Chapter XVI – Dissolution o attempted extension after term has expired: renewal of

Why was there a dissolution? charter which is clearly beyond corporate powers
Nature of dissolution Does dissolution result in application of 81? — corporation can amend its AOI to shorten its term
Key: who initiates the proceedings? o should follow procedure in Sec 37 and 16
— Signifies the extinguishment of3 its franchise
parties: and
State, the termination
creditor, SHs of its  notice to each SH or member
corporate existence or business purpose.
creditors rights: satisfied during winding up  holding of meeting
— May be either de jure or de facto
period of 3 years when board undertakes  vote of 2/3 OCS
o De jure: one adjudged andactiondetermined by administrative or judicial  filing certified copy of amended AOI with SEC
sentence or brought aboutonlyby an act
one of the sovereign
purpose power to wind
during liquidation:  approval of amendment within 6 mos by SEC
o De facto: one which takes up place in substance and in fact when the
corporation by reason of insolvency, cessation of business, or
suspension of all its operations, goes into liquidation, still retaining Sec 120
its primary franchise to be a corporation

Cause of dissolution
— 120: corporation automatically dissolved upon the happening of
either of two events:
o approval of amended AOI or
— Defn of dissolution: the corporation ceases to be a juridical person and o expiration of shortened term
consequently can no longer continue transacting its business, but may — no need of further proceedings
continue its corporate existence for a period of 3 years from such o expiration before SEC approval: no automatic dissolution
dissolution for the purpose of winding up and liquidation o expiration after SEC approval: dissolution can take effect only
— Defn of winding up: collection of all assets, payment of all creditors, upon the expiration of sich shortened term
distribution of all remaining assets (if any) among the SHs — SH has appraisal right if he dissents to either the extension or
— Defn of liquidation: the settlement of the affairs of the corporation shortening of term
which consists of adjusting the debts and claims, that is, of collecting all
that is due the corporation, the settlement and adjustment of claims 2. voluntary dissolution when no creditors affected
against it and the payment of its just debts (China Bank v M Michelin)
Sec 118
— Ways in which a corporation is dissolved:
— voluntary dissolution requires an act of state to be effective
1. expiration of original, extended or shortened term
— a corporation can be dissolved voluntarily where no creditors are
— life of corporation= not exceed 50 years affected, through an administrative application for dissolution
filed with the SEC
— once the period in the AOI expires, the corporation is automatically
dissolved without any further proceeding; corporation is deemed o process is equivalent to an application for amendment of the
dissolved by such expiration without need for further action on the AOI, except that dissolution should be published
part of the corporation or the State — Summary of procedural requirements
— In Sec 11: corporate term may be extended by an amendment of the o Majority vote of the board adopting a resolution
AOI but cannot be made earlier than 5 years prior to the original or o Sending of notices to each SH
subsequent expiry date  By registered mail or special delivery
o cannot even be considered a de facto corporation  Time, place, object of meeting
o original term cannot be more than 50 years  At least 30 days prior to meeting
o each extension= 50 years o Publication of notice of meeting for 3 consecutive weeks
o number of extensions= unlimited  Newspaper published where the principal office is
o extension may be accomplished by amending the AOI before located
expiration of term  Newspaper of general circulation
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 o Resolution duly approved by vote of 2/3 OCS
o Certified copy of the resolution filed with SEC
o SEC issues certificate of dissolution
— SEC will generally not deny an application for dissolution where no
creditors are involved
— Sec 130 on the other hand does not require publication for the
shortening of the corporate term
— Certificate of dissolution issued by SEC is the act of State which will
legally effect the dissolution
o Mere resolution not sufficient without the certificate
o Except: expiration of term (no need for certificate)
3. voluntary dissolution where creditors affected
— basis: creditors must be given the opportunity to present their
claims and objections to protect their interests and rights
Sec 119
— a corporation can be dissolved voluntarily where creditors are affect,
through a petition for dissolution filed with the SEC, with due notice
and hearing
o quasi-judicial in nature
o SEC is not mandated to dissolve
— Summary of procedural requirements:
o File petition for dissolution:
 Signed by majority of the board or corporate officers
 Verified by president or corporate secretary or a director
 Set forth all claims and demands against it
 Resolved upon by vote of 2/3 OCS at a meeting
o SEC determines whether the petition is sufficient in form and
substance
o If satisfied, SEC shall issue an order fixing the date on or before
objections may be filed by any person
 30 days<date<60 days
o order published in a newspaper of general circulation at least
once a week for 3 consecutive weeks
o SEC hears petition and try any issue upon 5 days notice
 If no objections and material allegations are true…
 …SEC renders judgment dissolving the corporation and
directing disposition of its assets
 may appoint a receiver to collect assets and pay the
debts
— SEC may direct the manner in which liquidation of corporate assets
should be made by assigning the task to the corporation itself or to a
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receiver
o SEC retains supervision in either case
— Vote of 2/3 OCS is required to signify corporation’s intent to
dissolve
o GR: No member may prevent such dissolution
o Exception: majority SH acted in BF or for the purpose of
“freezing out” the minority
Sec 122
4. dissolution by minority in close corporations
— Code requires vote of 2/3 OCS
— Two special rules on dissolution of close corporations:
o Deadlocks; in its exercise of power to arbitrate, SEC is
authorized to order dissolution
o Sec 105:
Sec 105
— Can the minority group in a non-close corporation petition for
dissolution under the grounds in 105?
o Campos: express grant of such right of the minority in close
corporations should not be interpreted to preclude the right
to the minority in non-close corporations
Financing Corporation v Teodoro. F: Lizares et al, minority SHs of
the Financing Corp of the Phils, sued the corporation and J Amado
Araneta, its president and GM, alleging gross mismanagement and
fraudulent conduct of the corporate affairs by Araneta and asking
that the corporation be dissolved and Araneta be declared personally
accountable for the unauthorized and fraudulent disbursements of
the corporate assets. Judge Teodoro granted petition for appointment
of a receiver (Yulo). The corporation contends that the appointment is
merely an auxiliary remedy; that the principal remedy was the
dissolution of the corporation, and that the minority SHs have nor
right and personality to maintain an action for dissolution, that right
belonging only to the State.
H: GR: minority SHs of a corporation cannot sue and demand
dissolution. Exception: if they are unable to obtain redress and
protection of their rights within the corporation (Hall v Piccio). Even
the existence of a de jure corporation may be terminated in a private
suit for its dissolution by SHs without the intervention of the State.
The question of the right of minority SHs to ask for dissolution in Hall
was held not to affect the court’s jurisdiction over the case, and that the
remedy by the party dissatisfied was to appeal.
GR: minority SHs cannot ask for dissolution in a private suit, and that
action should be brought by the government through its legal officer.
