REVISED CORPORATION CODE

TRUST FUND DOCTRINE

Meaning & Under the doctrine, capital stock, property and other assets of a
Concept corporation are regarded as equity in trust for the payment of corporate
creditors. It also provides that subscriptions to the capital stock of a
corporation constitute a fund to which creditors have a right to look for
the satisfaction of their claims.

A corporation may not dissipate this and the creditors may sue
stockholders directly for the unpaid subscription.

Effects 1. Dividends must never impair the subscribed capital stock and must
only be declared out of unrestricted retained earnings;
2. Subscription commitments cannot be condoned or remitted;
3. Generally, the corporation cannot buy its own shares using the
subscribed capital as the consideration therefore except on the
following:
• in case of redeemable shares which may be acquired even
without surplus profit for as long as it will not result to the
insolvency of the corporation,
• when corporation conveys its stocks in payment of a debt; or
• In a close corporation, a stockholder may demand the
payment of the fair value of shares regardless of existence of
retained earnings for as long as it will not result to the
insolvency of the corporation

Examples of • When the corporation releases or condones payment of the

cases where unpaid subscription
the Trust • When there is payment of dividends without unrestricted
Fund earnings
Doctrine is • When properties are transferred in fraud of creditors
violated • When properties are disposed of or undue preference is given to
some creditors even if the corporation is insolvent.

Provisions in (1) Distribution of capital assets which is allowed only on the three
the RCCP (3) instances as follows:
based on the a. Amendment of the AOI to reduce authorized capital stock;
Trust Fund b. Purchase of redeemable shares by the corporation regardless
Doctrine of existence of unrestricted retained earnings; or
c. Dissolution and eventual liquidation of the corporation

(2) Section 40 of the RCCP on the power of a corporation to acquire

its own shares
(3) Section 139 of the RCCP on the prohibition against the
distribution of corporate assets and property unless the stringent
requirements are complied with
DOCTRINE OF PIERCING OF CORPORATE VEIL

Meaning & A corporation is a legal entity distinct form persons composing it. But,
Concept when the veil of corporate fiction is used as a shield to perpetuate
fraud, to defeat public convenience, justify wrong or defend crime, the
fiction is disregard and the individuals composing it will be treated as
one.

This doctrine is applicable to both stock and non-stock corporation. It

also applies to One Person Corporation.

Effects 1. The corporation will be treated merely as an association of

persons -undertaking a business and liability will attach directly
to the officers and stockholders.
2. Where there are two (2) corporations, they will be merged into
one, the one being merely regarded as the instrumentality,
agency, conduit or adjunct of the other.

Ground for the 1. defeat of public convenience as when the corporate fiction is used
application of as a vehicle for the evasion of an existing obligation;
the doctrine 2. fraud cases or when the corporate entity is used to justify a wrong,
protect fraud, or defend a crime; or
3. alter ego cases, where a corporation is merely a farce since it is a
mere alter ego or business conduit of a person, or where the
corporation is so organized and controlled and its affairs are so
conducted as to make it merely an instrumentality, agency,
conduit or adjunct of another corporation

The test in 1. Control, not mere majority or complete stock control, but
determining the complete domination, not only of finances but of policy and
applicability of business practice in respect to the transaction attacked so that
the doctrine of the corporate entity as to this transaction had at the time no
piercing the veil separate mind, will or existence of its own;
of corporate 2. Such control must have been used by the defendant to
fiction is as commit fraud or wrong, to perpetuate the violation of a
follows statutory or other positive legal duty or dishonest and unjust
(Instrumentality act in contravention of plaintiff's legal rights; and
Rule/Three- 3. The aforesaid control and breach of duty must proximately
Pronged Control cause the injury or unjust loss complained of. (Concept
Test): Builders, Inc. v. NLRC, G.R. No. 108734 May 29, 1996)

SUITS BY STOCKHOLDERS/MEMBERS

Types of Suits 1. Individual Suit. A suit filed when the action personally belongs to
the shareholder or member. The shareholder or member sues in his
own name and pays for the corresponding costs of litigation. (e.g.,
right to receive dividends)

2. Class Suit. A suit filed when the cause of action belongs to a group
of shareholders.
 3. Derivative Suit. An action initiated by shareholders in the name or
for the benefit of the corporation against the management or
controllers of the corporation. The action is premised on the breach of
directors’ duties. The benefit from the suit will accrue to the
corporation, and not to the shareholders who instituted the action.

A derivative suit Suits by stockholders or members of a corporation based on wrongful

must be or fraudulent acts of directors or other persons may be classified into
differentiated individual suits, class suits, and derivative suits. Where a
from individual stockholder or member is denied the right of inspection, his suit
and would be individual because the wrong is done to him personally
representative and not to the other stockholders or the corporation. Where the
or class suits, wrong is done to a group of stockholders, as where preferred
thus: stockholders’ rights are violated, a class or representative suit
will be proper for the protection of all stockholders belonging to
the same group. But where the acts complained of constitute a
wrong to the corporation itself, the cause of action belongs to
the corporation and not to the individual stockholder or
member. Although in most every case of wrong to the corporation,
each stockholder is necessarily affected because the value of his
interest therein would be impaired, this fact of itself is not sufficient
to give him an individual cause of action since the corporation is a
person distinct and separate from him, and can and should itself sue
the wrongdoer. Otherwise, not only would the theory of separate
entity be violated, but there would be multiplicity of suits as well as a
violation of the priority rights of creditors. Furthermore, there is the
difficulty of determining the amount of damages that should be paid
to each individual stockholder.

However, in cases of mismanagement where the wrongful acts are

committed by the directors or trustees themselves, a stockholder or
member may find that he has no redress because the former are vested
by law with the right to decide whether or not the corporation should
sue, and they will never be willing to sue themselves. The corporation
would thus be helpless to seek remedy. Because of the frequent
occurrence of such a situation, the common law gradually
recognized the right of a stockholder to sue on behalf of a
corporation in what eventually became known as a "derivative
suit." It has been proven to be an effective remedy of the minority
against the abuses of management. Thus, an individual stockholder
is permitted to institute a derivative suit on behalf of the
corporation wherein he holds stock in order to protect or
vindicate corporate rights, whenever officials of the corporation
refuse to sue or are the ones to be sued or hold the control of the
corporation. In such actions, the suing stockholder is regarded
as the nominal party, with the corporation as the party in
interest. (Cua, Jr. v. Tan, G.R. Nos. 181455-56 and 182008, December
4, 2009)
Requisites of a Rule 8, Section 1 of the Interim Rules of Procedure for Intra Corporate
Derivative Suit Controversies provides the five (5) requisites for filing derivative suits
as follows:
1. He was a stockholder or member at the time the acts or
transactions subject of the action occurred and at the time the
action was filed;
2. He exerted all reasonable efforts, and alleges the same with
particularity in the complaint, to exhaust all remedies available
under the articles of incorporation, by-laws, laws or rules
governing the corporation or partnership to obtain the relief he
desires;
3. No appraisal rights are available for the act or acts complained
of;
4. The suit is not a nuisance or harassment suit; and,
5. The shareholder who is suing must allege in his complaint that
he is suing on a derivative cause of action on behalf of the
corporation and all other shareholders similarly situated who
wish to join him. (Florete v. Florete, G.R. Nos. 174909 & 17725,
January 20, 2016)