Virata vs Ng Wee (Myling)
Summary: Petitioners filed for a Motion for Reconsideration of the
Court’s 5 July 2017 decision holding the directors and officers of
Wincorp jointly and severally liable with the company for the
unpaid investment made by Ng Wee to Power Merge through
Wincorp. The Court dismissed the petitions finding the grounds
relied on in the MR were the same or substantially similar to those
raised in their respective petitions thus were denied. Santos-Tan,
however, did not appeal the CA decision and thus was only
participating in the proceedings in this reconsideration. The Court
however found her liable in the same way as Cua and the
Cualopings.
They were found personally liable as directors for either being
complicit to the fraud, or at the very least guilty of gross
negligence following Section 31 of the Corporate Code. Said
section provides that directors or trustees who willfully and
knowingly vote for or assent to patently unlawful acts of the
corporation or who are guilty of gross negligence or bad faith in
directing the affairs of the corporation or acquire any personal or
pecuniary interest in conflict with their duty as such directors or
trustees shall be liable jointly and severally for all damages
resulting therefrom suffered by the corporation, its stockholders or
members and other persons.
DOCTRINE: The Board of Directors is expected to be more than
a mere rubber stamp of the corporation and its subordinate
departments. It wields all corporate powers bestowed by the
Corporation Code, including the control over its properties and the
conduct of its business. Being stewards of the company, the
Board is primarily charged with protecting the assets of the
corporation in behalf of its stakeholders.
FACTS:
1. Before the Court are the Motion for Reconsiderations filed in
view of its 5 July 2017 Decision holding the directors and
officers of Wincorp jointly and severally liable with the
company for the unpaid investments of Ng Wee made to
Power Merge through Wincorp.
2. [From the 5 July 2017 Decision] Ng Wee, as a valued client of
Westmont Bank, was enticed by the bank manager to
make investments with Westmont Investment Corporation
(Wincorp). Wincorp would match a corporate borrower
with an investor willing to provide funds.
3. Ng Wee’s initial investments were matched with Hottick
Holdings Corporation whose majority shares were owned
by Halim Saad. The Credit Facility extended to Hottick by
Wincorp was secured by, among others, a Suretyship
Agreement executed by Luis Juan Virata and another
Suretyship Agreement by Halim Saad.
4. Hottick fully availed of the loan facility but defaulted in payment
during the Asian financial crisis. Wincorp filed collection
suits against Hottick but Virata eventually brokered a
compromise.
5. Ng Wee confronted Wincorp about the default of Hottick.
Wincorp assured Ng Wee that it will absorb the losses
from Hottick and Ng Wee’s investments will be transferred
to another borrower, Power Merge. Virata is the majority
stockholder of Power Merge owning 374,996 out of its
375,000 subscribed capital stock.
6. In a special meeting of Wincorp’s board of directors held on 9
February 1999, Wincorp approved Power Merge’s
application for a P1.3bn credit line. On 15 February 1999,
Wincorp President Antonio Ong and Vice-President for
Operations Anthony Reyes executed the Credit Line
Agreement in favor of Power Merge.
On 11 March 1999, Wincorp, through another board meeting,
increased the credit limit to P2.5bn and an Amendment to the
Credit Line Agreement was executed. Power Merge drew a total
of P2,183,755,253.11 from the line covered by Promissory Notes
(PN) in favor of Wincorp for itself or as agent in behalf of investors
which included Ng Wee who put in the total amount of
P213,290,410.36.
7. Unknown to Ng Wee, however, on the same date the two
Agreements were separately signed, Side Agreements
were also entered between Wincorp (represented by Ong
and Reyes) and Power Merge absolving Power Merge of
liability on the PNs.
8. Ng Wee was not able to collect his investment from Power
Merge. On 19 October 2000, he instituted a Complaint for
Sum of Money with Damages against 17 defendants of
which only Virata, Power Merge, UPDI, UEM-MARA,
Wincorp, Ong, Reyes, Cua, Tankiansee, Santos-Tan,
Vicente and Henry Cualoping, and Estrella were duly
served with summons. The last six were board directors of
Wincorp. Virata filed a cross claim against Wincorp and its
board of directors.
9. [Start of Case] On 5 July 2017, the Court issued its Decision in
the present consolidated cases. The Court held that the
actuations of Wincorp establishes actionable fraud for
which it can be held liable while Power Merge is liable to
Ng Wee based on the promissory notes even as an
accommodation party.
10.
On the basis of fraud, the Court pierced the veil of
Wincorp and held the directors and officers personally
liable to Ng Wee. The basis of the liability was Section 31
of the Corporation Code when they assented to the grant
of the Credit Line Agreement and its Amendment to Power
Merge.
11.
The cross claim of Virata against Ong, Reyes and the
board members were also granted and Wincorp, Ong and
Reyes together with the board members were ordered
jointly and severally liable to pay and reimburse Virata for
any payment or contribution he made to Ng Wee.
Petitioners filed for an MR which is the basis of this
Resolution.
12.
The Court notes that the grounds relied upon by Virata,
Estrella, Ng Wee, Cua and the Cualopings, Reyes, and
Wincorp are the same or substantially similar to those
raised in their respective petitions thus were denied.
13.
