6. Corporate Contract Law

CORPORATION  LAW  REVIEWER  (2013-­‐2014)  

 

 

     ATTY.  JOSE  MARIA  G.  HOFILEÑA    

 

CORPORATE  CONTRACT  LAW     I.  Pre-­‐Incorporation  Contracts     A.  Who  Are  Promoters?   •

“Promoter”  is  a  person  who,  acting  alone  or  with  others,  takes   initiative   in   founding   and   organizing   the   business   or   enterprise   of  the  issuer  and  receives  consideration  therefor.   (Section  3.10,   Securities  Regulation  Code  [R.A.  8799])  

•

It  is  necessary  to  identify  the  promoters  because  it  fills  the  gap   between  the  intention  to  create  the  corporation,  and  its  actual   birth.     o In  the  normal  scheme  of  things,  should  the  promoter  be   liable  for  contracts?  NO.  Because  when  the  corporation   is  born,  all  contracts  are  transferred  to  it.   o However,  where  the  company  was  not  formed,  then  the   liability  of  the  promoters  become  significant.  

  B.  Nature  of  Pre-­‐incorporation  Agreements  (Sections  60  and  61)     Section  60.  Subscription  contract.   Any   contract   for   the   acquisition   of   unissued   stock   in   an   existing   corporation   or   a   corporation   still   to   be   formed   shall   be   deemed   a   subscription  within  the  meaning  of  this  Title,  notwithstanding  the  fact   that  the  parties  refer  to  it  as  a  purchase  or  some  other  contract.  (n)     Section  61.  Pre-­‐incorporation  subscription.   A   subscription   for   shares   of   stock   of   a   corporation   still   to   be   formed  

shall   be   irrevocable   for   a   period   of   at   least   six   (6)   months   from   the   date  of  subscription,  unless  all  of  the  other  subscribers  consent  to  the   revocation,   or   unless   the   incorporation   of   said   corporation   fails   to   materialize   within   said   period   or   within   a   longer   period   as   may   be   stipulated   in   the   contract   of   subscription:   Provided,   That   no   pre-­‐ incorporation  subscription  may  be  revoked  after  the  submission  of  the   articles   of   incorporation   to   the   Securities   and   Exchange   Commission.   (n)     C.    Theories  on  Liabilities  for  Promoter's  Contracts:   •

Cagayan  Fishing  Dev.  Co.,  Inc.  v.  Teodoro  Sandiko,  65  Phil.  223   (1937).    

•

Rizal  Light  &  Ice  Co.,  Inc.  v.  Public  Service  Comm.,  25  SCRA  285   (1968).    

•

Caram,  Jr.  v.  CA,  151  SCRA  372  (1987).  

  Cagayan  Fishing  Dev.  Co.,  Inc.  v.  Teodoro  Sandiko     Facts:   Manuel   Tabora   owns   4   parcels   of   land   covered   by   three   mortgages   which   it   sold   to   Cagayan   Fisheries   Dev.   Co.   Inc.   at   a   time   when  it  was  still  in  the  process  of  incorporation  for  a  consideration  of  P1   and   under   the   condition   that   the   company   would   pay   Tabora’s   indebtedness   to   PNB.   5   months   later,   Cagayan   was   incorporated,   but   the   mortgage   loan   was   not   paid.   Subsequently   the   land   was   sold   to   Sandiko   under   the   name   of   the   corporation   with   the   same   conditions.   Sandiko   failed   to   comply   with   his   obligation   so   Cagayan   filed   an  action   praying  that  the  judgment  be  rendered.     Issue:  Whether  or  not  Sandiko  is  liable  to  Cagayan.  

  NOTES  BY  RACHELLE  ANNE  GUTIERREZ  (UPDATED  APRIL  3,  2014)  

CORPORATION  LAW  REVIEWER  (2013-­‐2014)  

 

 

     ATTY.  JOSE  MARIA  G.  HOFILEÑA    

    Held:   NO.  The  transfer  to  Cagayan  was  null  because  at  the  time  it  was   effected,   Cagayan   was   non-­‐existent.   If   Cagayan   could   not   and   did   not   acquire  the  4  parcels  of  land,  it  follows  that  it  had  no  right  to  sell  them   to   Sandiko.   A   corporation,   until   organized,   has   no   being,   franchise   or  

Securities  and  Exchange  Commission  just  before  the  Certificate  of  Public   Convenience   was   granted   to   it.   Rizal   Light   contended   that   Morong   Electric  did  not  have  a  corporate  personality  at  the  time  it  was  granted  a   franchise   by   the   Municipality   and   as   such   was   not   even   a   de   facto   corporation.  

faculties.  Nor  do  those  engaged  in  bringing  it  into  being  have  any  power   to   bind   it   by   contract,   unless   so   authorized   by   the   charter.   Manuel   Tabora,  his  wife  and  others,  as  mere  promoters  of  a  corporation  on  the   other   hand.   The   lands   remain   inscribed   in   Tabora’s   name.   Sandiko   always   regarded   Tabora   as   the   owner   of   the   lands.   He   dealt   with   the   latter   directly.   The   President   of   Cagayan   only   intervened   to   sign   the   contract   in   behalf   of   Cagayan.   Even   PNB   always   treated   Tabora   as   the  

  Issue:   Whether   or   not   Morong   Electric   could   validly   be   granted   a   franchise   and   apply   for   a   Certificate   of   Public   Convenience   even   when   it   did  not  yet  have  a  separate  corporate  legal  personality  at  those  times     Held:   YES.  Morong  Electric  might  not  yet  have  a  corporate  personality  at   those  times  but  ultimately,  it  was  granted  its  certificate  of  incorporation  

owner  of  the  lands.     Doctrine:   These   promoters   could   not   have   acted   as   agent   for   a   projected   corporation   since   that   which   had   no   legal   existence   could   have  no  agent.  A  corporation,  until  organized,  has  no  life  and  therefore   no   faculties.   However,   this   does   not   mean   that   acts   of   promoters   can   never  be  ratified  by  the  corporation  when  it  is  subsequently  organized.  

by   the   SEC   and   it   accepted   its   franchise   according   to   the   terms   and   conditions.  In  effect,  the  doctrine  of  ratification  was  applied  in  favor  of   Morong  Electric.     Doctrine:   “The   fact   that   a   company   is   not   completely   incorporated   at   the   time   the   grant   is   made   to   it   does   not   affect   the   validity   of   the   grant.   But   such   grant   cannot   take   effect   until   the   corporation   is   organized.”  

There  are  exceptions  

American  courts  generally  hold  that  contracts  made  by  the  promoters  of   a   corporation   on   its   behalf   may   be  adopted,   accepted,   or   ratified   by   the   corporation  when  organized.     General   Rule:   For  corporations  that  are  not  yet  incorporated,  they  don’t   have  capacity  to  act  yet.  

