Myline Cordial

Anthony S. Yu, Rosita G. Yu and Jason G. Yu
vs.
Joseph S. Yukayguan, Nancy L. Yukayguan, Jerald Nerwin L. Yukayguan and Neslie Yukayguan (on their own behalf and on behalf of) Winchester Industrial Supply, Inc.
G.R. No. 177549, June 18, 2009
607 Phil. 581
589 SCRA 588

FACTS:
Petitioners are members of the Yu Family while respondents belong to the Yukayguan Family. Anthony Yu is the older half-brother of Joseph Yukayguan, both of them are the heads of their respective families. Both families are stockholders of Winchester Industrial Supply, Inc., a domestic corporation engaged in the operation of a general hardware and industrial supply and equipment business.

On 15 October 2002, respondents Yukayguan filed against petitioners Yu a verified Complaint for Accounting, Inspection of Corporate Books and Damages through Embezzlement and Falsification of Corporate Records and Accounts before the RTC of Cebu. The Complaint was filed by respondents, in their own behalf and as a derivative suit on behalf of Winchester, Inc.

During the pendency of the proceedings before the RTC, the parties were able to reach an amicable settlement wherein they agreed to divide the assets of Winchester, Inc. among themselves. This amicable settlement was already partially implemented by the parties but respondents repudiated the same, for which reason the RTC proceeded with the case on its merits. On 10 November 2004, the RTC promulgated its Decision dismissing respondents’ Complaint for failure to comply with essential pre-requisites before they could avail themselves of the remedies under the Interim Rules of Procedure Governing Intra-Corporate Controversies; and for inadequate substantiation of respondents’ allegations in said Complaint after consideration of the pleadings and evidence on record.

On appeal, the Court of Appeals, in its Decision dated 15 February 2006, affirmed the findings of the RTC that respondents did not abide by the requirements for a derivative suit, nor were they able to prove their case by a preponderance of evidence. Respondents filed a Motion for Reconsideration of said judgment of the appellate court, insisting that they were able to meet all the conditions for filing a derivative suit. Pending resolution of respondents’ Motion for Reconsideration, the Court of Appeals urged the parties to again strive to reach an amicable settlement of their dispute, but the parties were unable to do so. The parties were not able to submit to the appellate court, within the given period, any amicable settlement; and filed, instead, their Position Papers. The parties opted to submit respondents’ Motion for Reconsideration of the 15 February 2006 Decision of the Court of Appeals, and petitioners’ opposition to the same, for resolution by the appellate court on the merits.

In accordance with respondents’ allegation in their Position Paper that the parties subsequently filed with the SEC, and the SEC already approved, a petition for dissolution of Winchester, Inc., the Court of Appeals remanded the case to the RTC so that all the corporate concerns between the parties regarding Winchester, Inc. could be resolved towards final settlement. The Court of Appeals converted the derivative suit between the parties into liquidation proceedings.

ISSUES:
Was the decision of the Court of Appeals in converting the derivative suit between the parties into liquidation proceeding proper?

RULING:
No. The action filed before the trial court and appealed before the appellate court is one of a derivative suit. The Court held that a derivative suit is fundamentally distinct and independent from liquidation proceedings.  They are neither part of each other nor the necessary consequence of the other. There is totally no justification for the Court of Appeals to convert what was supposedly a derivative suit instituted by respondents, on their own behalf and on behalf of Winchester, Inc. against petitioners, to a proceeding for the liquidation of Winchester, Inc.

NOTES:

What is a derivative suit?

The general rule is that where a corporation is an injured party, its power to sue is lodged with its board of directors or trustees. Nonetheless, an individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds stocks in order to protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue, or are the ones to be sued, or hold the control of the corporation. In such actions, the suing stockholder is regarded as a nominal party, with the corporation as the real party in interest.  A derivative action is a suit by a shareholder to enforce a corporate cause of action. The corporation is a necessary party to the suit. And the relief which is granted is a judgment against a third person in favor of the corporation.  Similarly, if a corporation has a defense to an action against it and is not asserting it, a stockholder may intervene and defend on behalf of the corporation. By virtue of Republic Act No. 8799, otherwise known as the Securities Regulation Code, jurisdiction over intra-corporate disputes, including derivative suits, is now vested in the Regional Trial Courts designated by this Court pursuant to A.M. No. 00-11-03-SC promulgated on 21 November 2000.

What is liquidation?

Following the voluntary or involuntary dissolution of a corporation, liquidation is the process of settling the affairs of said corporation, which consists of adjusting the debts and claims, that is, of collecting all that is due the corporation, the settlement and adjustment of claims against it and the payment of its just debts. More particularly, it entails the following:

Winding up the affairs of the corporation means the collection of all assets, the payment of all its creditors, and the distribution of the remaining assets, if any among the stockholders thereof in accordance with their contracts, or if there be no special contract, on the basis of their respective interests.  The manner of liquidation or winding up may be provided for in the corporate by-laws and this would prevail unless it is inconsistent with law.

It may be undertaken by the corporation itself, through its Board of Directors; or by trustees to whom all corporate assets are conveyed for liquidation; or by a receiver appointed by the SEC upon its decree dissolving the corporation.

The Court has recognized that a stockholder’s right to institute a derivative suit is not based on any express provision of the Corporation Code, or even the Securities Regulation Code, but is impliedly recognized when the said laws make corporate directors or officers liable for damages suffered by the corporation and its stockholders for violation of their fiduciary duties.  Hence, a stockholder may sue for mismanagement, waste or dissipation of corporate assets because of a special injury to him for which he is otherwise without redress.  In effect, the suit is an action for specific performance of an obligation owed by the corporation to the stockholders to assist its rights of action when the corporation has been put in default by the wrongful refusal of the directors or management to make suitable measures for its protection.  The basis of a stockholder’s suit is always one in equity.  However, it cannot prosper without first complying with the legal requisites for its institution.

What are the requirements for filing a derivative suit?

Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies lays down the following requirements which a stockholder must comply with in filing a derivative suit:

Sec. 1.  Derivative action. – A stockholder or member may bring an action in the name of a corporation or association, as the case may be, provided, that:

The wordings of Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies are simple and do not leave room for statutory construction.  The second paragraph thereof requires that the stockholder filing a derivative suit should have exerted all reasonable efforts to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires; and to allege such fact with particularity in the complaint. The obvious intent behind the rule is to make the derivative suit the final recourse of the stockholder, after all other remedies to obtain the relief sought had failed.

The allegation of respondent Joseph in his Affidavit of his repeated attempts to talk to petitioner Anthony regarding their dispute hardly constitutes “all reasonable efforts to exhaust all remedies available.”  Respondents did not refer to or mention at all any other remedy under the articles of incorporation or by-laws of Winchester, Inc., available for dispute resolution among stockholders, which respondents unsuccessfully availed themselves of.   And the Court is not prepared to conclude that the articles of incorporation and by-laws of Winchester, Inc. absolutely failed to provide for such remedies.

Neither can this Court accept the reasons proffered by respondents to excuse themselves from complying with the second requirement under Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies. They are flimsy and insufficient, compared to the seriousness of respondents’ accusations of fraud, misappropriation, and falsification of corporate records against the petitioners. The fact that Winchester, Inc. is a family corporation should not in any way exempt respondents from complying with the clear requirements and formalities of the rules for filing a derivative suit.  There is nothing in the pertinent laws or rules supporting the distinction between, and the difference in the requirements for, family corporations vis-à-vis other types of corporations, in the institution by a stockholder of a derivative suit.

Full Text: Yu vs Yukayguan G.R. No. 177549 June 18, 2009 Summary