TITLE XV: DISSOLUTION AND LIQUIDATION Gelano v. CA (1981) Digest Doctrine: when a corporation has a pending action and w/c cannot be terminated w/in the 3 yr period = the counsel who prosecuted and defended the interest of a corporation in the instant case and who appeared in behalf of the corporation may be CONSIERED A TRUSTEE of the corporation at least with respect to the matter in litigation only. Facts:

- Insular Sawmill is a corporation organized with a corporate term of 50 yrs. It is engage in general lumber and sawmill business.

- To carry out its business, Insular leases the paraphernal property of Guillermina Gelano (wife).

o Husband Carlos Gelano received from the corporation cash advances on account of rentals.

§ Carlos was only able to partially pay despite the demands of the corporation.

§ Wife also refused to pay claiming that the amount was for the personal account of the husband and that she had no knowledge or consent re: the debt. It also did not benefit the family.

- On various occasions, husband and wife also made credit purchases of lumber materials from Insular.

- Moreover, in order to accommodate/help the petitioners renew previous loans, Insular executed joint promissory notes with Carlos.

o Wife also rejected this saying she had no knowledge. - Corporation filed complaint via Atty. Lee. - Meanwhile Insular amended its AOI to shorten it term of existence.

o It was filed and approved by SEC but the trial court was not notified of the amendment shortening the corporate existence.

- 4 years after dissolution, the trial court rendered a decision in favor of Insular ordering Mr. & Mrs. Gelano to pay the contested amounts.

- Both parties appealed to CA; which modified the judgment raising the amount from 4k to 8k.

- The Gelanos came to know of the dissolution of Insular and filed a motion to dismiss on the ground that:

o The case was prosecuted after the dissolution of the corporation. A defunct corporation cannot maintain any suit without complying with the requirements of winding up and the assignment of its property right within the required period.

Issue: - W/N the corporation whose life had ceased because of the expiration

of its term could still continue prosecuting and defending suits after its dissolution and beyond the 3 year period WITHOUT having taken steps to transfer assets to a trustee or assignee?

Held:

- Sec 77 of Corp Code provides that the corporation shall continue as a body corporate for 3 yrs after it has been dissolved for the purpose of prosecuting and defending suits against.

o At any time during the 3 yrs, the corp can convey all of its properties to trustees for the benefit of the members, stockholders and creditors and others interested.

§ There is no time limit for the trustee to complete liquidation but the CONVEYANCE to the trustees must be made w/in the 3yr period.

§ Trustees to whom the corporate assets have been conveyed pursuant to the authority of Sec 78 may sue and be sued in all matters connected to liquidation.

- General Rule: after the expiration of said period, the corp ceased to exist for all purposes and it can no longer sue or be sued.

o Exception: when a corporation has a pending action and w/c cannot be terminated w/in the 3 yr period = the counsel who prosecuted and defended the interest of a corporation in the instant case and who appeared in behalf of the corporation may be CONSIERED A TRUSTEE of the corporation at least with respect to the matter in litigation only.

§ There is substantial compliance with Sec 78 of the Corp Code and Insular can still continue prosecuting the case even beyond the 3 yr period as represented by its counsel.

- The word trustee must be understood in its general concept: w/c include the counsel to whom was entrusted with the prosecution in present case.

- Insular ceased as a corp on Dec 1960, but the case was instituted in May 1959 when the corp was still alive.

o Any litigation filed by or against it instituted w/in the 3 yr period but could not be terminated must necessarily prolong the said period until final termination of the suit.

No vested rights to corporate fiction - Juridical persons w/n incorporated may come to an end for a variety

of reasons. o Fulfillment of abandonment of the business purpose. o Termination of corporate life o Dissolution of the corporation

§ Winding up of its operations § Liquidation of assets § Payment of its obligation and distribution of residual

assets to stockholders - Dissolution of juridical entity doesn't by itself imply the diminution or

extinction of rights demandable against a juridical entity. - When assets of a dissolved entity are taken over by another entity =

successor entity must be held liable for the obligations of the dissolved entity (to the extent of the fair value of assets actually taken over)

Nature of dissolution

- Dissolution signifies the extinguishment of a corporation’s franchise and termination of its corporation existence for business purpose.

