PROBLEM EXERCISES in
CORPORATION LAW
Prepared by: Dr. Jeannie P. Lim
1. Compare a Stock Corporation, Non-Stock Corporation and a Close Corporation:
Stock Corporation
It has capital stock
It’s existence can be De Jure or
De Facto
Its shares are listed in the
exchanges
Corporate shares can be held by
any number of persons
Under the revised Corporation
Code, it subscribed to the capital
stock of another corporation. It is
allowed to be an incorporator of
another corporation
Can declare dividends to its
stockholders
Shares as assessable and
corporation can call for payment
Board of Directors manages the
corporation. S/S cannot
participate in the management of
the corporation
BOD are elected for a one year
term, number of directors cannot
exceed 15 except banks under
merger or consolidation (21)
Stockholders elect BOD and
BOD elect the officers of the
corporation
Venue of stockholders’ annual
meetings is at the principal
office; Venue of BOT’s meeting
may be held anywhere as
agreed
Date of S/S annual meeting as
stated in the by-laws cannot be
changed unless By-Laws is
validly amended
Uses cumulative voting to elect
BOD
Quorum requirements is
provided for different businesses
or corporate acts
To establish the required
quorum the shares of deceased
S/S are included in the counting
of OCS.
Vacancies in the Board can be
filled up by the remaining board
with quorum or by the S/S of the
corporation in certain cases.
Baguio City
Non-Stock Corporation
No capital stock
It’s existence can be De Jure or De
Facto
May or may not be listed with the
SEC.
Membership thereto is non-
transferable unless allowed in the
AOI.
It can subscribed to the capital
stocks of another corporation
provided the subscription is not
counted inside the 25% subscription
requirement to incorporate a
corporation
Cannot declare dividends to its
members, trustees or officers
Shares are not assessable. No call
is to be made
Board of Trustees manage the
corporation
BOTs of a civic organization are
elected for a three-year term and
may be more than 15.
BOT of an Educational Institution
for 5- year term in multiples of
three.
Members elect the BOT and the
officers of the corporation
Venue of members’ meeting –
anywhere within the Philippines.
BOT’s meeting anywhere as agreed
Date of members’ annual meeting
may be held a day earlier than
scheduled in the by-laws provided
members were duly notified
Uses “Viva Voce” as a mode of
election but may adopt cumulative
voting if so stated in the “AI”
To establish quorum requirement,
the dead members are excluded
from the counting of votes.
Members will fill-up the vacancies
Close Corporation
It has capital stock
It’s existence can be De Jure or
De Facto
Its shares are not listed in the
exchanges
Shares are in the hand of few
persons usually by close
members within a family (less
than 20)
If 2/3 of its OCS is owned or
controlled by an open corporation,
the entity is not deemed a close
corporation
Can declare dividends to its S/S
Shares are assessable and with
call
S/S can manage and control the
business of the corporation
Mining, oil, stock exchanges,
banks, insurance, public utilities,
and those vested with public
interest and educational
institutions cannot be organized
as closed corporation.
Meeting to elect BOD is not
necessary, the very few S/S (less
than 20) oftentimes are the BOD
themselves
Meetings can be anywhere, or
even no meeting at all
All shares shall subject to one or
more restrictions on transfer
written in the “AI”, by-laws and
certificate of stock
Uses cumulative voting
It can provide a greater quorum or
voting requirements to maximize
participation of persons who are
close to each other
Vacancies can be filled up by the
1
members therein
Page
 Stock Corporation
Transfers of shares by S/S
cannot be restricted
Stockholders cannot be deprived
of their right to vote, unless their
shares are declared delinquent.
S/S has pre-emptive rights
whenever treasury shares, un-
issued shares or additional new
shares or other shares are to be
issued by the corporation
S/S are not liable beyond their
capital contributions and are not
responsible for corporate acts
S/S can exercise their Right of
Appraisal. In case of
disagreement about the value of
shares, a committee of three
shall be formed to determine the
FMV of the shares
Delinquent shares are to be sold
via a public sale or private sale
provided the latter is approved
by the board and the OCS
holders.
Upon dissolution corporate
assets are distributed to S/S
after satisfying creditors’
interests
2. Compare a De Jure Corporation, De Facto Corporation and a Corporation by
Estoppel:
De Jure Corporation
 It possesses all the powers of
a genuine corporation
 The incorporators must act in
good faith as required by law
 It has a Certificate of
Incorporation (Charter)
 It has substantially complied
with the statutory
requirements of law for its
creation & existence
 Its right to exist and exercise
corporate powers cannot be
attacked even in a direct
proceeding
 Its existence cannot be
attacked directly or
collaterally
 It is operating with the
sanctions of law
Non-Stock Corporation
Membership in a non-stock, non-
profit organizations are non-
transferable.
Transfer of membership are often
restricted
Members may be deprived of the
right to vote by proxy in the AI. May
be allowed to vote by mail or other
similar means.
No Pre-emptive Right
Cannot distribute corporate assets
to members unless stated in the
“AI”. It holds corp. assets only as a
trustee, at the end of its term, must
surrender the same to the
beneficiaries, founder, successors,
trustor, or state as the case may be.
Any incidental profit realized must
be used in furtherance of its
purpose.
No appraisal right of members
Non-payment of annual dues is a
ground to reclassify said member
as inactive but not to terminate him
as a member.
Officers are held responsible for
corporate acts
De Facto Corporation
 It has an Articles of
Incorporation duly filed with
SEC for approval.
 It has a “CI”, despite non-
compliance with some legal
requirements
 There is a law authorizing it to
become a de jure corporation
 The court recognizes its
existence upon grounds of
public policy, except as
against the state
 It was defectively formed (Ex.
a minor was included as an
incorporator)
 The defect was discovered
after incorporation, there
should be an attempt to
correct the defect(s)
 There is an attempt to
incorporate, if none, the
corporators shall be liable as
general partners (Corporation
by Estoppel)
 State can question its
existence directly under a quo
warranto proceeding
Close Corporation
Transfers of shares are restricted.
Restriction must be provided in
the “AI”, or Certificate of Shares.
However, absolute restrictions are
VOID.
Stockholders cannot be deprived
of their right to vote, unless their
shares are declared delinquent.
Pre-emptive rights of S/S can be
exercised against ALL kinds of
shares to be issued by the
corporation
Upon dissolution, corporate
assets’ are distributed to the S/S
after satisfying creditors’ claims
S/S may compel corporation to
buy back his shares at FMV but
never below its par value. If
disagreement ensues about the
FMV of shares, S/S petition court
to determine price of shares.
Delinquent shares are to be sold
to other existing S/S of the
corporation under “First Option
Clause” or “Right of First Refusal”
within 30 days
S/S are subject to liabilities
pertaining to directors
Corporation by Estoppel
 It is neither a de jure or a de
facto corporation
 It has no “”AOI” and Certificate
of Incorporation (“CI”) duly
issued by the State
 All participants are liable as
general partners.
 Taxed like a de jure corporation
 No attempt to organize as a
corporation
 Illegally exercises corporate
powers
 Maliciously presents itself as a
corporation to others
 Its existence can be questioned
by a collateral attack
2
 Contracts entered into are valid
Page
  It exercises all the powers,
rights and franchise of a de
jure corporation
 Its BOD has the same
powers/liabilities as those of a
de jure corporation.
 It is entitled to the protection
of law
 The incorporators must act in
good faith as required by law
 If the purpose of its creation is
prohibited by law, there is no
de facto corporation
 Corporators are personally
liable for corporate’s debt
 Taxed like a de jure
corporation
 Contracts entered into are
valid (Bonds, deeds of
mortgage)
 It exists as a corporation but
has no legal right to exist as
far as the State is concerned.
 It is a corporation in fact but
not in law
 It cannot be collaterally attack
in a private suit by private
individuals or by the State

3. How do you determine whether a corporation is a GOCC or a private corporation

performing public functions?

If the entity is created by its own charter for the exercise of a public function it is a GOCC.
Whereas, if it is incorporated under the general Corporation Code it is a private corporation.
While it is true that Congress enacted a special charter for Red Cross, it cannot be considered a
GOCC in the absence of the essential elements of ownership and control by the government. It
does not have government assets and does not receive any appropriation from the Phil.
Congress. It is a non-profit, donor-funded, voluntary organization, whose mission is to bring
timely, effective and compassionate humanitarian assistance for the most vulnerable people
without consideration of nationality, race, religion, gender, social status or political affiliation.
[Liban vs. Richard Gordon, 553 SCRA 68 (2009)]

Note: Congress cannot enact a law creating a private corporation with a special charter. Such
legislation is unconstitutional. Private corporations may exist only under a general law. If the
corporation is private, it must necessarily exist under a general Law. [Feliciano vs. COA, 464
Phil. 439 (2004)]

GOCC – refers to any agency organized as a stock or non-stock corporation vested with
functions relating to public needs whether governmental or proprietary in nature and owned
by the government through its instrumentalities either wholly or where applicable as in the
case of stock corporation to the extent of at least 51% of its capital stock. When a
stockholder ceded to the government shares representing 72.4% of the voting stock of the
corporation but subsequently clarified that it should be reduced to 32.4%, the corporation
shall not be considered GOCC until the quantification of shares resolves with finality.
(Carandang vs. Disierto, GR 148076, January 12, 2011)

4. X subscribed to 15,000 shares of stock of Y Corporation. The total amount of the

subscription was Php 1,500,000.00. He made an initial payment of Php 375K. He was
later on appointed as the General Manager of the corporation, but he resigned not
long after.

X instituted a complaint against Y before the NLRC for the payment of his unpaid
wages, allowances, bonuses, balance of his representation allowances and other
monetary benefits in the total amount of Php 800K. Y admitted that there is due to X
said amount but this was applied to the unpaid balance of this subscription in the
amount of Php 1,125.000.00. X questioned the set-off alleging that there was no call
3

or notice for the payment of unpaid subscription and that, accordingly, the alleged
Page

obligation is not enforceable. Is X correct? (APOCADA vs., NLRC, GR NO. 80039)

 The application of the Php 800K compensation income of X to his unpaid subscription is not
valid. There is no showing that the unpaid subscriptions are due and demandable. As provided,
unpaid subscriptions are not due and payable until a call is made by the corporation for
payment. Y had not presented a resolution of the BOD calling for the payment of the unpaid
subscription. It does not even appear that a notice of such call has been sent to X by Y
Corporation. What the records show is that Y Corporation deducted the amount due to petitioner
from the amount receivable from him for the unpaid subscriptions. No doubt such set-off was
without lawful basis, if not premature. When no date of payment is fixed in the subscription
contract a call is necessarily to enforce payment without which the unpaid subscription is not yet
due and demandable.

5. While the incorporation papers of X Corporation were pending before the SEC for
approval, T, the designated treasurer received from “S” a real property worth PHP
500K that was turned over for shares of stocks of the corporation. Before the
certificate of incorporation could be issued, “R” who claims to be the owner of said
real property, filed an action against the corporation for recovery of possession of
the same. Will the action prosper? (Hall vs. Piccio, 86 Phil. 603)

No. “R’s” action will not prosper. Since the incorporation papers of X Corporation were still
pending approval before the SEC, said corporation has not yet been registered and therefore, it
has yet no juridical personality in order to have the power to sue and be sued in any court.

6. When X Corporation was created and organized in 2005 its principal office as stated
in its Articles of Incorporation was in the City of Manila. In 2018, it has transferred its
office to Makati City. Y intends to file an action against X, where should Y file his
case against X Corporation?

An action against a corporation should be filed at its residence or principal address as stated
in its Articles of Incorporation even though it has closed its office therein and relocated to
another place. [Hyatt Elevators and Escalators Corp. vs. Goldstar Elevators Phils., Inc. 473
SCRA 705 (2005)]

7. What is the nature of a corporation operating after the expiry of its corporate
existence?

It is a de facto corporation for purposes of liquidating its affairs but for purposes of being
sued on its contracts entered beyond its term, it is a corporation by estoppel. When it enters into
new business, the new business is a contract of a corporation by estoppel.

8. What is the status of an ultra vires contract entered into by a corporation? (Rural Bank
of Milaor vs. Ocfemia, Feb. 8, 2000)

The contract is VOID for being in violation of a prohibitory provision of law. The ruling in
Republic vs. Acoje Mining that the contract is voidable is not controlling because it was a mere
obiter dictum.

9. Due to serious misrepresentation as to the powers and purposes of the corporation

and the commission of ultra vires acts, a creditor wishes to file an action for the
dissolution of the corporation. Where must he file his petition, SEC or RTC?

The petition for dissolution has to be filed with the SEC under Sec. 2 of the CC and Sec. 5.1
of the RSRC. This action, NOT being intra-corporate, is one of those that were retained with
the jurisdiction of the SEC.

10. Service of summons addressed to a corporation was served on the Secretary of the
President of said corporation, will it bind the corporation?

YES. The court acquires jurisdiction over the corporation by a service of summons on the
President, Manager, and Corporate Secretary, Cashier, Agent or any of the Directors of the
corporation. In the case of Filoil Marketing Corp. vs. Marine Dev’t. Corp. 117 SCRA 86, it was
held that a service of summons on a corporate counsel who previously appeared to argue on a
motion to dismiss could be considered as an agent of the corporation and a service to him would
be a valid service to the corporation.
4
Page
11. Who is/are the persons allowed to sign pleadings in case the corporation files an
action in court?

The following officers may sign the verification and certification against non-forum shopping
on behalf of the corporation even without a board resolution: (a) Chairperson of the BOD, (b)
President, (c) General Manager, (d) Personnel officer, (e) Employment specialist, in labor case.
These persons/officers are in the position to verify the truthfulness and correctness of the
allegations in the petition. (Mid Pasig Land & Dev’t. Corp., vs. Tablante, February 4, 2010)

The legal counsel of the corporation cannot sign pleading(s), verification and certification
against non-forum shopping unless he is duly and specifically authorized by the BOD of the
corporation. (Maranaw Hotels and Resort Corporation vs. CA, 576 SCRA 463 (2009)

12. The corporation needed additional capital for its expansion program. To raise
money, the BOD adopted a resolution authorizing the issuance of 10 million shares
from its un-issued stock to be issued at a premium.

(a) Does the resolution require approval of the stockholders to be effective?

(b) Do the stockholders of record have pre-emptive right over the shares to be
issued?

Answer.
(a) The resolution does not require S/S approval because the issuance of shares from the
existing but un-issued stocks will not result to an increase in the authorized capital of the
corporation. It is only the outstanding capital stock that will be increased. What is provided
and required by law is an approval of the S/S is required whenever a corporation would
increase its authorized capital stock through an amendment of its “AI”.

(b) Yes. The S/S of record has pre-emptive right over the issuance of (1) original or un-issued
shares, (2) additional shares brought about by an increased in the capital stock of the
corporation, or (3) treasury shares.