  Rizal  Light  &  Ice  Co.,  Inc.  v.  Public  Service  Comm.     Facts:  Rizal   Light   and   Ice   has   been   distributing   electricity   in   the   Morong,   Rizal   Area   since   1949   when   it   was   awarded   a   Certificate   of   Public   Convenience  by  the  Public  Service  Commission.  In  1962,  Morong  Electric   Company   was   granted   a   franchise   to   operate   an   electric   service   in   the   Municipality   of   Morong,   and   it   applied   for   a   Certificate   of   Public   Convenience.   Its   Certificate   of   Incorporation   was   granted   by   the  

  Caram,  Jr.  v.  CA     Facts:   The   Carams   are   challenging   the   validity   of   the   Court   of   Appeal’s  

  NOTES  BY  RACHELLE  ANNE  GUTIERREZ  (UPDATED  APRIL  3,  2014)  

CORPORATION  LAW  REVIEWER  (2013-­‐2014)  

 

 

     ATTY.  JOSE  MARIA  G.  HOFILEÑA    

  decision  ordering  them  to  pay  jointly  and  severally  with  Filipinas  Orient   Airways   and   with   Barretto   and   Garcia   plaintiff   Arellano   for   his   services   which   helped   in   the   incorporation   of   Filipinas   Orient   Airways.   The   Carams  claim  that  they  were  not  the  ones  who  requested  the  services  of   Arellano,   and   were   merely   financiers   of   the   airways.   As   such   they   cannot  be  held  personally  liable.     Issue:  Whether  or  not  the  Carams  are  also  and  personally  liable  for  such   expenses  and,  if  so,  to  what  extent.     Held:   NO.   After   a   perusal   of   the   decision   of   the   CA,   the   SC   found   that   the  Carams  were  not  really  involved  in  the  initial  steps  that  finally  led  to   the   incorporation   of   the   Filipinas   Orient   Airways.   It   was   Barretto   and   Garcia  who  handled  the  preparation  of  the  project  study.  The  said  study   being  then  subsequently  presented  to  the  Carams  to  induce  the  latter  in   investing  to  the  proposed  airlines.  The  Carams  were  merely  among  the   financiers  who  were  persuaded  by  the  strength  of  the  project  study  to   invest  in  the  proposed  airline.  Furthermore,  there  was  no  showing  that   the  Filipinas  Orient  Airways  was  a  fictitious  corporation  and  did  not  have   a   separate   juridical   personality,   to   be   able   to   justify   making   the   Carams,   as  principal  stockholders  thereof,  responsible  for  its  obligations.     Doctrine:     II.  De  Facto  Corporation  (Section  20)     Section  20.  De  facto  corporations.   The  due  incorporation  of  any  corporation  claiming  in  good  faith  to  be  a   corporation   under   this   Code,   and   its   right   to   exercise   corporate  

powers,   shall   not   be   inquired   into   collaterally   in   any   private   suit   to   which  such  corporation  may  be  a  party.  Such  inquiry  may  be  made  by   the  Solicitor  General  in  a  quo  warranto  proceeding.     •

A  de  facto  corporation  is  one  that  has  not  yet  been  certified  as   existing   by   the   SEC,   but   who   believes   in   good   faith   that   it   has   authority  and  power  to  operate  as  a  corporation.   o You   can’t   claim   to   be   in   good   faith   if   there   is   no   certificate  of  incorporation  since  you  know  that  it  is  only   upon  the  issuance  of  the  certificate  by  the  SEC  that  the   corporation  is  given  juridical  personality.  

  A.  Elements:  Arnold  Hall  v.  Piccio,  86  Phil.  634  (1950).     Arnold  Hall  v.  Piccio     Facts:   Arnold  and  Bradley  Hall  (petitioners)  and  Fred  and  Emma  Brown,   Chapman,   and   Abella   (respondents)   signed   and   acknowledged   the   articles   of   incorporation   of   the   Far   Eastern   Lumber   and   Commercial   Co.,   Inc.   Attached   to   the   articles   of   incorporation   was   an   affidavit   of   the   treasurer  stating  that  about  23k  of  the  stocks  were  subscribed  and  fully   paid  with  properties  transferred  to  the  corporation.     Pending  action  of  the  SEC  concerning  the  articles,  the  respondents  filed   a   case   against   petitioners   where   they   claimed   that   FELC   was   an   unregistered   partnership   and   now   they   wished   to   dissolve   it   due   to   dissension   among   members.   The   Halls   filed   a   case,   claiming   that   the   court   had   no   jurisdiction   to   decree   the   dissolution   of   the   company,   because  it  being  a  de  facto  corporation,  dissolution  may  only  be  ordered  

  NOTES  BY  RACHELLE  ANNE  GUTIERREZ  (UPDATED  APRIL  3,  2014)  

CORPORATION  LAW  REVIEWER  (2013-­‐2014)  

 

 

     ATTY.  JOSE  MARIA  G.  HOFILEÑA    

  in  a  quo  warranto  proceeding  before  the  Solicitor  General  and  that  the   respondents,   having   signed   the   articles   of   incorporation,   are   estopped   from  denying  that  it  is  a  corporation.     Issue:   Whether   or   not   the   court   had   jurisdiction   to   decree   the  

III.   Corporation   by   Estoppel   Doctrine   (Section   21;   Salvatierra   v.   Garlitos,   103   Phil.   757   [1958];   Albert   v.   University   Publishing   Co.,   13   SCRA  84  [1965];  Asia  Banking  Corp.  v.  Standard  Products,  46  Phil.  145   [1924];  Madrigal  Shipping  Co.,  v.  Ogilvie,  55  O.G.  No.  35,  p.  7331)    

dissolution     Held:   YES.   The   parties   very   well   know   that   the   SEC   has   not   issued   the   certificate  of  corporation.  Thus,  they  couldn’t  claim  in  good  faith  to  be  a   corporation.  In  this  case,  there  is  no  de  facto  corporation  immune  from   collateral  attack.  Besides,  this  corporation  is  not  a  party  to  this  case.  The   case   is   a   litigation   between   stockholders,   for   the   purpose   of   obtaining  

Section  21.  Corporation  by  estoppel.   All   persons   who   assume   to   act   as   a   corporation   knowing   it   to   be   without   authority   to   do   so   shall   be   liable   as   general   partners   for   all   debts,   liabilities   and   damages   incurred   or   arising   as   a   result   thereof:   Provided,  however,  That  when  any  such  ostensible  corporation  is  sued   on   any   transaction   entered   by   it   as   a   corporation   or   on   any   tort   committed  by  it  as  such,  it  shall  not  be  allowed  to  use  as  a  defense  its  

dissolution.   Even   the   existence   of   a   de   jure   corporation   may   be   terminated   in   a   private   suit   for   its   dissolution   between   stockholders,   without  the  intervention  of  the  state.     Doctrine:   Personality   of   a   corporation   begins   to   exist   only   from   the   moment   such   certificate   is   issued.   Immunity   from   collateral   attack   is   granted   to   corporations   “claiming   in   good   faith   to   be   a   corporation”  

lack  of  corporate  personality.     One  who  assumes  an  obligation  to  an  ostensible  corporation  as  such,   cannot  resist  performance  thereof  on  the  ground  that  there  was  in  fact   no  corporation.  

under   the   Corporation   Law.   When   both   parties   are   aware   that   a   corporation   has   not   been   duly   organized,   then   the   corporation   by   estoppel  doctrine  does  not  apply.  

