Ong Yong v. Tiu, et.al., GRN. 144476, Apr 8, 2003.

FACTS:

 1994: construction of the Masagana Citimall in Pasay City was threatened with stoppage, when its
owner, the First Landlink Asia Development Corporation (FLADC), owned by the Tius, became heavily
indebted to the Philippine National Bank (PNB) for P190M
 To save the 2 lots where the mall was being built from foreclosure, the Tius invited Ong Yong, Juanita
Tan Ong, Wilson T. Ong, Anna L. Ong, William T. Ong and Julia Ong Alonzo (the Ongs), to invest in
FLADC.
 Pre-Subscription Agreement: Ongs and the Tius agreed to maintain equal shareholdings in FLADC
 Ongs: subscribe to 1,000,000 shares
 Tius: subscribe to an additional 549,800 shares in addition to their already existing subscription of
450,200 shares
 Tius: nominate the Vice-President and the Treasurer plus 5 directors
 Ongs nominate the President, the Secretary and 6 directors (including the chairman) to the board of
directors of FLADC and right to manage and operate the mall.
 Tius: contribute to FLADC a 4-storey building P20M (for 200K shares)and 2 parcels of land P30M (for
300K shares) and P49.8M (for 49,800 shares)
 Ongs: paid P190M to settle the mortgage indebtedness of FLADC to PNB (P100M in cash for their
subscription to 1M shares)
 February 23, 1996: Tius rescinded the Pre-Subscription Agreement
 February 27, 1996: Tius filed at the Securities and Exchange Commission (SEC) seeking confirmation
of their rescission of the Pre-Subscription Agreement
 SEC: confirmed recission of Tius
 Ongs filed reconsideration that their P70M was not a premium on capital stock but an advance loan
 SEC en banc: affirmed it was a premium on capital stock
 CA: Ongs and the Tius were in pari delicto (which would not have legally entitled them to rescission)
but, "for practical considerations," that is, their inability to work together, it was best to separate the two
groups by rescinding the Pre-Subscription Agreement, returning the original investment of the Ongs
and awarding practically everything else to the Tius.

ISSUE

WON Tius' rescission of the Pre-Subscription Agreement violated the Trust Fund Doctrine?
RULING
Yes, according to the Supreme Court's decision, Tius' rescission of the Pre-Subscription
Agreement was found to have violated the Trust Fund Doctrine. The Trust Fund Doctrine is a
legal principle that emphasizes the protection of capital subscribed by shareholders for the
benefit of corporate creditors. It ensures that the capital contributed by shareholders remains
intact to satisfy the claims of creditors before any distribution is made to shareholders.
In the case at bar, the Court ruled that the Tius' attempt to rescind the Pre-Subscription
Agreement and reclaim their investment without adhering to the proper legal procedures
violated the Trust Fund Doctrine.
The Court's reasoning was as follows:
Violation of Authorized Procedures:
The Court noted that the Trust Fund Doctrine is reflected in the authorized procedures
for distribution of capital assets, such as decreasing authorized capital stock, purchasing
redeemable shares, and dissolution and liquidation of the corporation. These procedures are
designed to protect the rights of creditors by ensuring that their claims are satisfied before any
distribution of assets to shareholders.
Unlawful Distribution:
Rescinding the Pre-Subscription Agreement without complying with these authorized
procedures would lead to an unauthorized distribution of the corporation's assets. This would
run afoul of the Trust Fund Doctrine, as it would potentially prejudice creditors by allowing
distributions that aren't aligned with the lawful order of payment.
Premature Liquidation:
The Court further emphasized that the Tius' rescission would effectively lead to a
premature liquidation of the corporation without proper dissolution procedures. This would
bypass the protections in place for creditors and would not comply with the requirements of the
Corporation Code.
The Court's decision concluded that the Tius' attempt to rescind the Pre-Subscription
Agreement without adhering to the authorized procedures for distribution of assets violated the
Trust Fund Doctrine. The Court's primary concern was to protect the rights of creditors
and ensure that corporate distributions are made in accordance with the law to prevent
unjust harm to creditors' interests.
Outcome:

The Court's decision reversed its prior rulings and dismissed the Tius' request for rescission
of the Pre-Subscription Agreement. The Court declared the Tius' unilateral rescission as null
and void due to violations of the Trust Fund Doctrine and the procedures for valid
distribution of assets under the Corporation Code. The decision was rooted in principles of
protecting creditors' rights and respecting corporate decision-making processes.

NOTES FROM OTHER SOURCE:

 In this legal dispute, the main parties involved are Dr. Willie Ong (referred to as the "Ongs") and the Tiu family (referred to as the "Tius").
The dispute revolves around a Pre-Subscription Agreement related to FLADC (the corporation).
 FLADC was initially incorporated with an authorized capital stock of 500,000 shares, with the Tius owning 450,200 shares, representing
the paid-up capital. The Tius, who were the original incorporators, later invited the Ongs to invest in FLADC as stockholders to create
equal 50-50 shareholdings between the two groups. This arrangement led to the authorized capital stock being increased to 2,000,000
shares, with the Ongs subscribing to 1,000,000 shares and the Tius subscribing to an additional 549,800 shares.
 The Pre-Subscription Agreement outlined the terms of this investment, with the Ongs contributing P100 million for the subscription of
1,000,000 shares of FLADC stock. However, conflicts arose over the implementation of the agreement:
 Transfer Taxes and Shares: The Tius allegedly refused to pay transfer taxes for the property to be contributed to FLADC, leading the
Ongs to withhold the issuance of corresponding shares.
 Management Dispute: A dispute arose over management roles within FLADC. The Tius claimed that the Ongs prevented them from
participating in the management of the corporation.
 Rescission and Legal Claims: The Tius sought to rescind the Pre-Subscription Agreement, arguing that both parties had committed
breaches. The Tius claimed that their breaches were justified due to the Ongs' alleged violations, including withholding shares and
interfering with management.

The Supreme Court ultimately reversed its previous decisions and granted the motion for reconsideration filed by the Ongs. The Court declared
the unilateral rescission by the Tius as null and void. Trust Fund Doctrine: The Court emphasized those subscriptions to a corporation's capital
stock form a fund that creditors can rely on for satisfaction of their claims. It highlighted that distribution of corporate assets should adhere to
specific instances outlined in the Corporation Code to protect creditors' rights.