Reyes vs. Tan

A minority stockholder may maintain a derivative suit on behalf of the corporation, and a receiver may be appointed, where corporate directors are guilty of a breach of trust—not mere error of judgment or abuse of discretion—and intracorporate remedies are futile or useless.

Roxas-Kalaw Textile Mills, Inc. was a textile milling corporation whose stockholders included Francisca R. Justiniani and the directors named in the complaint. Its operations depended on Central Bank dollar allocations for importing raw materials, and Central Bank regulations restricted the use of those allocations to raw materials rather than finished goods. Catalina R. Reyes was the petitioner in the certiorari proceeding, while Judge Bienvenido A. Tan and Francisca R. Justiniani were respondents.

Roxas-Kalaw Textile Mills, Inc. was organized on June 5, 1954 by defendants Cesar K. Roxas, Adelia K. Roxas, Benjamin M. Roxas, Jose Ma. Barcelona, and Morris Wilson, for and on behalf of primary principals with the following shareholdings: Adelia K. Roxas, 1,200 Class A shares; I. Sherman, 900 Class A shares; Robert W. Born, 450 Class A shares; and Morris Wilson, 450 Class A shares. Francisca R. Justiniani held 50 Class A shares and 1,250 Class B shares. All plaintiff and defendants were members of the corporation. The complaint in Civil Case No. 42375 sought to hold the directors jointly and severally liable for damage caused to the corporation and asked for the appointment of a receiver.

On May 8, 1957, the Board of Directors approved a resolution designating Dayaram as co-manager, with the understanding that he was to act as defendant Wadhumal Dalamal's designee. Morris Wilson was likewise designated co-manager with responsibilities for the management of the factory only. An office in New York was opened for the purpose of supervising purchases, and purchases required the unanimous agreement of Cesar K. Roxas, a New York resident member of the board, Robert Born, and Wadhumal Dalamal or their respective representatives.

Several purchases aggregating $289,678.86 were made in New York for raw materials such as greige cloth, rayon, and grey goods for the textile mill and shipped to the Philippines. The shipments were found to consist not of raw materials but of finished products, including West Point Khaki rayon suiting materials dyed in the piece, finished rayon tafetta in cubes, and cotton eyelets. The supplier was United Commercial Company of New York, in which Dalamal had interests; the letters of credit were guaranteed by Indian Commercial Company and Indian Traders, in which Dalamal also held interests. The resale of the finished goods was the business of Indian Commercial Company of Manila, which could not obtain dollar allocations for importations of finished goods under Central Bank regulations.

Because of these importations, the Central Bank stopped all dollar allocations for raw materials for the corporation, which led to the paralyzation of the textile mill and its business. Justiniani and some members of the board urged the defendants to proceed against Dalamal, expose his offense to the Central Bank, and initiate suit against Dalamal for his fraud against the corporation. The defendants refused to proceed against Dalamal and instead continued to deal with Indian Commercial Company, to the damage and prejudice of the corporation.

At the hearing on the petition for appointment of a receiver held on January 30, 1960, various records of shipments of finished textile goods on dollar allocations for raw materials were exhibited. Publicity had been given to the importations of textiles by the corporation in place of cotton raw materials. The record showed a list of documents proving the purchase of letters of credit for textiles; these textiles were denied importation and had to be re-exported. The importation of finished textiles on dollar allocations for raw materials in violation of Central Bank regulations was conclusively shown, and the allocation of dollars to the corporation for raw materials was suspended.

The trial court found that the importation of textiles instead of raw materials, and the failure of the Board of Directors to take action against those directly responsible, constituted fraud or consent thereto by the directors. It also found that the controlling majority had done nothing for two years to protect the corporation and that the minority stockholders had no recourse before the majority. The court considered receivership necessary to protect the rights of minority and majority stockholders and to restore the faith and confidence of Central Bank authorities, potentially leading to restoration of the dollar allocation.

• No Emergency: Petitioner argued that respondent Justiniani neither alleged nor proved an emergency requiring the immediate appointment of a receiver, and that the alleged fraudulent transaction and the directors' refusal to sue occurred more than two years before the application for receivership.
• Change in Management: Petitioner maintained that management had been changed and the new management had not been afforded a chance to show what it could do.
• Respondent's Prior Role: Petitioner claimed that respondent Justiniani had been treasurer of the corporation for some time and had control of funds, yet had not taken steps to remedy the situation.

