REYES vs. TAN

G.R. No. L-16982             

September 30, 1961 

FACTS:

Several purchases of raw materials were allegedly made in New York for the textile mill and was shipped to the Philippines.  However, the shipment were found out to consist not of raw materials but of finished products, such as, West Point Khaki rayon suiting materials dyed in the piece, finished rayon tafetta in cubes, cotton eyelets, etc., for which reasons the Central Bank of the Philippines stopped all dollar allocations for raw materials for the corporation which necessarily led to the paralyzation of the operation of the textile mill and its business;

It was said that the Defendant Dalamal, who was the representative in the New York office had interests in the supplier of the aforesaid finished goods and in the Indian Commmercial Company and the Indian Traders responsible for the issuance of the Letters of Credit.

The plaintiff and some members of the board of directors urged defendants to proceed against Dalamal, exposing his offense to the Central Bank, and to initiate suit against Dalamal for his fraud against the corporation;

That defendants refused to proceed against Dalamal and instead continued to deal with the Indian Commercial Company to the damage and prejudice of the corporation. The prayer asks for the appointment of a receiver and a judgment marking defendants jointly and severally liable for the damages.

ISSUE:

W/N the minority stockholders of the corporation are justified in the filing of suit hence making the appointment of a receiver necessary?

RULING:

The importation of textiles instead of raw materials, as well as the failure of the board of directors to take actions against those directly responsible for the misuse of the dollar allocations constitute fraud, or consent thereto on the part of the directors. Therefore, a breach of trust was committed which justified the suit by a minority stockholder of the corporation.

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.

The directors permitted the fraudulent transaction to go unpunished and nothing appears to have been done to remove the erring purchasing managers. In a way the appointment of a receiver may have been thought of by the court below so that the dollar allocation for raw material may be revived and the textile mill placed on an operating basis. It is possible that if a receiver in which the Central Bank may have confidence is appointed, the dollar allocation for raw material may be restored. Claim is made that if a receiver is appointed, the Philippine National Bank to which the corporation owes considerable sums of money might be led to foreclose the mortgage. Precisely the appointment of a receiver in whom the bank may have had confidence might rehabilitate the business and bring a restoration of the dollar allocation much needed for raw material and an improvement in the business and assets the corporation, thus insuring the collection of the bank's loan.

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. The first assignment of error is, therefore, overruled.