Petitioner Lirag Textile Miil, Inc.

and defendant Social Security System (SSS) entered into a Purchase

Agreement wherein the latter will purchase preferred shares of stock from the former which is worth
one million pesos. Defendant paid petitioner in the amount of P500, 000 as evidence by Stock Certificate
128 and another P500, 000 as evidenced by Stock Certificate 139. The following conditions were
stipulated in the Purchase Agreement: (1) that petitioner will repurchase or redeem Stock Certificates
128 and 139 from defendant at regular intervals for one year and to pay dividends, and (2) that in case
of failure, the entire obligation shall become due and demandable and petitioner shall be liable in the
amount equivalent to 12% of the amount then outstanding as liquidated damages. Furthermore, Basilio
Lirag signed as a surety in the event Lirag Textile Mills, Inc. fails to make good on its obligation. However,
due to financial reverses, petitioner corporation failed to redeem the stock certificates and pay the
dividends despite defendant's demand letter. Because of such failure, defendant SSS sent a demand
letter to Basilio Lirag, requiring him to fulfill his obligation as surety. But he was also unable to comply
with such obligation. So SSS filed a petition for Specific Performance and damages with the Court of First
Instance in Rizal, praying for the fulfillment of Lirag Textile Mills, Inc. and Basilio Lirag's obligations. The
CFI ruled in favor of SSS, saying that the Purchase Agreement was a debt instrument. Hence this present
petition. Petitioners argue that the lower court erred in its decision. They contend that the obligation to
redeem the stock certificates and pay the dividends does not exist on the ground the SSS is a preferred
stockholder of the Lirag Textile Mills, Inc. and because of its financial condition upon which such liability
depended. Basilio Lirag further contends that since the corporation's obligation is without basis, he also
is not liable.

A ISSUE: Whether or not Basilio Lirag is liable for the entire obligation.

HELD: The petition is without merit. The purchase agreement is indeed a debt instrument since the
parties intended the repurchase of the certificates at scheduled dates to be an absolute obligation,
which is not dependent on the corporations financial standing. Basilio Lirag is liable for the corporation's
default since he bound himself as surety. There is a difference between the obligation of a surety and
the obligation of a guarantor. In guaranty, the guarantor merely insures the principal debtor's solvency
and binds himself to pay in the event the latter fails to pay. While the surety provides insurance for the
debt and undertakes to pay if the principal does not pay. Since Lirag Textile Mills, Inc. did not pay, Basilio
Lirag, as surety, is obligated to pay immediately without qualification. Thus, he is liable for the entire
obligation. The decision of the lower court is affirm
THE NATIONAL EXCHANGE CO., INC. vs. I. B. DEXTER,

This action was instituted in the Court of First Instance of Manila by the National Exchange Co.,
Inc., as assignee (through the Philippine National Bank) of C. S. Salmon & Co., for the purpose
of recovering from I. B. Dexter a balance of P15,000, the par value of one hundred fifty shares
of the capital stock of C. S. Salmon & co., with interest and costs. Upon hearing the cause the
trial judge gave judgment for the plaintiff to recover the amount claimed, with lawful interest from
January 1, 1920, and with costs. From this judgment the defendant appealed.

FACTS:

1. It appears that on August 10, 1919, the defendant, I. B. Dexter, signed a written
subscription to the corporate stock of C. S. Salmon & Co. in the following form:

I hereby subscribe for three hundred (300) shares of the capital stock of C. S.
Salmon and Company, payable from the first dividends declared on any and all shares of said
company owned by me at the time dividends are declared, until the full amount of this
subscription has been paid.

2. Upon this subscription the sum of P15,000 was paid in January, 1920, from a dividend
declared at about that time by the company, supplemented by money supplied personally by the
subscriber.

3. Beyond this nothing has been paid on the shares and no further dividend has been
declared by the corporation.

4. There is therefore a balance of P15,000 still paid upon the subscription.

5. The trial court held, in effect, that the stipulation mentioned is invalid.
ISSUE:

whether the stipulation contained in the subscription to the effect that the subscription is
payable from the first dividends declared on the shares has the effect of relieving the subscriber
from personal liability in an action to recover the value of the shares.

RULING:

In the absence of restrictions in its character, a corporation, under its general power to
contract, has the power to accept subscriptions upon any special terms not prohibited by
positive law or contrary to public policy, provided they are not such as to require the
performance of acts which are beyond the powers conferred upon the corporation by its
character, and provided they do not constitute a fraud upon other subscribers or stockholders,
or upon persons who are or may become creditors of the corporation.

