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CORPORATION

LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

CORPORATE DISSOLUTION AND LIQUIDATION



I. No Vested Rights to Corporate Fiction:

No person who has a claim against a juridical entity can claim


any constitutional right to the perpetual existence of such
entity. Gonzales v. SRA, 174 SCRA 377 (1989).

However, the Court emphasized that the termination of the life

still retaining its primary franchise to be a corporation.


This is actually a dissolution only of the "business
enterprise," while leaving intact the juridical entity.
2. Obtaining of Tax Clearance

of a juridical entity does not by itself imply the diminution or


extinction of rights demandable against a juridical entity.
Consequently, when the assets of a dissolved entity are taken
over by another entity, the successor entity must be held liable


A. Nature of Dissolution2
Dissolution of a corporation signifies the extinguishment of its

franchise and the termination of its corporate existence for


business purpose. The mere fact that the corporation has
ceased to do business does not necessarily constitute a
dissolution, if it is still solvent and has not gone into liquidation.
1. Dissolution: de jure v. de facto
o

A de jure dissolution is one adjudged and determined by


administrative or judicial sentence, or brought about by

Gonzales v. Sugar Regulatory Administration, 174 SCRA 377 (1989).


2
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.
(2013 ed.). Manila, Philippines: Rex Book Store.

Under Section 2 of BIR-SEC Regulations No. 1, whenever a


corporation undergoes dissolution, whether voluntarily or
involuntarily, a tax clearance must be obtained from the Bureau
of Internal Revenue, by filing with the Bureau an income tax
returns covering the income earned by them from the beginning
of the taxable year to the date of dissolution. The SEC is
required to furnish the Commissioner of Internal Revenue a

for the obligations of the dissolved entity pertaining to the


assets so assumed, to the extent of the fair value of assets
actually taken over.1

an act of the sovereign power, or which results from the


expiration of the charter period of corporate life.
A de facto dissolution is one which takes place in
substance and in fact when the corporation by reason
of insolvency, cessation of business, or suspension of all
its operations, as the case may be, goes into liquidation,

copy of any order of involuntary dissolution or suspension of


the primary franchise or certificate of registration of a
corporation.3

B. Methods of Dissolution
1. Voluntary

A corporation whose corporate powers cease and are deemed dissolved


because it was not formally organized and did not commence the transaction of
its business within two (2) years from its incorporation need not secure a
certificate of tax clearance. BIR Ruling No. 242, 10 November 1986.


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

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


a. Where no creditors are affected by the dissolution, by
an administrative application for dissolution filed with
the SEC;1
b. Where creditors are affected by dissolution, by a formal
petition for dissolution filed with the SEC, with due
notice, and hearing to be duly conducted;2 and
c. Shortening of corporate term by the amendment of the
articles of incorporation.3
2. Involuntary

II. Voluntary Dissolution (Section 117)

and object of the meeting for three (3) consecutive weeks in a


newspaper published in the place where the principal office of said
corporation is located; and if no newspaper is published in such place,
then in a newspaper of general circulation in the Philippines, after
sending such notice to each stockholder or member either by
registered mail or by personal delivery at least thirty (30) days prior to
said meeting. A copy of the resolution authorizing the dissolution shall
be certified by a majority of the board of directors or trustees and
countersigned by the secretary of the corporation. The Securities and
Exchange Commission shall thereupon issue the certificate of
dissolution. (62a)

Section 117. Methods of dissolution.


A corporation formed or organized under the provisions of this Code
may be dissolved voluntarily or involuntarily. (n)


A. No Creditors Affected (Section 118)

must also be complied with.4

Section 118. Voluntary dissolution where no creditors are affected.


If dissolution of a corporation does not prejudice the rights of any
creditor having a claim against it, the dissolution may be effected by
majority vote of the board of directors or trustees, and by a resolution
duly adopted by the affirmative vote of the stockholders owning at
least two-thirds (2/3) of the outstanding capital stock or of at least
two-thirds (2/3) of the members of a meeting to be held upon call of
the directors or trustees after publication of the notice of time, place

Section 118, Corporation Code.