1. One  who  assumes  an  obligation  to  an  ostensible  corporation  as   such,   cannot   resist   performance   thereof   on   the   ground   that   there  was  in  fact  no  corporation.  Section  21(2)   2. Both  parties  must  recognize  the  corporate  party  even  when  one   does  not  exist.  At  least  one  party  to  the  contract  was  under  the   impression   that   the   other   corporate   party   was   a   duly   incorporated  entity.  It  can  only  apply  when  a  certificate  is  issued  

  A.  Elements  of  the  Doctrine  Corporation  by  Estoppel    

  •

By   its   failure   to   submit   its   by-­‐laws   on   time,   the   AIIBP   may   be   considered   a   de   facto   corporation   whose   right   to   exercise   corporate   powers   may   not   be   inquired   into   collaterally   in   any   private   suit   to   which   such   corporations   may   be   a   party.   Sawadjaan  v.  Court  of  Appeals,  459  SCRA  516  (2005).  

 

  NOTES  BY  RACHELLE  ANNE  GUTIERREZ  (UPDATED  APRIL  3,  2014)  

but   where,   for   lack   of   the   other   criteria,   the   de   facto   corporation  doctrine  cannot  apply.  Arnold  Hall  v.  Piccio,  86  Phil.   634  (1950).  

CORPORATION  LAW  REVIEWER  (2013-­‐2014)  

 

 

     ATTY.  JOSE  MARIA  G.  HOFILEÑA    

    Salvatierra  v.  Garlitos     Facts:   Manuela   Salvatierra   entered   into   a   contract   of   lease   with   Philippine   Fibers   Producers   Corp.   (represented   by   its   President  

out  of  such  transaction.     Doctrine  1:  A   registered   corporation   has   a   juridical   personality   separate   and  distinct  from  its  component  members  or  stockholders  and  officers   and   conversely,   a   stockholder   or   member   cannot   be   held   personally  

Refuerzo)  over  a  parcel  of  land  in  Leyte  owned  by  the  former.  Barely  a   year   after   the   lease,   Salvatierra   filed   for   damages,   accounting   and   rescission;   she   averred   that   the   corporation   violated   the   provisions   in   the   contract.   The   Court   rendered   a   judgment   in   favour   of   Salvatierra,   and   moved   to   subject   parcels   of   land   owned   by   Refuerzo   to   attachment   because  the  corporation  had  no  properties  in  its  name.  Refuerzo  filed  a   motion   claiming   that   the   decision   rendered   was   null   and   void   with  

liable   for   any   financial   obligation   of   the   corporation   in   excess   of   his   unpaid   subscription.   But   this   rule   is   understood   to   refer   merely   to   registered  corporations  and  cannot  be  made  applicable  to  the  liability  of   members  of  an  unincorporated  association.    

respect  to  him,  there  being  no  allegation  in  the  complaint  pointing  to  his   personal   liability.   His   defense   was   that   for   while   it   was   stated   in   the   complaint  that  he  was  a  signatory  to  the  lease  contract,  he  did  so  in  his   capacity  as  president  of  the  corporation.     Issue   1:  Whether  or  not  Refuerzo,  in  his  personal  capacity,  can  be  held   liable  for  corporate  debts.  

applicable  in  this  case.     Held   2:   NO.  The  doctrine  of  corporation  by  estoppel  does  not  apply  in   this  case  because  fraud  was  part  of  the  transaction.  In  the  instant  case,   on  plaintiff's  charge  that  she  was  unaware  of  the  fact  that  the  Philippine   Fibers   Producers   Co.,   Inc.,   had   no   juridical   personality,   defendant   Refuerzo   gave   no   confirmation   or   denial   and   the   circumstances  

  Held   1:   YES.   A  person  who  acts  as  an  agent  without  authority  or  without   a   principal   is   himself   regarded   as   the   principal;   a   person   acting   or   purporting   to   act   on   behalf   of   a   corporation   which   has   no   valid   existence   assumes   such   obligations   and   comes   personally   liable   for   contracts   entered   into.   Refuerzo,   as   president   of   the   unregistered   corporation   Phil.   Fibers,   was   the   agent   of   a   non-­‐existent   principal,   his   liability  cannot  be  limited  or  restricted  to  that  imposed  upon  corporate  

surrounding   the   execution   of   the   contract   lead   to   the   inescapable   conclusion  that  plaintiff  Manuela  T.  Vda.  de  Salvatierra  was  really  made   to  believe  that  such  corporation  was  duly  organized  in  accordance  with   law.     Doctrine  2:  While  as  a  general  rule  a  person  who  has  contracted  or  dealt   with   an   association   in   such   a   way   as   to   recognize   its   existence   as   a  

shareholders.  In  acting  on  behalf  of  a  corporation  which  he  knew  to  be   unregistered,   he   assumed   the   risk   of   reaping   the   consequential   arising  

  Issue   2:   Whether   or   not   the   doctrine   of   corporation   by   estoppel   is  

corporate  body  is  estopped  from  denying  the  same  in  an  action  arising   out  of  such  transaction  or  dealing,  yet  this  doctrine  may  not  be  held  to   be  applicable  where  fraud  takes  a  part  in  the  said  transaction.    

  NOTES  BY  RACHELLE  ANNE  GUTIERREZ  (UPDATED  APRIL  3,  2014)  

CORPORATION  LAW  REVIEWER  (2013-­‐2014)  

 

 

     ATTY.  JOSE  MARIA  G.  HOFILEÑA    

    •

Agency   Doctrine:   Making   the   agent   of   an   inexistent   principal   liable  on  the  contract  entered  upon.1   o This   agency   doctrine   applies   only   where   there   is   fraud   or  misrepresentation  on  the  part  of  one  of  the  contract   parties.   The   doctrine   of   corporation   by   estoppel   has   not   application   to   a   situation   where   both   parties   to   the   contract   acted   in   the   honest   belief   that   a   contracting   corporate  entity  did  exist.   o It  is  in  such  no-­‐fraud  or  no-­‐misrepresentation  cases  that   Salvatierra   v.   Garlitos   is   clearly   inadequate.   This   is   where  the  present  statutory  version  of  the  corporation   by  estoppel  doctrine  applies,  since  its  applicability  does   not  require  fault  or  conscious  misrepresentation.     Albert  v.  University  Publishing  Co.  

  Facts:   UP  Co.  through  Jose  Aruego,  its  President,  entered  into  a  contract   with   Mariano   Albert   for   the   exclusive   right   to   publish   his   revised   Commentaries  on  the  Revised  Penal  Code.  Because  of  UP  Co.’s  failure  to   pay  its  installments  to  Albert,  the  latter  sued  UP  Co.  alleging  that  it  was   a   corporation   duly   organized   and   existing   under   the   laws   of   the   Philippines.  UP  Co.  also  admitted  to  Albert’s  allegation  of  its  corporate   existence  as  well  as  to  the  execution  and  terms  of  the  contract.  Albert   won  the  case,  and  thereafter  petitioned  for  a  writ  of  execution  against   Aruego   as   the   real   defendant   because   it   was   recently   discovered   that  