Exception: cases wherein the intervention of the State cannot be
obtained because the complaint is a matter strictly between the SH and
the corporation and does not involve issues which involve
acts/omissions warranting a quo warranto. When such action is brought,
the TC has jurisdiction and has discretion to grant the prayer or not.
Having such jurisdiction, the appointment of e receiver pendent elite is
left to the sound discretion of the TC. In Angeles v Santos, it was held
that it is within the power of the court upon proper showing to appoint a
receiver pendente lite once the action is properly brought and court
acquires jurisdiction.
The appointment of a receiver upon petition by the minority SH is a
power that must be exercised with great caution, and should be
exercised when necessary to protect their rights, especially when they
cannot obtain redress through or within the corporation. SC ruled that
the TC had jurisdiction and properly entertained the original case and
had jurisdiction to appoint a receiver pendente lite.
5. failure to organize and commence business; cessation of
business for 5 years
— “organize”: involves the election of officers, providing for
subscription and payment of capital stock, adoption of by-laws, and
other such steps as necessary to endow the legal entity with the
capacity to transact the legitimate business for which it was created
— “organization”: the systematization and orderly arrangement of the
internal and managerial affairs and organs of the corporation
— “commence business”: perform preparatory acts geared towards the
fulfillment of the purposes for which it was established such as but
not limited to:
o entering into contracts or negotiations for lease or sale of
properties
o making plans for and the construction of the factory
o taking steps to expedite construction
Sec 22
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— by-laws must be adopted within one month of receipt of notice of
the issuance of the certificate of incorporation, otherwise the
certificate may be suspended or revoked
— corporate business must be commenced within 2 years,
otherwise corporation deemed dissolved and corporate powers
will cease
o corporation would neither be a de jure or de facto corporation
— transacting business implies a continuity of acts or dealings in the
accomplishment of the purpose for which the corporation was
formed (Mentholatum case infra)
o even a single act would be sufficient if it is intended to be a
series of acts in pursuance of the corporate business
o but must take place within the 2-year period
— Art 3 of Code of Commerce: presumption of habituality
o Rebuttable
— Sec 22: corporate powers will cease, and corporation will be
deemed dissolved if not complied with the 2-year requirement
— If corporation commenced its business within 2 years but
discontinues for at least 5 continuous years, certificate of
incorporation may be revoked by SEC
o No automatic dissolution
o SEC proceeding necessary
o Notice must be given to the corporation and opportunity to
be heard
— If the corporation fails to commence operation within the 2 year
period but does so only after the 2-year period lapses:
o Doctrine of corporation by estoppel may apply
o Innocent third persons cannot be prejudiced by such
dissolution
6. involuntary dissolution
Sec 121
— a corporation may be dissolved by the SEC upon a filing of a
verified complaint and after notice and hearing
— Grounds for involuntary dissolution:
a. Does not formally organize and commence business
within 2 years from date of incorporation—corporate
power ceases and corporation is deemed dissolved
b. Subsequently becomes continuously inoperative after
commencing business for at least 5 years
c. Failure to adopt by-laws
d. Offended against a provision of law for its creation or
renewal
 e. Commission/omission of an act tantamount to a surrender of
corporate rights and privileges
f. Misuse of a right, privilege, franchise conferred by law or the
exercise of the same in contravention of law
g. Continuance of business would not be feasible or profitable
nor work to the best interests of SHs, parties, creditors,
general public
i. Based on findings and recommendations of a
management committee or receiver
h. Guilty of fraud in procuring certificate of registration
i. Guilty of serious misrepresentation
j. Refusal to comply or defiance to a lawful order of the SEC
k. Failure to file required reports
(1) revocation of certificate of registration by SEC
— certificate of registration refers to certificate of incorporation
— other grounds for suspending or revoking certificate are
recognized. Examples:
o violation by the corporation of any provision in the Corpo
Code
o deadlock in a close corporation
o grounds for quo warranto
o Sec 3 Rule 66 of ROC
o Non-compliance with 25% minimum requirement for
subscription and/or paid-up capital
o Continuous inoperation for 5 years
o Non-adoption or non-filing of by-laws within 1 month
o Failure to submit annual report of financial statements of
assets and liabilities
(2) quo warranto proceedings
— PD 902-A grants exclusive jurisdiction to the SEC over any
controversy between the corporation and the State
Republic v Bisaya Land Trans Co. F: Government files petition for quo
warranto against the Bisaya Land Tranpo Co and its board, and asks for
the appointment of a receiver pendente lite, alleging that the
corporation, through the board, violated the provisions of the
Corporation Law as outlined in 9 causes of action. Miguel Cuenco, a
member of the Board, sets up a cross-claim against the other members
to recover P4M arising for illegal acts of the corporation of which
damage was caused him, and asks for the appointment of a receiver.
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The other directors argue that the petition should be dismissed as to
Cuenco because his claims did not arise out of the transactions the
subject matter of the quo warranto, which did not assert any claim
against any of the directors. TC denies MTD the quo warranto.
Corporation then filed a motion for judgment on consent, manifesting
its consent to the ordering of the dissolution of the corporation, and
ordered the board to proceed with the liquidation of its assets. It
contended that the pendency of the quo warranto petition had
prejudiced the corporation and its business, and that immediate
relied be given the corporation. It also alleged that the majority of the
board and 2/3 SHs acceded to the request to dissolve as the most
feasible remedy to its problems. Republic moves that the matter of
implementation of the dissolution be submitted to the TC for
judgment. Cuenco concurs but urges the appointment of a receiver.
Directors not Cuenco filed a motion to withdraw its previous motion
for judgment on consent on the ground that the conditions to which
motion was subject had not been accepted. Cuenco opposes
withdrawal and pressed for appointment of receiver. TC denied
motion to withdraw. Corporation appeals. SolGen Barredo moved to
dismiss quo warranto proceedings, to which Cuenco opposed. TC
grants Republic’s motion but denies Cuenco’s crossclaim.
I: W/N the TC should have ordered dissolution upon its motion and not
the Republic’s, as it amounted to a confession of judgment.
H; A motion for judgment on consent is not to be equated with
judgment by confession. There must be an unqualified agreement
among the parties to the action entered in the record with leave of
court. A judgment by confession is not a plea but an affirmative and
voluntary act of the defendant himself. In this case, there was no
meeting of the minds among the parties with respect to the motion
for judgment on consent. Corporation wanted its liquidation to be
effected by its Board. Cuenco wanted the appointment of a receiver
in agreeing to dissolution, and after his cross-claims were considered.
Before the parties could come to an unqualified agreement, the
corporation moves to withdraw its motion for judgment on consent. It
is clear that the parties could not agree as to the terms of dissolution,
and the TC correctly rendered judgment dissolving the corporation.
