VOLCANOTES 2020 | CORPORATION LAW

6. Organization and Commencement of Business ü Formal organization – refers to the process

a. Corporate Organization – after issuance of of structuring the corporations to enable it to
the certificate of incorporation or registration, the effectively pursue the purpose for which it
corporation must formally organize and commence was organized.
its business lest it will be deemed dissolved. o It includes the following:
1. Organizational meeting of the
Sec. 21. Effects of Non-Use of Corporate Charter and
stockholders to elects its BOD;
Continuous Inoperation – if a corporation does not 2. Adoption of by-laws, if not
formally organize and commence its business within 5 simultaneously filed with the
years from the date of its incorporation, its certificate AOI, and its subsequent filing
of incorporation shall be deemed revoked as of the with the SEC which must be
day following the end of the 5-year period. within 1 month form the
issuance of the certificate of
However, if a corporation has commenced its business
but subsequently becomes inoperative for a period of
incorporation.
at least 5 consecutive years, the Commission may, 3. Organizational meeting of the
after due notice and hearing, place the corporation BOD elected to elect the
under delinquent status. corporate offices, adoption of
corporate seal, accepting pre-
A delinquent corporation shall have a period of 2 years incorporation subscriptions,
to resume operation and comply with all the
establishing the principal
requirements that the Commission shall prescribe.
Upon compliance by the Corporation, the Commission office and such other steps
shall issue an order lifting the delinquent status. necessary to transact the
Failure to comply with the requirements and resume legitimate business for which
operations within the period given by the Commission the corporation was formed.
shall cause the revocation of the corporation’s
certificate of incorporation. ü SC: “organize” or “organization” 
o Election of officers,
The Commission shall give reasonable notice to, and
coordinate with the appropriate regulatory agency o Providing for the subscription and
prior to the suspension of revocation of the certificate payment of capital stock,
of incorporation of companies under their special o The adoption of laws, and
regulatory jurisdiction. o Such other steps as are necessary to
endow the legal entity with capacity
to transact the legitimate business for
ü Failure of the corporation to organize within which it was created.
5 years from the date of its incorporation
would result in its automatic dissolution.

