G.R. No. 48195 and 48196; May 1, 1942
Sofronio T. Bayla, et al., petitioners, vs. Silang Traffic Co., Inc., respondent.

Silang Traffic Co., petitioner, vs. Sofronio Bayla, et al., respondents.

FACTS

Petitioners Sofronio T. Bayla, Venancio Toledo, Josefa Naval, and Paz Toledo entered into separate but identical “Agreement[s] for Installment Sale of Shares” with the respondent Silang Traffic Co., Inc., on March 30, 1935. The agreements, executed long after the corporation’s 1927 incorporation, stipulated that the petitioners (designated as “subscriber”) would pay the corporation (designated as “seller”) the purchase price for specified shares in quarterly installments over five years. The agreements contained a forfeiture clause stating that if the purchaser failed to pay any installment, the shares would revert to the corporation and all payments made would be forfeited. By April 30, 1937, the petitioners had paid partial sums but were in arrears.
On August 1, 1937, the corporation’s board of directors passed a resolution declaring, for the good of the corporation and to settle a pending civil case (Civil Case No. 3125) that challenged the validity of these sales, that: (a) the prior board resolution authorizing the installment sales was rescinded; (b) the sale of 123 shares (including those of the petitioners) was cancelled; and (c) the amounts paid by the listed purchasers, including the petitioners, were to be refunded. The petitioners demanded a refund based on this resolution.
The corporation refused, defending that: (1) the petitioners’ shares had already been automatically forfeited due to their default in payments prior to the August 1 resolution, and (2) the August 1, 1937 resolution was revoked by a subsequent board resolution dated August 22, 1937. The trial court ruled in favor of the corporation, declaring the shares forfeited and holding the August 1 resolution void, citing jurisprudence that a corporation cannot release a subscriber from the obligation to pay for shares. The Court of Appeals modified the judgment, affirming the dismissal of the complaint but reversing the forfeiture and ordering the corporation to give petitioners 30 days to pay their arrears. Both parties appealed to the Supreme Court.

ISSUE

The primary issue is whether the petitioners are entitled to a refund of the amounts they paid under the “Agreement for Installment Sale of Shares” based on the corporation’s board resolution of August 1, 1937, or whether their payments were automatically forfeited due to their default under the terms of the agreement.

RULING

The Supreme Court reversed the judgment of the Court of Appeals and ruled in favor of the petitioners, ordering the corporation to refund their payments with interest.
The Court held that the agreements in question were contracts of sale and not subscriptions to capital stock. The distinction is crucial: a subscription is a mutual agreement among subscribers to take and pay for stock of a corporation, typically at incorporation, while a purchase is an independent agreement to buy shares from an existing corporation. The contracts here, entitled “Agreement for Installment Sale of Shares,” were executed years after incorporation, designated the corporation as “seller,” and provided for payment over a five-year period, clearly indicating a contract of purchase and sale.
Since the contracts were sales and not subscriptions, the legal principle cited by the trial court (that a corporation cannot release a subscriber from the obligation to pay for shares to the prejudice of creditors) was inapplicable. The Court found no legal impediment to the rescission of these sales contracts by mutual agreement. The August 1, 1937 resolution constituted a valid offer of rescission by the corporation, made for its benefit and to settle litigation, which the petitioners accepted by demanding a refund. The subsequent revocation attempt on August 22, 1937, was invalid as it lacked the petitioners’ consent.
Furthermore, there was no evidence that the corporation was insolvent or that the rescission prejudiced any corporate creditor. The Court also noted it would be unjust discrimination to allow other purchasers named in the same resolution to receive refunds while denying the same to the petitioners.
Therefore, the corporation was ordered to refund the amounts paid by each petitioner (P360, P375, P675, and P675, respectively) with legal interest from the date of the filing of the complaint.