I: W/n TC was wrong in not granting quo warranto because the
evidence presented fails to constitute grounds for quo warranto
H: TC found that the alleged misuse of funds were committed more
particularly by Dr Manuel Cuenco with the cooperation of Velez, for
which they are personally liable. The alleged illegal corporate acts
had not resulted in substantial injury to the public, nor were they
willful and clearly obdurate. It found that the controversy between
the parties was more personal than anything else and did not at all
affect public interest. Such private controversies can be ventilated in
appropriate SHs suit which do not have to occupy the time and attention
of government officials. The SolGen himself admits that his reason for
the MTD is to take the State out of an unnecessary court litigation. Relief
by dissolution would only be awarded where no adequate relief is
available, and is not available where the rights of SHs can be or are
protected in some other way.
I: W/N the SolGen, as the lawyer for the Republic, was vested with full
power to manage and control the State’s litigation.
H: GR: the SolGen may do so with the approval of the court, subject to
well-defined exceptions. If it is discovered that the action commenced
was brought for the purpose of enforcing a right, the advisability or
necessity of which he later discovers no longer exists, then he should be
permitted to withdraw his action. Courts should not require parties to
litigate whey they no longer desire to do so. Thus the SolGen was within
his power to move to dismiss the petition for quo warranto, and the TC
was correct in dismissing Cuenco’s cross-claim, and receivership is
ordered terminated.
— Dissolution is a serious remedy granted to the courts against
offending corporations. Courts, as a general rule, should not
resort to dissolution when the prejudice is not against the public
or not an outright abuse or violation of the corporate charter.
Even if the prejudice is public in nature, the remedy is to enjoin
or rectify the mistake. Only when it cannot be remedied
anymore then that dissolution can come in.
Gonzales v Sugar Regulatory Administration. F: Spouses Gonzales
obtained a loan from the RPBank in the amount of P 176,000.00 secured
by a real estate mortgage. The proceeds of the loan were released on a
staggered basis and the loan was "payable from [the] 1980-1981 sugar
crop, " the amortization payments to be remitted by the Philsucom to
the RPBank. The RPBank is owned and controlled by the Philsucom.
Gonzales received a statement of account from the RPBank setting forth
that they had an outstanding loan balance due to the bank of P
652,446.38. It appeared that the Gonzaleses had received the total
amount of P l,041,610.55 in loan funds from the RPBank and that they
had re-paid thereon the total amount of P 1,051,296.77; in other words,
they had already more than fully repaid their loan. The Gonzales further
averred that Philsucom had deducted from the export sugar proceeds of
petitioners the amount of P 421,517.32 without their authority and
consent with the result that the spouses had overpaid the RPBank by P
289,260.88. the spouses prayed that the real estate mortgage be
cancelled, and that Philsucom and SRA be required jointly and severally
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to reimburse the petitioners the amount of P 289,260.88 + damages.
The RPBank, Philsucom and herein respondent SRA moved to dismiss
the complaint upon the ground of lack of cause of action. Philsucom
and respondent SRA through the Solicitor General, denied any
obligation on the part of the Philsucom to return any amount to
petitioners on account of allegedly unauthorized deductions from the
proceeds of petitioners' sugar sold by the Philsucom. For its part, the
SRA also noted that while the deductions complained of were made
by the Philsucom during the period from 1980 to 1984, the SRA itself
had been created by Executive Order No. 18 only on 18 May 1986
and that it was not a party to the real estate mortgage between
petitioners and the RPBank.
H: Executive Order No. 18, promulgated on 28 May 1986, abolished
the Philsucom, created the SRA and authorized the transfer of assets
from Philsucom to SRA. Although the Philsucom is hereby abolished, it
shall nevertheless continue as a juridical entity for three years after
the time when it would have been so abolished, 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
functions for which it was established, under the supervision of the
Sugar Regulatory Administration. (Emphasis supplied). We note that
Executive Order No. 18 did not provide for universal succession, as it
were, of SRA to Philsucom, or more specifically to the assets and
liabilities of Philsucom. The SRA has been authorized to determine
which of the assets and records of Philsucom are required for the
carrying out of the activities which the SRA is to carry on or
undertake. The succession of the SRA to the assets and records of the
Philsucom is thus limited in nature; the extent of such succession is
left to the discretionary determination of the SRA itself. More
importantly, Executive Order No. 18 is silent as to the liabilities of
Philsucom; it does not speak of assumption of such liabilities by the
SRA.
The Philsucom, it will be seen, succeeded as a matter of course to all
the assets, liabilities and records of the Philippine Sugar Institute and
the Sugar Quota Administration. The SRA did not, quite possibly
because the Government wanted the opportunity to examine the
assets, liabilities and records carefully and to determine the
compatibility of (asserted) liabilities of the Philsucom with applicable
law and relevant requirements of public policy and the public interest.
That the assets of the Philsucom must respond for payment of lawful
obligations of Philsucom, does not appear to require demonstration. The
assets which, in accordance with the second paragraph of Section 13 of
Executive Order No. 18, may be taken over by the SRA can thus be only
net or residual assets, assets remaining after payment of the valid and
enforceable liabilities of Philsucom has been made or been adequately
provided for. We believe, in other words, that Section 13 of Executive
Order No. 18 is not to be interpreted as authorizing respondent SRA to
disable Philsucom from paying Philsucom's demandable obligations by
simply taking over Philsucom's assets and immunizing them from
legitimate claims against Philsucom. The right of those who have
previously contracted with, or otherwise acquired lawful claims against,
Philsucom, to have the assets of Philsucom applied to the satisfaction of
those claims, is a substantive right and not merely a procedural remedy.
Section 13 cannot be read as permitting the SRA to destroy that
substantive right. We think that such an interpretation would result in
Section 13 of Executive Order No. 18 colliding with the non-impairment
of contracts clause of the Constitution insofar as contractual claims are
concerned, and with the due process clause insofar as the non-
contractual claims are concerned. 5 To avoid such a result, we believe
and so hold that should the assets of Philsucom remaining in Philsucom
at the time of its abolition not be adequate to pay for all lawful claims
against Philsucom, respondent SRA must be held liable for such claims
against Philsucom to the extent of the fair value of assets actually taken
over by the SRA from Philsucom, if any. To this extent, claimants against
Philsucom do have a right to follow Philsucom's assets in the hands of
SRA or any other agency for that matter. This result appears no more
than a dictate of elementary fairness, particularly when one takes into
account that under Section 11 of Executive Order No. 18, the SRA will
continue, "until otherwise provided, as directed and ordered by the
President of the Philippines," to collect and receive the proceeds of
"levies, charges and other impositions as [then] granted by law, decree
and/or executive order, to the [Philsucom]." Whether the deductions
here assailed by petitioners are included among the "levies, charges and
other impositions" then made by Philsucom and now continued by SRA
must be determined by the trial court.
