G.R. No. 177549; June 18, 2009
ANTHONY S. YU, ROSITA G. YU and JASON G. YU, Petitioners, vs. JOSEPH S. YUKAYGUAN, NANCY L. YUKAYGUAN, JERALD NERWIN L. YUKAYGUAN, and JILL NESLIE L. YUKAYGUAN, [on their own behalf and on behalf of] WINCHESTER INDUSTRIAL SUPPLY, INC., Respondents.

FACTS

Petitioners (Anthony S. Yu, Rosita G. Yu, Jason G. Yu) and respondents (Joseph S. Yukayguan, Nancy L. Yukayguan, Jerald Nerwin L. Yukayguan, Jill Neslie L. Yukayguan) are stockholders of Winchester Industrial Supply, Inc. (Winchester, Inc.). Anthony Yu is the older half-brother of Joseph Yukayguan. On October 15, 2002, respondents filed a verified Complaint for Accounting, Inspection of Corporate Books and Damages through Embezzlement and Falsification of Corporate Records and Accounts before the RTC of Cebu, both in their own behalf and as a derivative suit on behalf of Winchester, Inc. Respondents alleged that Anthony Yu held 1,000 shares of stock as a mere trustee for Joseph Yukayguan, who provided the money for the shares. They further alleged that petitioners controlled and ran the corporation, misappropriating its funds by understating sales, charging personal and family expenses to the corporation, and withdrawing stocks for personal use without payment. Petitioners filed an Answer with Compulsory Counterclaim, denying the trust relationship and asserting that Anthony Yu paid for his shares from personal savings and conjugal funds. They contended the complaint should be dismissed for failure to comply with conditions precedent, such as alleging earnest efforts to settle the dispute, exhausting intra-corporate remedies for a derivative suit, and making a prior demand for inspection of corporate books. The parties initially entered into an amicable settlement, leading to a division of some corporate assets and a unanimous Resolution on January 4, 2003, dissolving the corporation. However, respondents later repudiated the settlement due to failure to divide remaining assets. On August 26, 2004, the parties agreed that the RTC could render judgment based on the pleadings and affidavits. The RTC dismissed the complaint on November 10, 2004, ruling that respondents failed to comply with the requisites for filing a derivative suit under the Interim Rules. Respondents appealed to the Court of Appeals, which initially affirmed the RTC but later, upon respondents’ motion for reconsideration, reversed itself in a Resolution dated July 18, 2006, and remanded the case to the RTC for further proceedings. The CA denied petitioners’ motion for reconsideration on April 19, 2007. Petitioners then filed the present Petition for Review on Certiorari.

ISSUE

Whether the Court of Appeals erred in reversing its earlier Decision and remanding the case to the RTC for further proceedings, despite the respondents’ failure to comply with the conditions precedent for filing a derivative suit and an action for inspection of corporate books.

RULING

The Supreme Court granted the petition, reversed the Resolutions of the Court of Appeals dated July 18, 2006 and April 19, 2007, and reinstated the Decision of the RTC dated November 10, 2004, dismissing the complaint. The Court held that respondents’ complaint was a derivative suit, as it was filed on behalf of the corporation, Winchester, Inc., to redress alleged wrongs committed against it. Under Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies, a stockholder filing a derivative suit must allege with particularity in the complaint that he exerted all reasonable efforts to exhaust all remedies available under the corporation’s articles of incorporation, by-laws, laws, or rules governing the corporation. The complaint failed to contain any such allegation. Furthermore, the complaint also sought inspection of corporate books. Under Section 2, Rule 5 of the Interim Rules, a stockholder must have made a prior demand to inspect the corporate records which was refused by the corporation. The complaint likewise failed to allege that such a demand was made and refused. These failures constituted non-compliance with conditions precedent for filing the suit, warranting its dismissal. The Court rejected the Court of Appeals’ rationale that these defects were cured by the parties’ submission of affidavits and their agreement for judgment based on pleadings. The absence of the required allegations in the complaint was a fatal jurisdictional defect that could not be remedied by evidence submitted later. The Court also noted that the dissolution of Winchester, Inc. rendered the derivative suit moot and academic, as there was no longer a corporate entity in whose behalf the suit could be prosecuted.