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Steinberg vs. Velasco, 52 PHIL 953 (1929)

This case involves the Sibuguey Trading Company issuing a resolution approving purchases of its own stock and declaring dividends, despite having unpaid accounts payable and being insolvent. The trial court ruled in favor of the defendants. The Supreme Court reversed, finding the directors did not act in good faith or understand their duties, as they used corporate funds to purchase stock from resigning directors right before declaring dividends, leaving insufficient assets. The Court ruled creditors have a right to assume directors will not divert assets this way when debts are outstanding or the corporation is insolvent.

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105 views2 pages

Steinberg vs. Velasco, 52 PHIL 953 (1929)

This case involves the Sibuguey Trading Company issuing a resolution approving purchases of its own stock and declaring dividends, despite having unpaid accounts payable and being insolvent. The trial court ruled in favor of the defendants. The Supreme Court reversed, finding the directors did not act in good faith or understand their duties, as they used corporate funds to purchase stock from resigning directors right before declaring dividends, leaving insufficient assets. The Court ruled creditors have a right to assume directors will not divert assets this way when debts are outstanding or the corporation is insolvent.

Uploaded by

rudilyn.palero9
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Steinberg vs.

Velasco, 52 PHIL 953 (1929)

FACTS:
The defendants in this case are the executive staff of the company Sibuguey Trading
Company who issued a resolution that approved and authorized various lawful
purchases already made of a large portion of the capital stock of the company from its
various stockholders, thereby diverting its funds to the injury, damage and in fraud of the
creditors of the corporation. The total amount of the capital stock unlawfully purchased
was P3,300; and that at the time of such purchase, the corporation had accounts
payable amounting to P13,807.50, most of which were unpaid at the time petition for the
dissolution of the corporation was financial condition, in contemplation of an insolvency
and dissolution.
The corporation also permits the issuance of dividends to its stockholders which was
wrongfully done and in bad faith. Upon complaint, the trial court rendered a decision in
favor of the defendants and cost against plaintiff.

ISSUE:
Whether or not the defendants are guilty of wrongfully distributing dividends to its
stockholders.

RULING:
Yes, the Court ruled that it is indeed peculiar that the action of the board in purchasing
the stock from the corporation and in declaring the dividends on the stock was all done
at the same meeting of the board of directors, and it appears in those minutes that the
both Ganzon and Mendaros were formerly directors and resigned before the board
approved the purchase and declared the dividends, and that out of the whole 330
shares purchased, Ganzon, sold 100 and Mendaros 200, or a total of 300 shares out of
the 330, which were purchased by the corporation, and for which it paid P3,300. In other
words, that the directors were permitted to resign so that they could sell their stock to
the corporation. As stated, the authorized capital stock was P20,000 divided into 2,000
shares of the par value of P10 each, which only P10,030 was subscribed and paid.
Deducting the P3,300 paid for the purchase of the stock, there would be left P7,000 of
paid-up stock, from which deduct P3,000 paid in dividends, there would be left P4,000
only. In this situation and upon this state of facts, it is very apparent that the directors
did not act in good faith or that they were grossly ignorant of their duties.
Upon each of those points, the rule is well stated in Ruling Case Law, vol. 7, p. 473,
section 454 where it is emphasized the duties that should have been exercised by the
Directors such as duty to exercise reasonable care, knowledge, skill and the
competency.
Creditors of a corporation have the right to assume that so long as there are
outstanding debts and liabilities, the board of directors will not use the assets of the
corporation to purchase its own stock, and that it will not declare dividends to
stockholders when the corporation is insolvent.

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