there   is   no   such   entity   as   University   Publishing   Co.,   Inc.   The   SEC   records   show   that   UP   Co.   was   never   registered   either   as   a   corporation   or   partnership.  Aruego  claimed  he  is  not  a  party  to  the  case.     Issue:   Whether   or   not   the   judgment   may   be   executed   against   Jose   M.   Aruego,  supposed  President  of  University  Publishing  Co.,  Inc.,  as  the  real   defendant.     Held:   YES.   On   account   of   the   non-­‐registration   UP   Co.   cannot   be   considered   a   corporation,   not   even   a   corporation   de   facto.   It   has   therefore   no   personality   separate   from   Jose   M.   Aruego;   it   cannot   be   sued   independently.   It   is   patently   clear   that   Jose   M.   Aruego,   acting   as   representative   of   a   non-­‐existent   principal,   was   the   real   party   to   the   contract  sued  upon,  reaping  the  benefits  resulting  from  it.  Responsibility   under   the   judgment   falls   on   him   since   partial   payments   of   the   consideration   were   made   by   him,   he   violated   its   terms,   which   precipitated  the  previous  suit  in  question.   NOTE:  Doctrine  of  corporation  by  estoppel  did  not  apply  to  this  case.     Doctrine:   In   a   suit   against   a   corporation   with   no   valid   existence,   the   person  who  had  and  exercised  the  rights  to  control  the  proceedings,  to   make  defense,  to  adduce  and  to  cross-­‐examine  witnesses,  and  to  appeal   from   a   decision,   is   the   real   defendant,   and   the   enforcement   of   a   judgment   against   the   corporation   upon   him   is   substantial   observance   of   due  process  of  law.     •

                                                                                                                1

 Villanueva,  C.  L.,  &  Villanueva-­‐Tiansay,  T.  S.  (2013).  Philippine  Corporate  Law.   (2013  ed.).  Manila,  Philippines:  Rex  Book  Store.  

  NOTES  BY  RACHELLE  ANNE  GUTIERREZ  (UPDATED  APRIL  3,  2014)  

Albert   therefore   offers   us   the   "philosophical   bridge"   between   the  two  doctrines:    

CORPORATION  LAW  REVIEWER  (2013-­‐2014)  

 

 

     ATTY.  JOSE  MARIA  G.  HOFILEÑA    

  o o

First.  That  a  corporation  can  be  deemed  to  exist  when  in   fact  none  may  exist,  in  order  to  validate  a  contract;  and     Second.   That   although   the   veil   of   corporate   fiction   is   set   up,  it  will  be  pierced  to  enforce  the  contract,  to  hold  the   actors   behind   such   misrepresentation   liable   for   the   obligations  arising  from  such  contract.1  

  Asia  Banking  Corp.  v.  Standard  Products     Facts:   Standard   Products,   Co.,   Inc.   was   indebted   to   Asia   Banking   Corporation   and   secured   its   indebtedness   through   a   promissory   note.   Upon   demand   for   the   balance   due,   Standard   failed   to   pay.   Hence   an   action   was   brought   by   Asia   Banking   Corporation,   which   it   won.   But,   Standard   Products,   Inc.   contended   that   Asia   Banking   Corp   failed   to   prove   affirmatively   the   corporate   existence   of   the   parties,   and   the   appellant   insists   that   under   these   circumstances   the   court   erred   in   finding  that  the  parties  were  corporations  with  juridical  personality  and   assigns  same  as  reversible  error.    

corporate  existence.  Under  these  circumstances  it  was  unnecessary  for   the   plaintiff   to   present   other   evidence   of   the   corporate   existence   of   either  of  the  parties.     Doctrine:  The  general  rule  is  that  in  the  absence  of  fraud  a  person  who   has  contracted  or  otherwise  dealt  with  an  association  in  such  a  way  as   to  recognize  and  in  effect  admit  its  legal  existence  as  a  corporate  body  is   thereby  estopped  to  deny  its  corporate  existence  in  any  action  leading   out   of   or   involving   such   contract   or   dealing,   unless   its   existence   is   attacked  for  cause  which  have  arisen  since  making  the  contract  or  other   dealing  relied  on  as  an  estoppel  and  this  applies  to  foreign  as  well  as  to   domestic  corporations.     NOTE:   Atty.   Hofileña   à   The   doctrines   in   three   cases   were   laid   down   before  the  Corporate  Code.  As  such,  these  doctrines  were  embodied  in   the  Section  21  of  the  Corporation  Code.     B.  Nature  of  Doctrine   •

Issue:   Whether  or  not  respondent  Standard  Products  is  estopped  from   denying  the  corporate  existence  of  the  plaintiff  Asia  Banking  Corp.     Held:   YES.  The  defendant  having  recognized  the  corporate  existence  of   the  plaintiff  by  making  a  promissory  note  in  its  favor  and  making  partial   payments   on   the   same   is   therefore   estopped   to   deny   said   plaintiff's   corporate  existence.  It  is,  of  course,  also  estopped  from  denying  its  own  

third   person   is   involved   in   the   conflict,   there   is   no   corporation   by   estoppel.   A   failed   consolidation   therefore   cannot   result   in   a   consolidated  corporation  by  estoppel.  Lozano  v.  De  Los  Santos,   274  SCRA  452  (1997)   •

                                                                                                                1

 Villanueva,  C.  L.,  &  Villanueva-­‐Tiansay,  T.  S.  (2013).  Philippine  Corporate  Law.   (2013  ed.).  Manila,  Philippines:  Rex  Book  Store.  

  NOTES  BY  RACHELLE  ANNE  GUTIERREZ  (UPDATED  APRIL  3,  2014)  

Founded   on   principles   of   equity   and   designed   to   prevent   injustice   and   unfairness,   the   doctrine   applies   when   persons   assume  to  form  a  corporation  and  exercise  corporate  functions   and  enter  into  business  relations  with  third  persons.  Where  no  

The   doctrine   is   meant   to   hold   contractual   parties   to   their   representations   or   expectations   at   the   time   the   contract   was   perfected;   and   it   does   not   allow   parties   to   draw   on   a   basic  

CORPORATION  LAW  REVIEWER  (2013-­‐2014)  

 

 

     ATTY.  JOSE  MARIA  G.  HOFILEÑA    

  defect   —   lack   of   one   contracting   party   —   to   avoid   the   enforcement  of  the  contract.1   o A  party  cannot  challenge  the  personality  of  the  plaintiff   as   a   duly   organized   corporation   after   having   acknowledged   same   when   entering   into   the   contract   with   the   plaintiff   as   such   corporation   for   the  

o

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transportation   of   its   merchandise.   Ohta   Dev.   Co.   v.   Steamship  Pompey,  49  Phil.  117  (1926).2   A   person   who   accepts   employment   in   an   unincorporated  charitable  association  is  estopped  from   alleging   its   lack   of   juridical   personality.   Christian   Children’s  Fund  v.  NLRC,  174  SCRA  681  (1989).  

The   doctrine   has   evolved   in   Corporate   Law   primarily   as   a   rule   to   promote  the  integrity  of  commercial  contracts;  the  basic  role  of   the   doctrine   of   corporation   by   estoppel   is   to   promote   the   public's   underlying   faith   in   contracts   drawn   with   corporate   entities,  rather  than  to  promote  corporate  principles.3   o

One   who   deals   with   an   unincorporated   association   which  is  not  duly  incorporated  is  not  estopped  to  deny   its   corporate   existence   when   his   purpose   is   not   to   avoid   liability,   but   precisely   to   enforce   the   contract   against   the   action   for   the   purported   corporation.   Int’l   Express   Travel  v.  Court  of  Appeals,  343  SCRA  674  (2000).  

