Government of Philippine Islands v. El Ahorro Insular
REITERATIONFacts
The Antecedents: The Government of the Philippine Islands instituted quo warranto proceedings against El Ahorro Insular, a mutual building and loan association, alleging eight causes of action. The plaintiff sought the dissolution of the corporation and the deprivation of its corporate rights. The trial court ordered the defendant to comply with the orders of the Bank Commissioner and the Secretary of Finance concerning specific causes of action, with dissolution as a consequence of non-compliance. The court also deemed it impracticable to enforce certain orders from the association's inception, giving them effect from January 1, 1932. Procedural History: The defendant excepted to the decision but assigned as error only parts relating to the first, third, and seventh causes of action. The trial court's decision was affirmed by the Supreme Court concerning the discussed assignments of error. The Petition: The defendant appealed, raising four assignments of error concerning the prohibition of compensation to incorporators, the demand for payment of loans on 'fundadores' shares, the legality of maintaining a proportion between shares by closing issuance, and the denial of a motion for a new trial.
Issue(s)
Whether the trial court erred in prohibiting the defendant from paying compensation to its incorporators. Whether the trial court erred in ordering the defendant to demand payment of loans obtained on "fundadores" shares. Whether the trial court erred in holding it illegal for the defendant to maintain a certain proportion between its shares by closing the issuance of certain shares. Whether the trial court erred in denying the defendant's motion for a new trial.
Ruling
The Supreme Court affirmed the judgment of the trial court, holding that the compensation voted to incorporators was illegal and that the transactions concerning 'fundadores' shares were subject to the directives of the Bank Commissioner and the Secretary of Finance. The Court found the third assignment of error to be based on imaginary questions not addressed by the trial court.
Ratio Decidendi
On the prohibition of compensation to incorporators: The Court reiterated the ruling in Barretto vs. La Previsora Filipina and Viuda de Barretto vs. La Previsora Filipina, holding that compensations and remunerations of similar character to those proposed for the incorporators are null and void and illegal. This is because they do not constitute a contract between the beneficiaries and the corporation and violate the essential principles of mutuality and cooperation that distinguish mutual building and loan associations from ordinary corporations. The argument that the incorporators were not parties to the suit was dismissed, as the quo warranto proceeding was solely to test the validity of the resolutions, not to render judgment against the incorporators themselves. The distinction from the Government of the Philippine Islands vs. El Hogar Filipino case was emphasized, noting the presence of a ratified contract with specific considerations in the latter, which were absent in the case of the incorporators' compensation. On demanding payment of loans on "fundadores" shares: The Court found the facts concerning the issuance of 'fundadores' shares with partial payment and promissory notes to be beyond question, as implicitly admitted by the defendant. The argument regarding a pending suit was rendered moot by the dismissal of the appeal in G.R. No. 35982, which had conclusively decided the matter. Therefore, the trial court's decision sustaining the Bank Commissioner and the Secretary of Finance was upheld, as the transaction was deemed illegal and the administrative authorities' instructions should have been complied with. On maintaining a proportion between shares by closing issuance: The Court found this assignment of error to be purely academic and imaginary. It clarified that the trial court did not hold the maintenance of a proportion between shares illegal. Instead, the trial court declared illegal and misleading the tables in the defendant's prospectus that promised maturity dates and dividend rates, as these outcomes were dependent on uncontrollable circumstances. The defendant's proposition in its third assignment of error was a mischaracterization of the trial court's actual pronouncement. On denying the motion for a new trial: As this assignment of error was a mere corollary of the former ones, which were found to be without merit, it did not warrant further consideration.
Main Doctrine
Compensations and remunerations granted to incorporators of mutual building and loan associations, which do not constitute a contract and violate the principles of mutuality and cooperation, are null and void and illegal. Transactions involving the issuance of 'fundadores' shares with partial payment and promissory notes secured by the shares themselves are subject to the strict supervision and orders of the Bank Commissioner and the Secretary of Finance.