National Exchange Co. v. Dexter
REITERATIONFacts
The Antecedents: The National Exchange Co., Inc., as assignee of C. S. Salmon & Co., instituted an action to recover P15,000 from I. B. Dexter, representing the unpaid par value of 150 shares of the capital stock of C. S. Salmon & Co. The defendant, I. B. Dexter, had signed a written subscription for 300 shares, stipulating that the subscription was payable from the first dividends declared on any and all shares owned by him until the full amount was paid. Procedural History: The trial court rendered judgment in favor of the plaintiff, ordering the defendant to pay the claimed amount with interest and costs. The defendant appealed this judgment. The Petition: The sole issue presented to the appellate court was whether the stipulation in the stock subscription, making payment contingent on dividends, relieved the subscriber from personal liability.
Issue(s)
Whether a stipulation in a stock subscription agreement, making payment contingent upon dividends declared on the stock, is valid and relieves the subscriber from personal liability. Whether such a stipulation constitutes a fraud upon other stockholders and creditors.
Ruling
The Supreme Court affirmed the judgment of the trial court, holding that the stipulation in the stock subscription agreement making payment contingent upon dividends is illegal and void. The defendant is personally liable for the unpaid balance of his stock subscription.
Ratio Decidendi
On the validity of the stipulation and subscriber's liability: The Court held that the stipulation making the stock subscription payable only from dividends is illegal and void. Philippine law, specifically Act No. 1459, as amended by Act No. 2792, and the Organic Act of July 1, 1902, mandates that corporations shall issue stock only in exchange for actual cash or property equivalent to the par value of the stock. A stipulation that payment is contingent on dividends, meaning no payment is due if no dividends are declared, directly contravenes this statutory requirement. This creates a discrimination in favor of the particular subscriber, as they are not obligated to pay the full value of the shares, unlike other subscribers who pay in cash or property. Such a condition effectively allows the subscriber to receive stock without providing the required consideration, which is prohibited by law. The Court emphasized that the law aims to secure absolute equality among stockholders with respect to their liability upon stock subscriptions. On the stipulation constituting fraud: The Court further reasoned that such a stipulation constitutes a fraud upon other stockholders and creditors. By allowing one subscriber to pay only from dividends, the corporation's capital is effectively reduced or misrepresented. This is a fraud because it subjects the particular subscriber to lighter burdens than other stockholders and potentially withdraws or decreases the capital available to creditors. The general doctrine of corporation law, as cited from Corpus Juris and the case of Putnam vs. New Albany, etc. Railroad Co., supports the principle that agreements relieving a subscriber from full payment are illegal and void as they operate as a fraud upon other stockholders or creditors. The Court rejected the argument that a collateral agreement making a subscription collectible only from dividends is valid, citing that such a principle, if it existed, would not apply in the Philippines due to the explicit statutory prohibition.
Main Doctrine
A stipulation in a stock subscription agreement that payment shall be made solely from dividends declared on the stock is illegal and void as it constitutes a fraud upon other stockholders and creditors, violating statutory provisions requiring stock to be paid for in actual cash or its equivalent.