13. Instances when the concurring majority (51%) vote of the OCS of stockholders is
required to validate decisions of the BOD:

a) The pricing of no par value shares

b) Revocable of power given to the board to repeal/adopt by-laws
c) To adopt new by-laws or repeal existing ones
d) To give compensation to the BOD
e) Election of directors
f) Management contract

14. Instances when the concurring 2/3 (67%) votes of the OCS of stockholders is
required to validate decisions of the BOD:

a) To dissolve the corporation

b) To declare stock dividends
c) To delegate power to the BOD to adopt/repeal by-laws
d) To decrease or increase capital stocks
e) To increase bonded indebtedness
f) To invest corporate funds in other businesses
g) To sale of all or substantially all of corporate assets and properties
h) To merge or consolidate with another corporation
i) To repeal the “AI”
j) To ratify contracts of self-dealing directors
k) To remove directors

15. X Corporation wanted to engage the services of Engr. Milen for a special project. “M”
agreed provided his professional fee of Php 500K be paid with shares of stock of
the corporation. “X” agreed to “Ms” condition. A subscription contract was
executed in favor of “M” where it was stipulated that the contract price equivalent
to the services of “M” shall be paid in shares of stocks. After “M” completed the
work, he demanded for the certificates of stocks representing the value of his
services. “X” reneged on the ground that the subscription contract is void because
5

shares of stocks cannot be issued in payment of future services, and instead it was
Page

offering to pay in cash the value of the services rendered. Is “X” correct? Reason.
 No. The X Corporation is not correct. Sec. 61 of the new Code does not make the
subscription contract VOID when the consideration is future services. What the Code prohibits is
the issuance of the share in exchange for future services. It only means that until the future
services have been rendered, the subscriber cannot be recorded in the books of the corporation
as a stockholder and cannot be allowed to exercise the rights pertaining as a stockholder and
cannot be allowed to exercise the rights pertaining to the shares. The shares of stock covered by
the subscription agreement are not ISSUED upon the execution of the agreement. Shares are
ISSUED upon the recording of the subscriber in the books as a stockholder of record or when
the subscriber is allowed to exercise the rights of a stockholder.

16. When will the veil of corporate fiction be lifted to expose the individuals composing
the corporation?

a) When the corporation is used to cover fraud or irregularity;

b) To defeat public convenience, justify wrong;
c) To defend crimes or circumventing a statute;
d) When the corporation is used for illegitimate purpose(s)
e) When corporation allowed itself to cover for a wrong, fraud, or crime
f) When corporation or an individual evades just and valid obligation by transferring its/his
property to another corporation, the latter’s personality as a separate personality will be
disregarded.
g) To achieve or perfect a monopoly
h) When 2 corporations are made to appear as one and used as a device to defeat the ends of
law or as a shield to confuse legitimate issues;
i) When the parent corporation assumes complete control of its subsidiaries’ business;
j) When the corporation is an alter ego of the principal stockholder;
k) When the corporation functions for the benefit of a single person who has complete control
over its funds;
l) When a corporation is dissolved and its assets are transferred to another corporation to
avoid a financial liability of the former corporation to its employees;
m) When a corporation is organized by an insolvent debtor to defraud his creditors and he
transfers his properties to it in furtherance of such fraudulent purpose.

 The mere fact that one or more corporations are owned or controlled by the same or single
stockholder is NOT a sufficient ground for disregarding separate corporate personalities.
The wrongdoing must be clearly and convincingly established. (Del Rosario vs. NLRC, 187
SCRA 777)

 The mere fact that both of the corporations have the same president is NOT in itself
sufficient to pierce the veil of corporate fiction of the 2 corporations.

 The mere fact that the businesses of 2 corporations are interrelated is not a justification for
disregarding their separate personalities absent of sufficient showing of wrongdoing. (Umali
vs. CA, 189 SCRA 529)

 The mere ownership by a single stockholder or by another corporation of all or nearly all of
the capital stock of a corporation is not itself reason to pierce the veil of corporate alter-ego.
(Traders Royal Bank vs. CA, 269 SCRA 15)

17. What are the consequences after the veil of corporate entity has been pierced?

a) Liability will attach directly to the BOD, officers and stockholders and they shall be
considered as general partners.

However, in the absence of malice or bad faith, the stockholders or officers of a

corporation cannot be made personally liable for corporate liabilities.

An exception to the rule that the officers and members of a corporation are not
personally liable for acts done in the performance of their duties – When the employer
corporation is no longer existing and is unable to satisfy the judgment in favor of the
employee, the officers should be held liable for acting on behalf of the corporation.
(Restaurante Las Conchas vs. Liego, Sept. 9, 1999)

b) The corporation is not dissolve after the corporate personality has been disregarded.
6

c) The stockholders cannot maintain actions in their own name. The right to recover damages
Page

for injury belongs to the corporation which must be brought in the name of the corporation by
its authorized agents.
 d) The right to possess corporate property belongs to the corporation.

NOTE: The power to pierce the veil of corporate fiction belongs to the court.

 Even if the corporate fiction of a juridical entity is disregarded, still private individuals cannot
be divested of their shares of stock unless, in a proper forum, they have been shown to
have committed some wrongdoing in acquiring them. (Republic vs. Sandiganbayan, 22
SCRA 515)

 The issue of piecing the veil of corporate fiction should be raised before the trial court and
NOT for the first time on appeal.

18. When 2 corporations (X and Y) have the same president and same controlling
stockholders and it is commonly known at their place of operation that they are
one, Doctrine of Piercing the Veil of Corporate Entity shall be applied to prevent
multiplicity of suit. (Gold Line Tours vs. Heirs of Lacsa, June 18, 2012)

Illustration: X and Y have the same president and same controlling stockholders and it is
commonly known at their place of operation that they are one. C filed a third party claim
against X. The levy of Y’s property was held valid even if Y was not made a party in the case,
hence, the judgment may be enforced against Y to prevent multiplicity of suits and save the
parties unnecessary expenses and delay under the said Doctrine.

19. X Corporation’s personality as a separate entity was pierced by the Court. What is
the consequence thereof? The corporation will be treated as a mere association of
persons and the corporation and its stockholders or members are considered as
one and the same person. Hence, liability will attach directly to them as they are
treated as general partners in the questioned act(s). (Yao Sr., vs. People, June 19,
2007)

General Rule: A third party mortgagor is liable only up to the extent of the value of the
mortgaged property. In case the defaulting debtor is found to be liable, his judgment creditor
cannot attach the separate properties of the third party mortgagor (one who has allowed his
property to be used as security in an obligation) However, the third party mortgagor may be
required to pay the deficiency between the loan obligation and the proceeds of the sale if the
instrumentality or alter ego doctrine is found obtaining. i.e., the defaulting debtor and the third
party mortgagor are (a) both family corporations with the same controlling stockholders, (b)
the 2 corporations share the same office and transact their businesses from the same place,
(c) common president, (d) the promissory note was signed by the defaulting debtor-president
and the president of the mortgagor corporation and (e) the assets of both corporations are co-
mingled. (Heirs of Fe Tan Uy vs. International Exchange Bank, February 13, 2013)

20. X Corporation transferred all its employees to a sole proprietorship owned by its
controlling stockholder “R”. Despite the transfer, the employees’ daily time
records, reports, schedule of work and daily income remittances were all made,
performed, filed and kept in the corporation. The employees filed a case against
the X for illegal dismissal and the labor arbiter finds for the employees. Can the
employees’ claim be enforced against the sole proprietorship “R”?

Yes, the employees can hold R solidarily liable with X Corporation because it is clear that X
is hiding behind the supposed separate and distinct personality of the Sole Proprietorship in
evading a legitimate obligation. (Prince Transport, Inc. vs. Garcia, January 12, 2011)

21. What is emphasize in the Sunio Doctrine (Santos vs. NLRC, 254 SCRA 673)

It is a doctrine laid down in Sunio vs. NLRC, 127 SCRA 390, which maintains that a mere
ownership by a single stockholder or by another corporation of all or nearly all of the capital
stock of a corporation is not itself sufficient ground for disregarding the separate corporate
personality. Petitioner Sunio, therefore should not have been made personally answerable for
the payment of private respondent’s back salaries.

22. Plaintiff erroneously impleaded X Corporation in a collection case although said

juridical entity was not a party to the loan agreement. X Corporation filed an
7

answer and participated in the proceedings. In the course of the trial, it was learned
Page

that X Corporation was not registered with the SEC and that its controlling
shareholder “R” signed the loan documents in his personal capacity and as a
 single proprietor doing business under the trade name “BB Enterprises. Is X
Corporation liable under the given facts?

The judgment may still be enforced against X Corporation because the court has acquired
jurisdiction over its person when X filed an answer and participated in the proceedings
(corporation by estoppel). The controlling stockholder in X Corporation and the sole proprietor in
BB Enterprises is one and the same person, “R”. Therefore the Doctrine of Piercing the Veil of
Corporate Fiction may be disregarded and the obligation of one may be imputed or charged
against the other. (Benny Hung vs. BPI Finance Corporation, July 20, 2010)

23. “L” died intestate. He is survived by his wife and a nephew. Real properties in at
least five (5) corporations were included in the inventory of estate of “L” on the
ground that he owns these corporations and that the corporations are mere
dummies of the decedent “L”. The probate court denied the inclusion of subject
real properties on the ground that these corporations are merely instrumentality of
“L”.
Should the properties of the five corporations be included in the inventory of
the estate of “L”? (Rufino Lim vs. CA, Jan. 24, 2000)

No. The real properties registered in the name of the corporation under a Torrens Title are
conclusively presumed to be owned by the corporation. The corporation has a separate
personality from its officers and stockholders. Properties owned by the corporation are not co-
owned by the stockholders or officers. Moreover, mere ownership by single stockholder of all or
nearly all of the capital stock of a corporation is not of itself a sufficient reason for disregarding
the personality of separate corporate entities.

24. X owns 95% of the stocks of Reliable Corporation. When he died, his administrator
included in X’s gross estate the value of the assets, capital and equity of Reliable.
Is the administrator correct?

No. The corporation is clothed with personality separate and distinct from that of the person
composing it. The corporate properties are not the properties of X. Mere ownership by a single
stockholder or by another corporation of all or nearly all of the capital stock of a corporation is
valid as against a subsequent lawful attachment but it is not a sufficient reason for disregarding
the fiction of separate corporate personalities.

Reminder: The test in determining the applicability of the Doctrine of Piercing the Veil of
Corporate Fiction is as follows:

a. Control/complete domination of finances, policy and business practice to the transaction

attacked;

b. Control must have been used be defendant to commit fraud or wrong;

c. The wrongdoing must be clearly and convincingly established; and

d. The control and breach must proximately cause the injury/loss.

25. The national government held 81.8% of the common stock and 100% of the preferred
stock of North Davao Mining Corporation. Is the national government liable for the
indebtedness of the corporation?

No. In the case of North Davao Corp. vs. NLRC, 254 SCRA 721, it was held that even if the
national government owned or controlled 81.8% of the common shares and 100% of the
preferred stocks of North Davao, it remains only a stockholder thereof. Under existing laws and
prevailing jurisprudence, a stockholder as a rule is not directly, individually and/or personally
liable for the indebtedness of the corporation. The obligation of North Davao cannot be
considered obligation of the national government, hence, whether the latter be solvent or not is
immaterial to the instant case.

26. On Corporate Capital:

Common shares have voting rights which translate to control, while preferred shares have
no voting rights (cannot participate in the election of directors but can vote in other issues/matters
that will affect their rights as stockholders of the corporation)
8
Page

 The denial of voting rights of preferred shares must be provided in the Articles of
Incorporation and also stated in the Certificate of Stocks. If not complied with the preferred
 shareholders can vote during election.

 Sec. 11, Art. XII of the Constitution states that the term “capital” refers only to common
shares unless the preferred shares have voting right to vote in the election of directors.
(Gamboa vs. Teves, June 28, 2011)

If the corporation is a partially nationalized industry and it issues various kinds of shares, the
60%-40% Filipino capital ownership requirement in favor of Filipino citizens in Sec. 11, Art. XII of
the Constitution must apply not only to shares with voting rights but also to shares without voting
rights. Hence, it shall apply to common shares and preferred shares, where both shares must be
owned by Filipinos at the minimum 60%. (Heirs of Wilson P. Gamboa vs. eves, 682 SCRA 397
(2012)

27. What are the consequences of the dealings of a corporation by estoppel?

The doctrine of corporation by estoppel may apply to the alleged corporation and to third
parties. An unincorporated association, which represents itself to be a corporation, will be
estopped from denying its corporate capacity in a suit against it by a third person who relies in
good faith on such representation.

Those who act or purport to act as the representatives or agents of an ostensible corporate
unit who is proven to be legally inexistent do so without authority and at their own risk. Under the
law on estoppel, those acting on behalf of a corporation and those benefited by it, knowing it to be
without valid existence, are held liable as general partners.

A person who has reaped the benefits of a contract entered into by others with whom he
previously had an existing relationship is deemed to be part of said association and is covered by
the scope of the doctrine of corporation by estoppel.

A third person who, knowing an association to be unincorporated, nonetheless, treats it as a

corporation and receives benefits from it, may be barred from denying its corporate existence in a
suit brought against the alleged corporation.

 The concept of corporation by estoppel is founded on principles of equity and is designed to

prevent injustice and unfairness. It applies when persons assume to form a corporation and
exercise corporate functions and enter into business relations with third persons. Where
there is no third person involved and the conflict arises only among those assuming to form
a corporation, who knows that it has not been registered, there is no corporation by
estoppel. (Lozano vs. Delos Santos, GR No. 125221)

28. Some stockholders decided to file a case against X Corporation after they
discovered that X Corporation is not registered with the SEC. Who shall be the
defendant in the legal action they intend to file?

X Corporation is a corporation by estoppel and it may be impleaded as a party defendant

considering that it possesses attributes of a juridical person, otherwise it cannot be held liable for
damages and injuries it had inflicted on other persons. (Macasaet vs. Francisco, June 5, 2013)

29. Sonia is the president of XYZ Vendors’ Association of Baguio. Rica is the president
of Traders’ Association of Baguio. Both associations agreed to merge and
consolidate their association. It was agreed that a set of officers would be elected
who shall be given the authority to collect the dues from the members of the
consolidated association. Both Sonia and Rica ran for president. Sonia won. Rica
refused to recognize the results of the election. In fact, she refused to comply with
the agreement and even continued to collect dues from her old members. The
consolidated association filed suit against Rica. Rica filed a motion to dismiss
alleging that the consolidated association has no personality to sue, as it has not
registered itself with the SEC. The association argues that Rica cannot deny the
existence of the corporation and is estopped from doing so. Decide.

The concept of corporation by estoppel is not applicable. Corporation by estoppel is founded

on principles of equity and is designed to prevent injustice and unfairness. It applies when persons
assume to form a corporation and exercise corporate functions and enter into business relations
with third persons. There is no corporation by estoppel when there is no third person
involved and the conflict arises only among those assuming to form a corporation who
9

therefore know that it has not been registered. (Lozano vs. Delos Santos, G.R. 125221, June
Page

19, 1997)
 There is no valid merger between the two associations for failure to register the merger with
the SEC.

30. The BOD of X Corporation wanted to amend its By-laws by including the proviso
“that its officers shall be directly elected by the stockholders”, can this be validly
done?

No. The by-laws may not provide for the direct election of corporate officers. As a general rule,
the officers of the corporation are elected by the directors themselves soon after they have been
elected. The election of officers directly by the stockholders (a) may only be done in a close
corporation provided that the same is embodied in the “AI” and (b) in a non-stock corporation when
the right of the members to elect the officers is expressly provided for in the by-laws or “AI”.