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b. Commencement of Business Transaction
ü Means that the corporation has actually
functioned and engaged in the business for
which it was organized.
ü This may take form of entering into contracts
which tend to pursue its business
undertaking or other acts related thereto.
ü It is to be observed, that the Code requires
the corporation to commence the transaction
of its business within 5 years from the date of
its incorporation, otherwise, its corporate
powers ceases, and it shall be deemed
dissolved.
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V. CORPORATE CHARTER AND ITS AMENDMENTS
1. The Corporate Charter
ü Corporate charter – an instrument or
authority form the sovereign power,
bestowing rights or power, and is often used
convertibly with the term “Act of
Incorporation”, where the corporation was
formed under a special act of the legislature,
and with the “AOI”, when the corporation
was formed under a general law.
ü “Charter”, whether formed under a special
law or by virtue of the general provisions of
a governing corporation law, is regarded as
a three-fold contract:
1. Between the corporation and the
state – insofar as it concerns its
primary franchise to be and act as a
corporation;
2. Between the corporation and the
stockholders or members – in so far
as it governs their respective rights
and obligations; and
3. Between and among the
stockholders or members themselves
– as far as their relationship with one
another is concerned.
ü Charter –
o Corporations created under the CC –
consist of the AOI and the relevant
laws under which it is created, or the
Corporation Code itself inclusive of
the by-laws adopted thereunder and
all pertinent provisions of any statute
governing them.
o Corporations created by legislative
act or those mentioned in Sec. 4 of
this Code – consist of the special law
creating the same and any and all
laws, rules and regulations affecting
or applicable to them.
ü Sometimes, “charter” is likewise
interchanged with the word “franchise”.
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o Franchise – may either be primary or
secondary.
 Primary franchise – right to
exist as a corporation.
 Secondary franchise or special
franchise – powers and
privileges vested in a ü
corporation.
 EXAMPLE: State,
through SEC, issues a
certificate of
incorporation of an
employment agency
and effectively vests
unto it the right to be
and act as a individual property of its stockholders UNLESS transferred to
corporation. – there in
this case is a grant of
primary franchise.
In order, to legally acts
as an international or
overseas employment
agency, it must secure
a license or authority
from the POEA – the
grant of license would
constitute secondary
franchise.
a. Corporate Entity Theory
Sec. 18. Registration, Incorporation, and
Commencement of Corporate Existence –
…. A private corporation organized under this Code
commences its corporate existence and juridical
personality form the date the Commission issues the
certificate of incorporation under its official seal and
thereupon the incorporators, stockholders/members
and their successors shall constitute a body corporate
under the name stated in the articles of incorporation
for the period of time mentioned therein, unless said
period is extended or the corporation is sooner
dissolved in accordance with law.
3 corporation.
ü As a legal entity, the corporation is possessed
with a personality separate and distinct from
the individual stockholders or members.
ü Corporation is NOT affected by the personal
rights, obligations or transactions of its
members or stockholders.
The properties owned by the corporation –
belongs to it exclusively as a separate
juridical entity.
o The personal creditors of its
stockholders or members CANNOT
attach corporate properties to satisfy
their claims.
SULO NG BAYAN, INC. V. GREGORIO ARANETA, INC.
ü a corporation ordinarily has NO interest in the
the corporation.
ü Absent any showing if interest, a corporation, like the
plaintiff Sulo ng Bayan, has NO personality to bring an action
for and in behalf of its stockholders or members for the
purpose of recovering property which belongs to said
stockholders or members in their personal capacities.
FACTS: Sulo ng Bayan, Inc. is a domestic corporation which
filed an accion de revidicacion to recover the ownership of
almost 28,000 sq. m. of land for and in behalf of its
members. Said members, through themselves and their
predecessors-in-interest had pioneered in the clearing of
the land and cultivated the same since the Spanish Regime
and continuously possessed the said property.
Sulo ng Bayan alleged that defendant, Gregorio
Araneta, Inc., sometime in 1958, thorugh force and
intimidation, ejected the members of plaintiff corporation
form their possession of the tract of land in question.
Sulo’s PRAYER:
ü Title issued to Gregorio Araneta, Inc. be nullified.
ü Plainitffs-members be declared as absolute
onwers of said property.
ü Certificates of Title be issued to the members of
Sulo ng Bayan, Inc.
ISSUE: W/N Sulo ng Bayan, Inc. may institute an action for
recovery of the property for its individual members.
HELD: NO. As a rule, corporation is a distinct legal entity to
eb considered as separate and distinct apart from its
individual stockholders or members who compose it.
The property of the corporation is its
property and not that of the stockholders.
Conversely, a corporation ordinarily has NO
interest in the individual property of its
stockholders UNLESS transferred to the
It has NOT been claimed that the members have
assigned or transferred whatever rights they may have on
the land in question to the plaintiff corporation. Absent
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FERMIN CARAM JR and ROSA DE CARAM V. CA
ü As a bonafide corporation, the Filipinas Orient
Airways should alone be liable for its corporate
act as duly authorized by its directors and
officers.
ü Petitioners cannot be held personally liable for
compensation claimed by the private respondents
because they did not contract such services.
FACTS: Fermin Caram Jr and Rosa de Caram were ordered
to jointly and severally pay Alberto Arellano, the amount
of Php 50,000.00 for the preparation of the project study
and his technical services that led to the organization of
the defendant corporation.
Petitioners claim that this order has NO support in
fact and in law because they have no contract with the
private respondent. Their position is that as mere
subsequent investors in the corporation that was later
created, they should not be held solidarily liable with the
Filipinas Orient Airways, a separate juridical entity, and
with Barreto and Garcia, their co-defendants in the lower
court, who were the ones who requested the said services
from the Arellano.
ISSUE: W/N petitioners are personally liable for such
expenses, and if so, to what extent?
HELD: NO. The petitioners are not personally liable for
such expenses.
The petitioners were NOT involved in the initial
stages of the organization of the airline.
As a bonafide corporation, the Filipinas Orient
Airways should alone be liable for its corporate act as
duly authorized by its directors and officers.
Petitioners cannot be held personally liable for
