Directors’ personal liability

Businessman Robert John Sobrepeña, chair of Camp John Hay Development Corp. (CJHDevco) is facing estafa charges for failure to pay the Bases Conversion and Development Authority (BCDA) over P1.15 billion in rentals from 1998 to 2000.

By way of background, in 1996, BCDA leased to CJHDevco 247 hectares of land in John Hay Special Economic Zone in Baguio City for either P425 million or five percent of gross revenues for the first five years and P150 million for the succeeding years.

The company paid P425 million on the first year. On the second year, citing financial losses, it sought the amendment of the lease agreement.

Accordingly, CJHDevco and BCDA entered into two contracts revising the payment terms for 1999 and 2000. In spite of the adjustment, however, the company still failed to pay the rentals.

In a complaint filed with the Department of Justice (DOJ), BCDA said the company cannot cite poor revenue as justification for nonpayment because it declared cash dividends worth P928 million in 1998, 1999 and 2000.

Under existing laws, a company can declare cash or stock dividends only if it has sufficient unrestricted retained earnings.

Treatment

The DOJ upheld the complaint and stated that “CHJDevco deliberately chose not to perform its rental obligations to BCDA despite knowledge of such and existence of retained earnings and other revenue.”

Sobrepeña’s indictment is the latest in the string of legal and financial problems that has beset him since 2005 when the preneed company he once headed, College Assurance Plan (CAP), went bankrupt and sought court-supervised rehabilitation.

The estafa charges filed by BCDA is cold comfort to tens of thousands of CAP educational and pension plan holders who were left holding the proverbial empty bag after the court ordered the suspension of money claims against CAP.

The stop-payment order was issued in 2005. Only God knows when CAP will, if at all, emerge healthy from the rehabilitation process that, like most judicial proceedings, is moving exceedingly show.

Although the raps against Sobrepeña may be cause for bitter rejoicing by disgruntled CAP plan holders, something is amiss with the decision of DOJ to make him solely liable for non-payment of rentals to BCDA.

No other CJHDevco officials were charged because, according to DOJ, there was not enough evidence to hold them liable for the crime.

This action runs counter to the rules on corporate decision making and the liability of directors on certain business actions.

Responsibility

Unless Sobrepeña had unilaterally dissolved CJHDevco’s board of directors and arrogated its powers unto himself, the decision to declare the cash dividends in question was the collective act of the board.

The approval by a majority of the directors is required before any cash dividend can be paid out to the stockholders from the company’s unrestricted retained earnings.

Without that green light from the highest policy making body of the company, no money can be legitimately withdrawn from the corporate coffers and given out as returns on stockholder investments.

If the cash dividend declarations were fraudulent or made under false pretenses to deprive BCDA of the rentals it was legally entitled to, all the directors who voted in favor of  such action are equally liable (or guilty) as Sobrepeña for estafa.

In collective actions, the rule on punishment of conspiracies applies: The act of one is the act of all.

The alleged unlawful declaration of cash dividends is the combined liability of the directors who approved it and the president who ordered the release of funds to pay the stockholders, which includes the directors.

A portion of the money that was supposed to be paid to BDCA [but were not] went to the pockets of the directors who approved the contested dividend declarations.

Accountability

The directors cannot escape personal liability from the fraudulent acts that BCDA claims unduly prejudiced its interests and those of the people of Baguio City and adjoining towns who are entitled to a share in the unpaid rentals.

In the past, the Supreme Court has ruled that a director may be held personally liable for corporate acts if he willfully and knowingly votes for patently unlawful acts of the corporation, or is guilty of gross negligence or bad faith in directing the affairs of the corporation.

A director cannot hide behind the coattails of the corporation’s juridical personality to escape accountability for acts that are contrary to law or otherwise prejudicial to the best interests of the corporation.

Gathering evidence on the directors who approved the disputed cash dividend declarations does not require the talents of a Sherlock Holmes. The minutes of CJHDevco’s board meetings when these resolutions were discussed and approved would easily disclose that information.

If for some reason those minutes are no longer available [which is doubtful], the working papers of the company’s external auditors who signed on its audited financial statements in 1998, 1999 and 2000, which should include those minutes, can be looked into.

In case these documents are also nowhere to be found, the General Information Sheet the company is required to file every year with the Securities and Exchange Commission would be helpful.

BCDA will be susceptible to accusation of selective prosecution if it limits its action only to Sobrepeña. It should also run after the directors who made it possible for the alleged fraudulent cash dividend declarations to happen.

It does not need a legal genius to gather the proof needed to establish that culpability. All it takes are initiative and understanding of corporate governance.

By excluding the directors from the charge sheet, the DOJ have provided Sobrepeña a loophole that could weaken BCDA’s action against him and the company.

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