Baltazar v. Lingayen Gulf

Irineo Baltazar v. Lingayen Gulf Electric Power Co., Inc G.R. No. L-16236; June 30, 1965; Paredes, J. FACTS:  The Lingayen Gulf Electric Power Co., Inc. (Lingayen) has an authorized capital stock of P300,000 divided into 3,000 shares of voting stock at P100 par value per share.  There are two groups competing in this case: 1. Baltazar and Rose – both incorporators (Baltazar group) o Baltazar subscribed to 600 shares of stock, 535 of which are already fully paid, duly covered by certificates of stock issued to him. o Rose subscribed to 400 shares of stock, 375 of which are fully paid, duly covered by certificates of stock issued to him. 2. Ungson, Estrada, Fernandez, Yuson and Acena (Ungson Group) o Ungson, Estrada, Fernandez and Yuson were small stockholders of Lingayen, all holding a total number of fully paid-up shares of stock, of not more than 100 shares. These 4 constituted the majority of the 7-member Board of Directors of Lingayen. o Acena, was likewise an incorporator and stockholder, holding 600 shares of stock, duly covered by certificates of stock issued to him. He was the largest individual stockholder.  From the by-laws, the date of the annual stockholder’s meeting had been fixed on the 1 st Tuesday of February of every year, but for one reason or another, the meeting was to be held on May 1, 1955, principally for the purpose of electing new officers and Board of Directors for the year 1955.  The Ungson group had been in complete control of the management and property of the Corporation since January 1, 1955. So in order to continue retaining such control, they passed 3 Resolutions during the regular Board meeting held on Jan. 30, 1955. The plan was to expel and oust the Baltazar group and their companion stockholders, for the ultimate purpose of depriving them of their right to vote in the said annual stockholders' meeting scheduled for May 1, 1955. 1. declaring watered stocks issued to Acena, Baltazar, Rose and Jubenville of no value and cancelled; 2.a. all unpaid subscriptions to bear interest, and all payments to be credited to interest 1st, capital debt 2nd, 2.b declared as of no value and cancelled all capital stock shares certificates issued as fully paid up, upon payments made by stockholders, when interests on unpaid subscription from date of subscription were not previously and/or then and there paid 3. all stock declared delinquent on the accrued interest are incapacitated to avail of voting power.  The Baltazar group filed a complaint and prayed that a writ of preliminary injunction be issued against the the Ungson group. They sought to allow them to vote their fully paid-up shares and to declare the resolutions invalid. The trial court issued a Preliminary Injunction, as prayed for.  Defense of Ungson group: The Resolutions were merely functional instruments to bolster the faith in the assets of Lingayen, given that during the years that the Baltazar group and their allies were in control of Lingayen, no serious effort was attempted to retrieve it from its financial collapse. Furthermore, there were even attempts to release the Baltazar group from liability of their unpaid subscriptions.  A tentative amicable settlement, formulated and entered into by some of the parties was submitted. Lower Court approved the agreement (Decision 1), and thus dissolved the writ of preliminary injunction. o (Par 3 of agreement) With respect to the interest on unpaid balance of subscription, the subscribers would be given the opportunity to pay in 2 installments: 1st installment to cover ½ of the unpaid balance to be paid in 3mos, and 2nd installment will be for the remaining unpaid half payable in another 3mos,