- Dissolution legally affects the nature and capacity of the “juridical person” of the corporate being.

o The mere fact the corp ceased to do business does not necessarily constitute dissolution or diminution of the legal power and capacity of the corporation.

- Distinction between dissolution de jure and de facto o De jure

§ Adjudged by or determined by administrative or judicial sentence.

§ Brought by act of sovereign § Results from the expiration of charter period of

corporate life. o De Facto

§ By reason of insolvency, cessation of business, suspension of all its operation

§ Goes into liquidation § Still retains primary franchise § Dissolution only of the “business enterprise” will

leaving the juridical entity intact. Methods of dissolution

- Corps are dissolved either voluntarily o 3 modes of voluntary dissolution

§ where no creditors are affected = by administrative application for dissolution filed w/SEC

§ when creditors are affected = by formal petition for dissolution w/ SEC, due notice and hearing are conducted.

§ Shortening of corp term = by amendment of AOI * another voluntary dissolution = allowing the copr term as provided by AOI. Vesegas v. CA

- Board resolution to dissolve the corp doesn't operate to dissolve the juridical entity.

- Juridical entity of a corporation is NEVER considered a property right of the corp since It is the franchise that is w/in the control of the state.

o The juridical entity cant be legally affected except under the terms provided by the state or by official proceeding mandated by law.

Voluntary dissolution where no creditors are affected

- trust fund doctrine would not be adversely affected - only SEC application for dissolution is required. - The process is equivalent to the application for the amendment of

AOI except that in addition, there must be publication of the notice of dissolution.

Sec 118 reqs for dissolution

- majority vote of the Board of Directors/Trustees - sending of notice to the stockholders 30 days prior meeting - publication f notice of meeting for 3 consecutive weeks - ratification of 2/3 OCS or 2/3 members - filing w/ SEC of a copy of the resolution authorizing dissolution,

countersigned by Corp Secretary - issuance by SEC of certificate of dissolution

• SEC will not deny an application for dissolution when there are no

creditors prejudiced because of: o Constitution prohibition against involuntary servitude o Right to form association and right to refuse to continue an

assoc. • Since no 3rd parties are involved, state through SEC will grant the

application for dissolution. Voluntary dissolution where creditors are affected

- file formal petition for dissolution w/ SEC - proceedings are quasi-judicial in nature

o conducted to ensure that rights of creditors are fully protected.

- Sec is NOT mandated to dissolve the corp

o Creditors may still wish to rehabilitate the operations of the corp.

Sec 119 procedure

- petition for dissolution shall be filed with SEC signed by majority of the Board, verified by Pres or Secretary setting forth:

o claims and demands against corp o affirmative vote of 2/3 OCS or 2/3 members at a meeting

called for a purpose o copy of order shall be published o upon 5 days notice, given after the date on w/c the right to

files objection is fixed in the order has expired = the SEC shall proceed to hear the petition and try any issue made by objections filed.

o If no such objection is sufficient, and the material allegations of the petition are true = it shall render judgment dissolving the corporation and directing such disposition of its assets. Receiver may also be appointed to collect assets and pay the debts of the corp.

Dissolution by Shortening the Cop Term

- effected by amending the AOI - notice of dissolution of the corporation by shortening of the corporate

term must be published in newspaper of general circulation for 3 wks - list of corporate creditors with their consent to the shortening must

also be filed - accompanied with the submission to SEC of the ff:

o undertaking under oath that majority stockholders and principal offices shall personally answer for any outstanding obligations of the corp.

o latest audited financial statements of the corporation w/c must no be earlier than the date of the meeting w/c approved the amendment of the AOI.

o BIR clearance on tax liabilities of the corp. - Upon approval of the amended AOI or the expiration of the

shortened term = the corporation is deemed dissolved without further proceedings

- If the shortened term expires before the SEC approval, the corp will not be automatically dissolved but only upon approval of the SEC of such amendment.

- If the SEC gives approval after the shortened term expires, then dissolution only take effect upon stipulated shortened term.

Dissolution by expiration of the corporate term

- when the corporate life stated in the AOI is allowed to expire w/o extension, the corp is deemed dissolved by such expiration without further action.

- The corp cannot extend its life by amending the AOI w/in the 3 yr period of liquidation when its original term has already expired.