2
Sec. 119, Corporation Code.
3
Sec. 120, Corporation Code.

When no creditors are involved, only a SEC application for


dissolution is required. The process is equivalent to the
application for the amendment of the articles of incorporation,
except that in addition, publication of the notice of dissolution
The SEC will not deny an application for dissolution when there
are no creditors involved because of the constitutional
prohibition against involuntary servitude or the constitutional
guarantee of association, and the right to refuse to continue an
association. Since other than the stockholders or members of
the corporation, no third parties are involved, the State,
through the SEC, will generally grant the request for the
dissolution of the corporation.5

Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.


(2013 ed.). Manila, Philippines: Rex Book Store.
5
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)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA



B. There Are Creditors Affected (Sections 119 and 122).

Section 119. Voluntary dissolution where creditors are affected.
Where the dissolution of a corporation may prejudice the rights of any

Upon five (5) day's notice, given after the date on which the right to
file objections as fixed in the order has expired, the Commission shall
proceed to hear the petition and try any issue made by the objections
filed; and if no such objection is sufficient, and the material allegations
of the petition are true, it shall render judgment dissolving the

creditor, the petition for dissolution shall be filed with the Securities
and Exchange Commission. The petition shall be signed by a majority
of its board of directors or trustees or other officers having the
management of its affairs, verified by its president or secretary or one
of its directors or trustees, and shall set forth all claims and demands
against it, and that its dissolution was resolved upon by the
affirmative vote of the stockholders representing at least two-thirds

corporation and directing such disposition of its assets as justice


requires, and may appoint a receiver to collect such assets and pay the
debts of the corporation. (Rule 104, RCa)

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

(2/3) of the outstanding capital stock or by at least two-thirds (2/3) of


the members at a meeting of its stockholders or members called for
that purpose.

If the petition is sufficient in form and substance, the Commission
shall, by an order reciting the purpose of the petition, fix a date on or
before which objections thereto may be filed by any person, which

other purposes is terminated in any other manner, shall nevertheless


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
was established.

date shall not be less than thirty (30) days nor more than sixty (60)
days after the entry of the order. Before such date, a copy of the order
shall be published at least once a week for three (3) consecutive weeks
in a newspaper of general circulation published in the municipality or
city where the principal office of the corporation is situated, or if there
be no such newspaper, then in a newspaper of general circulation in
the Philippines, and a similar copy shall be posted for three (3)
consecutive weeks in three (3) public places in such municipality or


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
others in interest, all interest which the corporation had in the
property terminates, the legal interest vests in the trustees, and the

city.

beneficial interest in the stockholders, members, creditors or other


persons in interest.


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

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA



Upon the winding up of the corporate affairs, any asset distributable
to any creditor or stockholder or member who is unknown or cannot
be found shall be escheated to the city or municipality where such
assets are located.

Section 120. Dissolution by shortening corporate term.


A voluntary dissolution may be effected by amending the articles of
incorporation to shorten the corporate term pursuant to the
provisions of this Code. A copy of the amended articles of
incorporation shall be submitted to the Securities and Exchange


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)

Commission in accordance with this Code. Upon approval of the


amended articles of incorporation of the expiration of the shortened
term, as the case may be, the corporation shall be deemed dissolved
without any further proceedings, subject to the provisions of this Code
on liquidation. (n)

If there are creditors involved, there is a need to file a formal

petition for dissolution with the SEC. The proceedings are quasi-
judicial in nature and conducted to ensure that the rights of the
creditors are fully protected. In such proceedings, the SEC is not
mandated to dissolve the corporation, especially when it would

required to submit tax return on the income earned by it from


the beginning of the year up to the date of its dissolution and
pay the corresponding tax due. Bank of P.I. v. Court of Appeals,
363 SCRA 840 (2001).

be detrimental to the interests of the creditors, who may wish


to rehabilitate the operations of the corporation to ensure that
it would be able to pay-off all of its debts. This authority of the
SEC is also provided for in Presidential Decree 902-A.1

Where a corporation is contemplating dissolving itself, it is

When a corporation is contemplating dissolution, it must submit

Under its internal rules, the SEC would require the following:2
a. Notice of the dissolution of the corporation by
shortening of the corporate term be published in a
newspaper of general circulation for three (3)
consecutive weeks;
b. Listing of the corporate creditors, with their consent to
the shortening of the corporate term;
c. Submission by the majority stockholders or principal
officers of the corporation of an undertaking under oath
that they shall personally answer for any outstanding
obligations of the corporation; and

tax return on the income earned by it from the beginning of the


year up to the date of its dissolution and pay the corresponding
tax due. BPI v. Court of Appeals, 363 SCRA 840 (2001).