                                                                                                                1

 Villanueva,  C.  L.,  &  Villanueva-­‐Tiansay,  T.  S.  (2013).  Philippine  Corporate  Law.   (2013  ed.).  Manila,  Philippines:  Rex  Book  Store.   2  The  same  principle  applied  in  Compania  Agricole  de  Ultramar  v.  Reyes,  4  Phil.   1  (1911),  but  that  case  pertained  to  a  commercial  partnership  which  required   registration  in  the  registry  under  the  terms  of  the  Code  of  Commerce).   3  Villanueva,  C.  L.,  &  Villanueva-­‐Tiansay,  T.  S.  (2013).  Philippine  Corporate  Law.   (2013  ed.).  Manila,  Philippines:  Rex  Book  Store.  

•

Under   the   law   on   estoppel   including   that   under   Section   21   of   Corporation   Code,   those   acting   on   behalf   of   an   ostensible   corporation  and  those  benefited  by  it,  knowing  it  to  be  without   valid  existence,  are  held  liable  as  general  partners.  Lim  Tong  Lim   v.  Philippine  Fishing  Gear  Industries,  Inc.,  317  SCRA  728  (1999).  

  Lim  Tong  Lim  v.  Philippine  Fishing  Gear  Industries,  Inc.     Facts:   Chua   and   Yao,   on   behalf   of   Ocean   Quest   Fishing   Corp.,   entered   into   a   contract   for   the   purchase   of   fishing   nets   from   respondent-­‐PFGI.   They  claimed  that  they  were  engaged  in  a  business  with  petitioner-­‐Lim   who  was  not  a  signatory  of  the  agreement.  However,  the  buyers  failed   to   pay   for   their   purchases;   hence,   PFGI   filed   a   collection   suit   against   Chua,   Yao   and   Lim   with   a   prayer   for   a   writ   of   preliminary   attachment.   The  trial  court  ruled  that  a  partnership  existed  among  the  Lim,  Chua  and   Yao  and  held  them  jointly  liable  to  pay  PFGI  based  on  the  testimonies  of   witnesses   presented   and   the   Compromise   Agreement   executed   by   the   three.  Lim  claims  that  he  should  not  be  held  liable  for  the  purchase  price   since  he  was  not  part  of  the  negotiations  with  respondent-­‐PFGI.     Issue:   Whether   or   not   under   the   doctrine   of   corporation   by   estoppel,   liability  can  be  imputed  only  to  Chua  and  Yao  and  not  to  Lim.     Held:   NO.  Unquestionably,  petitioner  benefited  from  the  use  of  the  nets   found  inside  F/B  Lourdes,  the  boat  that  has  earlier  been  proven  to  be  an   asset   of   the   partnership.   Although   it   was   never   legally   formed   for   unknown  reasons,  this  fact  alone  does  not  preclude  the  liabilities  of  the   three   as   contracting   parties   in   representation   of   it.   Technically,   it   is   true   that   petitioner   did   not   directly   act   on   behalf   of   the   corporation.  

  NOTES  BY  RACHELLE  ANNE  GUTIERREZ  (UPDATED  APRIL  3,  2014)  

CORPORATION  LAW  REVIEWER  (2013-­‐2014)  

 

 

     ATTY.  JOSE  MARIA  G.  HOFILEÑA    

  thereof.   People  v.  Garcia,  271  SCRA  621  (1997);  People   v.  Pineda,  G.R.  No.  117010,  18  April  1997  (unpub).   2. On  the  other  hand,  when  no  fraud  or  misrepresentation  occurs,   although   it   does   not   make   persons   acting   for   the   purported   corporation   liable   personally,   it   would   prevent   both   sides   from   raising  the  non-­‐existence  of  the  corporation  as  a  means  to  avoid  

However,   having   reaped   the   benefits   of   the   contract   entered   into   by   persons   with   whom   he   previously   had   an   existing   relationship,   he   is   deemed  to  be  part  of  said  association  and  is  covered  by  the  scope  of  the   doctrine  of  corporation  by  estoppel.     Doctrine:  Clearly,  under  the  law  on  estoppel,  those  acting  on  behalf  of  a   corporation   and   those   benefited   by   it,   knowing   it   to   be   without   valid   existence,  are  held  liable  as  general  partners.  

enforcement  of  the  contract.2   o In  no-­‐fraud  or  no-­‐misrepresentation  cases,  the  estoppel   doctrine   under   Section   21   would   create   a   corporation   when   none   exists   to   uphold   the   validity   and   enforceability  of  the  contract   o Limited  Partner  liability  à  One  who  acts  for  a  purported   corporation  not  knowing  that  it  had  no  authority  to  do  

  C.  Two  Levels:  (i)  With  “Fraud;”  and  (ii)  Without  “Fraud”   1. When  fraud  or  misrepresentation  occurs  with  the  perfection  of   the  contract  with  a  purported  corporation,  then  section  makes   the  actor  personally  liable  on  the  contract  as  a  general  partner.1   o General   Partners   à   liable   not   only   with   what   he   purported   to   invest   in   the   venture,   but   he   could   be   held   liable   to   all   his   properties,   even   those   not   actually   invested  or  promised  to  be  invested  in  the  venture.   o When   the   incorporators   represent   themselves   to   be   officers   of   the   corporation   which   was   never   duly  

so   would   be   liable,   by   way   of   distinction,   only   as   a   limited   partner;   that   is,   he   would   be   liable   only   to   the   extent  of  his  investment  or  promised  investment  in  the   purported   corporate   venture.   In   a   no-­‐fraud   or   no-­‐ misrepresentation  case,  the  persons  acting  in  good  faith   for   the   purported   corporation   would   still   be   personally   liable,   but   only   to   the   extent   of   their   actual   or   promised  

registered   with   SEC,   and   engage   in   the   name   of   the   purported   corporation   in   illegal   recruitment,   they   are   estopped   from   claiming   that   they   are   not   liable   as   corporate  officers  under  Section  25  of  Corporation  Code   which  provides  that  all  persons  who  assume  to  act  as  a   corporation  knowing  it  to  be  without  authority  to  do  so   shall   be   liable   as   general   partners   for   all   the   debts,  

investment   in   the   corporate   venture.   This   logically   ties   in   with   the   limited   liability   feature   of   a   purported   corporation   given   legal   recognition   in   the   estoppel   doctrine.   3. When   there   was   clear   intention   to   form   a   partnership   venture   through   a   corporate   vehicle,   which   essentially   means   that   the   partners  had  intended  to  be  active  participants  in  the  business  

liabilities   and   damages   incurred   or   arising   as   a   result  

                                                                                                               

                                                                                                               

 Villanueva,  C.  L.,  &  Villanueva-­‐Tiansay,  T.  S.  (2013).  Philippine  Corporate  Law.   (2013  ed.).  Manila,  Philippines:  Rex  Book  Store.  

 Villanueva,  C.  L.,  &  Villanueva-­‐Tiansay,  T.  S.  (2013).  Philippine  Corporate  Law.   (2013  ed.).  Manila,  Philippines:  Rex  Book  Store.  

