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LUIS JUAN L. VIRATA v. ALEJANDRO NG WEE

FACTS:

This case involves a dispute over the liability of certain directors of Wincorp, namely Cua, the Cualopings, Santos-Tan, and Estrella, with regards to an investment made by Ng Wee. The directors argue that they should not be held jointly and solidarily liable with Virata, Wincorp, Ong, and Reyes to pay Ng Wee for his investment. They claim that there is a lack of proof that they assented to the execution of the Side Agreements, which prevents the court from holding them personally accountable for fraud. They also argue that they cannot be held liable for gross negligence as they exercised due diligence in conducting the affairs of Wincorp.

The court finds the directors' submissions meritless. Section 31 of the Corporation Code states that directors 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, shall be liable for damages suffered by the corporation, its stockholders, and other persons.

The liabilities of Cua and the Cualopings are more straightforward. They admit to approving the Credit Line Agreement and its subsequent Amendment, but claim that they did so based on the screening committee's findings that the application was above board. They deny knowledge of the Side Agreements and Power Merge's inability to pay. The court rejects their defense, stating that it creates a loophole for corporations to evade liability for financial fraud. The board of directors has a fiduciary duty to protect the assets of the corporation and should have been more circumspect in approving the credit line facility to Power Merge. The court finds that Cua and the Cualopings either acted in complicity to the fraud or were guilty of gross negligence.

The court also notes that Power Merge, the borrower, had several warning signs that should have cautioned the board of directors from approving the loan. These warning signs include the short existence of Power Merge, its lack of necessary permits and licenses, and its failure to file reports with the SEC. Moreover, no security other than promissory notes was demanded by Wincorp or furnished by Power Merge in relation to the drawdowns.

It is also revealed that Virata, who controlled Power Merge, had prior transactions with Wincorp and had direct obligations to the company under the Hottick account. However, the board of directors effectively released Virata from liability instead of including him in the collection suit against Hottick.

ISSUES:

  1. Whether petitioners Cua and the Cualopings areliable for gross negligence in managing the affairs of the company.

  2. Whether petitioner Estrella can be exempted fromliability.

  3. Whether Estrella can be held personally liable for the actions of Wincorp

  4. Whether Santos-Tan can be held personally liable for the actions of Wincorp and Power Merge

  5. Whether the Side Agreements were ratified by the Wincorp board

  6. Whether the Promissory Notes had already been discharged due to the subsequent agreements and transactions between the parties.

  7. Whether the movant-directors are liable for their participation in Wincorp's fraudulent scheme.

RULING:

  1. Petitioners Cua and the Cualopings are liable for gross negligence in managing the affairs of the company, to the prejudice of its clients and stakeholders. The Court of Appeals correctly held them liable in their personal capacity.

  2. Petitioner Estrella cannot be exempted from liability. The minutes of the board meetings clearly stated that Estrella was present when the credit line facility to Power Merge was approved. Estrella's claim that he left the meeting before Power Merge's application could have been discussed was not supported by concrete evidence. Estrella's defense that he is a mere nominee of the chairman of the board was also not allowed, as the fiduciary duty of a company director cannot be separated from the position he occupies even if he does not receive monetary benefit.

  3. Estrella can be held personally liable for the actions of Wincorp. The court held that even if Estrella was a mere nominee, he still owed a fiduciary duty to the shareholders, clients, and stakeholders of Wincorp. Therefore, his defense of being a mere nominee was disregarded.

  4. Santos-Tan can be held personally liable for the actions of Wincorp and Power Merge. Santos-Tan, as a member of the board of directors, approved the credit line application of Power Merge despite the glaring signs that it would be unable to fulfill its obligation. The court held that by failing to heed these warning signs, Santos-Tan and the other board members showed gross negligence or fraud for which they could be held personally accountable.

  5. The Side Agreements were ratified by the Wincorp board. Even though there were no documents expressly authorizing the execution of the Side Agreements, the court held that the Wincorp directors implicitly ratified, if not authorized, the signing of these agreements based on the totality of circumstances. The court relied on the concept of corporate ratification, which states that ratification by a corporation of an unauthorized act relates back to the time of the act and is equivalent to original authority.

  6. The Promissory Notes had already been discharged due to the subsequent agreements and transactions between the parties. There was a clear understanding between the parties on what their respective obligations will be, although this agreement had not yet been reduced into writing. The Side Agreements, which amounted to Wincorp's intentional cancellation of Power Merge and Virata's obligation under their Promissory Notes in exchange for the transfer of equity shares, constituted an arm's length transaction that substituted the obligations under the Promissory Notes. As far as Wincorp, Power Merge, and Virata are concerned, the Promissory Notes had already been discharged.

  7. The movant-directors are liable for their participation in Wincorp's fraudulent scheme. The approval of the credit line agreement, despite clear warning signs and circumstances indicating Wincorp's inability to pay the promissory notes, establishes the movant-directors' liability. Their subsequent actions, such as excluding Virata from the collection suit against Hottick, show that they were involved in a calculated maneuver to defraud the investors. The Court ruled that Section 31 of the Corporation Code must be applied, and the separate juridical personality of Wincorp should be pierced.

PRINCIPLES:

  • Directors have a fiduciary duty to manage the affairs of the company with utmost care and diligence.

  • Gross negligence can make directors liable for damages.

  • The business judgment rule admits of exceptions, such as gross negligence.

  • Being a nominee director does not exempt a person from liability for the actions taken as a director.

  • The fiduciary duty of a director cannot be separated from the position even if no monetary benefit is derived.

  • Fiduciary duty of directors: Directors owe a fiduciary duty to the shareholders, clients, and stakeholders of a corporation. They are expected to exercise due diligence and act in the best interest of the corporation.

  • Personal liability of directors: Directors can be held personally liable for their actions if they fail to fulfill their fiduciary duty or act negligently or fraudulently.

  • Corporate ratification: Ratification by a corporation of an unauthorized act relates back to the time of the act and is equivalent to original authority. Implied ratification may take the form of silence, acquiescence, acts consistent with approval, or acceptance or retention of benefits.

  • A subsequent agreement or transaction can discharge a previous obligation.

  • Directors can be held liable for their participation in a company's fraudulent scheme.

  • The separate juridical personality of a corporation can be pierced in certain circumstances.