C. Shortening of Corporate Term (Section 120)

Please see discussions on corporate rehabilitation in Chapter 14, Suspension


of Payments, Rehabilitation and Insolvency Proceedings.

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)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


d. The latest audited financial statements of the
corporation which must not be earlier than the date of
the stockholders' or membership meeting approving the
amendment to the articles of incorporation, and a BIR
clearance on the tax liabilities of the corporation. 1

III. Involuntary Dissolution (Section 121; Section 6(l), P.D. 902-A;
Section 2, Rule 66, Rules of Court)

Section 121. Involuntary dissolution.
A corporation may be dissolved by the Securities and Exchange
Commission upon filing of a verified complaint and after proper notice
and hearing on the grounds provided by existing laws, rules and
regulations. (n)

PRESIDENTIAL DECREE NO. 902-A
Section 6.
x x x
(i) To suspend, or revoke, after proper notice and hearing, the
franchise or certificate of registration of corporations, partnerships or
associations, upon any of the grounds provided by law, including the
following:

1. Fraud in procuring its certificate of registration;


3. Refusal to comply or defiance of any lawful order of the Commission
restraining commission of acts which would amount to a grave
violation of its franchise;

4. Continuous inoperation for a period of at least five (5) years;

5. Failure to file by-laws within the required period;

6. Failure to file required reports in appropriate forms as determined
by the Commission within the prescribed period;
x x x

CIVIL CODE
Section 2. When Solicitor General or public prosecutor must
commence action.
The Solicitor General or a public prosecutor, when directed by the
President of the Philippines, or when upon complaint or otherwise he
has good reason to believe that any case specified in the preceding
section can be established by proof, must commence such action.

A. Quo Warranto

2. Serious misrepresentation as to what the corporation can do or is


doing to the great prejudice of or damage to the general public;

SEC Opinion, 5 July 1979, the XIII SEC QUARTERLY BULLETIN 3 (No. 4, Oct. 1979).


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

Dissolution is a serious remedy granted by the courts only in


extreme cases and only to ensure that there is an avoidance of
prejudice to the public. Even when the prejudice were 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. Republic v. Bisaya Land Transportation Co., 81 SCRA
9 (1978). Government v. El Hogar Filipino, 50 Phil. 399 (1927).

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

merely to the systematization and orderly arrangement of the


internal and managerial affairs and organs of the corporation.
Benguet Consolidated Mining Co. v. Pineda, 98 Phil. 711.

Thus, in Republic v. Security Credit & Acceptance Corp., 19


SCRA 58 (1967), dissolution was imposed on a corporation that
was engaging in banking activities without a license from the
Central Bank, and risking the savings of the public.


B. Non-user of Charter and Continuous In-Operation (Section 22)

Section 22. Effects on non-use of corporate charter and continuous
inoperation of a corporation.

dissolve a corporation but is now considered only a ground for


such dissolution. Chung Ka Bio v. IAC, 163 SCRA 534 (1988).

C. Expiration of Term

If a corporation does not formally organize and commence the


transaction of its business or the construction of its works within two
(2) years from the date of its incorporation, its corporate powers cease
and the corporation shall be deemed dissolved. However, if a
corporation has commenced the transaction of its business but
subsequently becomes continuously inoperative for a period of at
least five (5) years, the same shall be a ground for the suspension or

ed.), p. 841.

legal entity with the capacity to transact the legitimate business


for which the corporation was created. Organization relates


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

A corporation cannot extend its life by amendment of its articles


of incorporation to be effected during the three (3) year
statutory period for liquidation when its original term had
already expired. The three (3) year statutory period for
corporate liquidation is not for the purpose of continuing the
business for which it was established, but strictly limited to
liquidation. The extension of corporate life of a corporation is
deemed to constitute new business and cannot be validly
pursued during the liquidation stage. Alhambra Cigar and
Cigarette Manufacturing Corp. v. Securities and Exchange


Organize involves the election of officers, providing for the
subscription and payment of the capital stock, the adoption of
by-laws, and such other steps as are necessary to endow the

Where the corporate life of a corporation as stated in its articles


of incorporation expired, without a valid extension having been
effected, it was deemed dissolved by such expiration without
need of further action on the part of the corporation. Majority
Stockholders of Ruby Industrial Corp. v. Lim, 650 SCRA 461
(2011), citing VILLANUEVA, PHILIPPINE CORPORATE LAW (2010

revocation of its corporate franchise or certificate of incorporation.