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  NOTES  BY  RACHELLE  ANNE  GUTIERREZ  (UPDATED  APRIL  3,  2014)  

CORPORATION  LAW  REVIEWER  (2013-­‐2014)  

 

 

     ATTY.  JOSE  MARIA  G.  HOFILEÑA    

  of   the   corporation,   then   even   those   who   did   not   directly   participate   in   the   contract   or   transaction   being   sued   upon,   but   benefited   therefrom   may   be   held   liable   as   general   partners   under  the  corporation  by  estoppel  doctrine.  On  the  other  hand,   when   the   investors   intended   only   to   invest   in   a   corporate   venture   with   no   intention   of   participating   in   its   corporate  

capital   stock,   property   and   other   assets   of   a   corporation   are   regarded   as   equity   in   trust   for   the   payment   of   corporate   creditors.   The   reason   is   that   creditors   of   a   corporation   are   preferred  over  the  stockholders  in  the  distribution  of  corporate   assets.   There   can   be   no   distribution   of   assets   among   the   stockholders   without   first   paying   corporate   creditors.   Hence,  

affairs,   and   the   corporation   was   not   formed,   no   partnership   relation  is  deemed  established  by  the  failure  to  incorporate,  and   such  investors  cannot  even  be  held  liable  for  the  contracts  and   transaction   sued   upon   even   when   such   contracts   and   transactions   were   entered   into   by   the   corporate   actors   in   the   name  of  an  ostensible  corporation.1  Lim   Tong   Lim   v.   Philippine   Fishing  Gear  Industries,  Inc.,  317  SCRA  728  (1999).  

any  disposition  of  corporate  funds  to  the  prejudice  of  creditors   is   null   and   void.   Boman   Environmental   Dev.   Corp.   v.   CA,   167   SCRA  540  (1988).  

  IV.  TRUST  FUND  DOCTRINE     A.  Commercial/Common  Law  Premise:  Equity  versus  Debts;  Preference   of  Creditors  over  Equity  Holders  (Art.  2236,  Civil  Code)    

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other   assets   of   the   corporation   are   regarded   as   equity   in   trust   for   the   payment   of   the   corporate   creditors.   Comm.   of   Internal   Revenue  v.  Court  of  Appeals,  301  SCRA  152  (1999).     B.  Nature  and  Coverage  of  the  Trust  Fund  Doctrine:   •

 

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• The  requirement  of  unrestricted  retained  earnings  to  cover  the   shares   is   based   on   the  trust   fund   doctrine   which   means   that   the  

                                                                                                                1

 Villanueva,  C.  L.,  &  Villanueva-­‐Tiansay,  T.  S.  (2013).  Philippine  Corporate  Law.   (2013  ed.).  Manila,  Philippines:  Rex  Book  Store.  

  NOTES  BY  RACHELLE  ANNE  GUTIERREZ  (UPDATED  APRIL  3,  2014)  

The  subscriptions  to  the  capital  stock  of  a  corporation  constitute   a  fund  to  which  the  creditors  have  a  right  to  look  for  satisfaction   of  their  claims  and  that  the  assignee  in  insolvency  can  maintain   an  action  upon  any  unpaid  stock  subscription  in  order  to  realize   assets  for  the  payment  of  its  debts.  Phil.  Trust  Co.  v.  Rivera,  44   Phil.  469  (1923).  

CIVIL  CODE   Article  2236.   The   debtor   is   liable   with   all   his   property,   present   and   future,   for   the   fulfillment   of   his   obligations,   subject   to   the   exemptions   provided   by   law.  (1911a)   •

Under   the   trust   fund   doctrine,   the   capital   stock,   property   and  

Atty.  Hofileña  à  a  shareholder  cannot  be  compelled  to   pay   more   than   what   they   subscribed   to   in   order   to   address  the  debts  of  the  corporation.  

Even   when   the   foreclosure   on   the   corporate   assets   was   wrongfully   done,   stockholders   have   no   standing   to   recover   for   themselves  moral  damages;  otherwise,  it  would  amount  to  the   appropriation   by,   and   the   distribution   to,   such   stockholders   of   part   of   the   corporation’s   assets   before   the   dissolution   of   the  

CORPORATION  LAW  REVIEWER  (2013-­‐2014)  

 

 

     ATTY.  JOSE  MARIA  G.  HOFILEÑA    

  corporation  and  the  liquidation  of  its  debts  and  liabilities.  APT   v.   Court  of  Appeals,  300  SCRA  579  (1998).   •

The  “trust  fund”  doctrine  considers  the  subscribed  capital  stock   as  a  trust  fund  for  the  payment  of  the  debts  of  the  corporation,   to   which   the   creditors   may   look   for   satisfaction.   Until   the   liquidation  of  the  corporation,  no  part  of  the  subscribed  capital   stock  may  be  turned  over  or  released  to  the  stockholder  (except   in   the   redemption   of   the   redeemable   shares)   without   violating   this  principle.  Thus  dividends  must  never  impair  the  subscribed   capital  stock;  subscription  commitments  cannot  be  condoned  or   remitted;  nor  can  the  corporation  buy  its  own  shares  using  the   subscribed  capital  as  the  consideration  therefore.  NTC   v.   Court   of  Appeals,  311  SCRA  508  (1999).   o Atty.  Hofileña  à  the  creditors  have  no  right  to  compel   the   company   to   sell   the   unsubscribed   shares   it   has   left   of  the  authorized  capital  stock.  

•

We   clarify   that   the   trust   fund   doctrine   is   not   limited   to   reaching   the   stockholders’   unpaid   subscriptions.   The   scope   of   the   doctrine   when   the   corporation   is   insolvent   encompasses   not   only   the   capital   stock,   but   also   other   property   and   assets   generally  regarded  in  equity  as  a  trust  fund  for  the  payment  of   corporate   debts.   All   assets   and   property   belonging   to   the   corporation   held   in   trust   for   the   benefit   of   creditors   that   were   distributed   or   in   the   possession   of   the   stockholders,   regardless   of   full   payment   of   their   subscriptions   may   be   reached   by   the   creditors   in   satisfaction   of   its   claim.   Halley  v.  Printwell,  Inc.  649   SCRA   116   (2011),   citing   VILLANUEVA,   PHILIPPINE   CORPORATE   LAW  (2001),  p.  558.  