Petitioners have noted in this connection that the three (3) year period
provided for in the third paragraph of Section 13 of Executive Order No.
18 is about to expire. There is nothing to prevent Philsucom from
appointing a trustee SRA for instance and conveying all its properties to
such trustee, for the benefit of the Government, creditors and other
persons in interest, following at least by analogy the provisions of the
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second paragraph of Section 122 of the Corporation Code. Should
Philsucom decline to so appoint SRA as trustee, the principles set
forth above would of course apply, mutatis mutandis, in respect of
whichever public agency may find itself actually holding the assets
and records of Philsucom.
We conclude that dismissal of petitioners' complaint against
respondent SRA was clearly premature. Petitioners have a cause of
action against SRA to the extent that they are able to prove lawful
claims against Philsucom, which claims Philsucom is or may be
unable to satisfy, and to the extent respondent SRA did, or does, in
fact take over all or some of the assets of Philsucom. At the very
least, the motion to dismiss was not shown to rest upon indubitable
grounds and should, therefore, have been denied not only in respect
of Philsucom but also in respect of respondent SRA.
H: The termination of the life of a juridical entity does not by itself imply
the diminution of extinction of rights demandable against such juridical
entity among which would be the priority claims of corporate creditors
against corporate assets. Since the assets must respond for payment of
lawful obligations of a dissolved corporation, then it is required that the
succeeding corporation would be liable for all such lawful claims to the
extent of the fair value of assets actually taken over.
No person who assets a claim against a juridical entity can claim any
constitutional right to the perpetual existence of such entity. Juridical
persons, whether incorporated or not, whether owned by the government
or the private sector, may come to any end at one time or another for a
variety of reasons, ex the fulfillment or abandonment of the business
purposes for which a corporation was set up. Thus the Code provides for
termination of corporate life, the dissolution of the corporation, the
winding up of its operations, the liquidation of its assets, the payment of
its obligations and distribution of any residual assets to its SHs.
Termination of life 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 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.
Effects of dissolution; winding up and liquidation
 — GR: no personality after dissolution
— Exception: liquidation and liquidation only
— Termination itself of personality does not cause extinction or
diminution of rights and liabilities of the dissolved entity nor of
its creditors (Gonzales)
— During the 3-year liquidation period, the dissolved corporation is
authorized and empowered to convey all of its property to
trustees for the benefit of SHs, creditors, and other persons in
interest
o If expired without a trustee or receiver, board may be
permitted to continue as trustees
o In the absence of the board or trustees, those having
pecuniary interest in the assets may make proper
representations with the SEC for working out a final
settlement of corporate concerns
— All interests which the corporation has in the corporate property
terminates, and legal interest vests in the trustees, and
beneficial interest in the SHs, creditors or other persons in
interest
— Any asset undistributable to any creditor or SH shall be
escheated to the city or municipality where such assets are
located
— A corporation in process of liquidation has no legal authority to
engage in any new business, even if consistent with its primary
purpose
Sec 122
1. loss of juridical personality
— except for the purpose of winding up its affairs
— cannot even be a de facto corporation
— existence cannot be subject to collateral attack
— cannot enter into new contracts
— during 3 year period, corporation must collect all debts owing to
it and pay all its creditors
— it may sue and be sued
— all pending actions by or against the dissolved corporation abate
Pepsi-Cola Products Phils. v CA. F: Pepsi-Cola Products Philippines, Inc.
Employees and Workers Union (PCEWU), a duly- registered labor union of
the employees of the Pepsi-Cola Distributors of the Philippines (PCDP)
filed a Complaint against PCDP for payment of overtime services
rendered by fifty-three (53) of its members, for work done during 8
Muslim Holidays. LA held that workers in Region 12 were entitled, but
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workers in Region 9 were not. Pepsi Distributors appeals to NLRC,
which affirms. Pending resolution of its MR, ownership of various
Pepsi-Cola bottling plants was transferred to petitioner Pepsi-Cola
Products Philippines, Inc. (PCPPI). The PCDP alleged that it had ceased
to exist as a corporation on July 24, 1989 and that it has winded up its
corporate affairs in accordance with law. It also averred that it was
now owned by PCPPI. NLRC dismisses complaint, holding that with the
cessation and dissolution of the corporate existence of the PCDP,
rendering any judgment against it is incapable of execution and
satisfaction. The CA reverses, and declared that the PCDP was still in
existence when the complaint was filed, and that the supervening
dissolution of the corporation did not warrant the dismissal of the
complaint against it. After all, the appellate court ratiocinated, every
corporation is given three (3) years to wind up its affairs. Hence, in
case any litigation is filed by or against the corporation within the
three (3)-year period which could not be terminated within the
expiration of the same, such period must necessarily be prolonged
until the final determination of the case.
H: Under Section 122 of the Corporation Code, a corporation 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. It may, during the three-year
term, appoint a trustee or a receiver who may act beyond that period.
At any time during the said three (3) years, the corporation is
authorized and empowered to convey all of its properties 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 properties in trust for the benefit of its stockholders,
members, creditors and others in interest, all interest which the
corporation had in the properties 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
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.
The termination of the life of a corporate entity does not by itself cause
the extinction or diminution of the rights and liabilities of such entity. 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) itself, may be permitted to so
continue as "trustees" by legal implication to complete the corporate
liquidation.
National Abaca v Pore. F: National Abaca Corp sued Apolonia Pore to
recover money advanced for the purchase of hemp for the account of
the corporation for which she failed to account therefor. Pore in defense,
contends that she made an accounting of the advances received by her.
TC held her accountable and ordered to her to pay the corporation.
Pore moved to dismiss on the ground that the corporation had no legal
capacity to sue, it having been abolished by EO 372. Corporation
contends that the EO also stipulates that it shall continue as a body
corporate for 3 years from date of effectivity of the EO, for the purpose
of defending and prosecuting suits and enabling the Board of Liquidators
to settle and close all its affairs.
TC ordered corporation to amend the complaint by including the Board
of Liquidators as co-party plaintiff, otherwise case shall be dismissed.
The corporation fails to submit amended complaint, and the TC
dismisses case. Corporation in seeking reconsideration, said that it was
not able to submit the amended complaint on time because of the
negligence of the filing clerk, Ms Ocampo, and that it was lost despite
diligent efforts to look for it. TC denies motion.