31. When are stockholders of a corporation personally liable for corporate torts?

When they actively engaged in the management or operation of the business and affairs of a
close corporation they should be held personally liable for corporate torts unless the corporation
has obtained reasonable adequate liability insurance. (Naguiat vs. NLRC, 269 SCRA 564)

32. May a corporation be held criminally liable for a tortuous act?

A corporation is liable whenever a tortuous act is committed by an officer or agent under the
express direction or authority of the stockholders or members acting as a body, or, generally, from
the directors, as the governing body. (PNB vs. CA, GR 27155, May 18, 1978)

In the case of People vs. Tan Boon Kong, GR 32652, March 15, 1980, it was held that since
a corporation is a mere legal fiction, it cannot be held liable for a crime committed by its officers
because it does not have the essential elements of malice, EXCEPT if by express provision of law
(i.e., Anti-Dummy Law and AMLA), the corporation is held criminally liable. In such case the
responsible officers would be criminally liable.

However, It is a settled rule that the officers of a corporation may be held criminally liable for
acts or omissions done in behalf of the corporation only where the law directly requires the
corporation to do an act in a given manner and the same law makes the person who fails to
perform the act in the prescribed manner criminally liable. Although the performance of an act is an
obligation directly imposed on a corporation, the responsible officer who performed the act must of
necessity be the one to assume criminal liability; otherwise this liability created by law would be
illusory, and the deterrent effect of the law, negated. (Sia vs. People of the Philippines, GR L-
30896, April 28, 1983)

33. When are directors, trustees or officers of a corporation jointly and severally
(solidarily) liable for damages suffered by the corporation, its stockholders or
creditors?

A corporation, being a juridical entity may act only through its directors, officers and
employees. Obligations incurred by them, acting as such corporate agents, are not theirs but the
direct accountabilities of the corporation they represent.

However, solidary liability arises only in the following cases:

(a) When the directors or trustees willfully and knowingly vote for or assent to patently
unlawful acts of the corporation.

(b) When the directors, trustees or officers are guilty of gross negligence or bad faith in
directing the affairs of the corporation.

(c) When directors, trustees or officers acquire pecuniary or personal interest in conflict with
their duties.

(d) If any of them acquires secret profits in violation of the trust reposed upon him.

(e) When any of them consented to the issuance of watered stocks;

(f) When he has contractually agreed or stipulated to hold himself personally and solidarily
liable with the corporation; and
10

(g) When such director, trustee or officer terminated an employee with malice or in bad
Page

faith.
34. The president of the corporation signed as a guarantor in its bank loan. If the
corporation cannot make good on said loan may the Bank enforced collection
against the president and attached his separate properties in answer to the
obligation of the corporation?

The president of the corporation cannot be held personally liable if the complaint merely
averred that he signed as a surety (guarantor) to secure the obligation of the corporation when the
surety agreement turned out to be spurious. (Heirs of Fe Tan Uy vs. International Exchange Bank,
February 13, 2013)

 The president of the corporation cannot bind the corporation unless (a) he is duly authorized
by the board, or (b) there is apparent authority.

 The governing law on personal liability of directors/officers for debts of the corporation is
Sec. 31 of the Corp. Code and not Art. 212(e) of the Labor Code.

35. X was employed as an interviewer of job applicants for abroad in a private

employment agency, SureGo Inc. He was prosecuted for illegal recruitment in large
scale together with the manager “Y” because SureGo’s license to recruit has been
suspended. Can X be prosecuted for illegal recruitment? (People vs. Chowdury,
February 15, 2000)

No. According to Sec. 6 of the Migrant Worker Act (RA 8042), in case of juridical persons, the
persons criminally liable are the officers having control, management or direction of their business.
The corporation acts only through its human agents, and it is their conduct which the law must
deter. X cannot be held liable and prosecuted because he is only an employee and not an officer
of the corporation.

36. Restaurant Services Corporation (RSC) owned and operated a restaurant named Las
Conchas. David and Rose Tan are members of the BOD and Officers thereof as
well. RSC shut sown the business and terminated the employees of the restaurant.
RSC became inexistent. The employees filed a complaint for payment of separation
pay and 13th month pay in the Labor Arbiter against Las Conchas and spouses Tan.
The Labor Arbiter ruled in favor of the employees. On appeal, spouses Tan
contended that they should not be liable because they acted in the performance of
their duties and in good faith. Rule on the contention. (Restaurante Las Conchas vs.
Llego, GR No. 119085, September 9, 1999)

The contention is untenable. Although as a rule, the officers and members of a corporation are
not personally liable for acts done in the performance of their duties, this rule admits of exceptions,
one of which is when the employer corporation is no longer existing and is unable to satisfy the
judgment in favor of the employees, the officers should be liable for acting on behalf of the
corporation.

37. Differentiate the following:

Founder’s Shares (Sec. 7) Redeemable Shares (Sec. 8) Treasury Shares (Sec. 9)

 Their issuance is stated in
the “AI”
 Issued to incorporating
stockholders
 Enjoys privileges as to
dividends and voting rights
 It has the exclusive right to
vote for directors to the
exclusion of the common
stockholders. This right is
only good for 5 years from
approval of the SEC
 Can be issued only when such
power is stated in the ‘AI”
 May be deprived of voting rights
 Terms & conditions on their
redemption must be stated in
the “AI” and in the Cert. of
stocks.
 Corporation issuing must
maintain a sinking fund
 Compulsory redeemable shares
- issuing corporation must
redeem on maturity
 Optional redeemable shares –
corporation may or may not
redeem at maturity
 Even if no money is in the
UREA, corporation must
 Shares previously issued and
paid but came back to the
corporation via donation,
purchase, dacion en pago,
forfeiture, redemption and other
lawful means.
 No voting right as long as they
are held by the corporation
 While in the hands of the
corporation, not entitled to
dividends and to other rights.
 Can be sold for less than the
par value
 They do not form part of the
outstanding capital stock of the
corporation but they are part of
the subscribed capital stock.
11

redeem and return the  They are not part of the surplus
stockholder’s investment at profit of the corporation and
Page

maturity. EXCEPTION: (a) may NOT be release as stock

redemption should not cause dividends
 prejudice to creditors, or (2)
when it will result to insolvency
of the corporation.
 Once redeemed must be retired
and cancelled. If re-issuance is
allowed, they are considered
treasury shares.
 Their re-issue is subject to the
pre-emptive right of the S/S
 They may be distributed as
property dividend
 When not retired or cancelled
they are not unissued shares
but are properties of the
corporation.

38. What are treasury shares?

These are shares that were issued by the corporation to investors upon full payment thereof
but for one reason or another validly came back to the corporation. Its re-acquisition is an
exception to the rule that corporations are not allowed to acquire their own shares of stocks.
(Phil. Coconut Producers Federation, Inc. et. al., vs. Republic, GR 177857, September 17, 2009)

Rules on treasury shares:

a) They shall have no voting rights as long as they remain in the treasury of the corporation
(Sec. 57)
b) Although they are part of the subscribed stock, they are not considered outstanding
shares (Sec. 137)
c) Being owned by the corporation, they are not entitled to dividends.
d) They may again be disposed of for a reasonable price fixed by the BOD (Sec. 9)
e) These shares may be distributed as property dividends.

39. Watered stocks – These are shares sold below par value. These are issued not in exchange for
its equivalent either in cash, property, share, stock dividends or services. The “water” in the stock
represents the difference between the FMV at the time of the issuance of the stocks and the par of
issued value of said stock. Both par value and no-par value shares can be watered stocks. (Sec.
65)
It is determined at the time of issuance and not at the time of DISCOVERY.

When the corporation issued these shares there is constructive fraud upon the creditors
because they are mislead into believing that the corporation has capitalization and real assets
represented by the value of the shares issued.

BOD and/or S/S are criminal liable for the issuance of watered stocks. (b) They shall also be
solidarily (civilly) liable for the difference in price, and (c) the directors who consented to the
issuance may be removed from the board.

40. Over issued shares – Shares issued in excess of the authorized capital stocks, they are null and
void.

41. Promotion stocks or escrow stocks – stocks deposited with a third person to be delivered to
the S/S or assignor after complying with certain conditions.

42. What are the requisites for the filing of a derivative suit by the stockholder(s) of a
corporation?

(a) The party bringing suit should be a stockholder/member as of the time the act or transaction
complained of. The number of shares he holds is immaterial;

(b) The party has tried to exhaust intra-corporate remedies – he has made a demand on the
BOD for the appropriate relief but the latter has failed or refused to heed his pleas;

(c) The cause of action actually devolves on the corporation, the wrongdoing or harm having
been, or being caused to the corporation and not to the particular stockholder bringing the
suit;

(d) No appraisal rights are available for the act(s) complained of; and

(e) The suit is not a nuisance or harassment suit. (Sec.1, Rule 8, Interim Rules of Procedures
for Intra-Corporate Controversies)

Derivative suit is also referred to as MINORITY STOCKHOLDER’S SUIT.

12
Page
43. When is an individual stockholder allowed to institute a derivative suit on behalf of
the corporation?

An individual stockholder is permitted to institute a derivative suit in behalf of the corporation

where he holds stock in order to protect or vindicate corporate rights, whenever the officials of
the corporation refuse to sue, or are the ones to be sued or hold the control of the corporation. In
such action, the suing stockholder is regarded as nominal party, with the corporation as the real
party in interest. (Gamboa vs. Victorino, 90 SCRA 40, cited in FBIB vs. CA, 252 SCRA 287)

44. X, a bank manager has been entrusted with the general charge of the branch office of
the corporation. Is X authorized to alter terms of written contracts (mortgages) of
borrowers?

No, X is not authorized to undo or nullify solemn agreements validly entered into with
borrowers of the bank. This power to modify or nullify corporate contracts remains generally in
the BOD. Being a branch manager alone is insufficient to support the conclusion that he has
been clothes with “apparent authority” to verbally alter terms of written contracts considering its
legal effects on the parties. (Banate vs. Phil. Countryside Rural Bank (Liloan, Cebu), Inc., GR
163825, July 13, 2010)

45. Martin is a member of the Cebu Country Club. He was issued a Proprietary
Ownership Certificate (POC) as an evidence of his membership thereto. He
transferred his POC to Gary, the chief-executive-officer of a business enterprise.
When Gary resigned from the position he executed a Deed of Transfer of that POC
to Johnson, the incoming officer. A copy of the deed was furnished to the Cebu
Country Club. Thereafter, a writ of attachment was issued against Gary in an earlier
case, and the POC in Gary’s name was levied upon. Which should prevail, the
attachment or the transfer? (Garcia vs. Jomouad, Jan. 26, 2000, 323 SCRA 424)

The attachment prevails. Sec. 63 of the CC mandates that “no transfer shall be valid, except
as between the parties, until the transfer is recorded in the books of the corporation showing the
names of the parties to the transaction, the date of the transfer, the number of certificates
transferred. The transfer made by Gary to Johnson was not valid as against the judgment
creditors, because the same still stood in the name of Gary, at the time of levy of execution, in
the stock and transfer book of the corporation.

46. X, a “sociedad anonima” begun its business long before the Corporation Code was
adopted. It was engaged in the operation and management of a cockpit. During its
existence, it has acquired a parcel of land for its business used. A and B assert
ownership over said land on the ground that their predecessors, C and D, had been
the original stockholders of the sociedad. Can A and B validly claim ownership of
the parcel of land? (Luis C. Clemente vs. CA, GR No. 82407)

Sociedad anomina is a kind of business association created by mere agreement that existed
before 1906. Act 1459 (The Corporation Law) was passed to cover all kinds of private business
associations in our country. Thus, “sociedad anonima” is a business entity under the umbrella of
the Corporation Law.

A and B have failed to substantiate their claim of ownership over the lands. Absence of a
corporate liquidation, it is the corporation, not the stockholders which can assert, if at all, any title
to the corporate assets.

47. When X Corporation was formed it was agreed unanimously among the
incorporators that its shares of stocks shall not be sold to any person or entity
engaged in the same line of business or activity. This agreement is contained in
the subscription contract and made know to stockholders of the corporation. S, a
stockholder questions the legality of the provision. Is his query valid?

Yes. Sec. 62 of the New Corporation Code contemplates no restriction as to whom the
stocks of a corporation may be transferred. It does not suggest that any discrimination may be
created by the corporation in favor of, or against a certain purchaser. The owner of shares, as
owner or personal property is at liberty, under said section to dispose them in favor of
whomsoever he pleases, without limitation in this respect, than the general provisions of law.
13

The only limitation imposed by Sec. 62 of the New Corporation Code is when it holds any
Page

unpaid claim against the shares intended to be transferred, which is absent in the given facts.
(Example – shares with subscription balances)
 The right of a transferee/assignee to have stocks transferred to his name is an inherent right
flowing from his ownership of the stocks. Thus. “The duty of the corporation to transfer is a
ministerial one and if it refuses to make such transaction good without valid cause, it may be
compelled to do so by mandamus.”

NOTE: Qualified and NOT absolute restrictions on transfer of shares are valid in a close
corporation but never in an open corporation.

48. Is a parent corporation liable for the obligations of its subsidiaries?

It may be held liable for the contractual obligation of its subsidiary if inequitable results are
caused by such factors as:

(a) Confusions of the affairs of the two corporations;

(b) Inadequacy of capital of the subsidiary; and

(c) Direct intervention in the management of the subsidiary corporation by the parent
corporation.

For tortuous acts of a subsidiary, its holding (parent) corporation may be held liable, if the
plaintiff further shows affirmative grounds aside from the relationship of the two corporations.

49. X invested a sum of money in the business of Y Corporation. Y Corporation is the

subsidiary of Z Corporation. Subsequently, Y became the acquired corporation and
Z the absorbing corporation in the merger of the 2 (Y and Z) corporations. Can X
enforce its claim against Z, the absorbing Corporation?

The claim of X against Y, the subsidiary and absorbed corporation of Z cannot be enforced
against the latter even though Z is the absorbing corporation by virtue of the merger where it
acquired all the shares of the absorbed corporation without proof that the transfer of Y’s assets
to Z includes all of Y’s liabilities. (Spouses Ramon Nisce vs. Equitable PCI Bank, 516 SCRA
231, 2007)

50. “C”, a creditor of X Corporation filed a suit against the latter. The case was decided
on the merits in favor of “C”. “C” discovered that X has no more properties to
answer for the judgment. “C” learned that “S” is a subsidiary of “X”. May “C”
pursue his claim against “S”? Reason.

No. While a corporation may be a subsidiary of another, it does not necessarily follow that its
corporate legal existence can just be disregarded. A subsidiary has an independent and
separate juridical personality, distinct from that of its parent company; hence, any claim or suit
against the parent does not bind the subsidiary, and vice-versa.

51. When is a certificate of stock validly transferred? (Bitong vs. CA, GR No. 123553)

The rule is that the endorsement of the certificate of stock by the owner or his attorney-in-
fact or any other person legally authorized to make the transfer shall be sufficient to effect the
transfer of shares but only if the same is coupled with delivery. The delivery of the stock
certificate duly endorsed by the owner is the operative act of transfer of shares from the lawful
owner to the new transferee. The buyer (transferee) has to register the transfer of shares to
him/it with the corporation and his/its name must thereafter must be recorded as the new owner
of the shares in the Stock Transfer Book of the Corporation.

52. What are the effects of unregistered transfer of shares?

(a) The transfer is valid between the parties but not against a third person, (b) it is invalid as far as
the corporation is concerned, (c) It is invalid as against the corporate creditors, and the transferor
is still liable to them on his balance on unpaid subscription, (d) it is invalid against the creditors of
the transferor without notice of the transfer, (e) the transferor continues to exercise all his rights
and privileges in the corporation, and (f) the transferee is not entitled to any right of stockholder.