This provision shall not apply if the failure to organize, commence the
transaction of its businesses or the construction of its works, or to
continuously operate is due to causes beyond the control of the
corporation as may be determined by the Securities and Exchange
Commission.

The failure to file the by-laws does not automatically operate to

Commission 24 SCRA 269 (1968).

Under Section 11 of the Corporation Code, the corporate term


as originally stated in the articles of incorporation may be
extended in any single instance by an amendment of the articles

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


of incorporation, but cannot be made earlier than five (5) years
prior to the original or subsequent expiry date.1
o The privilege of extension of corporate term is purely
statutory and that all statutory conditions precedent
must be complied with in order that the extension may
be effectuated.


D. Demand of Minority Stockholders for Dissolution.

brought in a private suit filed by stockholders or officers


on cases within the jurisdiction of the SEC.3

When it comes to close or family corporations, there was


recognition under the Corporation Law of an equitable right to
demand dissolution of the corporation. Financing Corp. of the
Phil. v. Teodoro, 93 Phil. 404 (1953).
o The Court said that although as a rule, minority
stockholders of a corporation may not ask for its
dissolution in a private suit, and that such action should
be brought by the Government through its legal officer
in a quo warranto case, at their instance and request,

Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.


(2013 ed.). Manila, Philippines: Rex Book Store.

Corporate dissolution due to mismanagement of majority


stockholder is too drastic a remedy, especially when the
situation can be remedied such as giving minority stockholders a
veto power to any decision. Chase v. Buencamino, 136 SCRA
365 (1985).


IV. Legal Effects of Dissolution

A corporations board of directors is not rendered funtus officio


by its dissolution, since Section 122 of the Corporation Code
prohibits a dissolved corporation from continuing its business,
but allows it to continue with a limited personality in order to
settle and close it affairs, including its complete liquidation.
Necessarily there must be a board that will continue acting for

there might be exceptional cases wherein the


intervention of the State, for one reason or another,
cannot be obtained, as when the State is not interested
because the complaint is strictly a matter between the
stockholders and does not involve, in the opinion of the
legal officer of the Government, any of the acts or
omissions warranting quo warranto proceedings, in
which minority stockholders are entitled to have such
dissolution. When such action or private suit is brought
by them, the trial court has jurisdiction and may or may

not grant the prayer, depending upon the facts and


circumstances attending it.2
This doctrine has eventually became part of Presidential
Decree 902-A which grants to the SEC the power to
decree the dissolution of the corporation upon the
appointment of a management committee or receiver

and on behalf of the dissolved corporation for that purpose.


Aguirre II v. FQB+7, Inc., 688 SCRA 242 (2013).

The dissolution of a juridical entity does not by itself cause the


extinction or diminution of the rights and liability of such entity,
since it is allowed to continue as a juridical entity for 3 years for

Financing Corp. of the Phil. v. Teodoro, 93 Phil. 404 (1953).


Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.
(2013 ed.). Manila, Philippines: Rex Book Store.
3


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

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


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. Republic v.
Tancinco, 394 SCRA 386 (2002).

settlement and adjustment of claims against it and the payment


of its just debts. Yu v. Yukayguan, 589 SCRA 588 (2009).1

settling with creditors and debtors. It is the winding up of a


corporation so that assets are distributed to those entitled to
receive them. It is the process of reducing assets to cash,
discharging liabilities and dividing surplus or loss. PVB
Employees Union-N.U.B.E. v. Vega, 360 SCRA 33 (2001).