I: W/n an action, commenced within 3 years after the abolition of the
corporation, may be continued by the same after expiration of the
period. NO
W/m the TC was correct in dismissing motion. NO. should have granted
the motion…
H: GR: pending actions by or against a corporation are abated upon the
expiration of the period allowed by law for liquidation. The old corpo law
contains no provision authorizing a corporation after 3 years from
expiration of its lifetime, to continue in its corporate name actions
instituted by it within a period of 3 years. It provides that it will continue
8
as a body corporate for 3 years after the time when it would have
been dissolved, for purposes of prosecuting and defending suit by or
against it. During the time which the corporation, through its officers,
may conduct the liquidation of assets and sue and be sued as a
corporation is limited to 3 years from the time period of dissolution
commences, but that there is no time limit within which trustees
must complete a liquidation placed in their hands. The conveyance to
the trustees must be made within the 3 year period. It may be found
impossible to complete the work of liquidation within the 3 year
period or to reduce dispute claims to judgment. Suits by or against a
corporate abate when it ceased to be an entity capable of suing or
being sued; but trustees to whom the corporate assets have been
conveyed pursuant to the authority of the code may sue and be sued
as such in all matters connected with the liquidation. The effect of
conveyance is to make the trustees legal owners of the property
conveyed, subject to the beneficial interest therein of creditors and
SHs. The complete loss of Abaca’s corporate existence after the
expiration of 3 year period is what impelled the creation of the Board
of Liquidators, to continue the management of pending matters.
— GR: in the absence of statutory rules to the contrary, pending actions
by or against a corporation are abated upon the expiration of the 3-
year period allowed by law for liquidation
2. executory contracts
— executory contracts are not extinguished by dissolution
— all rights and obligations in an executory contract pass on to
a liquidating trustee or receiver
Sec 145
3. methods of liquidation
122
— manner of liquidation or winding up may be stipulated in the
by-laws
— three methods of liquidation:
a. liquidation by the corporation itself through the
Board—the normal procedure is for directors and officers
to have charge of the winding up operations, though
there is the alternative method of assigning the property
to the trustees for the benefit of creditors and SHs. While
 the appointment of a receiver rests with the sound discretion
of the court, such discretion must be exercised with caution
and governed by legal and equitable principles (China Bank
v Michelin)
i. authority of the board to manage the corporate
affairs includes the power to undertake the
liquidation of corporate affairs
ii. 3-years to liquidate
b. conveying all corporate assets to trustees who will
take charge of liquidation
i. 3-year limitation does not apply
ii. but trusteeship may be limited in duration by the
deed of trust
iii. trustee may sue even beyond the 3 year period
c. liquidation conducted by a receiver appointed by the
SEC upon decree of dissolution
i. 3-year limitation does not apply
ii. mere appointment of receiver does not result in
dissolution
— receiver in liquidation stands on a different legal basis from a
trustee in liquidation
o trusteeship: basically a contractual relationship, governed by
the Law on Trust, such that the trustee assumes naked title
to the property placed in trust
 it is a relationship created by a corporation through
its board without need of judicial authorization
 trustee in liquidation is not appointed by any court,
but he is actually a transferee who holds legal title to
the corporate assets and is accountable under the
trust agreement
o receivership: created by means of judicial or quasi-judicial
appointment of a receiver
 receiver is actually an officer of the court and is
accountable to the court
 SEC is empowered to create or appoint a
management committee, board or body to
undertake the management of a corporation
— if three year period expires, a creditor may still sue the trustee
or follow the corporate assets in the hands of SHs who may have
received the same as liquidating dividends
4. distribution of assets after payments of debts
— remaining assets, if any, must be distributed to the SHs in
9
proportion to their interest
— liquidating dividend: share of each SH in the assets upon
liquidation
o not a partition of corporate assets among co-owners but
a transfer or conveyance by the corporation to its SHs
and therefore exempt from doc stamps (SHs of Guanzon
case)
— director or liquidator may be liable for negligence or fraud to
a creditor prejudiced by distribution of dividends
o may follow the assets in the hands of SHs who received
them as dividends (Tan Tiong Bio case)
— GR: corporation cannot distribute any of its assets or property
— Exception: lawful dissolution and after payment of debts and
liabilities
o GR: SH cannot get back any part of his invested capital
until dissolution and liquidation
o Exceptions:
 Decrease of capital stock: results in a surplus
which can be distributed to SHs provided no
creditors are prejudiced
 Otherwise allowed by the Code:
• Appraisal right under 81 and 42
• Deadlock in a close corporation (104)
• SH of close corp can compel the corp to
buy his shares at fair value for any reason
(105)
• Corporation repurchases shares of any SH
for legitimate corporate purpose (41)
• Corporation validly distributes dividends
(43)
— Directors/trustees/liquidators must still act with due diligence
and GF in settling corporate affairs
— Duty of the liquidator to look for creditors with reasonable
diligence
o Notice by publication sufficient
o SEC should not order dissolution without giving creditors
opportunity to be heard
o Creditors prejudiced by distribution of assets can attack
its validity for lack of due process
China Banking Corporation v. Michelin & Co. F: George O’Farrel &
Cie Inc is a domestic corporation acting as agent and representative
of the M Michelin & Cie, a foreign corporation engaged in the sale and
distribution of Michelin tires. Michelin decided to discontinue their
business relations, and it was discovered that O Farrel failed to account
for an amount representing the price of tires sold by the latter. Michelin
claims the money was disposed by O Farrel for its own use and benefit
and without the authority or consent of Michelin. Gaston O’Farrel (the
person) and Sanchez executed a mortgage on the house of O’Farrel and
shares owned by both to guarantee payment of the amount to the
Michelin, but left a balance which the latter seeks to recover. The board
of O’Farrel filed a petition for its dissolution and sought the appointment
of Gaston as receiver and liquidator, which was granted by TC. Michelin
filed its claim against O’Farrel Corp with a prayer that its claim be
allowed as a preferred one against the latter. TC grants motion of
Michelin. Nobody except Michelin and Gaston was notified of the order.
China Bank intervened and moved that Michelin’s claim be allowed as
an ordinary one under the Insolvency Law and sought the nullification of
the TC orders.
H: Claims against a corporation in the hands of a receiver should not be
approved and paid without some formal and regular proceeding after a
reasonable opportunity is given to all parties in interest.
The SC held that the provisions of the Insolvency Law should operate.
There is no reason for the corporation to resort to the court for a decree
of voluntary dissolution. If the corporation was under such a financial
condition as alleged, and did not desire to continue doing business,
there is no necessity for judicial intervention in the winding up of affairs
coupled with the appointment for a receiver to deal with creditors as
though they were creditors of an insolvent corporation. Under the old
corpo law, with respect to decrees of dissolution upon voluntary
application, the court may appoint receivers to collect and take charge
of the assets. It is permissive and not mandatory, because in cases of
voluntary dissolution there is no occasion for the appointment of a
receiver except under special circumstances. Such discretion on the part
of the court to appoint must be exercised with caution. IT does not
empower the court to hear and pass upon the claims of creditors of the
corporation at first hand. In such cases, the receiver does not act as a
receiver of an insolvent corporation. Since liquidation consists of
collecting all that is due the corporation, all claims must be presented
for allowance to the receiver or trustees during winding up, within 3
years as provided in Corpo Law. The rulings of the receiver are subject to
judicial review by the court which appointed him.