A provision in the Corporation states: ". . . no corporation shall issue stock or bonds except in
exchange for actual cash paid to the corporation or for property actually received by it at a fair
valuation equal to the par value of the stock or bonds so issued."

Now, if it is unlawful to issue stock otherwise than as stated it is self-evident that a stipulation
such as that now under consideration, in a stock subcription, is illegal, for this stipulation
obligates the subscriber to pay nothing for the shares except as dividends may accrue upon the
stock. In the contingency that dividends are not paid, there is no liability at all. This is a
discrimination in favor of the particular subscriber, and hence the stipulation is unlawful.

Corpus Juris:

Nor has a corporation the power to receive a subscription upon such terms as will operate as a
fraud upon the other subscribers or stockholders by subjecting the particular subcriber to lighter
burdens, or by giving him greater rights and privileges, or as a fraud upon creditors of the
corporation by withdrawing or decreasing the capital.

as a general rule, an agreement between the corporation and a particular subscriber that the
subscription is not to be payable, or is to be payable in part only is illegal and void as it
constitutes fraud to other stockholders or creditors, whether it is for the purpose of making the
stock seem greater than it is, or for the purpose of preventing the predominance of certain
stockholders, or for any other purpose thus, the agreement cannot be enforced by the
subscriber or interpose it as a defense in an action on the subscription.

"Conditions attached to subscriptions, which, lessen the capital of the company, are a fraud
upon the grantor of the franchise, and upon those who may become creditors of the corporation,
and upon unconditional stockholders."

G.R. No. L-4824 June 30, 1953

LINGAYEN GULF ELECTRIC POWER COMPANY, INC., plaintiff-appellant,

vs.

IRINEO BALTAZAR, defendant-appellee.

FACTS:

 The plaintiff, Lingayen Gulf Electric Power Company is a domestic corporation with an
authorized capital stock of P300,000 divided into 3,000 shares with a par value of P100 per
share.
 The defendant, Irineo Baltazar appears to have subscribed for 600 shares on account of which
he had paid upon the organization of the corporation the sum of P15,000.
 After incorporation, the defendant made further payments on account of his subscription,
leaving a balance of P18,500 unpaid for, which amount, the plaintiff now claims in this action.
 On July 23, 1946, a majority of the stockholders of the corporation, among them the herein
defendant, held a meeting and adopted stockholders' resolution No. 17. By said resolution, it
was agreed upon by the stockholders present to call the balance of all unpaid subscribed capital
stock as of July 23, 1946, the first 50 per cent payable within 60 days beginnning August 1, 1946,
and the remaining 50 per cent payable within 60 days beginning October 1, 1946.
 The resolution also provided, that all unpaid subscription after the due dates of both calls would
be subject to 12 per cent interest per annum.
 Lastly, the resolution provided, that after the expiration of 60 days' grace which would be on
December 1, 1946, for the first call, and on February 1, 1947, for the second call, all subscribed
stocks remaining unpaid would revert to the corporation.
 On September 22, 1946, the plaintiff corporation wrote a letter to the defendant reminding him
that the first 50 per cent of his unpaid subscription would be due on October 1, 1946. The
plaintiff requested the defendant to "kindly advise the company thru the undersigned your
decision regarding this matter."
  The defendant answered on September 25, 1946, asking the corporation that he be allowed to
pay his unpaid subscription by February 1, 1947.
 In his answer, the defendant also agreed that if he could not pay the balance of his subscription
by February 1, 1947, his unpaid subscription would be reverted to the corporation.
 On December 19, 1947, the defendant wrote another letter to the members of the Board of
Directors of the plaintiff corporation, offering to withdraw completely from the corporation by
selling out to the corporation all his shares of stock in the total amount of P23,000. (See Exhibit
8). Apparently this offer of the defendant was left unacted upon by the plaintiff.
 On April 17, 1948, the Board of Directors of the plaintiff corporation held a meeting, and in the
course of the said meeting they adopted Resolution No. 17. This resolution in effect set aside
the stockholders resolution approved on June 23, 1946 (Exhibit D), on the ground that said
stockholders' resolution was null and void, and because the plaintiff corporation was not in a
financial position to absorb the unpaid balance of the subscribed capital stock.
 At the said meeting the directors also decided to call 50 per cent of the unpaid subscription
within 30 days from April 17, 1948, the call payable within 60 days from receipt of notice from
the Secretary-Treasurer. This resolution also authorized legal counsel of the company to take all
the necessary legal steps for the collection of the payment of the call.
 On June 10, 1949, the stockholders of the corporation held another meeting in which the
stockholders were all present, either in person or by proxy. At such meeting, the stockholders
adopted resolution No. 4, whereby it was agreed to revalue the stocks and assets of the
company so as to attract outside investors to put in money for the rehabilitation of the
company. The president was authorized to make all arrangement for such appraisal and the
Secretary to call a meeting upon completion of the reassessment.
 It was admitted by the defendant that he received notice from the Secretary-Treasurer of the
company, demanding payment of the unpaid balance of his subscription.
 It was agreed by the parties that the call of the Board of Directors was not published in a
newspaper of general circulation as required by section 40 of the Corporation Law.
 On September 28, 1949, the legal counsel of the plaintiff corporation wrote a letter to the
defendant, demanding the payment of the unpaid balance of his subscription amounting to
P18,500.
 The defendant ignored the said demand. Hence this action.

