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Case digest · Directors’ compensation; the board cannot vote its own pay
Central Cooperative Exchange, Inc. vs. Tibe, Sr., et al.
A federation of farmers’ cooperatives had by-laws that left the directors’ compensation to the members, and the stockholders had fixed a ₱30 per diem. The board then voted its own members monthly allowances and discretionary funds. After a director left the board, the federation sued him for a refund.
Facts
The federation
Central Cooperative Exchange, Inc. (CCE) “is a national federation of farmers' cooperative marketing associations, or FACOMAS, scattered throughout the country; its single majority stockholder is the former Agricultural Credit and Cooperative Financing Administration (ACCFA), now Agricultural Credit Administration (ACA).”
The by-law
Section 8 of the by-laws provided: “The compensation, if any, and the per diems for attendance at meetings of the members of the Board of Directors shall be determined by the members at any annual meeting or special meeting of the Exchange called for the purpose.” On January 31, 1956, the stockholders resolved that directors attending board meetings be entitled to actual transportation expenses, per diems of ₱30.00 and actual expenses while waiting.
The board’s resolutions
The board then passed its own resolutions, among them a ₱200 monthly commutable allowance to each director, in lieu of the regular waiting-time per diems and transportation expenses (Res. No. 49, July 10, 1958), and an increase of each director’s monthly commutable allowance from ₱300 to ₱500 (Res. No. 35, June 11, 1959). Other resolutions provided per diems for visiting the FACOMAS and discretionary funds.
The director
The respondent sat on the board from May 23, 1958 to May 26, 1960. Besides cash advances, he drew ₱14,436.95 in commutable per diems for board meetings in Manila, per diems and transportation expenses for FACOMA visitations, representation expenses and commutable discretionary funds. The Court noted that all these sums “were disbursed with the approval of the general manager, treasurer and auditor of CCE.”
The courts below
In October 1960, the federation sued the respondent for the refund of amounts he had received while he served on the board. The Court of First Instance of Manila dismissed the suit, and the Court of Appeals affirmed, relying in part on laches.
Issue
Did the board have the power to vote these allowances, per diems and discretionary funds for its own members, and was the federation’s claim barred by laches?
Ruling
No on both counts. The resolutions were beyond the board’s power, and, under the circumstances, laches did not run while the directors controlled the board. The Court reversed and ordered the respondent to refund the ₱14,436.95, with legal interest.
The Court framed the main issue as “whether or not the board of directors of the CCE had the power and authority to adopt various resolutions which appropriated the funds of the corporation for the above-enumerated expenses for the members of the said board.” It held: “We agree with the petitioner that the questioned resolutions are contrary to the By-Laws of the federation and, therefore, are not within the power of the board of directors to enact.” The by-laws “explicitly reserved unto the stockholders the power to determine the compensation of members of the board of directors”, and the stockholders had fixed a ₱30 per diem. Even without that reservation, the Court added, quoting a commentator, directors “presumptively serve without compensation” and, absent an express agreement or resolution, can assert no claim for it. Assigning themselves additional duties, such as visiting the FACOMAS, was within the directors’ power; voting themselves compensation for those duties was not. The board’s general powers did not extend to fixing its members’ compensation, which was “specifically withheld from the board of directors, and reserved to the stockholders.” Nor did laches bar the claim: the board controlled the corporation and could not be expected to sue its own members, so, with the corporation “virtually immobilized from commencing suit against its directors,” laches did not begin to attach until the directors ceased to be such. From May 1960, when the respondent ceased to be a director, to October 1960, when the action was filed, was “too short a time for the claim to be considered stale.” The Court reversed the decision under review and ordered the respondent to pay the ₱14,436.95, together with a separate sum for cash advances, with legal interest from October 22, 1960 until fully paid. The case was decided under the old Corporation Law (Act No. 1459) and the federation’s by-laws, before B.P. Blg. 68. In Central Cooperative Exchange, Inc. vs. Enciso, G.R. No. L-35603, June 28, 1988, the Court followed this ruling for another director paid under the same resolutions and ordered a refund.
“Thus, the directors, in assigning themselves additional duties, such as the visitation of FACOMAS, acted within their power, but, by voting for themselves compensation for such additional duties, they acted in excess of their authority, as expressed in the By-Laws.”
Doctrine
When the by-laws reserve the directors’ compensation to the stockholders, the board cannot vote it for its own members: such resolutions are “not within the power of the board of directors to enact.” On delay, the Court reasoned: “The board of directors, under the By-Laws of the corporation, had the control of the affairs of the corporation and it is not to be expected that the board would sue its members to recover the sums of money voted by and for themselves.” Where the corporation was “virtually immobilized from commencing suit against its directors”, laches did not attach until they ceased to be directors. The case applied the old Corporation Law and the federation’s by-laws. Today, Sec. 29 of the Revised Corporation Code provides: “Directors or trustees shall not participate in the determination of their own per diems or compensation.”
Compare: approved, but no income
In Gonzaga, et al. vs. Commission on Audit, G.R. No. 244816, June 29, 2021, the directors’ bonuses had the Monetary Board’s approval, but the corporation had no net income in the preceding year, and the Court held that “the Corporation Code requires the presence of a net income before any compensation may be given by the Board of Directors unto themselves.”
Bar tip
Ask who holds the power. If the by-laws reserve the directors’ compensation to the stockholders, the board may assign itself extra duties but may not vote itself pay for them. Today Sec. 29 of the Revised Corporation Code says it outright: directors “shall not participate in the determination of their own per diems or compensation.” And remember the laches point: under the circumstances of this case, it did not run against the corporation while the directors controlled the board.
Hear it explained
Directors’ Compensation, Podcast Ep. 9, at 7:32
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This digest is general legal information for education, not legal advice, and it is not a substitute for reading the decision. Quoted passages are taken word for word from the full text.