compensation claimed by the private respondents
because they did not contract such services. The most that
can be said is that they benefited from such services, but
that is no justification to hold them personally liable.
Otherwise, all other stockholders of the corporation
including those who came in later, would be equally and
personally liable also with the petitioners for the claims of
the private respondents.
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RUSTAN PULP PAPER MILLS, INC. V. IACC
ü “the president and manager of a corporation
who entered into a signed contract in his official
capacity, cannot be made liable thereunder in his
individual capacity in the absence of stipulation to that
effect due to the personality of the corporation being
separate and distinct form the person composing it. “
FACTS: Rustan established a pulp and paper mill in Baloi,
Lanao del Norte. Respondent Lluch, transmitted a letter to
Ruston for the supply of raw materials by the former to
the latter which culminated the execution of a contract of
sale, whereby Lluch agreed to sell, and Rustan undertook
to pay the price of P30.00 per cubic meter of pulp wood
raw materials to be delivered at the buyer’s plant.
For sometime, deliveries were made by Lluch until
Sepetember 1968 when Romeo Vergara, the resident
manager of Rustan, wrote a letter to Lluch, informing the
latter that the supply of raw materials to them has become
sufficient and they will not be needing further delivery
form Lluch. And asked Lluch to stop delivering thirty days
from the day the letter was sent.
Lluch sought to clarify the tenor of the letter as to
the stoppage of delivery or termination of the contract of
sale was intended. The query was NOT answered.
Lluch ans other suppliers resumed deliveries and
later on, filed a complaint for contractual breach but such
complaint was dismissed.
IAC: modified the decision and directed Rustan Pulp to pay
private respondents jointly and severally, the sume of
P30,000 for moral damages.
ISSUE: W/N petitioners, Tantoco and Vergara, could be
held to answer for damages.
HELD: NO. The court said, “the president and manager of
a corporation who entered into a signed contract in his
official capacity, cannot be made liable thereunder in his
individual capacity in the absence of stipulation to that
effect due to the personality of the corporation being
separate and distinct form the person composing it. “
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CRUZ V. DALISAY
ü As a legal entity, a corporation has a personality
distinct and separate from its individual
stockholders or members.
ü The mere fact that one is president of a
corporation does not render the property he
owns or possesses, the property of the
corporation, since the president, as individual,
and the corporation are separate entities.
FACTS: Adelio Cruz charged Quiterio Dalisay, Senior
Deputy Sheriff of Manila, with malfeasance in office, when
the respondent sheriff attached and/or levied the money
belonging to complainant Cruz when he was NOT himself
the judgment debtor in the final judgment sought to be
enforced, but rather the company known as Qualitrans
Limousine Service, Inc. a duly registered corporation.
Respondent Dalisay explained that when he
garnished complainant’s cash deposit at the Philtrust bank,
he was merely performing a ministerial duty. While it is
true that the said writ was addressed to Qualitrans, the
complainant executed an affidavit stating that he is the
owner/president of said corporation and because of that
declaration, the counsel of the plaintiff in the labor case
advised him to serve the notice of garnishment on the
bank.
ISSUE: W/N the charge against the respondent should be
upheld for attaching the personal property of the
corporate president.
HELD: YES. The Court found that respondent Dalisay was
negligent in enforcing the writ of execution.
In enforcing writ of execution, it is incumbent
upon him to ensure that only he portion of a decision
ordered or decreed should be the subject of execution. No
more. No less.
The NLRC judgment and implementing writ is
clear. It directed Qualitrans to reinstate the discharged
employee and pay the full backwages. Respondent,
however, chose to “pierce the veil of corporate entity”
usurping a power belonging to the court and assumed
improvidently that since the complainant is the
owner/president, they are one and the same.
5 As a legal entity, a corporation has a personality
distinct and separate from its individual stockholders or
members. The mere fact that one is president of a
corporation does not render the property he owns or
possesses, the property of the corporation, since the
PALAY INC. V CLAVE
ü Mere ownership by a stockholder or another
corporation of all nearly all of the capital stock
of a corporation is NOT, of itself sufficient
ground for disregarding the separate corporate
personality.
ü The veil of corporate fiction may only be pierced
if it is used to protect fraud.
FACTS: Palay Inc. through its president, Albert Onstott,
executed in favor of private respondent, Nazario Dumpit, a
contract to sell of a parcel of land in Crestview Heights
Subdivision in Antipolo, Rizal. The contract provided for
automatic recission upon default in payment of any
monthly amortization without need of notice and with
forfeiture of all installments paid.
Respondent Dumpit paid the down payment and
several installments up to December 1967,
Almost 6 years later, private respondent
wrote petitioner offering to update all his
overdue accounts with interests and seeking its
written consent to the assignment of his rights to
a certain Lourdes Dizon.
Petitioners informed respondent that his
contract to sell had long been rescinded pursuant
to par. 6 of the contract, and that the lot had
already been resold.
Dumpit filed a letter-complaint with the
NHA, questioning the validity of the rescission of
the contract.
NHA, found the rescission void in the
absence of either judicial or notarial demand, and
ordered Palay Inc., and Alberto Onstott, in his
capacity as President, jointly and severally, to
refund immediately Nazario Dumpit the amount
paid plus 12% interest.
ISSUE: W/N the corporate president is liable to the
amount stated in the NHA ruling.
HELD: NO. Mere ownership by a stockholder or another
corporation of all nearly all of the capital stock of a
corporation is NOT, of itself sufficient ground for
disregarding the separate corporate personality.
As a general rule, a corporation may not be made
to answer for acts or liabilities of its stockholders or those
of the legal entities to which it may be connected and vice-
versa.
BOTH the corporation and its president are NOT
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SOIANO, ET AL. V.
ü As
FACTS: The President, Manager, Treasurer and Director
Representative of Bacarra Facoma, Inc. executed a
dcoumentt as proof of the receipt from Gervacio Cu a
truck load of Virginia Tobacco.
Conflict later arose when Mr. Cu was not paid his
tobacco, prompting him to file a complaint for collection fo
sum of money against all the signatories of the receipt.
RTC: Ordered the signatories of the recipe tot pay Mr. Cu
jointly and severally, P19, 350.00.
CA: Affirmed RTC decision.

