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Case digest · Business judgment rule; gross negligence of directors
Virata vs. Ng Wee
An investment house’s board approved a P2.5-billion credit line for a two-year-old borrower with no security. When the borrower did not pay, an investor sued the directors.
Facts
1998
Alejandro Ng Wee, a valued client of Westmont Bank, was enticed by the bank manager to place money with Westmont Investment Corporation (Wincorp), an investment house affiliated with the bank. He made “sans recourse” placements on representations that they were safe, stable, high-yielding and of little to no risk.
The borrower
Wincorp matched investors’ money with corporate borrowers, among them Power Merge Corporation, incorporated on August 4, 1997. Luis Juan L. Virata owned 374,996 of its 375,000 subscribed shares.
February 9, 1999
Wincorp’s board approved a credit line of P1,300,000,000.00 for Power Merge.
March 11, 1999
About a month later, the board raised Power Merge’s credit limit to P2,500,000,000.00. On the same dates that the credit line and its amendment were signed, Wincorp and Power Merge also signed side agreements, unknown to Ng Wee, absolving Power Merge of liability on its promissory notes. Power Merge drew P2,183,755,253.11, of which P213,290,410.36 came from Ng Wee’s placements, and it did not pay.
October 19, 2000
Ng Wee sued Wincorp, its directors and officers, Power Merge, Virata and others, 17 named defendants in all.
The defenses
Before the Supreme Court, some directors said they approved the credit line because the screening committee had found the application above board, and denied knowing of the side agreements. Wincorp argued that the approval was covered by the business judgment rule.
2011–2014
The Regional Trial Court of Manila ruled for Ng Wee, and the Court of Appeals affirmed with modification.
Issue
Did the business judgment rule shield the Wincorp directors from personal liability for approving the Power Merge credit line?
Ruling
No. The business judgment rule does not cover gross negligence. Seven Wincorp directors and officers were held jointly and severally liable, with Wincorp and others, to pay Ng Wee P213,290,410.36 with interest.
Applying Sec. 31 of the Corporation Code (now Sec. 30 of the Revised Corporation Code), the Court held that the board had ignored obvious warning signs. Power Merge had existed for only two years, was thinly capitalized with P37,500,000.00 in subscribed capital, never secured the permits and licenses to do business, and gave no security other than its promissory notes. The board’s failure to heed those signs was, at the very least, gross negligence, which the business judgment rule does not protect. Being a nominee, holding a single unpaid share or serving without pay was no excuse. One director, Manuel Tankiansee, was exempted because his immigration records showed he was out of the country on the meeting dates. Virata, the majority stockholder of Power Merge, was also held liable, but his cross-claim was granted: Wincorp and its liable directors and officers must reimburse him. On March 21, 2018, the Court denied the motions for reconsideration, with Tijam, J., dissenting on the directors’ liability.
“Neither can the business judgment rule apply herein for it is elementary in corporation law that the doctrine admits of exceptions: bad faith being one of them, gross negligence, another.”
Doctrine
The board of directors “is expected to be more than mere rubber stamps of the corporation and its subordinate departments.” The business judgment rule protects decisions made in good faith, but it admits of exceptions, bad faith and gross negligence among them. Directors guilty of gross negligence in directing the corporation’s affairs are liable jointly and severally under Sec. 31 of the Corporation Code (now Sec. 30 of the Revised Corporation Code), whether or not they are paid and however they came to sit on the board.
Compare: not liable
In Board of Liquidators vs. Heirs of Maximo M. Kalaw, G.R. No. L-18805, August 14, 1967, a board approved copra contracts knowing they would lose money after typhoons struck, but there was no bad faith, and the Court held: “The directors are not liable.”
Bar tip
The business judgment rule protects honest decisions, not careless ones. When a board ignores obvious warning signs, the rule gives way to gross negligence, and being a nominee, unpaid or holding a single share is no defense. A director may still be excused by proving he could not have taken part, as one director did with his immigration records.
Hear it explained
Business Judgment Rule, Podcast Ep. 6, at 6:14
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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.