 

Halley  v.  Printwell,  Inc.     Facts:  BMPI  (Business  Media  Philippines  Inc.)  is  a  corporation  under  the   control   of   its   stockholders,   including   Donnina   Halley.   In   the   course   of   its   business,   BMPI   commissioned   PRINTWELL   to   print   Philippines,   Inc.   (a   magazine   published   and   distributed   by   BMPI).   BMPI   placed   several   orders   amounting   to   P316,000   but   was   only   able   to   pay   P25,000.   PRINTWELL  sued  BMPI  for  collection  of  the  unpaid  balance  and  later  on   impleaded   BMPI’s   original   stockholders   and   incorporators   to   recover   on   their  unpaid  subscriptions.     Issue:   Whether   or   not   a   stockholder   (Halley   in   this   case)   who   was   in   active   management   of   the   business   of   the   corporation   and   still   has   unpaid   subscriptions   should   be   made   liable   for   the   debts   of   the   corporation  by  piercing  the  veil  of  corporate  fiction     Held:   YES.   Such   stockholder   should   be   made   liable   up   to   the   extent   of   her  unpaid  subscription.  It  was  found  that  at  the  time  the  obligation  was   incurred,  BMPI  was  under  the  control  of  its  stockholders  who  know  fully   well   that   the   corporation   was   not   in   a   position   to   pay   its   account   (thinly   capitalized).   And,   that   the   stockholders   personally   benefited   from   the   operations   of   the   corporation   even   though   they   never   paid   their   subscriptions  in  full.     Doctrine:   TRUST   FUND   DOCTRINE.   Under   which   corporate   debtors   might   look   to   the   unpaid   subscriptions   for   the   satisfaction   of   unpaid   corporate   debts.   Subscriptions   to   the   capital   of   a   corporation   constitutes   a   trust   fund   for   the   payment   of   the   creditors   (by   mere   analogy)   In   reality,   corporation   is   a   simple   debtor.   The   creditor   is  

  NOTES  BY  RACHELLE  ANNE  GUTIERREZ  (UPDATED  APRIL  3,  2014)  

CORPORATION  LAW  REVIEWER  (2013-­‐2014)  

 

 

     ATTY.  JOSE  MARIA  G.  HOFILEÑA    

  allowed   to   maintain   an   action   upon   any   unpaid   subscriptions   and   thereby  steps  into  the  shoes  of  the  corporation  for  the  satisfaction  of  its   debt.  The  trust  fund  doctrine  is  not  limited  to  reaching  the  stockholder’s   unpaid   subscriptions.   The   scope   of   the   doctrine   when   the   corporation   is   insolvent   encompasses   not   only   the   capital   stock   but   also   other  

o

property  and  assets  generally  regarded  in  equity  as  a  trust  fund  for  the   payment  of  corporate  debts.     C.  To  Purchase  Own  Shares  (Sections  8,  41,  43  and  122,  last  paragraph)     Section  8.  Redeemable  shares.   Redeemable  shares  may  be  issued  by  the  corporation  when  expressly   so   provided   in   the   articles   of   incorporation.   They   may   be   purchased   or   taken   up   by   the   corporation   upon   the   expiration   of   a   fixed   period,   regardless   of   the   existence   of   unrestricted   retained   earnings   in   the   books  of  the  corporation,  and  upon  such  other  terms  and  conditions  as   may   be   stated   in   the   articles   of   incorporation,   which   terms   and   conditions  must  also  be  stated  in  the  certificate  of  stock  representing   said  shares.     •

Unrestricted   Retained   Earnings   à   These   are   earnings   which   is   not  earmarked  for  any  particular  purpose.  

•

Dividends   come   from   the   unrestricted   retained   earnings.   Otherwise,  you  will  impair  the  capital  of  the  corporation.   o Stock   Dividend   à   instead   of   giving   you   cash   dividend   to   which   you   are   entitled   to,   you   will   be   given   a   stock   as  

Decision  to  issue  stock  dividends  is  made  by  2/3   of  the  stockholders  and  majority  of  the  Board.   Cash  Dividend  à  liquidated  cash   § Distribution   is   decided   upon   by   the   Board   of   Directors.   §

•

Redeemable   shares   need   to   be   classified   from   the   beginning   that  they  are  redeemable.   o This   is   the   exception   to   the   general   rule   that   you   need   URE  in  order  to  buy-­‐back  shares.  

  Section  41.  Power  to  acquire  own  shares.   A   stock   corporation   shall   have   the   power   to   purchase   or   acquire   its   own  shares  for  a  legitimate  corporate  purpose  or  purposes,  including   but  not  limited  to  the  following  cases:  Provided,  That  the  corporation   has  unrestricted  retained  earnings  in   its   books   to   cover  the   shares   to   be  purchased  or  acquired:     1.  To  eliminate  fractional  shares  arising  out  of  stock  dividends;     2.   To   collect   or   compromise   an   indebtedness   to   the   corporation,   arising   out   of   unpaid   subscription,   in   a   delinquency   sale,   and   to   purchase  delinquent  shares  sold  during  said  sale;  and     3.  To  pay  dissenting  or  withdrawing  stockholders  entitled  to  payment   for  their  shares  under  the  provisions  of  this  Code.  (n)    

equivalent.   It’s   like   reinvesting   your   dividends   to   the   corporation.  

•

The   URE   is   also   what   the   corporation   can   use   to   buy-­‐back   its   shares  from  its  stockholders.  

 

  NOTES  BY  RACHELLE  ANNE  GUTIERREZ  (UPDATED  APRIL  3,  2014)  

CORPORATION  LAW  REVIEWER  (2013-­‐2014)  

 

 

     ATTY.  JOSE  MARIA  G.  HOFILEÑA    

  Section  43.  Power  to  declare  dividends.     The   board   of   directors   of   a   stock   corporation   may   declare   dividends   out   of   the   unrestricted   retained   earnings   which   shall   be   payable   in   cash,   in   property,   or   in   stock   to   all   stockholders   on   the   basis   of   outstanding   stock   held   by   them:   Provided,   That   any   cash   dividends  

be   continued   as   a   body   corporate   for   three   (3)   years   after   the   time   when  it  would  have  been  so  dissolved,  for  the  purpose  of  prosecuting   and  defending  suits  by  or  against  it  and  enabling  it  to  settle  and  close   its   affairs,   to   dispose   of   and   convey   its   property   and   to   distribute   its   assets,  but  not  for  the  purpose  of  continuing  the  business  for  which  it  

due  on  delinquent  stock  shall  first  be  applied  to  the  unpaid  balance  on   the   subscription   plus   costs   and   expenses,   while   stock   dividends   shall   be   withheld   from   the   delinquent   stockholder   until   his   unpaid   subscription   is   fully   paid:   Provided,   further,   That   no   stock   dividend   shall  be  issued  without  the  approval  of  stockholders  representing  not   less  than  two-­‐thirds  (2/3)  of  the  outstanding  capital  stock  at  a  regular   or  special  meeting  duly  called  for  the  purpose.  (16a)  

was  established.     At  any  time  during  said  three  (3)  years,  the  corporation  is  authorized   and  empowered  to  convey  all  of  its  property  to  trustees  for  the  benefit   of   stockholders,   members,   creditors,   and   other   persons   in   interest.   From  and  after  any  such  conveyance  by  the  corporation  of  its  property   in   trust   for   the   benefit   of   its   stockholders,   members,   creditors   and  

  Stock   corporations   are   prohibited   from   retaining   surplus   profits   in   excess   of   one   hundred   (100%)   percent   of   their   paid-­‐in   capital   stock,   except:  (1)  when  justified  by  definite  corporate  expansion  projects  or   programs   approved   by   the   board   of   directors;   or   (2)   when   the   corporation   is   prohibited   under   any   loan   agreement   with   any   financial   institution   or   creditor,   whether   local   or   foreign,   from   declaring  

others   in   interest,   all   interest   which   the   corporation   had   in   the   property   terminates,   the   legal   interest   vests   in   the   trustees,   and   the   beneficial   interest   in   the   stockholders,   members,   creditors   or   other   persons  in  interest.     Upon   the   winding   up   of   the   corporate   affairs,   any   asset   distributable   to  any  creditor  or  stockholder  or  member  who  is  unknown  or  cannot  

dividends  without  its/his  consent,  and  such  consent  has  not  yet  been   secured;   or   (3)   when   it   can   be   clearly   shown   that   such   retention   is   necessary   under   special   circumstances   obtaining   in   the   corporation,   such   as   when   there   is   need   for   special   reserve   for   probable   contingencies.  (n)  

be   found   shall   be   escheated   to   the   city   or   municipality   where   such   assets  are  located.     Except   by   decrease   of   capital   stock   and   as   otherwise   allowed   by   this   Code,   no   corporation   shall   distribute   any   of   its   assets   or   property   except  upon  lawful  dissolution  and  after  payment  of  all  its  debts  and   liabilities.  (77a,  89a,  16a)  

