Tiu vs. Ong G.R. No. 144629. April 8, 2003: Trust Fund Doctrine

TIU vs.
ONG
G.R. No. 144629. April 8, 2003
VI. CORPORATE CONTRACT LAW

Trust fund doctrine
(b) Nature of Doctrine
Facts:
In 1994, the construction of the Masagana Citimall in Pasay City was threatened with stoppage and
incompletion when its owner, the First Landlink Asia Development Corporation (FLADC), which was
owned by the Tius, encountered dire financial difficulties. It was heavily indebted to the Philippine
National Bank (PNB) for P190 million. To stave off foreclosure of the mortgage on the two lots where the
mall was being built, the Tius invited Ong Yong, Juanita Tan Ong, Wilson T. Ong, Anna L. Ong, William
T. Ong and Julia Ong Alonzo (the Ongs), to invest in FLADC. Under the Pre-Subscription Agreement they
entered into, the Ongs and the Tius agreed to maintain equal shareholdings in FLADC: the Ongs were to
subscribe to 1,000,000 shares at a par value of P100.00 each while the Tius were to subscribe to an
additional 549,800 shares at P100.00 each in addition to their already existing subscription of 450,200
shares. Furthermore, they agreed that the Tius were entitled to nominate the Vice-President and the
Treasurer plus five directors while the Ongs were entitled to nominate the President, the Secretary and six
directors (including the chairman) to the board of directors of FLADC. Moreover, the Ongs were given the
right to manage and operate the mall.
The Tius, on February 23, 1996, rescinded the Pre-Subscription Agreement.

