CORPORATE DISSOLUTION &

LIQUIDATION
CORPORATE MANAGEMENT JURISPRUDENCE
 DISSOLUTION & LIQUIDATION

• Not all corporations are successful in its business

operations in the Philippines and not all domestic
corporations in the Philippines are meant forever.
• Like humans, corporate life may come to an end and this is
what is technically referred to as dissolution and
liquidation.
• Dissolution – process of terminating the life of a
corporation
• Liquidation – process of winding up the affairs, settlement
of corporate obligations/debts and distribution of
remaining corporate assets through dividends.
 NATURE OF DISSOLUTION

• Dissolution of a corporation signifies the extinguishment

of its franchise and the termination of its corporate
existence for business purpose.
• The mere fact that the corporation has ceased to do
business does not necessarily constitute a dissolution, if
it is still solvent and has not gone into liquidation.
 METHODS OF DISSOLUTION
SEC. 133, RCC

1. Voluntary
• A dissolution upon the instance of the corporation
itself
• It is the corporation who files the request or petition to
have the corporation be dissolved
2. Involuntary
• A dissolution upon a complaint filed with the SEC
• It is involuntary because the request or petition to have
the corporation be dissolved is upon the instance of
another person, not the corporation.
 VOLUNTARY DISSOLUTION

• Voluntary dissolution of corporations under the

Revised Corporation Code is effected as follows:
• Voluntary dissolution where no creditors are
affected
• Voluntary dissolution where creditors are affected
• Dissolution by shortening of the corporate term.
 VOLUNTARY DISSOLUTION
NO CREDITORS AFFECTED (SEC. 134, RCC)

• When no creditors are involved, only a SEC application for

dissolution is required.
• The dissolution may be effected by majority vote of the
Board of Directors/Trustees and by a resolution adopted
by the affirmative votes of the stockholders owning
majority of the outstanding capital stock or majority of
the members in case of a non-stock corporation.
• A verified request for dissolution shall be filed with the
SEC.
 VOLUNTARY DISSOLUTION
NO CREDITORS AFFECTED (SEC. 134, RCC)

• The SEC will not deny an application for dissolution

when there are no creditors involved because of the
constitutional prohibition against involuntary
servitude or the constitutional guarantee of
association, and the right to refuse to continue an
association.
• Dissolution shall take effect upon the issuance by
the SEC of the Certificate of Dissolution.
 VOLUNTARY DISSOLUTION
THERE ARE CREDITORS AFFECTED (SEC. 135, RCC)

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

formal petition for dissolution with the SEC.
• The petition must be signed by the majority of the
members of the Board and that such is resolved upon
the affirmative votes of the stockholders representing
2/3 of the outstanding capital stock or 2/3 of the
members in case of a non stock corporation.
• The petition will be published in a newspaper of
general circulation together with a notice of the date
of hearing.
 VOLUNTARY DISSOLUTION
THERE ARE CREDITORS AFFECTED (SEC. 135, RCC)

• The hearing of the petition will proceed as scheduled.

• Oppositions or objections, if there be, will be heard.
• The hearing is conducted to ensure that the rights of
the creditors are fully protected.
• The SEC is not mandated to dissolve the corporation,
especially when it would be detrimental to the
interests of the creditors, who may wish to rehabilitate
the operations of the corporation to ensure that it
would be able to pay-off all of its debts.
• Dissolution shall take effect upon the issuance by
the SEC of the Certificate of Dissolution.
 VOLUNTARY DISSOLUTION
SHORTENING OF CORPORATE TERM (SEC. 136, RCC)

• Requires compliance with the rules on amending the

articles of incorporation as provided by the Revised
Corporation Code
• Copy of the Amended Articles of Incorporation (AOI)
shall be submitted to the SEC.
• Upon the expiration of the shortened term, the
corporation shall be deemed dissolved without any
further proceedings but subject to liquidation.
• Dissolution takes effect the day after the last day of
corporate term as stated in the AOI.
 INVOLUNTARY DISSOLUTION
SEC. 138, RCC

• A corporation may be dissolved by the SEC itself or

upon filing of a verified complaint by any interested
party.
• Grounds for dissolution
• Non-use of corporate charter (2 years)
• Continuous inoperation (5 years)
• Upon receipt of a lawful order of a court dissolving the
corporation
• Upon final judgment finding that the corporation
procured its AOI through fraud.
 INVOLUNTARY DISSOLUTION
SEC. 138, RCC

• Upon final judgment finding the corporation was created

for the purpose of committing securities violation,
smuggling, tax evasion, money laundering or graft and
corrupt practices
• Upon final judgment finding the committed or aided in
the commission of securities violation, smuggling, tax
evasion, money laundering or graft and corrupt practices
• Upon final judgment finding the corporation repeatedly
and knowingly tolerated the commission of graft and
corrupt practices or other fraudulent or illegal acts by its
directors, trustees, officers or employees.
 NON-USER OF CHARTER AND
CONTINUOUS IN-OPERATION

• If a corporation does not formally organize and commence the

transaction of its business or the construction of its works within two
(2) years from the date of its incorporation, its corporate powers
cease and the corporation shall be deemed dissolved.
• “Organize” involves the election of officers, providing for the subscription
and payment of the capital stock, the adoption of by-laws, and such other
steps as are necessary to endow the legal entity with the capacity to
transact the legitimate business for which the corporation was created.
• However, if a corporation has commenced the transaction of its
business but subsequently becomes continuously inoperative for a
period of at least five (5) years, the same shall be a ground for the
suspension or revocation of its certificate of incorporation.
• The failure to file the by-laws does not automatically operate to
dissolve a corporation but is now considered only a ground for such
dissolution. (Chung Ka Bio v. IAC, 163 SCRA 534 [1988])
 QUO WARRANTO

