Ong Yong, et al. vs. Tiu, et al. [GR 144476, 8 April 2003]; also Tiu, et al. vs.

Ong Yong, et al. [GR 144629] Resolution of Special Second Division, Corona (J): 3 concur Facts: In 1994, the construction of the Masagana Citimall in Pasay City was threatened withstoppage and incompletion when its owner, the First Landlink Asia Development Corporation(FLADC), which was owned by David S. Tiu, Cely Y. Tiu, Moly Yu Gow, Belen See Yu, D.Terence Y. Tiu, John Yu and Lourdes C. Tiu (the Tius), encountered dire financial difficulties. Itwas heavily indebted to the Philippine National Bank (PNB) for P190 million. To stave off foreclosure of the mortgage on the two lots where the mall was being built, the Tius invited OngYong, Juanita Tan Ong, Wilson T. Ong, Anna L. Ong, William T. Ong and Julia Ong Alonzo(the Ongs), to invest in FLADC. Under the Pre-Subscription Agreement they entered into, theOngs and the Tius agreed to maintain equal shareholdings in FLADC: the Ongs were tosubscribe to 1,000,000 shares at a par value of P100.00 each while the Tius were to subscribe toan additional 549,800 shares at P100.00 each in addition to their already existing subscription of 450,200 shares. Furthermore, they agreed that the Tius were entitled to nominate the Vice-President and the Treasurer plus 5 directors while the Ongs were entitled to nominate thePresident, the Secretary and 6 directors (including the chairman) to the board of directors of FLADC. Moreover, the Ongs were given the right to manage and operate the mall. Accordingly,the Ongs paid P100 million in cash for their subscription to 1,000,000 shares of stock while theTius committed to contribute to FLADC a four-storey building and two parcels of landrespectively valued at P20 million (for 200,000 shares), P30 million (for 300,000 shares) andP49.8 million (for 49,800 shares) to cover their additional 549,800 stock subscription therein.The Ongs paid in another P70 million 3 to FLADC and P20 million to the Tius over and abovetheir P100 million investment, the total sum of which (P190 million) was used to settle the P190million mortgage indebtedness of FLADC to PNB. The business harmony between the Ongs andthe Tius in FLADC, however, was shortlived because the Tius, on 23 February 1996, rescindedthe Pre-Subscription Agreement. The Tius accused the Ongs of (1) refusing to credit to them theFLADC shares covering their real property contributions; (2) preventing David S. Tiu and CelyY. Tiu from assuming the positions of and performing their duties as Vice-President andTreasurer, respectively, and (3) refusing to give them the office spaces agreed upon. Thecontroversy finally came to a head when the case was commenced by the Tius on 27 February1996 at the Securities and Exchange Commission (SEC), seeking confirmation of their rescissionof the Pre-Subscription Agreement. After hearing, the SEC, through then Hearing Officer Rolando G. Andaya, Jr., issued a decision on 19 May 1997 confirming the rescission sought bythe Tius. On motion of both parties, the above decision was partially reconsidered but onlyinsofar as the Ongs' P70 million was declared not as a premium on capital stock but an advance(loan) by the Ongs to FLADC and that the imposition of interest on it was correct. Both partiesappealed to the SEC en banc which rendered a decision on 11 September 1998, affirming the 19May 1997 decision of the Hearing Officer. The SEC en banc confirmed the rescission of the Pre-Subscription Agreement but reverted to classifying the P70 million paid by the Ongs as premium