  Section  122.  Corporate  liquidation.   Every   corporation   whose   charter   expires   by   its   own   limitation   or   is   annulled  by  forfeiture  or  otherwise,  or  whose  corporate  existence  for   other  purposes  is  terminated  in  any  other  manner,  shall  nevertheless  

 

  NOTES  BY  RACHELLE  ANNE  GUTIERREZ  (UPDATED  APRIL  3,  2014)  

•

Under   common   law,   there   were   originally   conflicting   views   on   whether   a   corporation   had   the   power   to   purchase   its   own  

CORPORATION  LAW  REVIEWER  (2013-­‐2014)  

 

 

     ATTY.  JOSE  MARIA  G.  HOFILEÑA    

  stocks.   Only   a   few   American   jurisdictions   adopted   the   strict   English   rule   forbidding   a   corporation   from   purchasing   its   own   shares.  In  some  American  states  where  the  English  rule  used  to   be   adopted,   statutes   granting   authority   to   purchase   out   of   surplus   funds   were   enacted,   while   in   others,   shares   might   be   purchased   even   out   of   capital   provided   the   rights   of   creditors   were   not   prejudiced.   The   reason   underlying   the   limitation   of   share   purchases   sprang   from   the   necessity   of   imposing   safeguards   against   the   depletion   by   a   corporation   of   its   assets   and   against   the   impairment   of   its   capital   needed   for   the   protection   of   creditors.   Turner   v.   Lorenzo   Shipping   Corp.,   636   SCRA  13  (2010).     D.  Rescission  of  Subscription  Agreement   •

The   violation   of   terms   embodied   in   a   subscription   agreement,   with  are  personal  commitments,  do  not  constitute  legal  ground   to  rescind  the  subscription  agreement  since  such  would  violate   the   Trust   Fund   Doctrine   and   the   procedures   for   the   valid   distribution   of   assets   and   property   under   the   Corporation   Code.   “In   the   instant   case,   the   rescission   of   the   Pre-­‐Subscription   Agreement   will   effectively   result   in   the   unauthorized   distribution   of   the   capital   assets   and   property   of   the   corporation,   thereby   violating   the   Trust   Fund   Doctrine   and   the   Corporation   Code,   since   the   rescission   of   a   subscription   agreement   is   not   one   of   the   instances   when   distribution   of   capital   assets   and   property   of   the   corporation   is   allowed.”   Distribution  of  corporate  assets  among  the  stockholders  cannot   even   be   resorted   to   achieve   “corporate   peace.”   Ong   Yong   v.   Tiu,  401  SCRA  1  (2003).  

  Ong  Yong  v.  Tiu     Facts:   The   Tiu   family   members   are   the   owners   of   First   Landlink   Asia   Development  Corporation  (FLADC).  One  of  the  corporation’s  projects  is   the   construction   of   Masagana   Citimall   in   Pasay   City.   However,   due   to   financial   difficulties   (they   were   indebted   to   PNB   for   P190   million),   the   Tius   feared   that   the   construction   would   not   be   finished.   So   to   prevent   the   foreclosure   of   the   mortgage   on   the   two   lots   where   the   mall   was   being   built,   they   invited   the   Ongs   to   invest   in   FLADC.   The   two   parties   entered   into   a   Presubscription   Agreement   whereby   each   of   them   would   hold  1,000,000  shares  each  and  be  entitled  to  nominate  certain  officers.   The   Tiu’s   contributed   a   building   and   two   lots,   while   the   Ongs   contributed  P100M.     Two   years   later,   the   Tui’s   filed   for   rescission   of   the   Presubscription   Agremement   because   the   Ongs   refused   to   issue   them   their   shares   of   stock   and   from   assuming   positions   of   VP   and   Treasurer   to   which   they   were   entitled   to   nominate.   The   Ongs   contended   that   they   could   not   issue   the   new   shares   to   the   Tius   because   the   latter   did   not   pay   the   capital   gains   tax   and   the   documentary   stamp   tax   of   the   lots.   And   because   of   this,   the   SEC   would   not   approve   the   valuation   of   the   property   contribution   of   the   Tius.   The   Court   of   Appeals   ordered   liquidation  of  FLADC  to  enforce  rescission  of  the  contract.     Issue:   Whether  or  not  the  liquidation  of  FLADC  violated  the  Trust  Fund   Doctrine     Held:   YES.   In   this   case,   the   rescission   would   certainly   be   a   violation   of  

  NOTES  BY  RACHELLE  ANNE  GUTIERREZ  (UPDATED  APRIL  3,  2014)  

CORPORATION  LAW  REVIEWER  (2013-­‐2014)     the   doctrine   and   also   of   the   Corporation   Code   because   the   rescission   would   result   in   the   unauthorized   distribution   of   the   assets   of   the   corporation.   Rescission   based   on   a   breach   in   the   terms   of   a   subscription   agreement   is   not   one   of   the   instances   when   distribution   of   a   corporation’s  assets  and  property  is  allowed  (Section  122).  It  would  not   only   be   unlawful   but   it   would   also   be   prejudicial   to   the   corporate   creditors   who   enjoy   absolute   priority   of   payment   over   any   individual   stockholder.     Doctrine:   This  doctrine  enunciates  that  subscriptions  to  the  capital  stock   of   a   corporation   constitute   a   fund   to   which   the   creditors   have   a   right   to   look   for   the   satisfaction   of   their   claims.   This   doctrine   is   the   underlying   principle   in   the   procedure   for   the   distribution   of   capital   assets,   embodied   in   the   Corporation   Code,   which   allows   the   distribution   of   corporate  capital  only  in  three  instances:  (1)  amendment  of  the  Articles   of  Incorporation  to  reduce  the  authorized  capital  stock,  (2)  purchase  of   redeemable   shares   by   the   corporation,   regardless   of   the   existence   of   unrestricted   retained   earnings,   and   (3)   dissolution   and   eventual   liquidation  of  the  corporation.     NOTE:   Atty.   Hofileña   à   To   release   a   person   from   his   obligation   to   pay   his   subscribed  shares  is  offensive  to  the  Trust  Fund  Doctrine.   •

Trust   Fund   Doctrine   applies   to   all   properties   of   the   company,   and  not  limited  to  simply  the  unpaid  subscriptions.  

•

A   company   may   do   what   it   wills   with   its   properties,   but   creditors  are  protected.  

 

  NOTES  BY  RACHELLE  ANNE  GUTIERREZ  (UPDATED  APRIL  3,  2014)  

 

 

     ATTY.  JOSE  MARIA  G.  HOFILEÑA