• The Solicitor General or a public prosecutor, when

directed by the President of the Philippines, or when
upon complaint or otherwise he has good reason to
believe that any case specified in the preceding
section can be established by proof, must commence
such action.
• Dissolution is a serious remedy granted by the courts
only in extreme cases and only to ensure that there is
an avoidance of prejudice to the public.
 QUO WARRANTO

• Even when the prejudice were public in nature, the

remedy is to enjoin or correct the mistake; and only
when it cannot be remedied anymore that dissolution
should be imposed.
• Dissolution was imposed on a corporation that was
engaging in banking activities without a license from
the Central Bank, and risking the savings of the public.
(Republic v. Security Credit & Acceptance Corp., 19
SCRA 58 [1967])
 LEGAL EFFECTS OF DISSOLUTION

• A corporation’s board of directors is not rendered funtus officio by

its dissolution, since Section 122 of the Corporation Code prohibits a
dissolved corporation from continuing its business, but allows it to
continue with a limited personality in order to settle and close it
affairs, including its complete liquidation. Necessarily there must be a
board that will continue acting for and on behalf of the dissolved
corporation for that purpose. (Aguirre II v. FQB+7, Inc., 688 SCRA 242
[2013])
• The dissolution of a juridical entity does not by itself cause the
extinction or diminution of the rights and liability of such entity, since
it is allowed to continue as a juridical entity for 3 years for the
purpose of prosecuting and defending suits by or against it and
enabling it to settle and close its affairs, to dispose of and convey its
property, and to distribute its assets. Republic v. Tancinco, 394 SCRA
386 [2002])
 LEGAL EFFECTS OF DISSOLUTION

• It has no authority to enter into new business.

• A corporation cannot extend its life by amendment of its articles
of incorporation effected during the three-year statutory period
for liquidation when its original term of existence had already
expired, as the same would constitute new business.
• When the period of corporate life expires, the corporation
ceases to be a body corporate for the purpose of continuing
the business for which it was organized. (PNB v. Court of First
Instance of Rizal, Pasig, Br. XXI, 209 SCRA 294 [1992])
• A corporation that has reached the stage of dissolution is no
longer qualified to receive a secondary franchise. (Buenaflor
v. Camarines Industry, 108 Phil. 472 [1960])
 LIQUIDATION

• The settlement of its affairs consists of adjusting the

debts and claims, i.e., collecting all that is due to the
corporation, the settlement and adjustment of claims
against it and the payment of its just debts. (Yu v.
Yukayguan, 589 SCRA 588 [2009])
• It connotes a winding up or settling with creditors and
debtors.
• It is the winding up of a corporation so that assets are
distributed to those entitled to receive them.
• It is the process of reducing assets to cash, discharging
liabilities and dividing surplus or loss. (PVB Employees
Union-N.U.B.E. v. Vega, 360 SCRA 33 [2001])
 METHOD OF LIQUIDATION
THE BOARD OF TRUSTEES PURSUING LIQUIDATION

• It is subject to a 3-year period.

• Even after the expiration of the 3-year period, corporate creditors
can still pursue their claims against corporate assets against the
officers or stockholders who have taken over the properties of the
corporation. (Tan Tiong Bio v. Commissioner, 100 Phil. 86 [1956])
• Although a corporate officer is not liable for corporate
obligations, such as claims for wages, however, when such
corporate officer ceases corporate property to apply to his own
claims against the corporation, he shall be liable to the extent
thereof to corporate liabilities, since knowing fully well that
certain creditors had similarly valid claims, he took advantage of
his position as general manager and applied the corporation's
assets in payment exclusively to his own claims. (De Guzman v.
NLRC, 211 SCRA 723 [1992])
 METHOD OF LIQUIDATION
LIQUIDATION PURSUED THRU A COURT-APPOINTED RECEIVER

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

appointment of the receiver. The receiver is actually an officer of
the court and must therefore be accountable to the court.
• When the liquidation of a dissolved corporation has been placed
in the hands of a receiver or assignee, the 3-year period
prescribed by law for liquidation cannot be made to apply, and
that the receiver or trustee may institute all actions leading to
the liquidation of the assets of the corporation even after the
expiration of said period. (Sumera v. Valencia, 67 Phil. 721
[1939])
 METHOD OF LIQUIDATION
LIQUIDATION THROUGH A TRUSTEE

• A trusteeship is basically a contractual relationship governed by the

Law on Trust, and generally centered upon property, such that the
trustee assumes naked title to the property placed in trust.
• It is therefore a relationship that can be created by a corporation
through its Board of Directors, without need of judicial authorization.
• The trustee in liquidation is not appointed by any court, but he is
actually a transferee who holds legal title to the corporate assets
and he is accountable under the terms of the trust agreement. The
trustee's fiduciary obligations are provided in the trust instrument
and by applicable legal provisions.
• If the three-year extended life has expired without a trustee or
receiver having been expressly designated by the corporation within
that period, the board of directors (or trustee) itself, may be
permitted to continue as “trustees” by legal implication to complete
the corporation liquidation.
 EXTENSION OF CORPORATE LIFE DURING
PERIOD OF DISSOLUTION

• The Supreme Court has consistently taken the position that

it would be illegal for the corporation, when it has reached
the stage of dissolution, to seek to extend its corporate life,
even with the amendment of the articles of incorporation,
because the same would constitute "new business" contrary
to the injunction of the law that upon dissolution the
corporation cannot go into a transaction "for the purpose of
continuing the business for which it was established."