Asset Privatization vs CA (300 SCRA 579)

Asset Privatization Trust vs Court of Appeals
300 SCRA 579 [GR No. 121171 December 29, 1998]

Facts: The development, exploration and utilization  of the mineral deposits in the Surigao Mineral Reservation have been authorized by the Republic Act No. 1528, as amended by Republic Act No. 2077 and Republic Act No. 4167, by virtue of which laws, a memorandum of agreement was drawn on July 3, 1968, whereby the Republic of the Philippines thru the Surigao Mineral Reservation Board, granted MMIC the exclusive right to explore, develop and exploit nickel, cobalt, and other minerals in the Surigao Mineral Reservation. MMIC is a domestic corporation engaged in mining with respondent Jesus S. Cabarrus Sr. as president and among its original stockholders. The Philippine government undertook to support the financing of MMIC by purchase of MMIC debenture bonds and extension of guarantees. Further, from the DBP and/or the government financing institutions to subscribe in MMIC and issue guarantee/s of foreign loans or deferred payment arrangements secured from the US Eximbank, Asian  Development Bank (ADB), Kobe steel of amount not exceeding US$100 million. On July 13, 1981, MMIC, PNB, and DBP executed a mortgage trust agreement whereby MMIC as mortgagor, agreed to constitute a mortgage in favor of PNB and DBP as mortgages, over all MMIC assets; subject of real estate and chattel mortgage executed by the mortgagor, and additional assets described and identified, including assets of whatever kind, nature or description, which the mortgagor may acquire whether in substitution of, in replenishment or in addition thereto. Due to the unsettled obligations, a financial restructuring plan (FRP) was suggested, however not finalized. The obligations matured and the mortgage was foreclosed. The foreclosed assets were sold to PNB as the lone bidder and were assigned to the  newly formed corporations namely Nonoc Mining Corporation, Maricalum Mining and Industrial Corporation and Island Cement Corporation. In 1986, these assets were transferred to the asset privatization trust. On February  28, 1985, Jesus S. Cabarrus Sr. together with the other stockholders of MMIC, filed a derivative suit against DBP and PNB before the RTC of Makati branch 62, for annulment of foreclosures, specific performance and damages. The suit docketed as civil case no. 9900, prayed that the court: 1.) Annul the foreclosures, restore the foreclosed assets to MMIC, and require the banks to account for their use and operation in the interim; 2.) Direct the banks to honor and perform their commitments under the alleged FRP; 3.) Pay moral and exemplary damages, attorney’s fees, litigation expenses and costs. A compromise and arbitration agreement was entered by the parties to which committee awarded damages in favor of Cabarrus.

Issue: Whether or not the award granted to Cabarrus was proper.

Held: No. Civil case no. 9900 filed before the RTC being a derivative suit, MMIC should have been impleaded as a party. It was not joined as a part plaintiff or party defendant at any stage before of the proceedings as it is, the award for damages to MMIC, which was not  party before the arbitration committee is a complete nullity.

Settled is the doctrine that in a derivative suit, the corporation is the real party in interest while the stockholder filing suit for the corporation’s behalf is only a nominal party. The corporation should be included s a party in the suit.

An individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds stock in order to protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue, or are the ones to be sued or hold the control of the corporation. In such actions, the suing stockholder is regarded as a nominal party, with the corporation as the real part in interest.

It is a condition sine qua non that the corporation be impleaded as a party because – not only is the corporation an indispensable party, but it is also the present rule that it must be served with process. The reason given is that the judgement must be made binding upon the corporation in order that the corporation may get the benefit of the suit and may not bring a subsequent suit against the same defendants for the same cause of action. In other words the corporation must be joined as a party because it is its cause of action that is being litigated and because judgement must be a res judicata against it.

The reasons given for not allowing direct individual suit are:

  1. That the prior rights of the creditors may be prejudiced. Thus, our Supreme Court held in the case of Evangelista vs Santos that the “Stockholders may not directly claim those damages for themselves for that would result in the appropriation by, and the distribution among them of part of the corporate assets before the
  2. The universally recognized doctrine that a stockholder in a corporation has no title legal or equitable to the corporate property; that both of these are in the corporation itself for the benefit of the stockholders. In other words, to allow shareholders to sue separately would conflict with the separate corporate entity principle.
  3. dissolution of the corporation and the liquidation of its debts and liabilities, something which cannot be legally done in view of section 16 of the corporation law.
  4. The filing of such suits would conflict with the duty of the management to sue for the protection of all concerned;
  5. It would produce wasteful multiplicity of suits; and
  6. It would involve confusion in ascertaining the effect of partial recovery by an individual on the damages recoverable by the corporation for the same act.
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