ISSUES:

Was the defendant released from the obligation of the unpaid balance of his subscription by
virtue of stockholders' resolution Nos. 17 and 4?

RULING:

The claim of defendant and appellant that Resolution No. 17 of 1946 released him from the obligation to
pay for his unpaid subscription, the authorities are generally agreed that in order to effect the release,
there must be unanimous consent of the stockholders of the corporation. We quote some authorities:
Subject to certain exceptions, considered in subdivision (3) of this section, the general rule is that a valid
and binding subscription for stock of a corporation cannot be cancelled so as to release the subscriber
from liability thereon without the consent of all the stockholders or subscribers. Furthermore, a
subscription cannot be cancelled by the company, even under a secret or collateral agreement for
cancellation made with the subscriber at the time of the subscription, as against persons who
subsequently subscribed or purchased without notice of such agreement.

(3) Exceptions.

In particular circumstances, as where it is given pursuant to a bona fide compromise, or to set off a debt
due from the corporation, a release, supported by consideration, will be effectual as against dissenting
stockholders and subsequent and existing creditors. A release which might originally have been held
invalid may be sustained after a considerable lapse of time.

In the present case, the release claimed by defendant and appellant does not fall under the exception
above referred to, because it was not given pursuant to a bona fide compromise, or to set off a debt due
from the corporation, and there was no consideration for it.

Another authority:

SEC. 850. Unanimous consent of stockholders necessary to release subscriber. — It may be asserted as
the first rule under this proposition that, after a valid subscription to the capital stock of a corporation
has been made and accepted, there can be no cancellation or release from the obligation without the
consent of the corporation and all the stockholders; . . . . (2 Thompson on Corporation, p. 186).

He states the reason for the rule as follows:

SEC. 855. Right to withdraw as against subscribers. — A contract of subscription is, at least in the sense
which creates as estoppel, a contract among the several subscribers. For this reason no one of the
subscribers can withdraw from the contract without the consent of all the others, and thereby diminish,
without the universal consent, the common fund in which all have acquired an interest. . . . (2 Thompson
on Corporations, p. 194.).
As already found by the trial court, the release attempted in Resolution No. 17 of 1946 was not valid
for lack of a unanimous vote. If found that at least seven stockholders were absent from the meeting
when said resolution was approved.

Keller & Co. Ltd vs COB Group Marketing Inc.

141 SCRA 86 [GR No. L-68097 January 16, 1986]

Facts: Edward A. Keller & Co. Ltd appointed COB Group Marketing Inc. as exclusive distributor
of its household products, Brite and Nuvan in Panay and Negros, as shown in the sales
agreement dated March 14, 1970. Under that agreement sold by Keller on credit its products to
COB Group Marketing. As security for COB Group Marketing’s credit, purchases up to amount of
Php35,000, one Asuncion Manahan mortgaged her land to Keller. Manahan assumed solidarity
with COB Group the faithful performance of all terms and conditions of the sales agreement. In
July 1970 the parties executed a second sales agreement whereby COB Group Marketing’s
territory was extended to Northern and Southern Luzon. As security for the credit purchases up
to Php25,000 of COB Group Marketing for that area, Tomas C. Lorenzo Jr. and his father
executed a mortgage on their land in Nueva Ecija. Like Manahan, the Lorenzos were solidarily
liable with COB Group Marketing for its obligations under the sales agreement. The credit
purchases of COB Group Marketing, which started on October 15, 1969, limited up to January
22, 1971. On May 8, the board of directors of COB Group Marketing where apprised by Jose E.
Bax, the firm’s president and general manager, that the firm owed Keller about Php179,000.
Bax was authorized to negotiate with Keller for the settlement of his firm’s liability.

Issue: Whether or not the stockholders of COB Group Marketing can be held personally liable
for the credit.

Held: No. As to the liability of the stockholders, it is settled that a stockholder is personally
liable for the financial obligations of a corporation to the extent of his unpaid subscription.