- The 3yr period for liquidation is not for continuing the business, it is limited to liquidation

o The extension of corporate life IS DEEMED to constitute NEW BUSINESS and cannot be validly pursued during liquidation stage.

- Sec 11: the corporate term as originally stated in the AOI may be extended in any SINGLE instance by amendment of AOI. It cannot be made earlier than 5 years prior to the original expiry date.

- The privilege of amendment of the corp term is purely statutory - Extension must be taken during the life of the corporation and

BEFORE the expiration of its term. - The corp is IPSO FACTO dissolved as soon as the term expires.

Obtaining tax clearance

- w/in 30 days after the adoption of a resolution or plan for dissolution/liquidation or when corps are notified of involuntary dissolution by the SEC = it is necessary to file return w/ BIR.

- When corp undergoes dissolution it is required to submit a tax return on income earned form the beginning of the year up to the date of dissolution and also to pay the taxes due.

- SEC is required to furnish CIR a copy of the order or involuntary dissolution or suspension of the primary franchise

- SEC shall issue the final order of dissolution only after the certificate of tax clearance has been submitted by the dissolving corp.

o In the case of involuntary dissolution, SEC may still proceed with the dissolution If 30 days after the receipt of the suspension order no tax clearance has been issued.

Involuntary Dissolution

- dissolved by the SEC upon filling of a verified complaint and after notice and hearing.

- Grounds: o Corp doesn't formally organize or commence transaction of

its business w/in 2 yrs from the date of incorporation o Corp becomes continuously inoperative for at least 5 yrs o Fails to adopt bylaws o Offends a provision of law for its creation or renewal o Committed or omitted an act w/c amounts to surrender of

corporate right, privileges, franchise

o Misuse of corporate right/privilege; use of franchise in contravention of law; commission of ultra vires or illegal acts.

o Based on the finding of Management Committee or SEC continuance of business of the corp would not be feasible or profitable

o Corp is guilty of fraud in procuring certificate of registration o Guilty of serious misrepresentation o Refusal to comply or defiance of SEC order o Failure to file required reports in appropriate forms.

When corporation deemed organized

- election of officers, subscription and payment of capital stock, adoption of by laws and other steps necessary to endow legal entity the capacity to transact legitimate business

o organization = systemization of internal managerial affairs and organs of the corp.

- SEC Rules: corporation deemed formally organized when: o Adoption of bylaws after filing and approval of SEC o Election of Board/Trustees o Establishment of principal office o Providing for the subscription and payment of the capital

stock and taking other steps to endow legal entity with capacity to transact.

When corporation deemed to have commenced business

- when it has performed preparatory acts geared towards fulfillment of purposes established in charter (not limited to the following):

o entering into contracts or negotiations for lease/sale of properties to be used as business site

o making plans for and the construction of the factory o taking steps to expedite the construction of the company

working equipment. Procedure for Involuntary Dissolution

- Under old rule: o Soll Gen or public prosecutor when directed by Pres or when

upon complaint or if he has good reason to believe that dissolution is warranted = he may pursue quo warranto proceeding against the corp.

o RTC special commercial courts do not provide for rules governing dissolution because quasi judicial jurisdiction of the SEC in case of involuntary dissolution is provided under Sec 121 of Corp Code.

- Under PD 902-A o Management committee can be created

o No automatic dissolution of a corporation after its incorporation has been approved by the SEC. it shall continue to exist as a juridical entity notwithstanding its non-operational status until certificate of registration is formally revoked by SEC after due notice and hearing.

Right of Minority stockholders to demand dissolution

- minority stockholders don't have common law rights or statutory right to demand dissolution of corporation

o they invest in the copr aware that the corporate affairs will be subject to the control of the majority.

- General Rule: minority stockholders cannot sue and demand for dissolution

o Except: they are unable to obtain redress and protection of their rights w/in the corporation.

§ Cases when Government doesn't want to intervene because the complaint is strictly intra-corporate

§ Private interest ruling finds statutory support from title XII on close corp w/c provides that in cases of deadlock or illegal/ fraudulent acts = stockholder may seek dissolution of corp.

Jurisprudential attitude towards involuntary dissolution

- dissolution is a serious remedy granted by the courts only in EXTREME cases and only to ensure that prejudice to the PUBLIC is avoided.

