TOPIC: INTER-LOCKING DIRECTORS

CASE NO. 16

Development Bank Of The Philippines (DBP) Vs. Honorable Court Of Appeals And Remington Industrial Sales
Corporation (RISC)
G.R. No. 126200; August 16, 2001

Marinduque Mining-Industrial Co. (MMIC) obtained various loans from Philippine National Bank (PNB) and DBP
secured by Real Estate Mortgages (REM) and Chattel Mortgages (CM) over all their properties in Surigao del Norte,
Negros Occidental and Rizal as well as any assets it may subsequently acquire.

PNB and DBP instituted extrajudicial foreclosure against MMIC for failure to settle it obligations where PNB and
DBP emerged and was declared the highest bidder.

To ensure the continued operation of the refinery, PNB and DBP transferred and assigned all their right and
interest to Nonoc Mining and Industrial Co. (NMIC) and Miralcum Mining Co. (MMC).

PNB and DBP later transferred those given to NMIC and MMC to the Government thru the Asset Privatization Trust
(APT) pursuant to a proclamation.

Meanwhile, MMIC purchased and caused the delivery of construction materials from RISC. This remained unpaid,
however, which prompted Remington to file a complaint for sum of money against MMIC.

RISC later filed multiple amendments to implead PNB, DBP, NMIC, MMC, Island Cement Co. (ICC), and APT
asserting that they must all be considered as one entity by piercing the veil of corporate fiction, alleging: that
NMIC, MMC, ICC are wholly owned and managed by the officers of PNB and DBP; that the transfer of properties
was made in fraud of creditors; that the use of the same premises and hiring of the same employees and officers
are badged of bad faith.

The RTC favored RISC. Which the CA affirmed.

The CA agreed with RISC that:

When a corporation is insolvent, the directors of the creditor corporation are disqualified, by reason of
self-interest, from acting as directors of the debtor corporation in the authorization of a mortgage or deed
of trust to the former to secure such indebtedness. (Interlocking directors)

When the corporation is insolvent, its directors who are its creditors cannot secure to themselves any
advantage or preference over other creditors. (directors who are creditors)

If they do, equity will set aside the transaction at the suit of creditors of the corporation or their
representatives, without reference to the question of any actual fraudulent intent on the part of the
directors, for the right of the creditors does not depend upon fraud in fact, but upon the violation of the
fiduciary relation to the directors."

Hence this petition by DBP maintaining that RISC has no cause of action.

ISSUE:

1. Is there fraud so as to warrant piercing the veil of corporate fiction? NO

2. Can the claim of RISC be enforced? NO

RULING:
 1. There is no fraud. The acts of PNB and DBP are justified:
 PNB and DBP has the duty under the Law on Mandatory Foreclosure (PD No. 385) to foreclose mortgages
when the due accounts incur arrears of more than 20% of the total outstanding obligations.
 The creation of NMIC, MMC, and ICC is necessary to manage and operate the business since they are not
authorized to change their charter to engage in mining. Hence, there is no bad faith.
 The hiring of MMIC employees and the use of the same premises is also justified by reason of
convenience, practicality, and efficiency.

As to transactions between corporations with interlocking directors, it cannot apply in this case. RISC is a third
party and not the one that has interlocking directors like MMIC and DBP.

As to “directors who are creditors”, it is also not applicable since the creditor of MMIC is DBP and not the directors
of MMIC.

(yan lang talaga diniscuss about Interlocking directors ☹)

2. The claim of Remington cannot be enforced in absence of liquidation proceedings.

The Civil Code demands that there must be first some proceeding where the claims of all the preferred
creditors may be adjudicated, such as insolvency, the settlement of decedent's estate, or other liquidation
proceedings of similar import.

Since the extrajudicial foreclosure instituted by PNB and DBP is not the liquidation proceeding
contemplated by the Civil Code, Remington cannot claim its pro rata share from DBP.