Santos-Tan however did not appeal the decision of the CA
holding her liable with her co-parties to Ng Wee and was
only participating in the proceedings in her plea of
reconsideration. She argues that the cross-claim should
not have been granted because the Side Agreements
which served as the basis thereof never got the imprimatur
of the Board of Directors. Moreover, considering the
P2.18bn drawdowns of Power Merge, she found it
iniquitous and immoral to require her and her co-directors
to reimburse Virata of whatever he was required to pay Ng
Wee.
ISSUES: 1. Are the board of directors personally liable to Ng Wee
for the investment he
placed with Power Merge through Wincorp? YES
RATIO:
1. In its 5 July 2017 decision, the Court explained the liabilities of
the board directors in view of Section 31 of the Corporation Code.
2. Section 31 of the Corporation Code provides: Section 31.
Liability of directors, trustees or officers . — Directors or trustees
who willfully and knowingly vote for or assent to patently
unlawful acts of the corporation or who are guilty of gross
negligence or bad faith in directing the affairs of the corporation
or acquire any personal or pecuniary interest in conflict with their
duty as such directors or trustees shall be liable jointly and
severally for all damages resulting therefrom suffered by the
corporation, its stockholders or members and other persons.
When a director, trustee or officer attempts to acquire or acquire,
in violation of his duty, any interest adverse to the corporation in
respect of any matter which has been reposed in him in
confidence, as to which equity imposes a disability upon him to
deal in his own behalf, he shall be liable as a trustee for the
corporation and must account for the profits which otherwise
would have accrued to the corporation.
3. For Cua and the Cualopings, the totality of circumstances
proves that they are either complicit to the fraud, or at the very
least guilty of gross negligence.
a. The board is charged with a fiduciary duty which it failed to fulfill
when it did not heed the warning signs which would have
cautioned it from approving the loan in haste: (1) Power
Merge has only been in existence for two years when it
was granted a credit facility; (2) Power Merge was thinly
capitalized with only P37,500,000.00 subscribed capital;
(3) Power Merge was not an ongoing concern since it
never secured the necessary permits and licenses to
conduct business, it never engaged in any lucrative
business, and it did not file the necessary reports with the
SEC; and (4) no security other than its Promissory Notes
was demanded by Wincorp or was furnished by Power
Merge in relation to the latter's drawdowns.
b. Further, prior to Power Merge’s application for a credit facility,
Virata had outstanding unpaid transactions with Wincorp
for its Hottick obligations. Instead of impleading Virata in
the Hottick account, however, Wincorp released him from
liability and granted him a credit facility in the amount of
P1.3bn.
c. It is immaterial if Cua and the Cualopings approved or not the
Side Agreements or authorized its signing. Wincorp could
have avoided its troubles if they were vigilant enough to
disapprove the Power Merge credit application.
likewise did not allow him to use as defense his being a
mere nominee and that he only had one nominal share as
well as whether or not he received compensation or
honoraria for attending the board meetings.
6. The liability of Santos-Tan is no different from Cua and the
Cualopings in their personal capacity under Section 31 of
the Corporation Code.
7. The contention that the Side Agreements were without the
imprimatur of its board of directors cannot be given
credence. The totality of circumstances supports the
conclusion that the Wincorp directors impliedly ratified, if
not furtively authorized, the signing of the Side
Agreements in order to lay the groundwork for the
fraudulent scheme.
a.
Virata had existing obligations to Wincorp from the
Hottick account. However, the board excluded
Virata as a party respondent to its collection suit
against Hottick and, on the same day, approved
the P1.3bn credit line to Power Merge.
b.
Proceeds of the credit line were released to Power
Merge before the corresponding Agreements were
signed. This lends credence to Virata’s claim that
Wincorp did not intend for Power Merge to be
4. Tankiansee was absolved because his immigration records
clearly show that he was outside the country during the
dates when the Agreements were approved by the board.
5. Estrella tried to echo the same defense as Tankiansee although
the minutes of both board meetings indicate his presence.
He claims to have left the meeting before the matter of
Power Merge’s application was discussed. He however
failed to offer concrete evidence for this alibi. The Court
strictly bound by the terms of the credit facility.
8. RULING: The MRs were denied.
DISSENTING OPINION, Tijam, J. : In his dissent, Justice Tijam
found no basis in holding Cua, the Cualopings, Santos-Tan and
Estrella jointly and severally liable with Virata, Wincorp, Ong and
Reyes to pay Ng Wee the amount of his investment.
1. Directors, Trustees or Officers can be held personally and
solidarily liable with the corporation in situations
enumerated by law and jurisprudence. In this case, there
was no proof showing that the approval of the Credit Line
Agreement and its Amendment were patently unlawful
acts of the corporation.
2. The directors did not willfully and knowingly vote for or assent
to the execution of the Side Agreements that exonerated
Power Merge of its liability on the promissory notes,
except for the signatories who were Ong and Reyes.
3. Neither are the directors guilty of gross negligence or bad faith
in directing or dealing in the affairs of the corporation, they
merely approved the Credit Line Agreements because the
screening committee of the corporation and its
subordinate departments approved the same.
4. The Credit Line Agreements of Wincorp as approved by its
officers may be merely called as a business strategy
which turned out to be unfavorable.