A board resolution to dissolve the corporation does not operate

to so dissolve the juridical entity. For dissolution to be effective


[t]he requirements mandated by the Corporation Code should
have been strictly complied with. Vesagas v. Court of Appeals,
371 SCRA 509 (2002).
1. No Authority to Enter into New Business

A corporation cannot extend its life by amendment of its articles


of incorporation effected during the three-year statutory period
for liquidation when its original term of existence had already
expired, as the same would constitute new business. Alhambra
Cigar & Cigarette Manufacturing Company, Inc. v. SEC, 24
SCRA 269 (1968).
o When the period of corporate life expires, the
corporation ceases to be a body corporate for the
purpose of continuing the business for which it was
organized. PNB v. Court of First Instance of Rizal, Pasig,
Br. XXI, 209 SCRA 294 (1992).
o


VI. Methods of Liquidation (Section 122)

A. The Board of Trustees Pursuing Liquidation; Subject to the 3-year
Period

There is nothing in the Corporation Law which bars an action for


the recovery of the debts of the corporation against the
liquidator thereof, after the lapse of the said three-year period.
It immaterial that the present action was filed after the
expiration of the three yearsfor at the very least, and
assuming that judicial enforcement of taxes may not be initiated
after said three years despite the fact that actual liquidation has

A corporation that has reached the stage of dissolution


is no longer qualified to receive a secondary franchise.
Buenaflor v. Camarines Industry, 108 Phil. 472 (1960).

not terminated and the one in charge thereof is still holding the
assets of the corporation, obviously for the benefit of all the

Following the dissolution of a corporation, liquidation or the


settlement of its affairs consists of adjusting the debts and
claims, i.e., collecting all that is due to the corporation, the

A derivative suit is fundamentally distinct and independent from


liquidation proceedings they are neither part of each other
nor the necessary consequence of the other. There is therefore
no basis from one action to result in the other. Yu v.
Yukayguan, 589 SCRA 588 (2009).


V. Meaning of Liquidation

Liquidation, in corporation law, connotes a winding up or

Majority Stockholders of Ruby Industrial Corp. v. Lim, 650 SCRA 461 (2011).


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

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


creditors thereof, the assessment aforementioned, made within
the three years, definitely established the Government as a
creditor of the corporation for whom the liquidator is supposed
to hold assets of the corporation. Republic v. Marsman Dev.
Co., 44 SCRA 418 (1972). Reiterated under the Corporation
Code in Paramount Insurance Corp. v. A.C. Ordonez Corp., 561

B. Liquidation Pursued Thru a Court-Appointed Receiver

appointment of the receiver. The receiver is actually an officer


of the court and must therefore be accountable to the court.2

SCRA 327 (2008).

NOW: Even after the expiration of the 3-year period, corporate


creditors can still pursue their claims against corporate assets

Although a corporate officer is not liable for corporate


obligations, such as claims for wages, however, when such
corporate officer ceases corporate property to apply to his own
claims against the corporation, he shall be liable to the extent
thereof to corporate liabilities, since knowing fully well that
certain creditors had similarly valid claims, he took advantage of
his position as general manager and applied the corporation's
assets in payment exclusively to his own claims. De Guzman v.

While the appointment of a receiver rests within the sound


judicial discretion of the court, such discretion must, however,
always be exercised with caution and governed by legal and
equitable principles, the violation of which will amount to its
abuse, and in making such appointment the court should take
into consideration all the facts and weigh the relative
advantages and disadvantages of appointing a receiver to wind

NLRC, 211 SCRA 723 (1992).

up the corporate business. China Banking Corp. v. M. Michelin


& Cie, 58 Phil. 261 (1933).

There can be no doubt that under the Corporation Law, the


Legislature intended to let the shareholders have the control of
the assets of the corporation upon dissolution in winding up its
affairs, by having the directors and executive officers to have
charge of the winding up operations, though there is the
alternative method of assigning the property of the corporation
to the trustees for the benefit of its creditors and shareholders.

against the officers or stockholders who have taken over the


properties of the corporation. Tan Tiong Bio v. Commissioner,
100 Phil. 86 (1956).1

When the liquidation of a dissolved corporation has been placed


in the hands of a receiver or assignee, the 3-year period
prescribed by law for liquidation cannot be made to apply, and
that the receiver or trustee may institute all actions leading to
the liquidation of the assets of the corporation even after the
expiration of said period. Sumera v. Valencia, 67 Phil. 721
(1939).

Old Rule: Since the old Corporation Law did not contain any
provision that allowed any action after the 3-year period for
liquidation, then all actions for or against the corporation as
abated after the expiration thereof. National Abaca Corp. v.
Pore, 2 SCRA 989 (1961).

A receivership, is created by means of judicial or quasi-jucidial

Reiterated in Republic v. Marsman Dev. Co., 44 SCRA 418 (1972).