The normal method is for directors/officers to have charge of the
winding up, though there is the alternative method of assigning property
of the corporation to trustees. The law authorizing voluntary dissolutions
are generally held to apply only to dissolutions brought about by the SHs
10
themselves.
China Bank’s motion was filed 13 months after the decree of
dissolution was entered, thus the motion was flied on time to have its
claim reviewed by the court. The appointment of Gaston as the
receiver, who was also the principal promoter of the corporation and
at one time the majority SH, president, and GM, lends itself to serious
suspicion. His administration of the business left much to be desired
and that he alone ought to be blamed for the shortage claimed by
Michelin, but to save himself he made the corporation shoulder the
burden of obligations in exchange for a simulated conveyance of his
house and shares to the corporation. Once delinquent, Gaston
resorted to a judicial proceeding of voluntary dissolution in an
attempt to settle Michelin’ claim and to free himself from any liability,
and allowed the claim to be a preferred claim without informing or
notifying interested parties, such as China Bank, which also had a
claim.
Michelin’s claim cannot be allowed as a preferred claim, because the
merchandise was no longer in the corporation’s possession. The
rubber tires consigned were to be sold on order, and the claim for the
advance seems to be in the nature of a current account between the
two companies more than anything else.
Republic v Marsman Devt Co. F: Marsman is a lumber company. An
investigation was conducted and certain taxes due from logs
produced from its timber concession granted by the government. CIR
demanded payment representing three assessments made on forest
charges, deficiency sales tax and other surcharges and penalties.
Counsel for the corporation requested for reinvestigation, but was
denied unless the legal requirements for such a request were
complied with and payment of ½ of total assessments were made,
and to furnish a bond to guarantee payment of the balance. The
corporation repeated failed to comply with the conditions set by the
CIR, which was constrained to make extrajudicial demand for the tax
liabilities. Marsman was then extrajudicially dissolved. BIR files a
complaint for its demands after more than 3 years following the
corporation’s dissolution, and the TC sentenced the corporation to
pay the amount demanded by CIR.
H: TC did not err in holding that the period to question the tax
assessments had already expired. By its own omission, the
corporation made it possible for the BIR to act on its own MR. Mere
filing of a motion does not suspend the running of the period for
collection of the tax, which implies that any assessment made by the
BIR is supposed to be final and executory as to the taxpayer concerned.
I: w/n present action is barred by prescription, in light of the fact that the
corporation law allows corporations to continue only for 3 years after its
dissolution, for the purpose of presenting or defending suits by or
against it, and to settle its affairs. no
H: Stress given by Marsman on the extinction of corporate personality
by virtue of its extra0judicial dissolution is misplaced. The assessments
against the corporation were made before its dissolution and not later
than 6 months after dissolution. Thus the government became the
creditor of the corporation before the completion of its dissolution.
Burgess the liquidator became in law the trustee of all its assets for the
benefit of all person interested, including the government. It is
immaterial that the present action was filed after expiration of the 3
year period, because the assessment definitely established the
government as a creditor of the corporation for whom the liquidator is
supposed to hold corporate assets.
— Code provides for a 3-year period for continuation of the corporate
existence for purposes of liquidation
— But there is nothing in the provision which bars an action for recovery of
debts of the corporation against the liquidator himself, after the lapse of
the 3-year period
Tan Tiong Bio v CIR. F: Tan Tiong Bio et al are incorporators and
directors (some are officers—President and treasurer) of the Central
Syndicate. The company realized a net profit of close to P300K, and sale
of goods was the only transaction undertaken by it. BIR sues the Tan
Tiong et al for deficiency sales taxes and surcharges on surplus goods
purchased by the corporation from the Foreign Liquidation Commission.
Corporation was dissolved, and Tan Tiong and company substituted
themselves as parties, thereby becoming successors-in-interests in the
corporate assets after liquidation. TC rules ifo BIR, and Tan Tiong et al
appeals, claiming that they cannot be held liable for tax liability there
being no law authorizing the government to proceed against SHs of a
defunct corporation as transferees of the corporate assets upon
liquidation. If they were liable, it is only to the extent of the benefits
derived by them, and that the action is barred by prescription due to the
3-year limit in the corpo Law.
I: W/n the sales tax can be enforced against the corporation’s
successors-in-interest, even if corporation has been dissolved by
expiration of corporate existence.
--YES
11
H: Tan Tiong, as substitute parties-in-interest, cannot now be heard to
complain that they were being held liable for the tax due from the
corporation whose representation they assumed and whose assets
are distributed to them.
The creditor of a dissolved corporation may follow its assets once
they passed into the hands of a SH. The dissolution of a corporation
does not extinguish debts due or owing to it. A creditor of a dissolved
corporation may follow its assets, as in the nature of a trust fund, into
the hands of the SHs. The hands of government cannot collect taxes
from a defunct corporation, it loses thereby none of its rights to
assess taxes due, and to collect the taxes due from the corporation
from persons who by reason of transactions with the corporation, hold
property against which the tex may be enforced. Court ruled that the
net profit remained intact and was distributed among the SHs
immediately after sale of surplus. Tan Tiong et al are thus the
beneficiaries of the defunct corporation and should be held liable to
pay the taxes, but only in proportion to their respective shares in the
distribution of assets.
— Even after the 3 year period of liquidation, corporate creditors can
still pursue their claims against corporate assets against the officers
or SHs who have taken over the properties of the corporation
— SC held that the State cannot insist on making tax assessments
against a corporation that no longer exists and then turn around and
oppose the appeal questioning the legality of the assessment
precisely on the same ground that the corporation is non-existent
— The remedy of corporate creditors after the 3-year period is to race
where the corporate assets have gone, wherever they rested, be he a
SH or a non-SH. Cause of action is to file an action against that
person who has control over the corporate assets.
Distribution of assets of non-stock corporations
Sec 94
Dissolution
Method Initiating party Action to be taken
Voluntary SHs Amendment of AOI
(shorten term)
Petition for dissolution
with creditors consent
Involuntary Minority/majority SHs Petition for dissolution
 State Quo warranto
Creditors Petition for dissolution 1. collation of property/assets
Inaction SEC Revocation of 2. enforcement of contractual rights
certificate of 3. settlement of obligations
registration

Chapter XVII – Corporate Combinations

SHs do not have unconditional right to determine
whether a dissolution should happen, neither can they
enjoin the State to dissolve
Is dissolution sought to enforce obligations, or satisfy
liabilities?
