Carlos vs. Mindoro Sugar Co., et. al.October 26, 1932Imperial, J.Digest by Clark Uytico

Topic: Corporate Powers

SUMMARYMindoro Sugar Co. is going bankrupt, so it transferred all its assets into Philippine Trust in consideration that Philippine Trust would guarantee the bonds that Mindoro issued in the event Mindoro fails to pay. PhilTrust then sold some bonds to a certain Diaz and paid them for quite some time until PhilTrust suddenly stopped paying interest on the said bonds, alleging that the act of PhilTrust guaranteeing Mindoro Sugar’s bonds was ultra vires for: not being indicated in its corporate charter, and for contracting an obligation of P2,000,000, exceeding its capital of only P1,000,000 which is prohibited according to the Banking laws. SC held that the act was not ultra vires because as the Philippine Trust Company, although secondarily engaged in banking, was primarily organized as a trust corporation with full power to acquire personal property such as the bonds in question, according to both section 13 (par. 5) of the Corporation Law and its duly registered by-laws and articles of incorporation. Also, the exceeded the banking capital argument can easily be put in shambles when the fact that Mindoro Sugar transferred all its real assets and the improvements thereon in favor of PhilTrust, hence forming an increase in PhilTrust’s assets and capital.

FACTSThe Mindoro Sugar Company is a corporation constituted in accordance with the laws of the country and registered on July 30, 1917. According to its articles of incorporation, one of its principal purposes was to acquire and exercise the franchise granted by Act No. 2720 to George H. Fairchild, to substitute the organized corporation, the Mindoro Company, and to acquire all the rights and obligations of the latter and of Horace Havemeyer and Charles J. Welch in the so-called San Jose Estate in the Province of Mindoro.

The Philippine Trust Company is another domestic corporation, registered on October 21, 1917. In its articles of incorporation some of its purposes are expressed thus: "To acquire by purchase, subscription, or otherwise, and to invest in, hold, sell, or otherwise dispose of stocks, bonds, mortgages, and other securities, or any interest in either, or any obligations or evidences of indebtedness, of any other corporation or corporations, domestic or foreign.* * * Without in any particular limiting any of the powers of the corporation, it is hereby expressly declared that the corporation shall have power to make any guaranty respecting the dividends, interest, stock, bonds, mortgages, notes, contracts or other obligations of any corporation, so far as the same may be permitted by, the laws of the Philippine Islands now or hereafter in force." Its principal purpose, then, as its name indicates, is to engage in the trust business.

November 17, 1917, the board of directors of the Philippine Trust Company, composed of Phil. C. Whitaker, chairman, and James Ross, Otto Vorster, Charles' D. Ay ton, and William J, O'Donovan, members, adopted a resolution authorizing its president, among other things, to purchase at par and in the name and for the use of the trust corporation all or such part as he may deem expedient, of the bonds in the value of P3,000,000 that the Mindoro Sugar Company was about to issue, and to resell them, with or without the guarantee of said trust corporation, at a price not less than par, and to guarantee to the Philippine National Bank the payment of the indebtedness to said bank by the Mindoro Sugar Company or Charles J. Welch and Horace Havemeyer, up to P2,000,000.

In pursuance of this resolution, on December 21, 1917, the Mindoro Sugar Company executed in favor of the Philippine Trust Company the deed of trust, transferring all of its property to it in consideration of the bonds it had issued to the value of P3,000,000, the value of each bond being $1,000, which par value, with interest at 8 per cent per annum, the Philippine Trust Company had guaranteed to the holders, and in consideration, furthermore, of said trust corporation having guaranteed to the Philippine National Bank all the obligations contracted by the Mindoro Sugar Company, Charles J. Welch and Horace Havemeyer up to the aforesaid amount of P2,000,000.

The Philippine Trust Company then sold thirteen bonds, Nos. 1219 to 1231, to Ramon Diaz for P27,300, at a net profit of P100 per bond. The four bonds Nos. 1219, 1220, 1221, and 1222, here in litigation, are included in the thirteen sold to Diaz. The Philippine Trust Company paid the appellant, upon presentation of the coupons, the stipulated interest from the date of their maturity until the 1st of July, 1928, when it stopped payments; and thenceforth it alleged that it did not deem itself bound to pay such interest or to redeem the obligation because the guarantee given for the bonds was illegal and void; it being an ultra vires act. Also, it has been intimated that according to section 121 of the Corporation Law, the Philippine Trust Company, as a banking institution, could not guarantee the bonds to the value of P3,000,000 because this amount far exceeds its capital of P1,000,000 of which only one-half has been subscribed and paid.

ISSUEWON Philippine Trust Company bound itself legally and acted within its corporate powers in acquiring the bonds and subsequently guaranteeing them.

HELDYES.

Dispositive: Wherefore, the decision appealed from is reversed and the Philippine Trust Company is sentenced to pay to the appellant the sum of four thousand dollars ($4,000) with interest at eight per cent (8%) per annum from July 1, 1928 until fully paid, and the costs of both instances. So ordered.

RATIOThe Philippine Trust Company, although secondarily engaged in banking, was primarily organized as a trust corporation with full power to acquire personal property such as the bonds in question, according to both section 13 (par. 5) of the Corporation Law and its duly registered by-laws and articles of incorporation; secondly, that being thus authorized to acquire the bonds, it was given implied power to guarantee them in order to place them upon the market under better, more advantageous conditions, and thereby secure the profit derived from their sale.

It is not, however, ultra vires for a corporation to enter into contracts of guaranty or suretyship where it does so in the legitimate furtherance of its purposes and business. And it is well settled that where a corporation acquires commercial paper or bonds in the legitimate transaction of its business it may sell them, and in furtherance of such a sale it may, in order to make them the more readily marketable, indorse or guarantee their payment.

Whenever a corporation has the power to take and dispose of the securities of another corporation, of whatsoever kind, it may, for the purpose of giving them a marketable quality, guarantee their payment, even though the amount involved in the guaranty may subject the corporation to liabilities in excess of the limit of indebtedness which it is authorized to incur. A corporation which, has power by its charter to issue its own bonds has power to guarantee the bonds of another corporation, which has been taken in payment of a debt due to it, and which it sells or transfers in payment of its own debt, the guaranty being given to enable it to dispose of the bond to better advantage. And so guaranties of payment of bonds taken by a loan and trust company in the ordinary course of its business, made in connection with their sale, are not ultra vires, and are binding.

When a contract is not on its face necessarily beyond the scope of the power of the corporation by which it was made, it will, in the absence of proof to the contrary, be presumed to be valid. Corporations are presumed to contract within their powers. The doctrine of ultra vires, when invoked for or against a corporation, should not be allowed to prevail where it would defeat the ends of justice or work a legal wrong.

Re: Capital issuesThis difficulty is easily obviated by bearing in mind that the banking operations are not the primary aim of said corporation, which is engaged essentially in the trust business, and that the prohibition of the law is not applicable to the Philippine Trust Company, for the evidence shows that Mindoro Sugar Company transferred all its real property, with the improvements, to it, and the value of both, which surely could not be less than the value of the obligation guaranteed, became a part of its capital and assets; in other words, with the value of the real property transferred to it, the Philippine Trust Company had enough capital and assets to meet the amount of the bonds guaranteed with interest thereon.