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)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA



C. Liquidation Pursued Through a Trustee

A trusteeship is basically a contractual relationship governed by


the Law on Trust, and generally centered upon property, such
that the trustee assumes naked title to the property placed in
trust. It is therefore a relationship that can be created by a
corporation through its Board of Directors, without need of
judicial authorization. The trustee in liquidation is not appointed
by any court, but he is actually a transferee who holds legal title
to the corporate assets and he is accountable under the terms
of the trust agreement. The trustee's fiduciary obligations are
provided in the trust instrument and by applicable legal
provisions.1

When upon dissolution the affairs of the corporation were


placed in a Board of Liquidators, they were duly constituted as
trustees for the liquidation of the corporate affairs, and there
being no term placed on the Board, their power to pursue
liquidation did not terminate upon the expiration of the 3- year
period. Board of Liquidators v. Kalaw, 20 SCRA 987 (1967)

For purposes of dissolution and liquidation of a corporation, the


term trustee should include counsel of record who may be
deem to have authority to pursue pending litigation after the
expiration of the 3-year liquidation period. Gelano v. Court of
Appeals, 103 SCRA 90 (1981).


Gelano v. Court of Appeals

Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.


(2013 ed.). Manila, Philippines: Rex Book Store.


Facts: Insular Sawmill is a corporation organized for the primary
purpose of carrying on a general lumber and sawmill business. It was
leasing property of the Spouses Gelano, and the latter owed the
company certain sums of money arising from cash advances of the
husband, a loan in China Bank which Insular executed jointly with the
husband, and credit purchases of lumber materials for the spouses
residence. Insular then filed a complaint for collection against the
spouses. While the case was on going, Insular amended its Articles of
Incorporation to shorten its corporate existence of up to December 31,
1960 only. The amended Articles of Incorporation was filed with and
approved by the Securities and Exchange Commission, but the trial
court was not notified of the amendment shortening the corporate
existence and no substitution of party was ever made. Almost 4 years
after the dissolution of the corporation, the trial court rendered a
decision holding spouses liable. On appeal, the spouses filed a motion to
dismiss based on the grounds that the case was prosecuted even after
dissolution of Insular as a corporation and that a defunct corporation
cannot maintain any suit for or against it without first complying with
the requirements of the winding up of the affairs of the corporation and
the assignment of its property rights within the required period.
Incidentally, after the receipt of the spouses motion to dismiss, Insular
through its former directors filed a Petition for Receivership, which
petition remains pending before the lower court.

Issue: Whether a corporation whose corporate life had ceased by the
expiration of its terms of existence, could still continue prosecuting and
defending suits after its dissolution and beyond the period of 3 years
and without having undertaken any step to transfer its assets to a


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

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


in the assets, including the shareholders and the creditors of the
corporation, acting for and in its behalf, might make proper
representations with the appropriate body for working out a
final settlement of the corporate concerns. Clemente v. Court of
Appeals, 242 SCRA 717 (1995).1

trustee or assignee

Held: YES. It can continue prosecuting. When Insular Sawmill, Inc. was
dissolved on December 31, 1960, under Section 77 of the Corporation
Law, it still has the right until December 31, 1963 to prosecute in its
name the present case. Although private respondent did not appoint
any trustee, yet the counsel who prosecuted and defended the interest
of the corporation in the instant case and who in fact appeared in behalf
of the corporation may be considered a trustee of the corporation at
least with respect to the matter in litigation only. Said counsel had been
handling the case when the same was pending before the trial court
until it was appealed before the Court of Appeals and finally to this

whose corporate existence is terminated in any manner


continues to be a body corporate for three (3) years after its
dissolution for purposes of prosecuting and defending suits by
and against it and to enable it to settle and close its affairs,
culminating in the disposition and distribution of its remaining
assets. If the three-year extended life has expired without a
trustee or receiver having been expressly designated by the
corporation within that period, the board of directors (or
trustee) itself, may be permitted to continue as trustees by
legal implication to complete the corporation liquidation.

Court. We therefore hold that there was a substantial compliance with


Section 78 of the Corporation Law and as such, private respondent
Insular Sawmill, Inc. could still continue prosecuting the present case
even beyond the period of three (3) years from the time of its
dissolution.

