially if the party asking for it has no legal personality to do so and the requirements of the law therefor have not been met."

• Philippine Trust Co. vs. Rivera (44 Phil. 469, 1923) — Cited as the seminal case enunciating the Trust Fund Doctrine.
• Philippine Consumers Foundation, Inc. vs. National Telecommunications Commission (131 SCRA 200, 1984) — Cited for the principle that members of the Court may change their minds after a re-study of the facts and law.
• Security Bank and Trust Company vs. Cuenca (G.R. No. 138544, October 3, 2000) — Cited to hold that a motion for reconsideration is not pro-forma merely because it reiterates arguments previously passed upon and rejected.
• Boyer-Roxas vs. Court of Appeals (211 SCRA 470, 1992) — Cited for the rule that piercing the veil of corporate fiction requires proof that the corporation is being used as a cloak for fraud, illegality, or injustice.
• Sustiguer vs. Tamayo (176 SCRA 579, 1989) — Cited for the principle that contracts take effect only between the parties and their assigns.
• Gamboa vs. Victoriano (90 SCRA 40, 1979) — Cited for the business judgment rule regarding non-interference by courts in corporate contracts.

• Section 60, Corporation Code — Defines a subscription contract as any contract for the acquisition of unissued stock in an existing corporation.
• Section 25, Corporation Code — Prohibits the President from concurrently acting as Treasurer to ensure checks and balances.
• Section 38, Corporation Code — Specifies the procedure for decreasing authorized capital stock (requires board majority vote and approval by stockholders owning at least two-thirds of outstanding capital stock).
• Section 41, Corporation Code — Regulates the power of a corporation to acquire its own shares, requiring unrestricted retained earnings.
• Section 122, Corporation Code — Prohibits the distribution of any corporate assets or property except by decrease of capital stock or upon lawful dissolution after payment of all debts.
• Sections 117-120, Corporation Code — Govern the methods and procedures for voluntary dissolution of a corporation.
• Article 1311, Civil Code — Establishes the relativity of contracts, limiting their effect to the parties, assigns, and heirs.
• Article 1191, Civil Code — Governs the rescission of reciprocal obligations.
• Article 2209, Civil Code — Prescribes the legal rate of interest for loans and forbearance of money.
• Section 5.2, RA 8799 (Securities Regulation Code) — Provides for the retention of jurisdiction by the SEC over pending intra-corporate disputes submitted for final resolution before the law's effectivity.

• Justices Bellosillo, Quisumbing, and Callejo, Sr. — Concurred with the Resolution penned by Justice Corona, reversing the previous Decision and granting the Ongs' motions for reconsideration.