Lien on shares of stocks – The arrangement provided in the by-laws of the corporation
whereby a lien is constituted on the membership share for dues, assessments and subsequent
14

obligations to the corporation cannot be upheld unless coupled by a corresponding pledge or

chattel mortgage agreement. [Valley Golf & Country Club, Inc. vs. Vda. De Caram, 585 SCRA 218
Page

(2009)]
  The board does not have the power to forfeit shares of an erring director or stockholder.

53. X Corporation was incorporated in 2010 and immediately upon receipt of its
Certificate of Incorporation began its business operation. “Y”, a disgruntled
stockholder filed a case against X. In the course of the trial it was found out that X
failed to submit its by-laws to the SEC. (a) What kind of corporation is X? (b) May
X’s exercise of corporate powers be questioned collaterally in that pending suit
filed by Y?

In case a corporation fails to submit its by-laws on time, the same may be considered a de
facto corporation whose right to exercise corporate powers may not be inquired into collaterally
in any private suit to which such corporation may be a party. Inquiry into its legal existence may
be done by the Solicitor General in a quo warranto proceeding because such corporation cannot
sustain its right to exist as against the State. (Sawadjaan vs. CA, GR 141735, June 6, 2005)

54. X Corporation was not able to file its by-laws within the prescribed time, would its
existence automatically cease?

No. A corporation would not ipso facto lose its powers for failure to file the required by-laws
within the reglamentary period. At the very least, the corporation may be considered a de facto
corporation whose right to exist may not be inquired into in a collateral manner. (Loyola
Grandvilla Homeowners Association vs. CA, 276 SCRA 681, Sawadjaan vs. CA, June 8, 2005)
The State can dissolve X in a quo warranto proceeding (Direct attack).

55. X, Y and Z are directors of Yes Corporation. They are also the President, Secretary
and Treasurer of the corporation respectively. A Broad Resolution was issued
authorizing the payment of salaries of X, Y and Z as officers of the corporation. Is
the board resolution valid? (Western Institute of Technology vs. Salas, GR No. 113032)

As a general rule, the directors are not entitled to salaries or other compensation when they
perform nothing more than the usual and ordinary duties of their office. However, when the
directors render services to the corporation in some other capacities, they may receive
compensation in addition to their per diems.

56. X Corporation owns a beach resort with several cottages. “A”, the president of said
corporation occupied one of the cottages for residential purposes. After the
expiration of “A’s” term as President, X Corporation wants to get the cottage back.
“A” refused to surrender the cottage claiming that he has the right to possess and
enjoy the same by virtue of his being a stockholder and a former President of the
corporation. Is “A’s contention correct? (Roxas vs. CA, 221 SCRA 470)

“A’s” contention is not correct. Properties registered in the name of the corporation are
owned by it as an entity separate and distinct from its members. While share of stock constitute
personal property, they do not represent property of the corporation. The corporation has
property of its own which consists chiefly of real estate. A share of stock only typifies an aliquot
part of the corporation’s property, or the right to share in its proceeds to that extent when
distributed according to law and equity, but its holder is not the owner of any part of the capital of
the corporation. Nor is he entitled to the possession of any definite portion of its property or
assets. The stockholder is not a co-owner or tenant in common of the corporate property.

57. X, is a domestic corporation engaged in retail trade with chain stores all over the
country. Lately, it decided to expand its business activities abroad. Said decision
was approved both by the BOD and the stockholders under the requirements of
law. To bring forth this decision, X released 20% of its un-issued shares for
subscription. “Y”, the president of another domestic corporation with 40% foreign
equity wanted to subscribe for and in behalf of “Y”. Can “Y” subscribe?

Retail trade is a nationalized industry reserved only to Filipinos. When a corporation would
like to participate in a retail business, the GRANDFATHER RULE must be applied to determine
whether or not the investee corporation is qualified. Under this rule, corporate stockholdings
would be traced from the nationality of the stockholders of investor corporations in determining in
turn, the nationality of the investee-corporation. The rule should apply only if there is a problem
on the nationality of the investor-corporation itself. Under the given facts, if X will allow Y to
15

purchase its shares, then X will no longer be 100% owned by Filipinos because Y has foreign
participation.
Page
58. X, a domestic corporation, borrowed money from two of its major stockholders. The
proceeds of the loan were used to construct a warehouse for its business needs.
Under the agreement X will pay a legal interest and to settle the obligation at the
end of two years from date of receipt of such loan. Before due date, the president
of “X” comes to you inquiring about the prevailing rate of the legal interest as it
was not clear in the contract the exact rate of percentile representing legal interest
due thereon. What will be your most esteemed advice on the matter? (Eastern
Shipping Lines, Inc. vs. CA, 234 SCRA 78)

X, is covered by the 12% legal interest. The CB Circular imposing 12% per annum applies
only to loan or forbearance of money, goods or credits as well as to judgment involving such
loan or forbearance of money, goods or credits. Whereas, the 6% interest under the Civil Code
governs when the transaction involves the payment of indemnities in the concept of damages.
However, when the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest shall be 12% per annum from such finality until its
satisfaction, this interim period being deemed to be by then equivalent to a forbearance of
money.

59. X bank filed a collection case against D (debtor) for his failure to pay his loan. While
the case was pending, X Bank entered into a corporate combination with B Bank
(Merger and Consolidation). Can B Bank, the absorbing corporation be bound by
the orders and processes issued by the trial court in that collection case despite
not having been properly pleaded therein?

By virtue of the merger between X Bank and B Bank, the latter, as the surviving corporation,
effectively became the garnishee of D’s accounts and properties, thus B is the “virtual party” or
the “forced intervenor” to the civil case of collection filed by X against D. (BPI vs. Lee, GR
190144, August 1, 2012)

60. X Corporation and Y Corporation have common directors. After several years of
unsuccessful business activities Y Corporation suspended its operation. C, a
creditor of Y filed a collection case against Y, but summons could not be served on
Y-debtor Corporation for reason that its current address is unknown. Can C include
X Corporation as party defendant in the collection case?

While it is true that X and Y are interrelated and that they have common directors. The two
(2) corporations are separate and distinct entities from one another. Hence, X cannot be made a
party defendant to the collection case of C simply because summons could not be served on Y
Corporation. The obligations/liabilities of Y are not those of X.

61. X Corporation buys all the assets of S Corporation; can the creditors of S
corporation enforce its claims against X Corporation?

When a corporation buys the assets of another corporation, it will not be liable for the debts
of the selling corporation, provided: (a) the sale is made in good faith, (b) for an adequate
consideration and (c) the Bulk Sales Law had been observed.

NOTE: In merger and consolidation, the surviving corporation assumes all liabilities of the
dissolved corporation whether or not creditors consented to the merger or consolidation.

62. X is the owner of a sole proprietorship. A few years after a successful business
operation, he organized a corporation and invested big sum of money in it.
However, due to economic reverses his original business (sole proprietorship)
collapsed and ceased operating. C, a creditor of X in that business filed a case
against the Corporation where X invested big sum of money. Will the case filed by
C against the Corporation prosper? Why?

A suit seeking to enforce the contractual rights of a single proprietorship must be brought in
the name of the proprietor himself. A sole proprietorship is not vested with any juridical
personality to file or defend an action. Such suit cannot be brought either in the name of a
corporation organized by the proprietor there being no showing that the proprietor assigned his
receivables to the corporation. [Excellent Quality Apparel, Inc. vs. Win Multi-Rich Builders, Inc.
578 SCRA (2009)]
16

63. During the course of its business operation X Corporation purchased several
Page

vehicles principally used in its daily business activities. The vehicles purchased
 were registered in the name of its president, P. Subsequently, X became
insolvent and ceased operation. May the creditors of X garnish the motor
vehicles to satisfy the debts of the corporation?

The motor vehicles even if principally used in X’s business operation cannot be garnished as
they were not registered in the name of the corporation but in the name of the P, the president of
the corporation. P is not the corporation and X is not P. (Virgilio S. Delima vs. Susan Mercaida
Gois, 554 SCRA 731 (2008)

64. Under a valid warrant, the customs officials seized excisable goods, papers and
documents belonging to X Corporation. “R”, its president questions the legality
of the seizure and contested the same. Does “R” have the personality to do so?
(Stonehill vs. Diokno, 20 SCRA 383)

No. The legality of a seizure can be contested only by the party whose right had been
violated, the right to subject the seizure of goods, papers and documents of the corporation
belongs to the corporation as a separate entity and not its stockholders as such, regardless of
the amount of shares of stock, or of the interest of each of them in the corporation and whatever
office they hold therein may be.

65. On Merger and Consolidation – Merger and consolidation must be approved by the
majority vote of the board and concurred by 2/3 votes of the stockholders.

 Effects: - (a) The surviving or consolidated corporation shall be responsible and liable for all
liabilities and obligations of each of the constituent corporations, (b) any claims against the
constituents may be prosecuted by or against the surviving or consolidated corporation, (c)
Neither the rights of creditors or any lien upon the property of any of each constituent
corporation shall be impaired by the merger or consolidation.

The plan must be submitted to the SEC form approval. SEC issues Certificate of Merger
and Consolidation to effect the change. Without the Certificate the merger is incomplete. The
issuance of the certificate of merger is crucial because it (a) bears the SEC’s approval and
(b) it marks the moment when the consequence of the merger5 takes place. By operation of
law, upon the effectivity of the merger, the absorbed corporation ceases to exist but its
rights, properties, assets and liabilities are deemed transferred to and vested with the
surviving corporation. (Mindanao Savings & Loan Association vs. Willkom, October 11,
2010)

 S/S who does not agree to the M/C may exercise his right of appraisal.

66. The laborers of “Pantranco”, a corporation which had ceased operation filed their
claims against PNB because it was PNB that acquired “Pantranco at a time the
former was suffering financial reverses. The laborers impleaded PNB Madecor
being the owner of “Pantranco” properties and a subsidiary of PNB. Mega Prime
was likewise included as party defendant because it had acquired the shares of
PNB over PNB-Madecor. Are the claims of the laborers against these
corporations valid? Why?

PNB, PNB-Madecor and Mega Prime are corporations with personalities separate and
distinct from that of “Pantranco”. The general rule is that a corporation has a personality
separate and distinct from those of its stockholders and other corporations to which it may be
connected. Moreover, these corporations are registered as separate entities and, absent of any
valid reason, their separate identities should be maintained and should not be treated as one.

The legal personality of “Pantranco” cannot be merged with PNB simply because the latter
acquired the former. Settled is the rule that where one corporation sells or otherwise transfers all
its assets to another corporation for value, the latter is not, by that fact alone, liable for the debts
and liabilities of the transferor.

Hence, the execution sale on the “Pantranco” properties to satisfy the laborers’ claims is null
and void. It must be noted that only PNB-Madecor or its successors or assigns has the right to
annul the sale being the owner of “Pantranco” properties. PNB is not a real party in interest to
question the same simply because Mega Prime is indebted to it. PNB’s right over the properties
of “Pantranco” is only inchoate which could ripen to substantial interest only if Mega Prime does
17

not pay its indebtedness to PNB. [PEA-PTGWO vs. NLRC, 581 SCRA 598 (2009)]
Page

67. X Bank change its corporate name to Y Bank. Thereafter, one of Y Bank’s
debtors, D defaulted in the payment of its obligations. Y enforces judicial
 collection against D. D refuses to pay contending that it was not given notice of
X’s change of name to Y Bank. The court finds in favor of D. Is the court correct?

The Court cannot impose on a bank that changes its corporate name to notify all its debtors
of such change absent any law, circular or regulation requiring it. Such act of the court would be
judicial legislation. Consequently, the defense that debtors should first be formally notified of the
change of corporate name before they will continue paying their loan obligations to the bank is
untenable. [P. C. Javier & Sons, Inc. vs. CA, 462 SCRA 36 (2005)]

68. X, a foreigner use his own personal money to purchase a piece of land which he
gave to a corporation representing his capital therein. The corporation has no
other real property except this land. Can the corporation be considered a
Philippine national and be allowed to incorporate?

The sale to a foreigner of parcels of land does not violate public policy prohibiting aliens from
owning lands in the Philippines even if the purchase price thereof was paid by the said foreigner
where at no point in time were the lots registered in the name of the foreigner nor was it
contemplated that the lots be under his control. The lots are actually to be included as capital of
the private corporation to be formed with Filipinos who will own 60% of the corporation with the
foreigner holding only 40% thereof. [Marissa R. Unchuan vs. Antonio J. P. Lozada, 585 SCRA
42, (2009)]

69. (a) X, a stockholder of W Corporation. X pledged all his shares to his friend, is the
pledge required to be registered in the corporate books for validity? (b) Can the
pledgee or mortgagee vote on the shares pledged to him? (c) Is the administrator
of an estate allowed to vote on the shares of the decedent?

a) Pledges and mortgages of shares of stocks are not required to be registered with the
corporation for validity.

b) Only legal owners (whose name appears in the stock transfer book) of shares in a stock
corporation have the right to vote. The S/S right to vote is an incident of his ownership of a
corporation; He cannot be deprived of it without the consent. The pledgee or mortgagee may
vote on the shares if he is duly authorized in writing by the original owner of the shares and
such authority must be recorded on the appropriate corporate books.

c) Administrator executor, receiver or other legal representative duly appointed by the court
may votes on decedent’s share(s) and there is no need of written authority.

70. What are the consequences of death of stockholder on his shares?

Upon the death of the stockholder, his heirs DO NOT automatically become the stockholders
of the corporation. The heirs acquire standing in the corporation only upon registration of the
transfer of the ownership of the shares in the stock transfer books (STB) of the corporation. (Puno
vs. Puno Enterprises, September 11, 2009)

During the lifetime of the stockholder he can transfer his shares to whomsoever and
whensoever he desires. He need not ask for the consent of the board of the directors. (Doctrine of
Transferability of Shares)

But to constitute the transferee of the shares as owner thereof, the transfer must be brought to
the attention of the corporate secretary so that his name will appear in the STB of the corporation.
His mere possession of the certificate will not make him a stockholder of the corporation.

71. Right of Redemption of foreclosed property of corporation - when corporation

borrows money from the bank and defaulted in the payment thereof. It does not have a 1-YEAR
RIGHT OF REDEMPTION, but only EQUITY OF REDEMPTION [The period to redeem
commences from the foreclosure sale and expires upon registration of the sale or three months
(90 days) after foreclosure whichever is earlier.] (Goldenway Merchandising Corp. vs. Equitable
PCI Bank, March 13, 2013)

72. X Corporation was sequestered by the government, (a) may the registered
owners of the shares of X exercise their right and privileges of voting on them?
(b) When may the nominee directors of PCGG exercise the right to vote on them?
18

(a) The registered owners of the shares of a corporation, even if they are sequestered by the
Page

government through the PCGG exercises the right and the privilege of voting on them. The
PCGG as a mere conservator cannot, as a rule, exercise acts of dominion by voting these
 shares.

(b) The registered owners of sequestered shares may only be deprived of these voting rights,
and the PCGG authorized to exercise the same, if it is able to establish that (1) there is prima
facie evidence showing that the shares are ill-gotten and thus belong to the State, and (2) there
is imminent danger of dissipation. [Trans Middle East (Phils.) vs. Sandiganbayan, 490 SCRA
455 (2006)]

73. X owns shares of stocks of Y Corporation, a sequestered corporation by the

government. While a case against Y Corporation is pending before the
Sandiganbayan, X sold all her shares to Z. Z then asked PCGG to cause the
transfer of the shares she purchased in the stock transfer book of the Y
Corporation. PCGG refused to register the shares contending that X did no longer
own the shares when Y Corporation was sequestered. Is the refusal valid?

