Petitioner Lirag Textile Miil, Inc.

and defendant Social Security System (SSS) entered into a Purchase

Agreement wherein the latter will purchase preferred shares of stock from the former which is worth
one million pesos. Defendant paid petitioner in the amount of P500, 000 as evidence by Stock Certificate
128 and another P500, 000 as evidenced by Stock Certificate 139. The following conditions were
stipulated in the Purchase Agreement: (1) that petitioner will repurchase or redeem Stock Certificates
128 and 139 from defendant at regular intervals for one year and to pay dividends, and (2) that in case
of failure, the entire obligation shall become due and demandable and petitioner shall be liable in the
amount equivalent to 12% of the amount then outstanding as liquidated damages. Furthermore, Basilio
Lirag signed as a surety in the event Lirag Textile Mills, Inc. fails to make good on its obligation. However,
due to financial reverses, petitioner corporation failed to redeem the stock certificates and pay the
dividends despite defendant's demand letter. Because of such failure, defendant SSS sent a demand
letter to Basilio Lirag, requiring him to fulfill his obligation as surety. But he was also unable to comply
with such obligation. So SSS filed a petition for Specific Performance and damages with the Court of First
Instance in Rizal, praying for the fulfillment of Lirag Textile Mills, Inc. and Basilio Lirag's obligations. The
CFI ruled in favor of SSS, saying that the Purchase Agreement was a debt instrument. Hence this present
petition. Petitioners argue that the lower court erred in its decision. They contend that the obligation to
redeem the stock certificates and pay the dividends does not exist on the ground the SSS is a preferred
stockholder of the Lirag Textile Mills, Inc. and because of its financial condition upon which such liability
depended. Basilio Lirag further contends that since the corporation's obligation is without basis, he also
is not liable.

A ISSUE: Whether or not Basilio Lirag is liable for the entire obligation.

HELD: The petition is without merit. The purchase agreement is indeed a debt instrument since the
parties intended the repurchase of the certificates at scheduled dates to be an absolute obligation,
which is not dependent on the corporations financial standing. Basilio Lirag is liable for the corporation's
default since he bound himself as surety. There is a difference between the obligation of a surety and
the obligation of a guarantor. In guaranty, the guarantor merely insures the principal debtor's solvency
and binds himself to pay in the event the latter fails to pay. While the surety provides insurance for the
debt and undertakes to pay if the principal does not pay. Since Lirag Textile Mills, Inc. did not pay, Basilio
Lirag, as surety, is obligated to pay immediately without qualification. Thus, he is liable for the entire
obligation. The decision of the lower court is affirm
THE NATIONAL EXCHANGE CO., INC. vs. I. B. DEXTER,

This action was instituted in the Court of First Instance of Manila by the National Exchange Co.,
Inc., as assignee (through the Philippine National Bank) of C. S. Salmon & Co., for the purpose
of recovering from I. B. Dexter a balance of P15,000, the par value of one hundred fifty shares
of the capital stock of C. S. Salmon & co., with interest and costs. Upon hearing the cause the
trial judge gave judgment for the plaintiff to recover the amount claimed, with lawful interest from
January 1, 1920, and with costs. From this judgment the defendant appealed.

FACTS:

1. It appears that on August 10, 1919, the defendant, I. B. Dexter, signed a written
subscription to the corporate stock of C. S. Salmon & Co. in the following form:

I hereby subscribe for three hundred (300) shares of the capital stock of C. S.
Salmon and Company, payable from the first dividends declared on any and all shares of said
company owned by me at the time dividends are declared, until the full amount of this
subscription has been paid.

2. Upon this subscription the sum of P15,000 was paid in January, 1920, from a dividend
declared at about that time by the company, supplemented by money supplied personally by the
subscriber.

3. Beyond this nothing has been paid on the shares and no further dividend has been
declared by the corporation.

4. There is therefore a balance of P15,000 still paid upon the subscription.

5. The trial court held, in effect, that the stipulation mentioned is invalid.
ISSUE:

whether the stipulation contained in the subscription to the effect that the subscription is
payable from the first dividends declared on the shares has the effect of relieving the subscriber
from personal liability in an action to recover the value of the shares.

RULING:

In the absence of restrictions in its character, a corporation, under its general power to
contract, has the power to accept subscriptions upon any special terms not prohibited by
positive law or contrary to public policy, provided they are not such as to require the
performance of acts which are beyond the powers conferred upon the corporation by its
character, and provided they do not constitute a fraud upon other subscribers or stockholders,
or upon persons who are or may become creditors of the corporation.

A provision in the Corporation states: ". . . no corporation shall issue stock or bonds except in
exchange for actual cash paid to the corporation or for property actually received by it at a fair
valuation equal to the par value of the stock or bonds so issued."

Now, if it is unlawful to issue stock otherwise than as stated it is self-evident that a stipulation
such as that now under consideration, in a stock subcription, is illegal, for this stipulation
obligates the subscriber to pay nothing for the shares except as dividends may accrue upon the
stock. In the contingency that dividends are not paid, there is no liability at all. This is a
discrimination in favor of the particular subscriber, and hence the stipulation is unlawful.

Corpus Juris:

Nor has a corporation the power to receive a subscription upon such terms as will operate as a
fraud upon the other subscribers or stockholders by subjecting the particular subcriber to lighter
burdens, or by giving him greater rights and privileges, or as a fraud upon creditors of the
corporation by withdrawing or decreasing the capital.

as a general rule, an agreement between the corporation and a particular subscriber that the
subscription is not to be payable, or is to be payable in part only is illegal and void as it
constitutes fraud to other stockholders or creditors, whether it is for the purpose of making the
stock seem greater than it is, or for the purpose of preventing the predominance of certain
stockholders, or for any other purpose thus, the agreement cannot be enforced by the
subscriber or interpose it as a defense in an action on the subscription.

"Conditions attached to subscriptions, which, lessen the capital of the company, are a fraud
upon the grantor of the franchise, and upon those who may become creditors of the corporation,
and upon unconditional stockholders."