Fong v. Dueñas

Doctrine: Under the Corporation Code, before a stock corporation may be incorporated and registered, it is required that at least 25% of its authorized capital stock as stated in the articles of incorporation, be first subscribed at the time of incorporation, and at least 25% of the total subscription, be paid upon subscription. 

Facts: Dueñas is engaged in the bakery, food manufacturing, and retailing business, which are all operated under his two companies, Danton and Bakcom. He was an old acquaintance of Fong as they were former schoolmates at DLSU. 

Dueñas and Fong entered into a verbal joint venture contract where they agreed to engage in the food business and to incorporate a holding company under the name Alliance Holdings, Inc. Its Capitalization would be P65M to which they would contribute in equal parts. The parties agreed that Fong would contribute P32.5M in cash while Dueñas would contribute all his Danton and Bakcom shares which he valued at P32.5M. 

Fong started remitting in tranches his share in the proposed corporation’s capital. He made the remittances under the impression that his contribution would be applied as his subscription to 50% of Alliance’s total shareholdings. On the other hand, Dueñas started processing the Boboli international license that they would use in their food business. 

Then, Fong sent a letter to Dueñas informing him of his decision to limit his total contribution from P32.5M to P5M. Fong observed that despite his P5M contribution, Dueñas still failed to give him the financial documents on the valuation of the Danton and Bakcom shares. Moreover, Dueñas failed to incorporate and register Alliance with the SEC. 

Fong wrote Dueñas informing him of his decision to cancel the joint venture agreement. He also asked for the refund of the P5M that he advanced. Dueñas admitted that he could not immediately return the money since he used it to defray the business expenses of Danton and Bakcom. Dueñas proposed several schemes for the payment but Fong did not accept any of the proposed schemes. Fong wrote a final demand letter but Dueñas did not pay.

Fong filed a complaint against Dueñas for the collection of a sum of money and damages. The trial court ruled in favor of Fong. Fong filed a partial MR and asked for the imposisiton of 6% annual interest which was granted. Dueñas appealed to the CA which was granted and annuled the trial court’s ruling.

Issue: Whether or not the CA erred to annul the trial court’s ruling.

Held: No.

Fong’s prayer for the return of his contribution did not automatically convert the action to a complaint for a sum of money. The mutual restitution of the parties’ original contributions is only a necessary consequence of their agreement’s rescission. 

Fong and Dueñas’ execution of a joint venture agreement created between them reciprocal obligations that must be performed in order to fully consummate the contract and achieve the purpose for which it was entered into. The parties never agreed that Fong would invest his money in Danton and Bakcom. Contrary to Dueñas’ submission, Fong’s understanding was that his money would be applied to his shareholdings in Alliance. 

Under the Corporation Code, before a stock corporation may be incorporated and registered, it is required that at least 25% of its authorized capital stock as stated in the articles of incorporation, be first subscribed at the time of incorporation, and at least 25% of the total subscription, be paid upon subscription. To prove compliance with this requirement, the SEC requires the incorporators to submit a treasurer’s affidavit and a certificate of bank deposit, showing the existence of an amount compliant with the prescribed capital subscription. In this light, we conclude that Fong’s cash contributions play an indispensable part in Alliance’s incorporation. The process necessarily requires the money not only to fund Alliance’s registration with the SEC but also its initial capital subscription. 

Thus, Dueñas erred when he invested Fong’s contributions in his two companies. This money should have been used in processing Alliance’s registration. Its incorporation would not materialize if there would be no funds for its initial capital.