Shares originally owned by a sequestered corporation controlled by the nominees of PCGG

remain to be privately owned until such time when the court declares that the subject shares
were acquired through government funds. The PCGG, as a mere conservator, does not
automatically become the owner of a sequestered property in behalf of the government. Thus, Z,
the transferee/assignee has the right to have the stocks transferred to her name, this being an
inherent right flowing from her ownership of the stocks. The duty of the corporation to transfer is
a ministerial one and if it refuses to make such transaction without good cause, it may be
compelled to do so by mandamus. The only limitation imposed by Sec. 63 of the Corporation
Code is when the corporation holds any unpaid claim against the shares intended to be
transferred. [Pacific Basin Securities vs. Oriental Petroleum, 531 SCRA 667 (2007)]

74. Who exercises corporate powers?

a) BOD
b) Stockholders
c) Officers of the corporation as duly authorized

75. Powers of the corporation:

a) Express – powers that are expressly authorized by the Corporation Code, other laws
and it “AI”.
b) Implied – powers that are incidental to the existence of the corporation
c) Incidental - powers that can be inferred from or necessary for the exercise of the
express powers.
d) Necessary – powers that must be exercise to effectively and efficiency so that the
corporation can realize its objectives.
e) Apparent powers
f) Emergency powers.
g) Residual powers – Those that are not illegal but within the confines of the other powers
of the corporation.

How do you determine the validity of necessary or incidental power of the

corporation? – Find out if: (a) the act is lawful, (b) is it beneficial to the corporation, and (c)
it is promotive of the purposes of the corporation.

Specific or particular powers: (CSC vs. Sojor, May 22, 2008)

1) To sue and be sued in its corporate name – the person signing the verification and
certification for non-forum shopping must be specifically authorized by the BOD. (Metro
Drugs Distribution, Inc., vs. Narciso, July 17, 2006)
2) Power of succession
3) Power to adopt corporate name, corporate seal
4) To amend its “AI”,
5) Power to adopt and/or amend its by-laws
6) Power to make reasonable donations except to politicians and political parties.
7) To issue or sell stocks to subscribers (stock corporation)
8) To admit members (non-stock corporation)
9) To sell treasury shares
10) To enter into merger and consolidation
11) To establish pension, retirement and other plans for the benefit of its directors, trustees,
19

officers and employees.

12) To make reasonable donations for public welfare, hospitals, charitable, cultural,
Page

scientific, civic or similar purposes, Under the New Corporation Code, corporations are
allowed to donate to any (a) political party, (b) political candidate and (c) partisan
 political activity, however, foreign corporations are not allowed to donate to politicians,
political parties or for partisan political activity.
13) To extend or shorten corporate life (Sec. 36) – also referred to as voluntary dissolution.
14) To increase or decrease capital stock (Sec. 37) – the 25%-25% Rule on subscription
and paid-up is still applicable. NOTE: This Rule is not application to incorporate.
15) To increase or decrease bonded indebtedness (Sec. 37)
16) To deny stockholders of their pre-emptive rights (Sec. 38)
17) To purchase, receive, take or grant, hold, covey, sell, lease, pledge, mortgage and deal
with real or personal property, securities and bonds or to sell assets. (Sec. 39)
18) To invest corporate funds in other businesses (Sec. 41)
19) To declare dividends (Sec. 42)
20) To enter into management contract (Sec. 43)
21) To exercise other powers essential or necessary to carry out its purposes.

76. Is the sitting board allowed to create additional offices and/or positions in the
corporation?

The determination of the necessity for additional offices and/or positions in a corporation, if
authorized under the by-laws of the corporation, is a management prerogative which courts are
wont to review in the absence of any proof that such prerogative was exercised in bad faith or
with malice.

In the same vein, the BOD may create an executive committee or other board committees
as part of its prerogative provided that such committees do not function as an executive
committee as contemplated by Sec. 35 of the Corporation Code, in which case, authority in the
by-laws is required. [Filipinas Port Services, Inc. vs. Go et al., 518 SCRA 452 (2007)]

The BOD has no power to create other corporate officers without first amending the
corporate by-laws so as to include therein the newly created corporate office. If the Board
appointed persons to occupy positions other than the position of corporate officers in its by-laws,
that person appointed is a mere employee of the corporation. (March II Marketing vs. Joson, GR
171993, December 12, 2011)

77. One of the powers of a corporation is the power to sue and be sued. To whom is
this power given?

It is lodged in the board of directors that exercises its corporate powers and not in the
President or officers thereof.

78. Briefly explain the Doctrine of Apparent Authority.

The Doctrine of Apparent Authority, with special preference to banks, was laid out in the
case of Prudential Bank vs. CA, 223 SCRA 350, where it was held that: conformably, we have
declared in countless decisions, that the principal is liable for obligations contracted by the
agent. The agent’s apparent representation yields to the principal’s true representation and the
contract is considered entered into between the principal and the third person x x x x.
Accordingly, a banking corporation is liable to innocent third persons where the representation is
made in the course of its business by an agent acting within the general scope of his authority
even though, in the particular case, the agent is secretly abusing his authority and attempting to
perpetrate a fraud upon his principal or some other person, for his own ultimate benefit. (First
Philippine International Bank vs. CA, 252 SCRA 259)

79. Rule on Abstention – In case of abstention during a board meeting on a vote taken on any
issue, the general rule is that an abstention is counted in favor of the issue that won the majority
vote, since by their act of abstention, the abstaining director are deemed to abide by the rule of
majority. [Lopez vs. Ericta, 45 SCRA 539 (1972)]

80. X Corporation is a non-stock corporation and some of its members are dead.
Should X still count the dead members to establish quorum for voting purposes?

In a non-stock corporation, membership is personal and non-transferable unless the articles

of incorporation or by-laws states otherwise. Sec. 91 of the CC states that termination
extinguishes all the rights of a member of the corporation. Hence, dead members are not to be
counted in determining the requisite vote in corporate matters or the requisite quorum in the
members’ meeting. (Tan vs. Sycip, 499 SCRA 216, August 17, 2006)
20

NOTE: The shares of stocks held by dead stockholders in a stock corporation are included in
Page

the computation of the corporation’s outstanding capital stocks.

81. “S” owns 60% of the capital stock of X Corporation. X is engaged in the business
of import/export of garments. While on vacation in Italy, “S” met her prince
charming, “P” and together they came home to the Philippines. “P” still
maintains his residence in Italy. Upon arrival, “P” bought one share of the capital
stock of X so that he could participate in her business. Is “P” qualified as a
director of the X? Can he become a corporate officer?

Yes. “P” is qualified to become a director of X, having bought one share of the capital stock
of “X”, he meets the requirement on stock ownership and thus, he could become a director of “X”
if duly elected by its stockholders. The New Code, requires that the treasurer (CFO) of the
corporation must be a resident of the Philippines. The requirement that majority of the directors
must be residents of the Philippines has been deleted.

82. “S”, a stockholder of Universal Corporation, was privileged enough to be able to

borrow money from said corporation, being the brother-in-law of the President.
When the obligation became due and demandable, S offered to settle by
surrendering his shares to the corporation. S was able to subscribe at par value
of Php 100.00 per share and today it is already priced at Php 200.00 in the open
market. “S” was offering it back to the corporation for only Php 125.00 per share.
Majority of the Board of Directors agreed with S’s proposal, but its legal officer
advised otherwise. Decide. (Garcia vs. Lim Chu Sing, 59 Phil. 562)

The legal officer is correct. When a person makes an investment as a stockholder in a

corporation, he is not a creditor of the latter but a plain investor who may rise and fall with the
financial success or failure of the corporation. Thus, he cannot compensate what he owes the
corporation by way of an ordinary loan. Upon demand of the corporation for payment of his loan,
he must pay the same and he cannot claim extinguishment of the debt by compensating the
same with his shareholding.

83. Differentiate the following:

Subscriber
A person may become a subscriber even before
the corporation is formed or during its existence.
Is a stockholder even if he has not fully paid his
shares
Subscription not covered by Statute of Frauds,
may be in any form, written or oral, express or
implied
Cannot be released from his subscription
Creditors may proceed against subscribers for
their unpaid balance on subscription in case
assets of corporation cannot satisfy their claims
Purchaser
Purchase of shares may be made only after
incorporation
Becomes a S/S only upon full payment and his
purchase registered in the books of the
corporation
Purchase of more than Php 500 shall be
covered by the Statute of Fraud.
Corporation may cancel the contract of sale for
non-fulfillment of the purchaser of his
commitment to the seller-stockholder.
Creditors may not proceed against purchasers

84. Is a subscriber of a corporation a stockholder thereof?

No. A subscriber becomes a stockholder only from the time his subscription is accepted by
the corporation or the corporation’s offer is accepted by him. Technically, a person is not a
stockholder or member unless he is recorded as such in the stock transfer books of the
corporation. (Subscriber is a person who has agreed to take and pay for original or un-issued
shares of a corporation formed or to be formed.)

85. Stockholders’ Rights –

A) Rights as to control of the corporation:

1) Right to attend and vote in person

2) Right to approve certain corporate acts
3) Right to amend or repeal by-laws or adopt new ones
4) Right to compel the calling of meetings when none is held or no person is authorized to
call for a meeting
21

5) Right to have the corporation voluntarily dissolve

Page

B) Rights as to the management of the corporation:

 6) Right to vote by proxy at stockholders’ annual meeting
7) Right to elect or remove directors
8) Right to enter into voting trust agreement

C) Proprietary rights:

9) Right to issuance of certificate of stocks in evidence of his stock ownership upon full
payment thereof
10) Right to participate in the distribution of corporate property in liquidation (Secs. 118-119)
11) Right to dividends
12) Right to transfer his shares of stock
13) Right to pre-emption in the issue of shares
14) Right to be furnished with the financial reports and statements of the corporation
15) Right to inspect corporate books and records
16) Right to recover stocks unlawfully sold for delinquency
17) Right of first refusal
18) Appraisal’s right

1. Books and records of Corporation are kept where principal office is located. Must be
kept for as long as corporation exists.
2. S/S has right to inspect them at reasonable hours on any business days and may
demand in writing for a copy or excerpts from said records, books or minutes at his
expense.
3. Any officer who shall refuse to allow examination shall be liable for damages.
4. Grounds for denial – (a) the S/S has improperly used any information previously
secured, and (b) is not in good faith and (c) not for legitimate purpose.
5. The S/S has statutory right to inspect books and records of wholly owned subsidiary
of the corporation.
6. Board cannot limit this right arbitrarily. (ex. Number of days)
7. SEC and BIR can examine books and records of corporation even if they are not
stockholders of the corporation.

D) Remedial rights:

19) Right to bring individual, representative or derivative suits

86. X is a director of Futuristic Corporation holding a qualifying share. He is likewise

a director of Current Trend, Inc. holding 15% of the outstanding capital stocks.
Futuristic and Current Trend entered into a joint venture agreement. Y, a
shareholder of Futuristic filed for the nullification of the same for failure to
observe the provisions on self-dealing directors with respect to Futuristic. Y
maintains that X is an interlocking director of both corporations and therefore
must comply with the provisions required by law. Is Y correct?

No. X did not violate the requirements of law. Except in cases of fraud and provided that the
contract is fair and reasonable under the circumstances, a contract between corporations having
interlocking directors shall not be invalidated on that ground alone. There is no need for X to
observe the provisions on self-dealing directors with respect to Futuristic because his
shareholding in Current Trend is not substantial. “Substantial interest” is defined as 20%
ownership of the outstanding capital stock. Given X’s one qualifying share in Futuristic and 15%
in Current Trend, he has no substantial interest in BOTH corporations. (Sec. 32)

87. Differentiate the following:

Proxy Voting Trust

The proxy holder votes as an agent of the S/S
The proxy must vote in person
The proxy has no title to the shares of the
principal
Proxy need not be notarized
Revocable anything except one with interest
Proxy can act only at a specific stockholder’s
The trustee votes as owner rather than as agent
The trustee may vote in person or by proxy
unless the agreement provides otherwise
Trustees acquires legal title to the shares of the
transferring stockholder
The agreement must be notarized
The agreement is irrevocable
Trustee is not limited to act at a specific
22

meeting except in continuing proxy stockholders’ meeting

Proxy can vote only in the absence of the A trustee can vote and exercise all the rights of
stockholder the S/S even when the latter is present
Page

Trust agreement must not exceed 5 years at

 The proxy cannot exceed more than 5 years any one time except when the same is made a
condition of a loan

Proxy Voting Trust

The right to vote is inherent or inseparable from The voting right is divorced from the ownership
the right of ownership of the stock of stock

88. (a) What is meant by the INSTRUMENTALITY RULE?

(b) BEST JUDGMENT RULE.

(a) The SEC en banc explained the “instrumentality rule” which the courts have applied in
disregarding the separate judicial personality of a corporation as follows” “where one
corporation is so organized and controlled and its affairs are conducted as that it is, in fact,
a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the
instrumentality, may be disregarded.

(b) Best Judgment Rule is one which dictates that directors/trustees cannot be held liable for
mistakes or errors in the exercise of their business judgment, provided they have acted in
good faith and with due care and prudence. Wrong decision should not automatically be
equated as bad faith.

89. X Corporation filed a case against P, a private individual for damages. X prays for
the award of moral damages among others. Can moral damages be awarded in
favor of a corporation? Reasons. (ABS-CBN Broadcasting Corp. vs. CA, et. al., GR
128690, Jan. 21, 1999)

The award of moral damages cannot be granted in favor of a corporation because, being an
artificial person and having an existence only in legal contemplation, it has no feelings,
emotions, senses. Thus, it cannot experience physical suffering and mental anguish that can be
experienced only by one having a nervous system. The statement in People vs. Manero and in
Mambulao Lumber Co. vs. PNB that a corporation may recover moral damages if it “has a good
reputation that is debased, resulting in social humiliation” is an obiter dictum. On this score
alone the award for moral damages is not proper.

NOTE: In the cases of Jardine Davies Inc. vs. CA & Far East Mills Supply Corp. GR No.
128066, June 19, 2000, and Purefoods Corporation vs. CA and Far East, GR NO. 128069, June
19, 2000, the Supreme Court awarded moral damages because the respondent has sufficiently
shown that its reputation was tarnished after it immediately ordered equipment from its suppliers
on account of the urgency of the project, only to be canceled later. The award of moral damages
should not be excessive because this is never intended to enrich the recipient.

90. What is the effect of sequestered shares as to the registered owners’ right to
vote?

The registered owner retains his right and privileges to vote on those shares even if they
were sequestered by the PCGG because PCGG is a mere conservator and as a rule cannot
exercise ACTS OF DOMINION, by voting on those shares.

