G.R. No. L-30460
March 12, 1929
Steinberg v. Velasco Nature: Petition for review of lower court decision to dismiss P’s complaint since it held that the Board of Driectors could legally declare dividend of P3000 Facts: Steinberg (P) is the receiver of Sibuguey Trading Corp. P alleges that [Velasco, as president, Del Castillo, as vice-president, Navallo, as secretary-treasurer, and Manuel, as director of the trading Company][R], at a meeting of the board of directors held on July 24, 1922, approved and authorized various lawful purchases already made of a large portion of the capital stock of the company from its various stockholders, thereby diverting its funds to the injury of the creditors of the corp. At the time of such purchase, the corporation had debts amounting to P13,807.50, most of which were unpaid at the time petition for the dissolution of the corporation was financial condition, in contemplation of an insolvency and dissolution. P also alleges that R approved a resolution for the payment of P3,000 as dividends to its stockholders, which was done in bad faith, and to the injury and fraud of its creditors since it had accounts less in amount than the accounts receivable. R argues that the distribution of dividends was authorized by the board of directors and they constitute surplus profit of the corp. The lower court found out that R authorized the purchase of, purchased and paid for, 330 shares of the capital stock of the corporation at the agreed price of P3,300, and that at the time the purchase was made, the corporation was indebted in the sum of P13,807.50, and that according to its books, it had accounts receivable in the sum of P19,126.02. Issue: Whether R can declare dividends. Ruling: No. The action of the board in purchasing the stock from the corporation and in declaring the dividends on the stock was all done at the same meeting of the board of directors. The directors were permitted to resign so that they could sell their stock to the corporation. The authorized capital stock was P20,000 divided into 2,000 shares of the par value of P10 each, which only P10,030 was subscribed and paid. Deducting the P3,300 paid for the purchase of the stock, there would be left P7,000 of paid up stock, from which deduct P3,000 paid in dividends, there would be left P4,000 only. R acted on assumption that it appeared from the books of the corporation that it had accounts receivable of the face value of P19,126.02, therefore it had a surplus over and above its debts and liabilities. However, there is no stipulation as to the actual cash value of those accounts, and it does appear from the stipulation that, P12,512.47 of those accounts had but little value. The corporation did not then have an actual bona fide surplus from which the dividends could be paid, and that the payment of them in full at the time would affect the financial condition of the corporation. Because of this, the directors did not act in good faith or that they were grossly ignorant of their duties. Creditors of a corporation have the right to assume that so long as there are outstanding debts and liabilities, the board of directors will not use the assets of the corporation to purchase its own stock, and that it will not declare dividends to stockholders when the corporation is insolvent.