Can creditors sue for dissolution to enforce
obligations? GR: No!
Exceptions: insufficiency of assets; inability to pay
obligations
Trust fund doctrine continues until every obligation is
satisfied
Result of dissolution: mandatory institution of actions
to enforce obligations
Is dissolution limited to distressed corporations?
Apparently yes.
Dissolution is a step-by-step process
Omit one, you don’t proceed!
Sale of substantially all assets does not mean
dissolution
Liquidating dividends: assumes these are properties
remaining for distribution among SHs as dividends
May even be the assets themselves! Distribution still
based on shares/aliquot ownership
In Teodoro: minority wanted out, but did not have
representation on the board! Personal action sought
to be enforced. (compare with Republic and Cease)
Should a derivative suit be filed in Teodoro? No. its
purpose is to seek redress for a wrong done to the
Board
Purposes of Combinations; Methods
Merger and Consolidation
— Parties to a merger or consolidation are called constituent
corporations
o No liquidation of assets of dissolved corporations
o Surviving or consolidated corporation acquires all their
properties, rights, and franchises
o The SHs of the dissolved corporation become SHs of the
consolidated corporation
— Consolidation is the union of two or more existing corporations to
form a new corporation called the consolidated corporation.
o A combination by agreement between two or more corporations
by which their rights, franchises, privileges, and properties are
united and become those of a single new corporation
o All constituents are dissolved and absorbed by the new
consolidated enterprise
— Merger is a union whereby one or more existing corporations are
absorbed by another corporation which survives and continues the
combined business
o All constituent corporations are dissolved, except the surviving
corporation
o May be horizontal (competing firms), vertical (corporation
acquired is a user of products of the absorbing corporation), or
conglomerate
— In both cases, there is no liquidation of the assets of the dissolved
corporations
— The surviving or consolidated corporation assumes ipso jure the
liabilities of dissolved corporations

Winding Up 3-yr period 1. Nature; distinction

Board of Trustees
— The power to merge or consolidate is not among the inherent
“limited corporate existence” powers of corporations and must be expressly granted by law

12
 — Amendment of Plan
2. Only de facto merger under corporation law o Amendment must be approved by majority vote of the
board
— Old law contained no express provision on merger or o Ratified by at least 2/3 OCS
consolidation — Articles of Merger (AOM)
— Reyes v Blouse paved the way for de facto o Executed by each of the constituent corporations
mergers/consolidations o Signed by president or VP
o Even without express provisions authorizing mergers or o Certified by secretary
consolidations, the effects of such could be obtained by the o Sets forth:
ff:  Merger plan
 Sale of all corporate assets of the absorbed to the  Number of shares outstanding or number of
absorbing members
 Subsequent dissolution of the selling corporation by  Number of shares or members voting for and
shortening its corporate term against the plan
 Amendment of the AOI of the absorbing o AOM must be filed not more than 120 days from date of
o No automatic assumption by the absorbing corporation of long form audit report of each corporation
the liabilities of the absorbed — Submission of financial statements
o Creditor consent is indispensable — Approval by SEC
o SEC issues a certificate of merger or consolidation
3. Express authority to merge granted by Code; requirements o Date of issuance makes merger effective
o Merger does not become effective upon the mere
Secs 76-80 agreement of the constituent corporations
— Once all requirements in 76-80 are complied with,
Procedures in Merger or Consolidation: combination gains legal recognition
— Plan of Merger or Consolidation — Apply to stock and non-stock
o Under Sec 76, the board is expressly empowered to approve — Steps to accomplish a merger/consolidation:
a plan of merger or consolidation which shall set forth the ff: (1) board draws up plan of merger or consolidation
 Names of constituent corporations a. includes any amendment to the AOI or statements
 Terms of the merger and mode of carrying it into required therein
effect (2) submission of plan to SHs of each corporation for approval, at a
 A statement of changes in the AOI of the surviving meeting (2 weeks notice)
corporation in case of merger; all statements a. vote of 2/3 representing 2/3 OCS
required to be set forth in the AOI in the case of (3) execution of formal agreement—Articles of Merger or
consolidation Consolidation
 Such other provisions as are deemed necessary (4) submission of AOM to Sec for approval
o Approval by majority vote of the board (5) SEC sets hearing
— SHs approval (6) Issuance of certificate of merger or consolidation
o at separate corporate meetings of SHs of each corporation a. Only upon issuance of certificate would the merger
o notice given to all SHs at least 2 weeks prior to the meetings become effective
o vote of 2/3 of OCS
— Appraisal right — Effects of merger:
o Available to dissenting SHs (of the absorbing or absorbed o All constituent corporations, except the surviving corporation
corporations or both?) in case of merger, shall be dissolved
o Extinguished when the board decides to abandon its merger o There is no winding up or liquidation of assets of the
plans absorbed—absorbing automatically acquires rights,

13
 privileges, powers and liabilities
o Creditors rights are not impaired
4. Remedies of creditors and dissenting SHs; appraisal right
— Creditors cannot prevent the merger or consolidation, even if the
new entity is unacceptable a debtor as the old corporation
o Remedy: enforce claims against the surviving or consolidated
corporation
o Fraudulent conveyance: follow the assets of the dissolved
constituents in the hands of the surviving or consolidated
corporation
— SHs who dissent cannot prevent the merger or consolidation
o Remedy: exercise their appraisal right
o Fraud or gross unfairness: can enjoin the merger
 If merger already executed: sue for the value of their
interests
 Rescission not granted, generally
o Only a derivative suit in behalf of the corporation is proper
 Exception: personal action may be allowed
o If new stock as are issued by the absorbing to SHs of the
absorbed, SHs of the absorbing cannot exercise preemptive right
 Why? Consideration is for property. No preemptive right
Sale of substantially all corporate assets
— Other ways to effect a merger or combination (other than in code)
— Sale of all its assets to the other in exchange for stock
o Acquiring corporation assumes selling corporation’s liabilities
o Selling corporation shortens its term, dissolves, and liquidates and
distributes stock received form the acquiring
o Consideration must be stocks if the intent is to combine
— No intent to combine: consideration for the sale would be in cash or
other properties and selling corporation may still continue in existence
or remain in suspended animation
Sec 40
1. legal requirements
— sale of all or substantially all assets: one which will render the
corporation incapable of continuing the business or
accomplishing the purpose= SH action required
— short of “substantially all”= no SH action required
14
2. no assumption of liabilities; exceptions
— GR: purchasing corporation will not be liable for the debts of
the selling corporation if it acted in GF and paid adequate
consideration
— Exceptions:
o Purchasing corp impliedly agreed to assume such debts
o Transaction amounts to a consolidation or merger
o Purchasing corp is merely a continuation of the selling
o Transaction entered into fraudulently
3. remedies of dissenting SHs: appraisal right
— minority SH cannot prevent sale if approved by the required
vote
o remedy: appraisal right
 only if there is unrestricted retained earnings
— if sale is fraudulent and entered into to “freeze out” the
minority
o remedy: sue in court to enjoin the sale
— if sale already executed:
o remedy: sue for value of proportionate interest in the new
corporation
— majority SHs do not have appraisal right
o GR: corporation can purchase assets of another
corporation by mere resolution and no need for SH
approval
o Exceptions:
 where amendment to AOI would be necessary to
effect it or
 Where investment in the selling corporation’s
business is not reasonable necessary for the
accomplishment of the purpose
4. compared with merger and consolidation
— merger v sale of all corporate assets:
o merger:
 short cut to the accomplishment of various
transactions
 avoid difficulty of dissolution
 constitutes a transfer of property and business of
one corporation to another in exchange for
securities issued by the absorbing corp to the
absorbed
  automatic assumption of liabilities
o sale:
 there must be sufficient funds reserved by the
absorbed to pay its liabilities
 chance that sale may be attacked by creditors
alleging fraud
 lesser problems in securing SH approval and
recognizing appraisal rights
Reyes v. Blouse et al. F: Minority SHs of the Laguna Tayabas Bus Co file
an action to enjoin Blouse et al from executing its resolution approved
by 99 ½% of SHs to consolidate the properties and franchises of Laguna
Tayabas with Batangas Transport. Blouse believes it is merely an
exchange of properties and not a consolidation.