91. When may conservator vote on sequestered shares?

As a mere conservator, he cannot, as a rule, exercise acts of dominion by voting on the

sequestered shares, except:

a) When the shares were purchased with public funds or affected with public interest

b) If the share are ill-gotten and thus it belongs to the State;

c) If there is imminent danger of dissipating of private corporation’s assets and/or property

the conservator may vote or be appointed as nominee director. (Poland Industrial Ltd.
Vs. Nat’l. Development Co., et.al., August 22, 2005)

92. X Corporation is under sequestration by the PCGG. Should there be intra-

corporate disputes in the subject corporation, which court will have jurisdiction?
Is it the RTC-Special Commercial Court or the Sandiganbayan?
23

An intra-corporate dispute involving a corporation under sequestration of the PCGG falls

Page

under the jurisdiction of the RTC special commercial court and NOT the Sandiganbayan.
 (Philippine Overseas Telecommunications Corporation vs. Africa, et. al., July 13, 2013)

93. What cases are considered intra-corporate controversies that are now cognizable
by the RTC (Special Commercial Court)?

a) Devices or schemes amounting to fraud and misrepresentations;

b)
1) Between a corporation, partnership or association and the public;

2) Between a corporation, partnership or association and its stockholders, partners,

members or officers.
3) Between a corporation, partnership or association and the State in so far as its
franchise, permit or license to operate is concerned, and
4) Among the S/S, partners or members themselves. (Union Glass vs. SEC, 126 SCRA 31;
A & A Continental Commodities Phils. Inc. vs. SEC, 225 SCRA 341)

c) Controversies in the election or appointment of directors, officers, etc. of the corporation by

the board; Concomitant to the power of the regular court to decide and hear said cases is
the authority to issue orders necessary or incidental to the carrying out of powers expressly
granting to it, including in appropriate cases, the holding of a special stockholders’ meeting.
[Yujuico vs. Quiambao, 513 SCRA 243 (2007)]

d) Petition to be declared in the state of suspension of payments;

e) Issues involving the Trust Fund Doctrine;

f) Compelling a corporation to register the sale of shares and to issue new certificate of stock
in the name of the purchaser thereof.

Examples:
 An order of refusal of a corporation to issue replacement of stocks certificates to
stockholders who alleged that he has not received the original certificates which were
lost.

 The issue of ouster of corporate officers.

 An action for rescission of an agreement to bail out a corporation is essentially an

action to recover control of corporation’s management.

 A suit filed by a stockholder against the corporation to enforce the latter’s promissory
note or to compel the corporation to pay for his shareholdings.

 A suit demanding vacant all corporate positions for reason of an illegal election.

 An action against a corporation to collect on a contractual obligation payable in cash

and partly in shares of stocks without averment of fraud or misrepresentation falls within
the jurisdiction of ordinary courts and it is not an intra-corporate dispute. [DMRC
Enterprise vs. Este Del Sol Mountain Reserve, Inc. 132 SCRA 293 (1984)]

 The determination as to who among the shareholders of a corporation is the true owner
of the disputed property is not considered an intra-corporate controversy but an
ordinary civil action between or among the claimants. [Eustacio Atwel, et. al., vs.
Concepcion Progressive Association, Inc. 551 SCRA 272 (2008)]

NOTE: To determine whether or not a case is an intra-corporate dispute cognizable by the

RTC, the following must be met:

a) Relationship Test – The relationship of the parties to the controversy.

b) Controversy Test – The nature of the question that is the subject of the dispute.

94. An intra-corporate case was filed in court. The RTC assumed jurisdiction of the
case, in the course of the trial, it realized that it should be heard by an RTC
designated by the SC as a special commercial court and immediately ordered its
24

transfer to the branch so designated. Is the transfer valid?

Page

The transfer to another court is not proper. The only action that such RTC could take on the
matter was to dismiss the petition for lack of jurisdiction and not to order the transfer of the case
 to another court. [Calleja vs. Panday, 483 SCRA 680 (2006)]

95. Is a pending intra-corporate case against an officer of a corporation precluding

the filing of a criminal action against the said officer?

The filing of an intra-corporate dispute (civil in nature) before the court does not preclude the
simultaneous and concomitant filing of a criminal action before the regular courts; a fraudulent
act may give rise to liability for violation of the rules and regulations of the SEC, both charges
may be filed and proceeded independently and simultaneously with the other.

96. An existing intra-corporate dispute is pending before the RTC Special

Commercial Court. Before the final adjudication of the said case, the corporation
was dissolved. What will happen to the intra-corporate dispute?

An existing intra-corporate dispute which does not constitute a continuation of corporate

business is not affected by the subsequent dissolution of the corporation. The dissolution simply
prohibits it from continuing its business. The parties involved in the litigation are still corporate
actors. The dissolution does not automatically convert the parties into total strangers or change
their intra-corporate relationship. Neither does it change or terminate existing causes of action,
which arose because of the corporate ties between the parties. Thus, the pending action
remains and must continue (or must be filed if not yet in court) despite the subsequent
dissolution of the corporation. (Aguirre vs. FQB, January 9, 2013)

97. X was denied his right to vote as member of a condominium corporation for
failure to pay his association dues. X filed a damage suit against the corporation
contending that the reason why he did not update his dues was for the reason
that he does not agree with the computation of his alleged unpaid obligations. Is
the issue an intra-corporate dispute?

The action although denominated as one for damages is an intra-corporate dispute and
therefore, within the jurisdiction of the RTC designated as a special commercial court. In
determining whether a dispute constitute an intra-corporate controversy, the court uses 2 tests:
(a) the relationship test and the (b) controversy test. Applying these 2 would show that issue
involving condominium dues is indeed an intra-corporate controversy.

98. The president of the Wonder Corporation created the Office of Vice President for
Finance and Administration. X was appointed the vice president of the
corporation and heads said office. Subsequently, because of differences X was
dismissed. Is the dismissal an intra-corporate dispute or an ordinary labor case?

If the office or the position is not express in the by-laws of the corporation the power to elect
the corporate officers or to create a corporate office in a corporation belongs to the Board of
Directors and it may not delegate that power to any subordinate officer or agent. The presence
of a Board Resolution is of no moment, the office of the Vice-President for Finance and
Administration created by the president of the Corporation is not a corporate office. Hence, in
case of dismissal or removal from office of an officer in that department, the labor arbiter, NOT
the RTC special commercial court that has jurisdiction. (Matling Industrial and Commercial
Corporation, October 13, 2010)

If the officer removed/terminated holds a position that is provided in the by-laws of the
corporation, his dismissal is an intra-corporate dispute and not an ordinary labor case.

99. What t is an election contest?

It refers to any controversy or dispute involving title or claim to any elective office in a stock
or non-stock corporation, the validation of proxies, the manner and validity of election, and the
qualifications of the candidates, including the proclamation of winners, to the office of director,
trustee or other officer directly elected by the stockholders in a close corporation or by members
of a non-stock corporation where the articles of incorporation or by-laws so provide.

100. Can the SEC pass upon the validity of proxies in relation to election
controversies in a corporation?
25

No. The power belongs to the RTC (Special Commercial Court) but, the power of the SEC to
Page

regulate proxies remains extant and could be very well exercised when stockholders vote on
matters other than the election of directors. (GSIS vs. CA, April 16, 2009)
101. Is an assignee of shares of stocks transferred under a Deed of Trust and
Assignment and duly notarized a stockholder of a corporation? (b) Is there a
transfer of stocks if the certificate of stock was duly endorsed and delivered by
the stockholder-transferor but without a Deed of Trust and Assignment a valid
transfer?

a. The assignee is NOT a stockholder of the corporation unless his name appears in the stock
and transfer book of the corporation. He must surrender the certificate of stock of the
transferor duly endorsed to the corporate secretary and the Deed of Trust and Assignment
so that his name will be recorded in the “STB” and a new certificate issued in his name.

b. Yes, there is a valid transfer between the transferor and transferee when the certificate is
endorsed and delivered by the transferor-stockholder, absence of Deed of Trust and
Assignment is not fatal to the transfer. However, the transfer must be registered in the stock
transfer book of the corporation otherwise the transferee will not be recognized as a
stockholder of the corporation.

102. When are shares of stocks deemed delinquent?

When so declared by the Board of Directors to be delinquent under obtaining circumstances

provided by law.

103. What are the effects of stock delinquency?

a. It deprives the stockholder thereof the right to: (1) be voted upon, (2) be entitled to vote or
(3) representation at any stockholder’s meeting,

b. Quo warranto proceedings may be instituted against directors elected by delinquent

stockholders

c. Delinquent stockholders shall not be entitled to any of the rights of a stockholder except the
right to dividends; and

d. Delinquent stocks shall be subject to delinquent sale.

104. Is a corporation authorized to engage in an activity not expressly provided for in

its purpose clause?

A corporation has powers only as are expressly granted in its Charter or in the statutes
under which it was created or such powers as are necessary for the purpose of carrying out its
express powers. If the intended business activity is NOT expressly included in the purpose
clause of the “AI”, it cannot be undertaken by a corporation. (SEC Opinion, October 6, 1999)

105. When may corporation distribute its corporate capital?

a) After amendment of its “AI” to reduce authorized capital stock with the approval of the
SEC.

b) In cases of purchase of redeemable shares by corporation regardless of existence of

unrestricted retained earnings.

c) In case of dissolution and eventual liquidation of the corporation.

106. What are the consequences if shares were acquired in violation of the
restrictions provided for in a close corporation?

(a) The corporation may refuse to register the transfer of the stock in the name of the transferee
unless it has been consented to by all the stockholders of the close corporation or

(b) If the Articles of Incorporation is amended to allow the transfer.

107. How do we apply the 60-40 per centum capital requirement in case the
26

corporation is partly nationalized?

Page
 The 60-40% ownership requirement in favor of Filipino citizens must apply separately to
each class of shares, whether common, preferred non-voting, preferred voting or to any other
class of shares issued by the corporation. [Heirs of Wilson P. Gamboa vs. Teves, 682 SCRA 397
(2012)]
108. What kinds of shares are allowed to vote in the election of directors?

Only shares with voting rights are allowed to vote during election of directors. The term
“capital” under the Constitution (Sec. 11, Art. XII) refers to common shares. However, if the
preferred shares issued by the corporation also have voting rights, then the term “capital” shall
include such preferred shares because the right to participate in the control or management of
the corporation is exercised through the right to vote in the election of directors. (Gamboa vs.
Teves, June 28, 2011)

109. Who is a: (a) Self-dealing director? (b) Interlocking director? (c) Provisional
director? (d) Hold-over director? (e) Nominal director? (f) Alternate director? (g)
Ex-officio director? and (h) Interim directors?

a) Self-dealing director – An incumbent director of a corporation who enters into a

private contract with the corporation where he is seated as a director. The contract is
VOIDABLE at the option of the corporation.

b) Interlocking director – One who serves as a director in two or more corporations.

The contracts entered into are VOIDABLE and becomes binding and unassailable when
ratified by each corporation either expressly or by acquiescence and lapse of time.
NOTE: interlocking directorship is NOT ALLOWED in competing corporations.

c) Provisional director - An impartial person (not a stockholder or a creditor of the

corporation) who is appointed by the SEC to sit in the board of a corporation to assists in
its management in appropriate cases wherein there is imminent danger of dissipation,
loss or wastage or destruction of assets or other properties or paralization of business
operation in a corporation to the prejudice of stockholders, party-litigants or the general
public. He shall have the powers and rights of a duly elected director including the right
to receive notice of meetings and to vote at such meetings. He may be removes by the
SEC or by ALL the stockholders. He is not a receiver of the corporation; hence, he
cannot have the title and powers of custodian of corporate property. His additional
qualifications shall be determined by the SEC.

d) Hold-over director – An “old” director that is allowed to continue and function as such
in the management of the corporation even beyond his 1-year tenure until a duly elected
and/or qualified one has been elected to replace him. This is to prevent any
unnecessary disruption in carrying out the business affairs of the corporation.

e) Nominee director – A conservator appointed to a corporation by the SEC or the RTC

where there is danger of wasting assets and/or properties thereof.

In sequestered corporations, the President appoint nominee director(s) to sit in the

board, in private corporations, SEC or RTC appoints nominee director(s).

f) Alternate director – A person that is designated to take the place of an incumbent

director in the event of vacancy in the Board. This is not allowed because there would be
two (2) directors for the same position, one permanent and the other one temporary, a
situation that the law does not permit.

g) Ex-officio director – A person who becomes a director of a corporation because of his

title in an office and not because of an election by the stockholders or members. He
does not have the powers, rights and privileges of a director and is only an honorary
member of the Board.

h) Interim directors – The persons who shall act as directors or trustees of a corporation
until the first regular set of directors/trustees are duly elected and qualified

110. Who is a provisional director and what are his powers in a corporation?

He is a person appointed by the SEC or Court who is an impartial person who is neither a
stockholder nor a creditor of the close corporation to assist in the management of the close
27

corporation. He shall have the powers and rights of a duly elected director, including the right to
receive notice of meetings and to vote at such meetings. He may be removed by the SEC or by
Page

the Court or by ALL the stockholders. He is not and cannot exercise the powers of a receiver.
 111. The New Corporation Code requires that 20% of the Board of Directors of
corporations vested with public interest must be composed of independent
directors. Who are considered as independent directors?

These are persons voted by the stockholders of the corporation, independent of

management and free from any business or relationship that could affect the exercise of
independent judgment in carrying out their responsibilities as directors of the corporation. They
have the same powers and responsibilities are the other directors of the corporation. Serving
also for one year in the board.

112. In case the hold-over director resigns who is authorized to fill-in the vacancy in
the board?

Since the hold-over director stays in office after the expiration of his term of office, then it
shall be the stockholders who should fill up the vacancy upon his resignation and not the
remaining directors of the board. (Valle Verde Country Club vs. Africa, Sept. 4, 2009)

113. Eleven directors usually fill-up the board of X Corporation. In the annual
stockholders meeting of X Corporation last year only 10 candidates were duly
elected on the basis of number of votes taken. One vacancy was temporarily
filled-up by a hold-over director until his replacement is qualified and elected.
Subsequently the hold-over director resigned for reason of poor health. May the
vacancy be filled-up by the incumbent directors?

Vacancy created by the resignation of the hold-over board member cannot be filled-up by
the incumbent directors but only by the stockholders. (Valle Verde Country Club vs. Africa,
September 4, 2009)

NOTE: A Hold-over director can be removed any time, without cause, upon the election or
appointment of his successor. (Barayuga vs. Adventist University of the Phils., GR No. 168008,
August 17, 2011)

114. X Ltd., a non-resident foreign corporation, not licensed to do business in the

Philippines engaged in manufacture and sale of cable wires for industrial
purposes. F, doing business under Links International Corporation ordered and
received from X Ltd., all its needed supplies in 18 different transactions. For non-
payment of the supplies, X wanted to sue F; can X Ltd. sue F in the Philippines
courts? (Eriks Pte. Ltd., vs. CA, 267 SCRA 567)

No. The series of transactions could not have been isolated or casual transaction that would
enable X Ltd. to sue in Philippine courts. What is determinative of doing business is not really the
number or the quantity of the transactions, but more importantly, the intention of an entity to
continue the body of its business in the country. The number and quantity are merely evidence
of such intention. Accordingly, X Ltd. Is incapacitated to maintain an action against F.

115. Define “Isolated Transaction”

It is a transaction or series of transaction set apart from the common business of a foreign
enterprise in the sense that there is no intention in a progressive pursuit of the purpose and
object of the business organization. Whether a foreign corporation is “doing business” does not
necessarily depend upon the frequency but more upon the nature and character of the
transactions. (Eriks’ case)

116. X is Japanese Corporation engaged in the sale and distribution of furniture in

Japan and to other European countries. It regularly buys Philippine rattan and
bamboos from a Philippine exporter. Is X “doing business” in our country?

