Angeles vs Santos G.R. No.

L-43413 August 31, 1937

FACTS:

The Parties are all stockholders and member of the board of directors of the "Paraaque Rice Mill, Inc., a
corp organized or the purpose of operating a rice mil. In 1962, Angeles et al (minority) filed a complaint
as stockholders, for and in behalf of the corporation, against Santos et al (majority) in CFI Rizal. The
complaint alleged that:

a special meeting was held in Feb. 1932 where the Board formed an investigation committee
(headed by the minority) to look into the losses of the corporation in the year 1931, however,
Santos et al denied access to the properties, books and record of the corporation which were in
their possession
According to the by-laws, said documents should be under the exclusive control and possession
of the secretary-treasurer, not Santos
Santos had appropriated to his own benefit properties, funds, and income of the corporation in
the sum of P10,000
he refused to sign over fully paid-up shares of stock to Higinio Angeles so that he can control the
affairs of the corp
that he refused to hold monthly meetings of the board, even after due request, and
Santos et al was disposing of the properties and records of the corporation without authority
from the board of directors or the stockholders of the corporation and suspended Jose Lara
from the office of general manager to prevent any interferrence with or examination of his
arbitrary acts.

The complaint prayed that:

Jose Lara be reinstated and appointed as receiver of the properties of the corp
Santos be ordered to make a detailed accounting of the properties
He be required to pay to the corporation the amount of P10,000 and other amounts which may
be found due to the said corporation as damages
be ordered to sign the certificate of stock subscribed to and paid by the plaintiff Higinio Angeles,
and
the members of the board of directors of the Paraaque Rice Mill, Inc., be removed and an
exrtraodinary meeting of the stockholders called for the purpose of electing a new board of
directors.

Santos et al filed an answer with general and specific denials and allege that Santos did not sign over the
paid-up shares due to Angeles for 600 shares valued at P15,000, because the board of directors decided
to give Higinio Angeles only 320 shares of stock worth P8,000. It also puts up a counter-claim for
malicious procurement of a receivership along with damages. They also included a cross-complaint
against the minority members based on the alleged failure of the Higinio Angeles to render a report of
his administration of the corporation from February to June 1928, during which time the corporation is
alleged to have accrued earnings.

Angeles et al renewed their petition for the appointment of a receiver pendent lite alleging pretty much
the same stuff they did in the complaint and that without the knowledge and consent of the
stockholders and of the board of directors, Santos installed a small rice mill for converting rice husk into
"tiqui-tiqui", the income of which was never turned over or reported to the treasurer of the corporation.
Santos et al opposed saying that the court had no jurisdiction over the Paraaque Rice Mill, Inc.,
because it had not been include as party defendant and, therefore the court could not properly appoint
a receiver of the corporation pendente lite.
Preliminarily, Melchor de Lara was appointed by the court a receiver, then upon opposition by Santos et
al, Benigno Agco took his place. After trial, the court appointed Emilio Figueroa as receiver of the
corporation. Santos et al filed and MR which was denied. After trial, the court ruled in favor of Angeles
et al, ordering Santos to render an accounting and pay whatever may be owing to the corporation, sign
over to Angeles the shares in the amount of 15,000, and that a new set of board of directors be elected
in a general meeting.

ISSUE:

WON Paraaque Rice Mill, Inc. was a neccessary party to the case and trial court had jurisdiction
to appoint a receiver. (YES)
WON Santos was liable to render an accounting and to pay whatever may be owing to the
corporation (YES, but later)
WON it was proper for the court to order the removal of Santos et al from their offices as
members of the board of directors of the corporation. (NO)

RATIO:

There is ample evidence showing that Santos et al are guilty of breach of trust as directors of the
corporation. The board of directors of a corporation is a creation of the stockholders and controls and
directs the affairs of the corporation by allegation of the stockholders. But the board of directors, or the
majority thereof, in drawing to themselves the power of the corporation, occupies a position of
trusteeship in relation to the minority of the stock in the sense that the board should exercise good
faith, care and diligence in the administration of the affairs of the corporation and should protect not
only the interest of the majority but also those of the minority of the stock. Where a majority of the
board of directors wastes or dissipates the funds of the corporation or fraudulently disposes of its
properties, or performs ultra vires acts, the court, in the exercise of its equity jurisdiction, and upon
showing that intracorporate remedy is unavailing, will entertain a suit filed by the minority members of
the board of directors. Where corporate directors are guilty of a breach of trust not of mere error of
judgment or abuse of discretion and intracorporate remedy is futile or useless, a stockholder may
institute a suit in behalf of himself and other stockholders and for the benefit of the corporation, to
bring about a redress of the wrong inflicted directly upon the corporation and indirectly upon the
stockholders.

The contention of Santos et al that the Paraaque Rice Mill, Inc., should have been brought in as
necessary party and the action maintained in its name and in its behalf directly states the general rule,
but not the exception recognize by this court in the case of Everrett vs. Asia Banking Corporation:

like most rules, the rule in question has its exceptions. It is alleged in the complaint and, consequently,
admitted through the demurrer that the corporation Teal & Company is under the complete control of
the principal defendants in the case, and, in these circumstances it is obvious that a demand upon the
board of directors to institute action and prosecute the same effectively would have been useless, and
the law does not require litigants to perform useless acts.

The lower court in its decision not only orders Santos to account for the properties and funds of the
corporation, but it also and at the same time adjudges him to pay an undermine amount which is made
to depend upon the result of such accounting. This accounting should better be filed with the new board
of directors whose election has been ordered by the lower court. The decision of the lower court in this
respect is therefore modified so that the defendant Santos shall render a complete accounting of all the
corporate properties and funds that may have come to his possession during the period mentioned in
the jugment of the lower court to the new board of director to be elected by the stockholders.

The Corporation Law, in section 29 to 34, provide for the election and removal of the directors of a
corporation. It does not confer expressly upon the court the power to remove a director of a
corporation. In some jurisdictions, statutes expressly provide a more or less summary method for the
confirmation of the election and for a motion of the directors of a corporation. There are abundant
authorities, however, which hold that if the court has acquired jurisdiction to appoint a receiver because
of the mismanagement of directors these may thereafter be remove and others appointed in their place
by the court in the exercise of its equity jurisdiction. In the present case, however, the properties and
assets of the corporation being amply protected by the appointment of a receiver and view of the
statutory provisions above referred to, we are of the opinion that the removal of the directors is, under
the circumstances, unnecessary and unwarranted.