I: W/n the real purpose of the resolution is merger or consolidation, and
if so, whether it can be carried out under the old Corpo Law.
H: The questioned resolution charges the board of Laguna to consolidate
properties and franchises thereof with that of Batangas Transport. Both
corporations have passed similar resolutions to take steps to effect the
consolidation. It is apparent that the purpose of the resolution is not to
dissolve but to merely transfer its assets to a new corporation in
exchange for its shares. This comes within the purview of the old
corporation law, which provides that a corporation may sell, exchange,
lease or otherwise dispose of all its property and assets when authorized
by affirmative vote of 2/3 of SHs. The phrase “otherwise dispose of”
covers mergers and consolidations. The transaction in this case cannot
be considered, strictly speaking, as a merger or consolidation because a
merger implies the termination or cessation of the merged corporations
and not merely a merger of assets and properties. The two companies
will not lose their corporate existence but will continue to exist after
consolidation. What is intended to be managed and operated by a new
corporation, and not a merger.
The court added that the merger/consolidation (if any) would still be
carried out under the Public Service Law. It does not impose any
qualification other that it shall be done with the approval of the PSC.
Edward Nell Company v Pacific Farms Inc. F: The Edward Nell Co
secured a judgment representing the unpaid balance of the price of a
pump sold to Insular Farms. Pacific Farms then purchased all or
substantially all of shares of stock as well as real and personal property
of Insular, selling the shares to certain individuals who reorganized
Insular. The board of the reorganized Insular then sold its assets to be
sold to Pacific for P10000. The writ of execution was returned, stating
15
that Insular had no leviable property. Nell Co sued Pacific Farms, on
the ground as a result of the purchase of all or substantially all assets
of Insular, Pacific became the alter ego of Insular Farms.
H: GR: where the corporation sells or otherwise transfers all of its
assets to another corporation, the latter is not liable for the debts and
liabilities of the former.
Exception: (1) purchaser expressly or impliedly assumes such debts;
(2) transaction amounts to a consolidation or merger; (3) purchasing
corporation is merely a continuation of the selling corp; (4) there is
fraud to escape liability for the debts
In the present case, no proof was submitted that Pacific expressly
agreed to assume the debts of Insular or that it is a continuation of
Insular, or that the transaction was tainted in fraud of creditors, or
that the two parties merged or consolidated. In fact, the sales took
place, not only over 6 months before judgment, but also over a
month before the filing of the case. Pacific also purchased the shares
as the highest bidder at an auction sale held at the instance of a bank
to which shares have been pledged as security by Insular. Nell Co’s
theory that Pacific is the alter ego of Insular negates the fact of
consolidation/merger, because a corporation cannot be its own alter
ego.
As to the allegation that the selling price of the assets of P10K was
grossly inadequate and thus tainted with fraud, the SC held that the
sale was approved by the SEC and that it should be presumed that
the price was fair and reasonable, and should be a matter litigated in
another venue.
SC: since there is neither proof nor allegation that the transferee-
corporation expressly or impliedly agreed to assume the debt of the
corporation, or that the sale of either the shares or the assets to the
appellee has been entered into fraudulently, in order to escape liability
for the debt of the subject corporation, there was no basis to hold the
transferee liable for the debts and liabilities of the subject corporation
Rules on enforceability of liabilities of the transferor against the
transferee after the transfer
1. pure assets-only transfer: transferee not liable
2. transfer of business enterprise: transferee liable
3. transfer of equity: not liable except where transferee expressly or
impliedly agrees to assume the same
Exchange of stocks
— yet another method of corporate combination
— acquisition of all or substantially all stock of one corporation
from SHs in exchange for stock of another corporation
o SHs of the acquiring become SHs of the acquired
o Once completed, acquired corp becomes a subsidiary of the
acquiring (parent)
— Right of dissenting SHs: depends on whether the mother decides
to retain the acquired corporation as a subsidiary, merges with
it, or buys all its assets
o If parent retains as subsidiary:
 No appraisal right
 No express provision in the Code, but…
 … Campos: SH can sell his stocks to another
corporation, but may be liable for damages if in BF
or if it damages the corporation
o If parent merges or purchases: provisions of the Code
 Same rights as dissenting SHs in a merger or sale—
appraisal right

You have to comply with the provisions of the Code to

legally effect mergers/consolidations; short of that, no
merger, no consolidation!
Parties to a merger/consolidation are the
corporations, not the SHs!
Merger: marriage of assets and assumption of
liabilities
SHs of absorbing become SHs of the absorbed
Isa lang ang patay; or maraming patay pero buhay and
kumain!
Consolidation: lahat ng sumali, patay! Why? Objective
is to put up a new one, which shall own all combined
assets and is the successor-in-interest to all
obligations
Combinations can happen to distressed corporations
Blouse was NOT a merger/consolidation!
Each corporation still had personality
They shared assets, business operations; neither
absorbed the other
There was no new corporation formed
All of the elements below must be present!

Merger/Consolidation

16