No. X is not doing business in our country because without opening an office or appointing
an agent in the Philippines, it is not deemed to be engaged in business here. (Cargill, Inc. vs.
28

Intra Strata Assurance Corporation, March 15, 2010)

Page

117. SMBA advertised an invitation offering to the private sector the opportunity to
develop and operate a modern marine container terminal within the Subic Bay
 Freeport Zone. ICTSI, RPSI and HPPL were declared as qualified bidders. Upon
review, HPPL’s offer was considered to be the most advantageous. ICTSI’s
protested with the Office of the President, requesting nullification and reversal of
the SMBA resolution rejecting ICTSI’s bid while awarding the same to HPPL. The
Office of the President ordered that a rebidding be conducted. HPPL filed an action
for specific performance with the RTC alleging that SMBA has accepted its offer
and had repeatedly declared that it was the winning bidder. HPPL later filed a
motion to have the rebidding enjoined. The motion was denied. A petition for
injunction was then filed with the SC. During the course of the trial, it was proven
that HPPL was a foreign corporation that had no license to so business in the
Philippines. HPPL’s argument was that it was merely suing on an “isolated
transaction”. Is the contention of HPPL correct?

HPPL must be held to be incapacitated to bring a petition for injunction for it is a foreign
corporation doing business in the Philippines without the requisite license. A single act or
transaction may be considered as “doing business” when (a) a corporation performs acts for
which it was created or (b) exercises some of the functions for which it was organized or (c) the
single act done pertains to the ordinary business of the corporation. The amount or volume of
the business is of no moment for even a singular act cannot be merely incidental or casual if it
indicates the foreign corporation’s intention to do business.

Participating in the bidding process constitutes “doing business” because it shows the
foreign corporation’s intention to engage in business in the Philippines .

118. What is the true test as to what constitutes “doing” or “engaging” or “transacting
business”?

There is no exact rule or governing principles as to what constitutes “doing” or “engaging” or

“transacting” business. Indeed, such case must be judge in the light of its peculiar
circumstances, upon its peculiar facts and upon the language of the statute applicable. The true
test, however, seems to be whether the foreign corporation is continuing the body or
substance of the business or enterprise for which it was organized. (Com. Materials and
Design Inc. vs. CA, 260 SCRA 673)

The general tests applied to determine whether a foreign corporation is doing business in
the Philippines are:
a) Substance Test – whether the foreign corporation is continuing the body of the
business or enterprise for which it was organized or whether it has substantially retired
from it and turned it over to another.

b) Continuity Test – continuity of commercial dealings and arrangements, and

contemplates, to that extent, the performance of acts or works or the exercise of some of
the functions normally incident to, and in the progressive prosecution of the purpose and
object of its organization.

119. X, a foreign corporation, is doing business here without a license. Are the
contracts entered into by X with local businessmen and/or entities valid?

Such contracts are VALID AND ENFORCEABLE. The requirement of registration affects
only the remedy that X can avail of to enforce said contracts. The lack of capacity at the time of
the execution of the contract can be cured by the subsequent registration of said corporation.
The penal sanction for the violation and the denial of access to our courts and administrative
bodies are sufficient punishments.

NOTE: A foreign corporation not engaged and licensed to do business in the Philippines may
maintain an action for unfair competition because said crime is punishable under Art. 189 of the
Revised Penal Code which is a public crime. It is essentially an act against the State and it is the
latter which principally stands as the injured party. The complainant’s capacity to sue in such
case becomes immaterial. (Melbarose R. Sasot, et. al., vs. People of the Philippines, June 29,
2005)

120. “I”, is a foreign corporation not licensed to do business in the Philippines. It

entered into a “Representative Agreement” with “A”, a local electronics firm, as its
29

“exclusive representative” in the Philippines for the sale of “I”s products on a

commission basis. Later, “I” terminated said contract alleging violations of
Page

agreement on the part of “A”. It then filed an action for the issuance of writ of
preliminary injunction to enjoin further business transactions for which the court
 granted. “A” countered that “I” has no legal personality to sue, as it is a foreign
corporation doing business in the Philippines without the required BOI authority
and SEC license. Is “A’s contention tenable? (Communication Materials & Design, Inc. vs.
CA, 260 SCRA 673)
No. The general rule is that before a corporation can transact business in this country, it
must first obtain license to transact in the Philippines and certificates from appropriate
government agencies. Otherwise, it shall not be permitted to maintain or intervene in any action,
suit or proceeding in any court or administrative agency of the Philippines, but it may be sued on
any valid cause of action recognized under Philippine laws.

Under the case at bar, the facts show that “I” is deemed to have been “engaged in” or “doing
business” in the Philippines because its agreement with “A” indicates that “I’s” purpose is to
bring about a situation among its customers and the general public that they are dealing directly
with “I” and that “I” is actively engaged in business in the country. However, despite the fact that
“I” is doing business in the Philippines, “A” is estopped to challenge its (“I”) personality after
having acknowledged the same by entering into a contract with it.

One who has dealt with a foreign corporation is estopped to deny its corporate existence
and capacity. The principle will be applied to prevent a person contracting with a foreign
corporation from later taking advantage of its non-compliance with the statutes where such
person has received the benefits of the contract.

121. X, a foreign corporation is doing business in our country without license. It entered
into a contract with a local manufacturer promising to deliver raw materials within
the agreed time and date. X defaulted. Can X be sued in the Philippines and be held
liable for breach of contract?

A foreign corporation doing business in our country without a license can be sued in court
but it cannot sue to enforce its rights and interest. Our court will acquire jurisdiction over the
person of X thru its agents, representatives or distributors of its products.

122. X, a foreign corporation not license to do business in the country appointed a

distributor of its products here. Is the appointment of a local distributor considered
doing business in our country?

The appointment of a distributor in the Philippines is not sufficient to constitute doing

business unless it is under the full control of the foreign corporation. If the distributor is an
independent entity which buys and distributes products, other than those of X’s, for its own name
and account, X cannot be considered as doing business here. (Steel Case vs. Design Int’l.
Selections, GR 171995, April 18, 2012)

123. Is a resident agent of a foreign corporation allowed to sign the certification against
forum shopping of the foreign corporation in an action to be filed here?

The resident agent of a foreign corporation doing business in the Philippines is not
necessarily authorized to execute the requisite certificate against non-forum shopping. He is not
among those specifically authorized under the Corporation Code. This is because while a
resident agent may be aware of actions filed against is principal, it may not be aware of actions
initiated by its principal, whether in the Philippines, against a domestic corporation or private
individual, or in the country where such corporation was organized and registered, against a
Philippine registered corporation or a Filipino citizen. [Expert Travel & Tours, Inc. vs. C.A., 459
SCRA 147 (2005)]

124. Is the SEC empowered to order dissolution of a corporation?

Yes. The SEC has jurisdiction to order dissolution of a corporation. While jurisdiction over
the liquidation or settlement of claims of corporation belongs to the regular court (RTC)

125. Dissolution – Is the extinguishment of its franchise to be a corporation and the termination of
its corporate existence.

 Being a creation of the State, it can only be dissolved with the consent of the State; mere
agreement of stockholders to dissolve is not valid.

 The courts of one State do not have the power to dissolve a corporation created by the laws
30

of another State.
Page
  If no dissolution papers are filed with SEC, the corporation still legally exists even if in fact it
has ceased to operate. Exception: By court order of judicial dissolution, the corporation is
legally dead even if the Commissioner of the SEC has no notice of such fact.

 Lost of all corporate properties will not dissolve a corporation neither will change of
corporate name result to dissolution nor the appointment of receiver cause dissolution.
 Piercing the veil of corporate fiction will not dissolve a corporation.

 A defendant corporation is subject to suit and service of process even though dissolved.

 Want of officers by reason of failure to elect or by reason of death, abandonment or

resignation does not itself work to dissolve a corporation.

 A dissolved corporation can not be revived but those interested may form a new one.

 A dissolved corporation may hold election of officers but only for the purpose of winding up.

 A corporation that has a pending action and which cannot be terminated within the 3-year
period after dissolution is authorized to convey all its property to a trustee(s) to enable it to
prosecute and defend suits by or against the corporation beyond the 3-year period.

126. Is there dissolution if (a) the corporation lost all its property? (b) Change of name
of the corporation?

No dissolution results in any of the given 2 situations above.

127. May the same or some stockholders of the corporation form another one while
the corporation is under liquidation?

Yes. Even if they will engage in the same line of business during the liquidation period. The
newly organized one is VALID.

128. May the Congress enact laws dissolving a corporation?

Yes. The Congress by legislative enactment may withdraw or revoke the franchises of
corporations engaged in public utilities services, resulting to their dissolution.

129. Two methods of dissolving a corporation:

Voluntary dissolution Involuntary dissolution

Extrajudicial voluntary dissolution – by majority
vote of the BOD/BOT with the 2/3 concurring
votes of the OCS and NO creditors are
affected. No hearing is required.
If there are creditors affected - by judicial
voluntary dissolution. Judgment of the SEC
after hearing of petition for voluntary
dissolution. Hearing is required.
By amending the “AI” to shorten corporate life
(Same number of votes as above)
In case of corporation sole, by submitting to
SEC a verified declaration of dissolution for
approval
By voluntary surrender of its charter provided it
is authorized by statute and accepted as
ratified by the State.
By merger or consolidation, the constituent
corporations automatically cease upon
issuance by SEC of certificate of merger and
consolidation.
Legislative enactment
Non-user Clause – Failure to formally
organized and commenced business within 2
years from date of issuance of certificate of
incorporation except when such failure is due
to causes beyond its control.
Expiration of term without renewal
Judicial involuntary dissolution is filed by
minority S/S to obtain redress and protection of
their rights within the corporation
Order of SEC upon verified petition and after
notice and hearing – (a) Fraud (b)serious
misrepresentation (c) refusal to comply with
lawful orders, (d) continuous inoperation for at
least 5 years, (e) Failure to file by-laws, (f)
failure to file reports and (g) revocation of
franchise pursuant to quo warranto
proceedings.

130. What is the status of stockholders in relation to the properties of the corporation
upon its dissolution?
31
Page
 Legal title to corporate properties is vested in the stockholders who become co-owners
thereof. They are entitled to have the assets sold which will in turn be distributed to them pro rata
provided all claims of creditors and the net contractual liabilities of the corporation are settled.

131. Can the minority stockholders ask for dissolution of corporation?

Yes. If they are unable to obtain redress and protection of their right within the corporation.

HOW? By filing a petition for judicial involuntary dissolution in court.

132. X Corporation was dissolved in 2007. The SEC cancelled the certificate of
registration of X which had finally put an end to X’s juridical personality. Granting
that X has several unsettled collection against its previous clients, can X still file
collection cases after its dissolution?

The Corporation Code provides that 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. Moreover, the rights of a corporation which is dissolved pending litigation are
accorded protection by the law pursuant to Sec. 139 of the Corporation Code. Thus, X may still
maintain actions in court for the protection of its rights which includes the right to appeal.
Dissolution or even the expiration of the 3-year liquidation period should not be a bar to a
corporation‘s enforcement of its rights as a corporation. [Paramount Insurance Corp. vs. A. C.
Ordonez Corp., 561 SCRA 327 (2008)]

133. Can the Board of directors fill up vacancies in the Board?

Vacancies in the board may be filled-up by the remaining board only when there is still
quorum and the vacancy is due to (a) resignation, (b) abandonment, (c) insolvency or (d) death.
If the cause of the vacancy is removal of director, expiration of term, increase in the number of
seats in the board, it may only be filled-up by the stockholders

In the case of Rufino vs. Endriga, 496 SCRA 13, (2006) the modern statutes view that
vacancies in the Board, regardless of cause, may be filled up by the remaining board itself
provided there is a quorum in the board. This is to avoid delay in making decisions or in the
performance of corporate acts.

Under the New Corporation Code, the remaining members of the board (even without a
quorum) is allowed to create an emergency board to prevent grave, substantial, and irreparable
loss or damage to the corporation.

134. Is the misconduct of corporate officers a ground for the appointment of a

receiver?

No. it is not a ground for the appointment of a receiver. A receiver is appointed when: (a)
corporate property is in danger of being wasted and destroyed, (b) the business of the
corporation is being diverted from the purpose for which it has been organized and (c) there is
serious paralization of operation to the detriment of all concerned.

135. State the requisites for the creation of a management committee.

The requisites are:

a) an imminent danger of dissipation, loss, wastage or destruction of assets or other

corporate properties, and

b) paralysis of its business operations which may be prejudicial to the interest of the parties-
litigants, or the general public.

136. What is the effect(s) of the creation of a management committee?

It will result in the suspension of all actions (pecuniary in nature including labor cases)
regardless of the phase of the suit, be it before the court or any tribunal against the corporation
to enable such management committee or rehabilitation receiver to effectively exercise its
32

powers free from any judicial or extra-judicial interference that might unduly hinder or prevent the
rescue of the distressed company. (Tyson’s Super Concrete, Inc. vs. CA, June 23, 2005)
Page

137. When can the minority stockholders file a petition for the appointment of an
 interim management committee?

They must do more than merely make a prima facie showing of a denial of their right to
share in the concerns of the corporation. They must show that corporate property is in danger of
being wasted or destroyed, that the business of the corporation is being diverted from the
purpose for which it has been organized; and that there is a serious paralization of operations all
to their detriment. It is only in a strong case where there is a showing that the majority are clearly
violating the chartered interest of the minority and putting their interests in imminent danger that
a management committee may be created.

138. What is a One-Person Corporation (“OPC”)?

This is a business entity formed by a single stockholder, who may be a natural person, trust
or an estate. The single stockholder becomes the sole director and president of the “OPC”.

 Only domestic corporations organized as stock corporation may be converted to a n

“OPC”
 Foreigners and non-residents may form an OPC subject to the applicable constitutional
and statutory restrictions on foreign participation in certain investment areas and
activities.
 Corporations vested with public interests cannot be converted to an “OPC”.

139. What is the “serious situation test”?

This test is used in appointing a receiver to the corporation. The court should consider
whether the company’s financial situation is serious and whether there is a clear and imminent
danger that it will lose its corporate assets if a receiver is not appointed.

140. Distinguish liquidation from rehabilitation.

Liquidation 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.

Rehabilitation – It contemplates a continuance of corporate life and activities in an effort to

restore and reinstate the corporation to its former position of successful operation and
solvency.

141. Rule on corporate rehabilitation:

The reason for suspending actions for claims against the corporation should not be difficult
to discover. It is not really to enable the management committee or the rehabilitation receiver to
substitute the defendant in any pending action against it before any court, tribunal, board or
body. Obviously, the real justification is to enable the management committee or rehabilitation
receiver to effectively exercise its/his powers free from any judicial or extra-judicial interference
that might duly hinder or prevent the “rescue” of the debtor corporation. ( B. F. Homes, Inc. vs.
CA cited in PAL vs. Spouses Sadic)

142. What are the requirements for voluntary rehabilitation of a corporation under the
FRIA 2010?

A petition for corporate rehabilitation must be filed before the RTC. The petition must be
approved by a majority of the Board of Directors and by 2/3 votes of the outstanding capital
stockholders.

143. X Corporation is under rehabilitation. How will X enforce its claim against its own
debtors?

Since the jurisdiction of the rehabilitation court is over claims against the debtor corporation
under rehabilitation, all claims by the debtor corporation against its own debtors or against third
parties must be filed in a separate action. (Steel Corporation vs. Mapfre Insular Insurance
Corporation, October 16, 2013)

144. Briefly explain the “pari passu principle” in corporate rehabilitation.

33

When the petition for rehabilitation of a corporation is approved by the RTC, all its assets
Page

shall be held in trust by the rehabilitation receiver for the equal benefit of all creditors, precluding
one from obtaining an advantage of preference over another by the expediency of attachment,
 execution or otherwise. Hence, all creditors stand on equal footing and no one may be paid
ahead of the others.