Contention of the Tiu’s;
The Tius accused the Ongs of (1) refusing to credit to them the FLADC shares covering their real property
contributions; (2) preventing David S. Tiu and Cely Y. Tiu from assuming the positions of and performing
their duties as Vice-President and Treasurer, respectively, and (3) refusing to give them the office spaces
agreed upon. According to the Tius, the agreement was for David S. Tiu and Cely S. Tiu to assume the
positions and perform the duties of Vice-President and Treasurer, respectively, but the Ongs prevented
them from doing so. Furthermore, the Ongs refused to provide them the space for their executive offices as
Vice-President and Treasurer. Finally, and most serious of all, the Ongs refused to give them the shares
corresponding to their property contributions of a four-story building, a 1,902.30 square-meter lot and a
151 square-meter lot. Hence, they felt they were justified in setting aside their Pre-Subscription Agreement
with the Ongs who allegedly refused to comply with their undertakings.
The Ong’s defense;
the Ongs said that David S. Tiu and Cely Y. Tiu had in fact assumed the positions of Vice-President and
Treasurer of FLADC but that it was they who refused to comply with the corporate duties assigned to
them. It was the contention of the Ongs that they wanted the Tius to sign the checks of the corporation and
undertake their management duties but that the Tius shied away from helping them manage the
corporation. On the issue of office space, the Ongs pointed out that the Tius did in fact already have
existing executive offices in the mall since they owned it 100% before the Ongs came in. What the Tius
really wanted were new offices which were anyway subsequently provided to them. On the most important
issue of their alleged failure to credit the Tius with the FLADC shares commensurate to the Tius property
contributions, the Ongs asserted that, although the Tius executed a deed of assignment for the 1,902.30
square-meter lot in favor of FLADC, they (the Tius) refused to pay P 570,690 for capital gains tax and
documentary stamp tax. Without the payment thereof, the SEC would not approve the valuation of the Tius
property contribution (as opposed to cash contribution). This, in turn, would make it impossible to secure a
new Transfer Certificate of Title (TCT) over the property in FLADCs name. In any event, it was easy for
the Tius to simply pay the said transfer taxes and, after the new TCT was issued in FLADCs name, they
could then be given the corresponding shares of stocks. On the 151 square-meter property, the Tius never
executed a deed of assignment in favor of FLADC. The Tius initially claimed that they could not as yet
surrender the TCT because it was still being reconstituted by the Lichaucos from whom the Tius bought
it. The Ongs later on discovered that FLADC had in reality owned the property all along, even before their
Pre-Subscription Agreement was executed in 1994. This meant that the 151 square-meter property was at
that time already the corporate property of FLADC for which the Tius were not entitled to the issuance of
new shares of stock.
The Court affirmed the fact that both the Ongs and the Tius violated their respective obligations under the
Pre-Subscription Agreement. The Ongs prevented the Tius from assuming the positions of Vice-President
and Treasurer of the corporation. On the other hand, the Decision established that the Tius failed to turn
over FLADC funds to the Ongs and that the Tius diverted rentals due to FLADC to their MATTERCO
account. Consequently, it held that rescission was not possible since both parties were in pari
delicto. However, this Court agreed with the Court of Appeals that the remedy of specific performance, as
espoused by the Ongs, was not practical and sound either and would only lead to further squabbles and
numerous litigations between the parties.
On March 15, 2002, the Tius filed before this Court a Motion for Issuance of a Writ of Execution on the
grounds that: (a) the SEC order had become executory as early as September 11, 1998 pursuant to Sections
1 and 12, Rule 43 of the Rules of Court; (b) any further delay would be injurious to the rights of the Tius
since the case had been pending for more than six years; and (c) the SEC no longer had quasi-judicial
jurisdiction under RA 8799 (Securities Regulation Code). The Ongs filed their opposition, contending that
the Decision dated February 1, 2002 was not yet final and executory; that no good reason existed to issue a
warrant of execution; and that, pursuant to Section 5.2 of RA 8799, the SEC retained jurisdiction over
pending cases involving intra-corporate disputes already submitted for final resolution upon the effectivity
of the said law.
Aside from their opposition to the Tius Motion for Issuance of Writ of Execution, the Ongs filed their own
Motion for Reconsideration; Alternatively, Motion for Modification (of the February 1, 2002 Decision) on
March 15, 2002, raising two main points: (a) that specific performance and not rescission was the proper
remedy under the premises; and (b) that, assuming rescission to be proper, the subject decision of this
Court should be modified to entitle movants to their proportionate share in the mall.
Issue;
Whether the Tius could legally rescind the Pre-Subscription Agreement.
Held;
We rule that they could not.
FLADC was originally incorporated with an authorized capital stock of 500,000 shares with the Tius
owning 450,200 shares representing the paid-up capital. When the Tius invited the Ongs to invest in
FLADC as stockholders, an increase of the authorized capital stock became necessary to give each group
equal (50-50) shareholdings as agreed upon in the Pre-Subscription Agreement. The authorized capital
stock was thus increased from 500,000 shares to 2,000,000 shares with a par value of P100 each, with the
Ongs subscribing to 1,000,000 shares and the Tius to 549,800 more shares in addition to their 450,200
shares to complete 1,000,000 shares. Thus, the subject matter of the contract was the
1,000,000 unissued shares of FLADC stock allocated to the Ongs. Since these were unissued shares, the
parties Pre-Subscription Agreement was in fact a subscription contract as defined under Section 60, Title
VII of the Corporation Code: Any contract for the acquisition of unissued stock in an existing
corporation or a corporation still to be formed shall be deemed a subscription within the meaning of this
Title, notwithstanding the fact that the parties refer to it as a purchase or some other contract (Italics
supplied).
A subscription contract necessarily involves the corporation as one of the contracting parties since the
subject matter of the transaction is property owned by the corporation its shares of stock. Thus, the
subscription contract (denominated by the parties as a Pre-Subscription Agreement) whereby the Ongs
invested P100 million for 1,000,000 shares of stock was, from the viewpoint of the law, one between the
Ongs and FLADC, not between the Ongs and the Tius. Otherwise stated, the Tius did not contract in their
personal capacities with the Ongs since they were not selling any of their own shares to them. It was
FLADC that did.
Granting but not conceding that the Tius possess the legal standing to sue for rescission based on breach of
contract, said action will nevertheless still not prosper since rescission will violate the Trust Fund Doctrine
and the procedures for the valid distribution of assets and property under the Corporation Code.
The Trust Fund Doctrine, first enunciated by this Court in the 1923 case of Philippine Trust Co. vs.
Rivera, provides that subscriptions to the capital stock of a corporation constitute a fund to which the
creditors have a right to look for the satisfaction of their claims. This doctrine is the underlying
principle in the procedure for the distribution of capital assets, embodied in the Corporation Code,
which allows the distribution of corporate capital only in three instances: (1) amendment of the Articles
of Incorporation to reduce the authorized capital stock, (2) purchase of redeemable shares by the
corporation, regardless of the existence of unrestricted retained earnings, and (3) dissolution and
eventual liquidation of the corporation. Furthermore, the doctrine is articulated in Section 41 on the
power of a corporation to acquire its own shares and in Section 122 on the prohibition against the
distribution of corporate assets and property unless the stringent requirements therefor are complied
with.

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VI. CORPORATE CONTRACT LAW

The Tius, on February 23, 1996, rescinded the Pre-Subscription Agreement.

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