on capital and not as a loan or advance to FLADC, hence, not entitled to earn interest. On appeal,the Court of Appeals (CA) rendered a decision on 5 October 1999, modifying the SEC order of 11 September 1998. Their motions for reconsideration having been denied, both parties filedseparate petitions for review before the Supreme Court. On 1 February 2002, the Supreme Courtpromulgated its Decision, affirming the assailed decision of the Court of Appeals but with themodifications that the P20 million loan extended by the Ongs to the Tius shall earn interest at12% per annum to be computed from the time of judicial demand which is from 23 April 1996;that the P70 million advanced by the Ongs to the FLADC shall earn interest at 10% per annum tobe computed from the date of the FLADC Board Resolution which is 19 June 1996; and that theTius shall be credited with 49,800 shares in FLADC for their property contribution, specifically,the 151 sq. m. parcel of land. The Court affirmed the fact that both the Ongs and the Tiusviolated their respective obligations under the Pre-Subscription Agreement.On 15 March 2002, the Tius filed before the Court a Motion for Issuance of a Writ of Execution.Aside from their opposition to the Tius' Motion for Issuance of Writ of Execution, the Ongs filedtheir own "Motion for Reconsideration; Alternatively, Motion for Modification (of the February1, 2002 Decision)" on 15 March 2002. Willie Ong filed a separate "Motion for PartialReconsideration" dated 8 March 2002, pointing out that there was no violation of the Pre-Subscription Agreement on the

part of the Ongs, among others. On 29 January 2003, the SpecialSecond Division of this Court held oral arguments on the respective positions of the parties. On27 February 2003, Dr. Willie Ong and the rest of the movants Ong filed their respectivememoranda. On 28 February 2003, the Tius submitted their memorandum. Issue [1]: Whether the pre-Subscription Agreement executed by the Ongs is actually asubscription contract. Held [1]: FLADC was originally incorporated with an authorized capital stock of 500,000 shareswith the Tius owning 450,200 shares representing the paid-up capital. When the Tius invited theOngs to invest in FLADC as stockholders, an increase of the authorized capital stock becamenecessary to give each group equal (50-50) shareholdings as agreed upon in the Pre-SubscriptionAgreement. The authorized capital stock was thus increased from 500,000 shares to 2,000,000shares with a par value of P100 each, with the Ongs subscribing to 1,000,000 shares and the Tiusto 549,800 more shares in addition to their 450,200 shares to complete 1,000,000 shares. Thus,the subject matter of the contract was the 1,000,000 unissued shares of FLADC stock allocatedto the Ongs. Since these were unissued shares, the parties' Pre-Subscription Agreement was infact a subscription contract as defined under Section 60, Title VII of the Corporation Code. Asubscription contract necessarily involves the corporation as one of the contracting parties sincethe subject matter of the transaction is property owned by the corporation its shares of stock.Thus, the subscription contract (denominated by the parties as a Pre-Subscription Agreement)whereby the Ongs invested P100 million for 1,000,000 shares of stock was, from the viewpointof the law, one between the Ongs and FLADC, not between the Ongs and the Tius. Otherwisestated, the Tius did not contract in their personal capacities with the Ongs since they were notselling any of their own shares to them. It was FLADC that did. Considering therefore that thereal contracting parties to the subscription agreement were FLADC and the Ongs alone, a civilcase for rescission on the ground of breach of contract filed by the Tius in their personalcapacities will not prosper. Assuming it had valid reasons to do so, only FLADC (and certainly not the Tius) had the legal personality to file suit rescinding the subscription agreement with theOngs inasmuch as it was the real party in interest therein. Article 1311 of the Civil Codeprovides that "contracts take effect only between the parties, their assigns and heirs. . ."Therefore, a party who has not taken part in the transaction cannot sue or be sued for performance or for cancellation thereof, unless he shows that he has a real interest affectedthereby. Issue [2]: Whether the rescission of Pre-Subscription Agreement would result in unauthorizedliquidation. Held [2]: The rescission of the Pre-Subscription Agreement will effectively result in theunauthorized distribution of the capital assets and property of the corporation, thereby violatingthe Trust Fund Doctrine and the Corporation Code, since rescission of a subscription agreementis not one of the instances when distribution of capital assets and property of the corporation isallowed. Rescission will, in the final analysis, result in the premature liquidation of thecorporation without the benefit of prior dissolution in accordance with Sections 117, 118, 119and 120 of the Corporation Code.