Doctrine: A corporation that has a pending action and which cannot be
terminated within the three-year period after its dissolution is
authorized under Section 78 to convey all its property to trustees to
enable it to prosecute and defend suits by or against the corporation
beyond the three-year period.


VII. Reincorporation:

If the 3-year extended life has expired without a trustee or


receiver having been designated, the Board of Directors itself,
following the rationale of the decision in Gelano, may be
permitted to so continue as trustees to complete liquidation;
and in the absence of a Board, those having pecuniary interest

A trustee appointed for purposes of liquidation does not


become personally liable for the outstanding obligations of the
corporation. Republic v. Tancinco, 394 SCRA 386 (2003).

Under Section 122 of the Corporation Code, a corporation

By following the procedures on the sale of all or substantially all


of the assets of the corporation, the stockholders may transfer
the assets and business enterprise of the dissolved corporation
to a newly registered entity bearing the same corporate name.
Chung Ka Bio v. IAC, 163 SCRA 534 (1988).

Reiterated in Reburiano v. Court of Appeals, 301 SCRA 342 (1999); Knecht v.


United Cigarette Corp., 384 SCRA 48 (2002); Pepsi- Cola Products Phils., Inc. v.
Court of Appeals, 443 SCRA 571 (2004).


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

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA



Chung Ka Bio v. IAC

Facts: Philippine Blooming Mills Company, Inc. was incorporated for a
term of 25 years. The members of its board of directors executed a deed

finding, the penalty is not necessarily revocation but may be only


suspension of the charter. In fact, under the rules and regulations of the
SEC, failure to file the by-laws on time may be penalized merely with the
imposition of an administrative fine without affecting the corporate
existence of the erring firm.

of assignment of all of the accounts receivables, properties, obligations


and liabilities of the old PBM in favor of Chung Siong Pek in his capacity
as treasurer of the new PBM, then in the process of reincorporation.
The new PMB was issued a certificate of incorporation by the Securities
and Exchange Commission. Chung Ka Bio and the other petitioners
herein, all stockholders of the old PBM, filed with the SEC a petition for
liquidation of both the old PBM and the new PBM. The allegation was


Doctrine:

that the former had become legally non-existent for failure to extend its
corporate life and that the latter had likewise been ipso facto dissolved
for non-use of the charter and continuous failure to operate within 2
years from incorporation.

Issue: Whether or not the new corporation has not substantially
complied with the two-year requirement of Section 22 of the new

Corporation Code on non-user because its stockholders never adopted a


set of by-laws.

Held: NO. Non-filing of the by-laws will not result in automatic
dissolution of the corporation. Under Section 6(i) of PD 902-A, the SEC is
empowered to suspend or revoked, after proper notice and hearing,
the franchise or certificate of registration of a corporation on the
ground inter alia of failure to file by-laws within the required period. It
is clear from this provision that there must first of all be a hearing to
determine the existence of the ground, and secondly, assuming such


1. Applicable Legal Provisions

Section 121 and 122, Corporation Code

Section 6(l), of Pres. Decree 902-A


2. Extension of Corporate Life During Period of Dissolution
The Supreme Court has consistently taken the position that it
would be illegal for the corporation, when it has reached the
stage of dissolution, to seek to extend its corporate life, even
with the amendment of the articles of incorporation, because

the same would constitute "new business" contrary to the


injunction of the law that upon dissolution the corporation
cannot go into a transaction "for the purpose of continuing the
business for which it was established."1
3. Distinctions Between Extension of Corporate Life, Revival and
Reincorporation2

Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.


(2013 ed.). Manila, Philippines: Rex Book Store.
2
8 FLETCHER CYCLOPEDIA CORPORATIONS, Perm. Ed., Sec. 4092. Fletcher also holds
that "[w]hether a charter creates a new corporation or merely continues the
existence of an old one is to be determined from its terms, construed in
accordance with the legislative intent and the intent of the corporators.
Ordinarily neither an extension nor a revival creates a new corporation." Ibid,
Sec. 4093.


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

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

corporation, is not prohibited, even when the old corporation


has reached the state of dissolution.

"To renew a charter is to revive a charter which has expired, or,


in other words, to give a new existence to one which has been
forfeited, or which has lost its vitality by lapse of time.
o The renewal of a corporate charter by extending the
term of corporate life has been considered, in legal
effect, as amounting to the grant of a new charter so as
to subject the corporation to the laws in effect at the
time of renewal.