• Derivative Suit for Breach of Trust: Respondent Justiniani alleged that the directors caused the corporation to import finished textiles under dollar allocations for raw materials, in violation of Central Bank regulations, and refused to proceed against Dalamal, thereby damaging the corporation; she sought joint and several liability.
• Receivership: She prayed for the appointment of a receiver to protect the corporation and its stockholders from mismanagement and prejudice.
• Futility of Intracorporate Remedy: She alleged that she and some board members urged the defendants to act against Dalamal, but they refused and continued dealing with Indian Commercial Company, leaving the minority without recourse before the majority.

• Derivative Suit and Receivership: Whether a minority stockholder may maintain a derivative suit and whether the appointment of a receiver was proper where corporate directors were guilty of a breach of trust and intracorporate remedies were futile or useless.
• Emergency and Delay: Whether the appointment of a receiver was improper because no emergency was alleged or proved and the alleged fraudulent transaction and refusal to sue occurred more than two years before the application for receivership.
• Change in Management: Whether the appointment of a receiver should be set aside because management had been changed and the new management had not been given an opportunity to show what it could do.
• Respondent's Prior Role: Whether respondent Justiniani's prior service as treasurer with control of funds barred her from seeking receivership.

• Derivative Suit and Receivership: Yes. A minority stockholder may sue on behalf of the corporation where directors commit a breach of trust and intracorporate remedy is futile; receivership was not an abuse of discretion.
• Emergency and Delay: No. The importation of finished textiles under raw-material dollar allocations and the suspension of allocations established the factual basis; delay did not bar relief because respondent could reasonably await action by the directors.
• Change in Management: No. The ground was not raised in the court below and cannot be considered on appeal; moreover, the Board of Directors, not the management alone, caused the situation.
• Respondent's Prior Role: No. The fraud was committed by the manager and consented to by the directors, beyond respondent's reach as treasurer.

• Derivative Suit and Receivership: The Court applied the settled rule that where corporate directors are guilty of a breach of trust—not mere error of judgment or abuse of discretion—and intracorporate remedy is futile or useless, a stockholder may institute a suit in behalf of himself and other stockholders and for the benefit of the corporation to redress a wrong inflicted directly upon the corporation and indirectly upon the stockholders. The complaint alleged, and the hearing showed, the importation of finished textiles under dollar allocations for raw materials, violation of Central Bank regulations, suspension of allocations, and refusal of the directors to act against Dalamal. The majority did nothing for two years and admitted they would not entertain minority suggestions. These facts constituted fraud or consent by the directors, a breach of trust, and justified the derivative suit. The trial court's appointment of a receiver was not only expedient but necessary to restore Central Bank confidence and potentially revive the dollar allocation. The Court cited Pascual vs. Del Saz Orozco and Angeles vs. Santos.
• Emergency and Delay: Petitioner's claim that no emergency was alleged or proved was not well founded. At the January 30, 1960 hearing, records of shipments of finished textile goods on dollar allocations for raw materials were exhibited; publicity had been given; documents proving letters of credit for textiles were in the record; and the textiles were denied importation and had to be re-exported. The importation in violation of Central Bank regulations was conclusively shown, and the allocation of dollars for raw materials was suspended. The importation of textiles instead of raw materials and the failure of the Board to act against responsible persons constituted fraud or consent, a breach of trust. The two-year delay did not bar relief: respondent had the right to assume and expect that the directors would remedy the anomalous situation; only after that period could she conclude that the directors were remiss. The fraud was committed by the manager and consented to by the directors, beyond reach of respondent even if she had been treasurer.
• Change in Management: This ground was not mentioned or raised as a defense or objection in the court below; it was raised for the first time in the petition for certiorari. The Court cited the principle that an appellate court may not consider any ground of objection that was not raised in the court below. Also, a new management is not in itself a ground of objection to the appointment of a receiver. The parties found guilty of fraud were the Board of Directors, which took no action to stop the anomalies being perpetrated by the management; the management must have acted directly under orders of the Board. The appointment of a new management would not remedy the anomalous situation because it was due principally to the direction of the Board of Directors.
• Respondent's Prior Role: Counsel for petitioner claimed that respondent was treasurer and had control of funds and had not taken steps to remedy the situation. The Court answered that the fraud consisted in importing finished textile instead of raw cotton for the textile mill; the fraud was committed by the manager of the business and was consented to by the directors, evidently beyond the reach of respondent.