ISSUE: W/N the signatories of the receipt are liable for the
money judgment rendered by the trial court.

HELD: NO.
The acts of the petitioners -indicating in
the receipt their official designation- is vital in the
resolution of the case. The official designations
are NOT merely meaningless and hollow
decorations. The receipt itself states that the
conditions contained therein were between Mr.
Cu and the “association”. “Association” refers to
non-other than Bacaraa Facoma, Inc., which is a
farmer’s cooperative marketing association. It is
clear that the liability of the petitioners is NOT
personal but corporate, therefore it attaches to
Bacarra Facoma, Inc., which being a corporation,
has a personality distinct and separate from that
of the petitioners who are only its officers.
It is the general rule that the protective mantle of
a corporation’s separate and distinct personality could
only be pierced, and liability attached directly to its officers
and/or members-stockholders, when the same is used for
fraudulent, unfair or illegal purpose.
In the case at bar, there is NO showing that the
Association entered into the transaction with the private
respondent for the purpose of defrauding the latter of his
goods or the payment thereof, there is no proof
whatsoever that the majority of the directors used the
distinct and separate from that of the petitioners

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2. Piercing the Veil of Corporate Fiction

a. General Concept
ü The notion of corporate legal entity is NOT, at
all times respected.
o This is because the applicability of the
corporate entity theory is confined to
legitimate transactions and is subject
to equitable limitations to prevent
being used as a cloak for fraud or
illegality, or to work an injustice.
ü Corporation is an entity separate and distinct
from its stockholders or members and rom
other corporations to which it may be
connected.
ü BUT when the notion of legal entity is used
to defeat public convenience, justify wrong,
protect fraud or defend crime, the law will
regard the corporation as a mere association
of persons, or in the case of 2 corporations,
merge them into one, the one being merely
regarded as part or instrumentally of the
other.
o The same is true where a corporation
is a mere dummy and serves no
business purpose and is intended only
as a blind, or an alter-ego or business
conduit for the sole benefit of the
stockholders.
ü Doctrine of piercing the veil of the corporate
fiction has been applied by the SC in the
following instances:
1. When the corporate entity is used to
evade taxes, or
2. When necessary for the protection of
creditors, or
3. To perpetuate deception.
o In such cases, liability will attach directly
to the officers and stockholders, in so far
as that particular is concerned.

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stated capital vs legal capital

SC - sum of the par value of all issued par
value shares or any amount transferred
via stock div. or any corp action from
surplus to stated capital

LC - amount equal to the aggregate par or

issued value of stated SCS

Working capital vs circulating capitalWC-

excess of current assets over current
liabilities

CC - total amount of current assets