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CONDONATION OF SUBSCRIPTIONS RECEIVABLES OR

CANCELLATION OF SUBSCRIPTIONS
Subscription receivables due from shareholders of a corporation cannot be
condoned
The partially-paid subscription of a shareholder cannot be considered as full
payment
Subscription contracts cannot be cancelled without just cause

M
ay a corporation condone subscriptions receivables?

The above query was one of the issues that were tackled in the Opinion
No. 19-50 dated October 11, 2019 rendered by the Securities and
Exchange Commission (SEC). In responding to the query, the SEC
referred to what the law, particularly the Revised Corporation Code,
has to say.

The law says:

No corporation shall distribute any of its assets or property except upon lawful
dissolution and after payment of all its debts and liabilities except by decrease of
capital stock. This is called “Trust Fund Doctrine”.

The “Trust Fund Doctrine” considers the subscribed capital as a trust fund for the
payment of the debts of the corporation, to which the creditors may look for
satisfaction. Until the liquidation of a corporation, no part of the subscribed capital
may be returned or released to the stockholder (except in the redemption of
redeemable shares) without violating the principle of Trust Fund Doctrine. Thus,
dividends must never impair the subscribed capital; subscription commitments
cannot be condoned or remitted; nor can the corporation buy its own shares using
the subscribed capital as a consideration.

Also, upon the acceptance of a stock subscription by a corporation, the subscription

becomes a binding contract to which the subscriber cannot withdraw. In the same
manner, a corporation does not have the power to release an original subscriber
from its subscription, and as against the creditors, a reduction of the capital stock
can only take place in the manner and under the conditions prescribed by law or
the charter of the corporation. Again, to do so would be violative of the Trust Fund
Doctrine since it does not fall under any of the allowable instances where a
corporation may distribute its assets to its creditors and stockholders. As such,
subscription contracts cannot be cancelled by the Board of Directors without
justifiable cause. Thus, a corporation may not condone subscription receivables due
from shareholders as it violates the Trust Fund Doctrine.

May a corporation issue a certificate of stock for the portion of the subscription that
is paid and cancel the portion which remains unpaid?

The law says:

No.

Again, this is similar to the discussion above. A corporation cannot issue a

certificate of stock for the portion of the subscription that is paid and cancel the
portion which remails unpaid as it violates the doctrine of divisibility. The “Doctrine
of Indivisibility” which is enunciated under the Revised Corporation Code provides
that no certificate of stock shall be issued to a subscriber until the full amount of
the subscription together with interest and expenses (in case of delinquent shares),
if any is due, has been paid. The cancellation of the subscription which remains
unpaid is in effect a condonation of part of the subscription of a stockholder which
is violative of the Trust Fund Doctrine as already explained earlier.