Wednesday, March 21, 2012

Pirovano vs. The De La Rama Steamship Co. [G.R. No. L-5377, December 29, 1954]

Facts: Enrico Pirovano was the President and General Manager of the De la Rama Steamship Company. Early in 1941 the company insured the life of said Enrico Pirovano in various Philippine and American Life Insurance companies. Enrico Pirovano was largely responsible for the rapid and very successful development of the activities of the company. He was killed by the Japanese in Manila sometime in 1944 leaving as his only heirs four minor children. In view of the fact that Enrico Pirovano left practically nothing to his heirs, the current President of De la Rama Steamship proposed that it is but fit and proper that the company which owes so much to the deceased should make some provision for his children. He proposed that out of the proceeds of the insurance policies the sum of P400,000 be set aside for Pirovano’s minor children, said sum of money to be convertible into 4,000 shares of the stock of the Company, at par, or 1,000 shares for each child. A resolution was adopted to carry out the proposal and submitted to the stockholders of the De la Rama company at a meeting properly convened, and on that same date the same was duly approved. 

Sometime in March 1950, the President of the corporation, Sergio Osmeña, Jr., inquired to the Securities and Exchange Commission asking for opinion regarding the validity of the donation of the proceeds of the insurance policies to the Pirovano children. SEC rendered its opinion that the donation was void because the corporation could not dispose of its assets by gift and therefore the corporation acted beyond the scope of its corporate powers. In 1951, in view of the failure of compliance with the conditions to which the above donation was made subject, and in view of the opinion of the SEC Commissioner, the majority of the stockholders' voted to revoke the resolution approving the donation to the Pirovano children. The minor children of the late Enrico Pirovano, represented by their mother and guardian, Estefania demanded the payment of the credit due them, amounting to P564,980.89, but the company refused to pay. Thus, they instituted an action in the Court of First Instance of Rizal. 

Issue: Can defendant corporation give by way of donation the proceeds of said insurance policies to the minor children of the late Enrico Pirovano under the law or its articles of corporation, or is that donation an ultra vires act? 

Held: After a careful perusal of the provisions of the articles of incorporation of the De la Rama company, we find that the corporation was given broad and almost unlimited powers to carry out the purposes for which it was organized among them, (1) "To invest and deal with the moneys of the company not immediately required, in such manner as from time to time may be determined" and, (2) "to aid in any other manner any person, association, or corporation of which any obligation or in which any interest is held by this corporation or in the affairs or prosperity of which this corporation has a lawful interest." The world deal is broad enough to include any manner of disposition, and refers to moneys not immediately required by the corporation, and such disposition may be made in such manner as from time to time may be determined by the corporations. The donation in question undoubtedly comes within the scope of this broad power for it is a fact appearing in the evidence that the insurance proceeds were not immediately required when they were given away. 

Granting arguendo that the donation given by Pirovano children is outside the scope of the powers of the defendant corporation, or the scope of the powers that it may exercise under the law, or it is an ultra vires act, still it may said that the same can not be invalidated, or declared legally ineffective for the reason alone, it appearing that the donation represents not only the act of the Board of Directors but of the stockholders themselves as shown by the fact that the same has been expressly ratified in a resolution duly approved by the latter. By this ratification, the infirmity of the corporate act, it may has been obliterated thereby making the act perfectly valid and enforceable. This is specially so if the donation is not merely executory but executed and consummated and no creditors are prejudice, or if there are creditors affected, the latter has expressly given their confirmity. 

A distinction should be made between corporate acts or contracts which are illegal and those which are merely ultra vires. The former contemplates the doing of an act which is contrary to law, morals, or public policy or public duty, and are, like similar transactions between the individuals void. They cannot serve as basis of a court action, nor require validity. ultra vires acts on the other hand, or those which are not illegal and void ab initio, but are merely within are not illegal and void ab initio, but are not merely within the scope of the articles of incorporation, are merely voidable and may become binding and enforceable when ratified by the stockholders. Said donation, even if ultra vires in the supposition we have adverted to, is not void, and if voidable its infirmity has been cured by ratification and subsequent acts of the defendant corporation. The defendant corporation, therefore, is now prevented or estopped from contesting the validity of the donation.

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