"[R]eincorporation consists in the taking out of a new charter by


a corporation in order to correct errors or defects in the original
incorporation, or to enlarge the power or limit the liabilities of
the corporation, or to lengthen or revive the corporate life. In a
sense it is but an amendment of the charter, and generally,
under the statutes, there is no new corporation but the
company is the same as before the reincorporation.

As has already been pointed out, under Philippine


jurisprudence the reincorporation of a corporation
which has the legal effect of extended the old corporate
entity is not authorized when this is sought to be
achieved after the original term has expired.
4. Process of Reincorporating1
o

While extension of corporate life of a corporation which has


reached the stage of dissolution, is not permitted, the Supreme
Court has recognized that "reincorporation" of an old

Even under the provisions of the present Corporation Code,


nothing prohibits the old board of directors of a dissolved
corporation to negotiate and transfer the assets of the dissolved
corporation to the new corporation intended to be created as
long as the stockholders have given their consent, and such
consent by stockholders is expressly allowed in Section 40 of the
said Code.

To extend a charter is to increase the time for the existence of


one which would otherwise reach its limit at an earlier period.
(E.g. amendment made within 5 years before term expiration)


Summary on Dissolution and Liquidations Proceedings

Recently, Clemente v. Court of Appeals2 revisited the procedures
of dissolution and liquidation. In that case, the Supreme Court refused
the petition filed by alleged stockholders of a sociedad anonima for the
declaration of the corporate assets to pertain to them in the absence of
showing any transfer or disposition by the corporation in their favor.
The Court said that in the absence of a corporate liquidation, it is the
corporation, not the stockholders, which can assert, if at all, any title to
the corporate assets. "If indeed, the sociedad has long become defunct,
it should behoove petitioners, or anyone else who may have any
interest in the corporation, to take appropriate measures before a
proper forum for a peremptory settlement of its affairs."3

The Court then proceeded to lay down the procedures and
effects of dissolution and liquidation of a corporation as provided for in

Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.


(2013 ed.). Manila, Philippines: Rex Book Store.

242 SCRA 717 (1995).


Ibid, at p. 722.


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

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


Sections 117 to 122 of the Corporation Code, and existing jurisprudence,
thus:
1. The termination of the life of a juridical entity does not by itself
cause the extinction or diminution of the rights and liabilities of
such entity nor those of its owners and creditor;1
2. The corporation continues to be a body corporate for three (3)
years after its dissolution for purposes of prosecuting and
defending suits by and against it and for enabling it to settle and
close its affairs, culminating in the disposition and distribution
of its remaining assets;
3. It may, during the three-year term, appoint a trustee or a
receiver who may act beyond that period;

Corporation Code, thus:



In Gelano case, the counsel of the dissolved
corporation was considered a trustee. In the later case
of Clemente v. Court of Appeals [242 SCRA 717 (1995)],
we held that the board of directors may be permitted to
complete the corporate liquidation by continuing as

4. If the three-year extended life has expired without a trustee or


receiver having been expressly designated by the corporation
within that period, the board of directors or trustees
themselves, following the rationale of the Supreme Court's
decision in Gelano v. Court of Appeals2 may be permitted to so
continue as "trustees" by legal implication to complete the
corporate liquidation;

trustees by legal implication. Under Section 145 of the


Corporation Code, No right of remedy in favor or
against any corporation . . . shall be removed or
impaired either by the subsequent dissolution of said
corporation or by any subsequent amendment or repeal
of this Code or of any part thereof. This provision
safeguards the rights of a corporation which is dissolved

5. Still in the absence of a board of directors or trustees, those


having any pecuniary interest in the assets, including not only
the shareholders but likewise the creditors of the corporation,
acting for and in its behalf, might make proper representations
with the SEC, which has primary and sufficient broad jurisdiction
in matters of this nature, for working out a final settlement of
the corporate concerns.

pending litigation.


1
2


Reburiano v. Court of Appeals, 3 reiterated the ruling of the
Supreme Court that seeks to allow the full liquidation of the corporate
affairs even beyond the three-year period provided for in the Code, and
invoked in addition the transitory provision of Section 145 of the

See Gonzales v. Sugar Regulatory Administration, 174 SCRA 377 (1989).


103 SCRA 90 (1981).

301 SCRA 342, 102 SCAD 285 (1999).


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