• Derivative Suit for Breach of Trust — Where corporate directors are guilty of a breach of trust—not mere error of judgment or abuse of discretion—and intracorporate remedy is futile or useless, a stockholder may institute a suit in behalf of himself and other stockholders and for the benefit of the corporation to redress a wrong inflicted directly upon the corporation and indirectly upon the stockholders. The Court applied this because the directors allegedly caused the importation of finished textiles under raw-material dollar allocations and refused to act against the responsible director, while the majority did nothing for two years.
• Futility of Intracorporate Remedy — A stockholder may sue on behalf of the corporation without first pursuing intracorporate remedies when those remedies are futile or useless. The Court found futility because the controlling majority had done nothing for two years and the defendants admitted in open court that the majority stockholders would not entertain any suggestion of the minority.
• Receivership as Protective Remedy — Appointment of a receiver is justified when necessary to protect the rights of minority and majority stockholders and to restore the faith and confidence of regulatory authorities, especially where the corporation's license and dollar allocations are at risk. The Court upheld receivership because the importation violated Central Bank regulations, dollar allocations were suspended, and a receiver might restore confidence and the allocation needed for operations.
• Delay in Seeking Relief — A stockholder's delay in seeking receivership is not fatal where she could reasonably assume that the directors would remedy the anomalous situation; only after the lapse of a reasonable period could she conclude that the directors were remiss in their duty.
• Appellate Review of Unraised Grounds — An appellate court may not consider any ground of objection that was not raised in the court below. The Court refused to consider petitioner's new-management argument because it was raised for the first time on certiorari.

• "It is well settled in this jurisdiction that where corporate directors are guilty of a breach of trust — not of mere error of judgment or abuse of discretion — and intracorporate remedy is futile or useless, a stockholder may institute a suit in behalf of himself and other stockholders and for the benefit of the corporation, to bring about a redress of the wrong inflicted directly upon the corporation and indirectly upon the stockholders." — This is the canonical formulation of the derivative-suit rule applied in the case.
• "The fact of the importation of finished textiles on dollar allocations for raw materials in violation of Central Bank regulations was, therefore, conclusively shown." — This passage states the factual foundation for the finding of breach of trust and the justification for receivership.
• "The principle has long ago been enunciated by Us that an appellate court may not consider any ground of objection that was not raised in the court below." — This procedural rule disposed of petitioner's new-management argument.
• "Considering the above circumstances we are led to agree with the judge below that the appointment of a receiver was not only expedient but also necessary to restore the faith and confidence of the Central Bank authorities in the administration of the affairs of the corporation, thus ultimately leading to a restoration of the dollar allocation so essential to the operation of the textile mills." — This passage explains why receivership was upheld as a necessary protective remedy.

• Pascual vs. Del Saz Orozco, 19 Phil. 82 — Cited as an early illustration that a minority stockholder may maintain a derivative suit on behalf of the corporation against directors to recover damages, even over the objection of the majority and directors.
• Angeles vs. Santos, 64 Phil. 697 (G.R. No. L-43413, Aug. 31, 1937) — Cited in connection with the derivative-suit rule, following Pascual vs. Del Saz Orozco.
• Paminsan vs. Costales, 29 Phil. 587, 489 — Cited by the trial court for the test of sufficiency of a cause of action: whether, admitting the facts alleged in the complaint, the court could render a valid judgment in accordance with the prayer.
• Tan Machan vs. Trinidad, 3 Phil. 684; Ramiro vs. Graño, 54 Phil. 744 — Cited for the rule that an appellate court may not consider a ground of objection not raised in the court below.
• Vda. de Villaruel, et al. vs. Manila Motor Co., Inc., et al., G.R. No. L-10394 (Dec. 13, 1958); Collector of Internal Revenue vs. Estate of F. P. Buan, et al., G.R. Nos. L-11438-39 and L-11542-46 (July 31, 1958); S.V.S. Pictures, Inc., et al. vs. Court of Appeals, et al., G.R. No. L-7075 (Jan. 29, 1960); Elena Peralta Vda. de Caina vs. Reyes, et al., G.R. No. L-15792 (May 30, 1960) — Cited as further authority for the same rule on unraised grounds.

• Central Bank regulations on dollar allocations — The decision refers to Central Bank regulations governing dollar allocations for raw materials and states that importing finished textiles under raw-material allocations violated those regulations. The violation led the Central Bank to stop all dollar allocations for raw materials, paralyzing the textile mill and supporting receivership. No specific article or section is cited in the text.

Bengzon, C.J., Padilla, Reyes, J.B.L., Paredes and De Leon, JJ., concur.