GR 118692; (July, 2006) (Digest)
G.R. No. 118692 ; July 28, 2006
COASTAL PACIFIC TRADING, INC., petitioner, vs. SOUTHERN ROLLING MILLS, CO., INC. (now known as Visayan Integrated Steel Corporation), ET AL., respondents.
FACTS
Respondent Visayan Integrated Steel Corporation (VISCO) obtained loans from the Development Bank of the Philippines (DBP) and a consortium of respondent banks. The DBP loan was secured by a first recorded real estate mortgage. The consortium’s loan was secured by a second, unrecorded mortgage over the same properties. VISCO defaulted. The creditor banks, through negotiations, acquired over 90% of VISCO’s equity and assumed management control. Concurrently, petitioner Coastal Pacific Trading, Inc. had a processing agreement with VISCO, whereby it delivered steel coils. VISCO failed to fully deliver the processed sheets, leaving petitioner as an unpaid creditor.
To address VISCO’s debt to DBP, the consortium, whose officers also sat as VISCO directors, orchestrated the sale of VISCO’s generator sets to a third party. The proceeds were funneled to pay DBP, thereby extinguishing the first mortgage and allowing the consortium’s unrecorded second mortgage to become first in rank. This scheme was deliberately planned in meetings to “protect the interests of the Consortium of Banks,” effectively prioritizing their claims over those of other unsecured creditors like petitioner.
ISSUE
Whether the consortium of banks, through their representatives who were also directors of VISCO, acted in bad faith and committed fraud to the prejudice of other corporate creditors, particularly petitioner Coastal Pacific.
RULING
Yes. The Supreme Court affirmed the lower courts’ findings of bad faith and fraud. The legal logic centers on the fiduciary duty of corporate directors. Directors owe duties of loyalty and fidelity to the corporation and, by extension, to all its creditors. Here, the bank representatives on VISCO’s board used their dual positions to engineer a transaction that exclusively benefited their banks as creditors, to the detriment of other creditors like petitioner.
The sale of assets and the application of proceeds to benefit only the consortium’s secured position constituted a fraudulent scheme. The directors’ actions were not in the best interest of the insolvent corporation’s entire body of creditors but were a self-serving maneuver to gain an undue preference. This was a clear violation of their fiduciary responsibility, amounting to fraud. Consequently, the consortium, having acted in bad faith, cannot claim superior rights over the mortgaged properties to the exclusion of petitioner’s claims. The transaction was deemed prejudicial to other creditors and thus invalid as against them.