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From the time of the approval of this agreements, those who comply with this arrangement will not pay interest on the balance of their subscription, from the date of incorporation up to the grant of franchise on February 24, 1948, which shall be deemed as condoned, and from 1948 they will pay only as interest 3% compounded annually, failure of any subscriber to pay any of the installment provided will subject the stockholders concerned to the provision of the corporation law of the payment of 6% interest compounded quarterly. Enforcement of Decision 1 was enjoined by the Ungson Group, who asked for amendment. The Trial Court amended the decision (Decision 2), which now provides that: o The compromise agreements only modified the Resolutions, and did not repeal them. Considering that the primary intention of each of said resolutions was to effect an early collection of unpaid balance of stock subscriptions and interest thereon, and the moving consideration for a compromise settlement of the instant cases is likewise the early collection of the obligations of stockholders of the defendant corporation, the extension of time to pay, as granted in par. 3 of said agreement, was clearly intended to cover not only the accrued interest but also the unpaid stock subscription of the stockholders, for to hold otherwise would be to defeat the primary purpose of early collection of said obligations. o The declaration of delinquency from the Resolutions is not repealed by the extension of time granted under par. 3 of the compromise agreement. Complete restoration of voting rights will only take effect upon full payment of the balance of said stock subscriptions and interest within the period provided therein. The Baltazar group opposed Decision 2, thus, the Trial Court reversed it and issued Decision 3. o All shares of the capital stock of the defendant corporation covered by fully paid capital stock shares certificates are entitled to vote in all meetings of the stockholders of this corporation, and the 3 Resolutions of the Board are hereby nullified insofar as they are inconsistent this ruling. On appeal: o Baltazar group claims that once a shareholder has subscribed to a certain number of shares, although he has made partial payments, but is issued a certificate for the paidup shares, he is entitled to vote the whole number of shares subscribed, WON paid, until said unpaid shares shall have been called for payment or declared delinquent. o Lingayen/Ungson group counters that under the doctrine in Fua Cun, in the absence of special agreement to the contrary, a partial payment of a subscription does not entitle the shareholder to a certificate for the total number of shares subscribed by him, and his right consists only in equity to a certificate of the total number of shares subscribed for, upon payment of the remaining portion of the subscription price.

ISSUES/HELD: WON a shareholder with a balance of unpaid shares subscribed is entitled to vote the paid shares – YES. WON previous payments should be applied to the interest first – NO. WON there was a waiver of right to enforce the voting power, by virtue of the compromise agreement – NO. RATIO: WON a shareholder with a balance of unpaid shares subscribed is entitled to vote the paid shares – YES.  The present case does not come under the principle in Fua Cun because it was the practice of the company there since its inception, to issue certificates of stock even for unpaid shares and gave voting power to stocks fully paid. And even though no agreement existed, the ruling in said case does not now reflect the correct view on the matter, for better than an agreement or practice, there is the law, which renders Fua Cun, obsolescent.

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Sec. 37 of the Corporation Law, as amended by Act No. 3518, approved 6 yrs after Fua Cun (1923), provides: SEC. 37. No certificate of stock shall be issued to a subscriber as fully paid up until the full par value thereof, or the full subscription in the case of no par stock, has been paid by him to the corporation. Subscribed shares not fully paid up may be voted provided no subscription is unpaid and delinquent. The present law requires as a condition before a shareholder can vote his shares, that his full subscription be paid in the case of no par value stock; and in case of stock corporation with par value, the stockholder can vote the shares fully paid by him only, irrespective of the unpaid delinquent shares. o Since it was the practice of Lingayen to issue stock certificates to not fully paid subscribers, it may not take away the right to vote granted by the certificate. o Stock certificates may be issued for less than the number of shares subscribed for provided that:  The par value of each represented by the certificate has been paid, and  It is not prohibited by the by-laws.

WON previous payments should be applied to the interest first – NO.  As observed by the trial court, a corporation may now, in the absence of contrary provisions in their by-laws, apply payment made by, subscribers-stockholders, either as: a) full payment for the corresponding number of shares of stock, the par value of each of which is covered by such payment; or b) payment pro-rata to each and all the entire number of shares subscribed for.  In this case, Lingayen chose to apply payments by the shareholders to definite shares of stock and had full paid-up shares certificates for the payments. Its call for payments of unpaid subscription and its declaration of delinquency only affected the remaining number of shares.  Lingayen applied the payments made to the full par value of shares subscribed, instead of the accrued interest. This being the case, the application of payments must be deemed to have been agreed upon by the Lingayen and the shareholders and cannot now be changed without the consent of the shareholders concerned. It would therefore result that a corporation may, upon the request of an interested shareholder, apply payments by them to the full par value of subscribed capital stock. o The Corporation Law and the by-laws of Lingayen do not contain any provision, prohibiting the application of stockholders' payments to the full par value of a corporation's capital stock, ahead of the payment of accrued interest for unpaid subscriptions. o Although NCC 1253 states that if a debt produces interest, payment of the principal is not deemed made until the interest has been covered, this applies only when there is no agreement to the contrary, which is obviously the situation in the case at bar. WON there was a waiver of right to enforce the voting power, by virtue of the compromise agreement – NO.  Certain clauses of the agreement are contrary to law and public policy and would cause injury to the Baltazar group and other stockholders similarly situated. Estoppel cannot be predicated on acts which are prohibited by law or are against public policy.