- Even when the prejudice is public in nature, the remedy is to enjoin or correct the mistake and only when it cannot be remedied anymore that dissolution should be imposed.

- Dissolution was imposed on banking corp because it risked the savings of numerous people. (Public interest)

Legal Effects of dissolution

- Corp which reached dissolution is no longer qualified to receive a secondary franchise

- Corp cant extend itself by amendment after expiration of orig term. - Board resolution to dissolve corp doesn't operated to dissolve the

juridical entity. For dissolution to be effective the requirements mandated by Corp Code should be strictly complied with.

- Dissolution of juridical entity doesn't by itself cause the extinction or diminution of rights and liabilities since it is allowed to continue as a juridical entity for 3 yrs to wind up.

Nature of Liquidation - settlement of affairs of Corp

o adjusting debt claims o distribution of assets o discharging liabilities o dividing surplus or loss

- in rem proceeding = all other interested persons are bound - dissolution ALWAYS precedes liquidation

o in accordance with the trust fund doctrine o except by decrease of capital stock, no corp shall distributed

any of its assets or property except upon lawful dissolution and after payment of debts and liabilities.

Methods of Liquidation

- old method: o old corp code didn't contain provision that allowed action

after 3yr period of liquidation = all actions for or against the corp is abated after the expiration

- present rule: o even after 3yr period, creditors can still pursue their claims

against corp assets against officers or stockholders who have taken over the corporation

o although general rule is corp officer is not liable to corporate obligations = when he seizes corporate properties and applies to his own obligation, he takes advantage of his position and must be liable.

o There is nothing in the Corp Law that bars an action for the recovery of debts of the corporation against the liquidator after the lapse of the 3yr period.

- 3 recognized methods o liquidation through Board/Trustees o through a trustee o through a receiver

Liquidation via Board/Trustee

- Sec 122 ( then sec 77 and 78 of the Old Corp Code) o Normal method is for directors/executive officers to have

charge in the winding up operations § Alternative = assigning the property to the trustees

for the benefit of creditors and shareholders § Appointment of receiver is w/in discretion of the

court.

Liquidation via Trustee - Sec 122 - during the 3 years of liquidation the corp is authorized to convey all

its property to trustees for the benefit of stockholder, members, creditors and other persons w/ interest.

o When this happens, legal interest of corporation in the property terminates and is vested in the trustees. The beneficial interest is with the stockholder, creditors, members and other persons w/ interest.

o Even after the lapse of 3 yr period = power of the Board doesn't terminate to continue liquidation process because the Board of Liquidators became the trustees.

§ There is no time limit as to the existence of the board and its functions of closing the affairs of the corporation.

- Term trustee should be understood in its general concept = to include counsel entrusted w/ pending case.

- If a pending case against a dissolved corporation cannot be terminated w/in the 3 yr period, any person, agency or entity appointed by la to supervise the closing of its affairs is considered a trustee who cannot be made jointly and severally liable.

Liquidation via receiver

- receiver has been appointed by the courts - the appointment of a receiver by the court to wind up the affairs of

the corp upon petition for voluntary dissolution does not empower the court to hear and pass claims of the creditors.

o All claims must be presented for allowance to the receiver or trustee or other proper persons during the winding up proceedings

- A receiver in liquidation stands on a different legal basis from a trustee in liquidation.

o Trusteeship is contractual and governed by law on trust. It is generally centered upon property such that trustee assume naked/legal title

§ it is a relationship that could be created by the Board without need of judicial authorization.

§ Trustee in liquidation is not appointed by the court o A receivership is created by means of judicial or quasi

judicial appointment of the receiver. § The receiver is actually an officer of the court § SEC is empowered to create the management

committee or rehabilitation receiver which manages/facilitates or takes custody of the corp assets.

§ Also the 3 yr period does not apply because the corporation is substituted by the receiver who may sue or be sued.

- When the liquidation is pursued either by the trustee or receiver, the corporate personality is not important.

- The trustee or receiver may lawfully proceed with liquidation even if the corp no longer exists because he has legal title to the assets.

Disposition of Pending claims against dissolved corporation

- 3 year period for abatement to set in has been discarded by recent SC rulings.

o Court held that dissolution or even the expiration of the 3 year liquidation period should not be a bar to the corporations enforcement of its rights as a corporation.