145. X, a secured creditor questions the constitutionality of pari passu treatment

(placing secured creditors and unsecured creditors in equal footing and
treatment during rehabilitation of the corporation) and claims that the same
offends the Non-impairment clause of the Constitution? Decide.
Rehabilitation of corporation is not a proper subject of the Non-impairment Clause of the
Constitution. This process is designed to benefit both debtor and creditors alike. It gives the
corporation a chance to continue its business operation without claims yet being enforced so
that it can return and regain from financial stress to solvency. At the end of the day, creditors are
satisfied in their full claims rather than recover at a lesser amount if corporate properties are
immediately sold.

146. What kinds of action are suspended against a distressed corporation placed
under rehabilitation of the court?

Upon issuance by the RTC of a Stay Order all actions and/or monetary claims against a
corporation under rehabilitation shall be automatically suspended. It shall include damage suits
founded on a breach of contract of carriage, labor cases, collection suits or any other claims of a
pecuniary nature. The new rules on corporate rehabilitation, its interim rules provide an all-
encompassing definition of the term and thus, include all claims or demands of whatever nature
or character against a debtor-corporation or its property. The suspension does not only cover
cases pending in court, but embraces all phases of the suit (for execution) and monetary claims
against the corporation yet to be filed.

147. Purpose of the Stay Order – To avoid a possibility of favorable judgment and execution
thereof against the assets of the distressed corporation which might prejudice the other creditors
and depositors. (Barrameda vs. Rural Bank of Canaman, Inc. GR 176260, November 24, 2010)

This is an attempt to conserve and administer the assets of an insolvent corporation in the
hope of its eventual return from financial stress to solvency. It contemplates the continuance of
corporate life and activities in an effort to restore and reinstate the corporation to its former
position of successful operation and liquidity. This process enables the company to gain a new
lease on life and thereby allow creditors to be paid their claims from its earnings.

 Criminal actions against the distressed corporation or its officers are not included in the Stay
Order not being pecuniary in nature.

 The suspension embraces all phases of a suit involving claims or debts or demands of
pecuniary in nature, be it before the trial court or any tribunal including the rendition of
judgment during the state of suspension. Labor cases are included but the criminal aspect of
BP 22 is not suspended only the civil aspect thereof.

 BP Blg. 22 is not included in the suspension because this is a suit is for the issuance of
unfunded checks.

148. X, a judgment creditor filed an extra-judicial foreclosure against C Corporation

for failure to pay its debts. A Certificate of Sale was issued in favor of X-
mortgagee. But, before the transfer of the foreclosed properties was effected, a
Stay Order was duly issued by the Court. Can X move for the issuance of new
title in its favor after the Stay Order?

Yes. Since the foreclosure of the mortgage and the issuance of the Certificate of Sale in
favor of X-mortgagee were done prior to the appointment of a Rehabilitation Receiver and the
Stay Order, all actions taken by X are not affected by the Stay Order. Thus, after the redemption
period expired without C-mortgagor redeeming the foreclosed property, X becomes the absolute
owner thereof and it is within its right to ask for the consolidation of title and the issuance of new
title in its favor. The writ of possession procured by X despite the subsequent issuance of a stay
order in the rehabilitation proceedings instituted is VALID.

149. RTC finds that the petition for rehabilitation of Z Corporation is sufficient in form
and substance. Hence, the court issued a “Stay Order” and appointed a
rehabilitation receiver to stay the enforcement of all claims against Z. What is the
34

rationale of the Stay Order of the court?

Page

The stay order of the court places all creditors of Z in equal footing under the Doctrine of
Equality in Equity”. The stay order will enable the rehabilitation receiver or management
 committee to effectively exercise his/its powers free fro, judicial or extrajudicial interference that
might unduly prevent rehabilitation of Z. The receiver should not be unduly hindered from
rescuing the distressed corporation, rather than waste his/its time, efforts and resources in
defending claims against Z, the receiver can concentrate on the possible rehabilitation of Z.
which at the end of the day benefits all creditors of Z. [Rubberworld (Phils), Inc. vs. NLRC, 305
SCRA 721 (2000]

150. C Corporation mortgaged to the X Bank three (3) parcels of land under a valid
real estate Mortgage. Due to very poor business activities, C defaulted in its loan
payment to X Bank. Subsequently C became insolvent. Insolvency or liquidation
proceedings are undertaken to settle C’s liabilities. Can X Bank proceed to
foreclose C’s property at this stage?

While the case of insolvency or liquidation proceedings is ongoing, the right to foreclosed
real estate mortgage is merely suspended upon the appointment of a management committee or
a rehabilitation receiver or upon the issuance of a stay order by the trial court. However, the
creditor-mortgagee may exercise his/its right to foreclose the mortgage upon the termination of
the rehabilitation proceedings or upon lifting of the stay order. (Yngson, Jr. vs. PNB, GR 171132,
August 12, 2012)

151. X Corporation borrowed money from B Bank. Y, the brother of X’s president
allowed to corporation to use his property as additional collateral to that loan
application X applied for. Subsequently, X was placed under corporate
rehabilitation. A stay order was issued by the trial court. Can B bank proceed to
foreclose B’s property?

Yes. Nowhere in the Interim Rules of the old and the New Corporate Rehabilitation Law is
the rehabilitation court authorized to suspend foreclosure proceedings against properties of
third-party mortgagors.

The Stay Order cannot suspend foreclosure proceedings already commenced over
properties belonging to third party mortgagors. The Stay Order can only cover those claims
directed (a) against petitioner corporation or their properties, (b) against petitioners’ guarantors
or (c) against petitioners’ sureties who are NOT solidarily liable with them. (Situs Dev’t.
Corporation, et.al., vs. Asia Trust Bank et al., GR. 180036, July 25, 2012)

152. Are the properties of third party mortgagors included in the stay over of the
rehabilitation court?

The properties of guarantors and sureties NOT solidarily liable with the debtor are excluded
from the suspension order or stay order of the court. Hence, the court is not authorized to
suspend foreclosure proceedings against properties of third-party mortgagors. (Situs
Development vs. Asia Trust Bank, January 16, 2013)

153. The court issued a Stay Order against X, a distressed corporation. Will the
suspension order extend to criminal action against the corporation or its
directors and officers?

The suspension of claims in corporate rehabilitation does not extend to criminal actions
against the distressed corporation or its directors and officers. It would be absurd for one who
has engaged in criminal conduct to escape punishment simply because the corporation of which
he is a director or officer filed a petition for rehabilitation. The prosecution of the directors or
officers of the corporation has no bearing on the pending rehabilitation of the corporation.
(Panlilio vs. RTC, Branch 51, City of Manila, February 2, 2011)

154. P, the president of C Corporation is duly authorized by its BOD to file suit for and
in behalf of the corporation. C Corporation has been placed under corporate
rehabilitation. May P file a case to recover an unlawfully detained corporate
property despite the fact that C is under rehabilitation?

Yes, notwithstanding the appointment of a rehabilitation receiver, P can file the case since
there is no allegation that the SEC gave the rehabilitation receiver the exclusive right to sue.
(Umale vs. ASB Realty Corporation, GR 181126, June 15, 2011)
35

155. RST Corporation was granted a commercial loan of Php 25M by Merchant Bank.
Three (3) parcels of land were mortgaged in support of the loan. On due date RST
Page

defaulted in making good its obligation. The Bank sought the extra-judicial
 foreclosure of the mortgages. On March 7, 2009 it filed a petition for sale of the
subject real properties. On May 28, 2009, the mortgaged properties were sold at
public auction and the Bank won the bid being the highest bidder thereof. On the
same day, the Sheriff executed a Certificate of Sale in favor of the Bank.

On July 15, 2009, RST filed a Petition for Rehabilitation. Pursuant thereto a
Stay Oder was issued by the RTC on August 22, 2009.
Meanwhile on September 3, 2009 the Merchant Bank caused the registration
of the Certificate of Sale with the Register of Deeds of the City where the
properties are located. It executed an Affidavit of Consolidation of Ownership and
had the same annotated on the title of RST Corporation. Thereafter, the Reg. of
Deeds cancelled RST’s titles and issued new titles in the name of the Bank on
October 1, 2009. On January 4, 2010, the Bank also filed an ex-parte petition for
issuance of Writ of Possession before the RTC of the City. After hearing, the
court March 3, 2010 issued an order directing the issuance of the Writ of
Possession.

RST claims that all subsequent actions pertaining to the mortgaged

properties should have been held in abeyance after the Stay Oder was issued by
the rehabilitation court. Is the contention of RST correct?

No, the contention of RST Corporation is not correct. The foreclosure of mortgages and the
issuance of the Certificate of Sale were done prior to the appointment of a Rehabilitation
Receiver and the Stay Order. The actions of the Bank with respect to the foreclosure were not
affected by the Stay order which was issued after the foreclosure and public sale of the
mortgaged properties. Hence, after the redemption period expired without RST exercising its
right of Equity of Redemption, the Bank becomes the absolute owner of the real properties and it
was within its right to ask for the consolidation of title and the issuance of new titles in its name
as the new owner thereof. It is entitled to the possession of the property. (Equitable PCI Bank,
Inc. vs. DNG Realty & Development Corporation, G. R. 168672, August 2, 1010)

156. May secured creditors enforce their preference in payment during the
rehabilitation by virtue of a contractual agreement?

Secured creditors retain their preference over unsecured creditors but enforcement of such
preference is equally suspended upon the appointment of a management committee,
rehabilitation receiver, board or body.

In the event that the assets of the corporation, partnership or association are finally
liquidated, however, secured and preferred credits under the applicable provisions of the Civil
Code will definitely have preference over unsecured ones.

157. X Corporation filed a petition for rehabilitation before the RTC. The petition was
dismissed for lack of substance. Can X thereafter file a petition for insolvency?

Yes, the dismissal of a petition for rehabilitation means that the corporation can no longer be
restored to solvency. Hence, the further recourse of X is to file a petition for insolvency.

158. X Corporation filed for corporate rehabilitation before the RTC. While the action
was ongoing, X ceased operation. X’s employees were terminated. Y, for himself
and his co-employees filed a case before the Labor Commission for illegal
dismissal. The LA decided the case in favor of Y and group. Can Y move for the
execution of the judgment in their favor while X is under rehabilitation?

All pecuniary claims including unpaid wages and court decisions against a corporation under
rehabilitation shall be suspended until the process or the rehabilitation of subject Distress
Corporation has been completed. (PAL, Inc. vs. Reynaldo Paz, GR No. 192924, November 26,
2014).

159. C Corporation applied for rehabilitation, it submitted the rehabilitation plan with
the required financial commitments. Upon scrutiny of the rehabilitation plan and
the financial commitment of C, it was found out that it is not feasible. The
additional working capital it stated to infuse from an insurance claim has already
36

been written off as bad debt by C’s affiliate. Whereas, its proposal to enter into
Page

the dacion en pago to create a fresh source of capital is also doubtful because
the object thereof would come from Y Corporation another affiliate. Nonetheless,
 the RTC approved the rehabilitation plan. One of P, one of C’s creditors opposed
the plan. The CA sustained the approval of the RTC. P went to the SC to question
the assailed decision. Decide.

Sec. 5, Rule 4 of the Interim Rules provides that the material financial commitment is an
indispensable requirement of a financial rehabilitation plan and a liquidation analysis setting out
for each creditor that the present value of payments it would received under the plan is more
than that which it would receive if the assets of the distress corporation were sold by a liquidator
within 6 months period from the filing of the petition. . If the plan is doubtful and impossible to
achieve the approval is irregular and not valid. The plan must be doable. (PBCom vs. Basic
Polyprinters and Packaging Corp., GR No. 187581, October 20, 2014, BPI Family Savings Bank,
Inc. vs. St. Michael Medical Center, Inc. GR No. 205469, March 25, 2015)

160. Distinguish stay order in corporate rehabilitation from Declaration in a state of

suspension of payments:

Stay Order in Corporate Rehabilitation Declaration in s State of Suspension of

Suspensive effect commences from the
issuance by the court of the stay order or upon
the appointment of a rehabilitation receiver or
management committee
The suspensive effect covers all corporate
creditors, both secured and unsecured.
The suspensive effect has no time limit and
would prevail for as long as the corporate
debtor is under a management committee or
rehabilitation receiver and there is no directive
to have its assets liquidated.
Payments
Suspensive effect commences from the filing
of the petition.
The suspensive effect covers unsecured
creditors only.
In the absence of agreement among the
corporate creditors, the suspensive effect
would expire after 3 months.

161. Distinguish insolvency from suspension of payments.

Insolvency Suspension of payments

The liabilities of the debtor are more than his
assets
The assets of the debtor are to be converted
into cash for distribution among its creditors
The insolvency petition may be filed either by
the debtor (voluntary insolvency) or at least 3
creditors whose aggregate credit is not less
than Php 1K (involuntary insolvency)
Discharge of the debtor from his liabilities is
possible
The assets of the debtor are more than his
liabilities
The debtor is only asking for time within which
to convert his frozen assets into liquid cash
with which to pay his obligations when the
latter fall due.
The petition is filed by the debtor. His
proposal can be sustained id approved by at
least 2/3 of his creditors representing at 3/5 of
the total liabilities of the debtor.
There is no discharge of debtor from his
obligations.

162. When is the remedy of declaration in a state of suspension of payments available

to a corporation?

The remedy is available to the corporate debtor in two instances:

a) Where the corporate debtor possesses sufficient property to cover all its debts but foresees
the impossibility of meeting them when they respectively fall due, or

b) Where the corporate debtor as no sufficient assets to cover its liabilities but is under
management of a rehabilitation receiver or Management Committee.

163. Debtor Corporation “D” and its principal stockholders filed with the RTC (Special
Commercial Court) a petition for rehabilitation and declaration of a state of
suspension of payments under RA 8799. The purpose was for the court to
appoint a receiver to take control of the corporation and all its assets and
liabilities, earnings and operations, and to determine the feasibility of continuing
operations and rehabilitating the company for the benefit of investors and
creditors.
37
Page
 After hearing, the court directed and appointed a receiver and ordered the
suspension of all actions and claims against “D” as well as against the principal
stockholders. Discuss the validity of the order.

Generally, the unsecured creditors had manifested willingness to cooperate

with Debtor Corporation. The secured creditors, however, expressed serious
objections and reservations.

First Bank had already initiated judicial foreclosure proceedings on the

mortgage constituted on the factory of the Debtor Corporation.

Second Bank had already initiated foreclosure proceeding on a third-party

mortgage constituted on certain assets of the principal stockholders.

Third Bank had already filed a suit against the principal stockholders who has
held themselves liable jointly and severally for the loans of Debtor Corporation
with said bank.

a) Discuss the validity of the RTC order of suspension.

b) Discuss the effect of the RTC order of suspension on the judicial
foreclosure proceeding initiated by the First Bank.
c) Would the order of suspension have any effect on the foreclosure
proceeding initiated by the Second Bank? Explain.
d) Would the order of suspension have any effect on the suit filed by the
Third Bank? Explain.
e) What are the legal consequences of a rehabilitation receivership?
f) What measures may the receiver take to preserve the assets of Debtor
Corporation?

Answer. (a) The RTC order of suspension of payment is valid with respect to the debtor
corporation but not with respect to the principal stockholders. The RTC has jurisdiction to
declare suspension of payments with respect to corporations, partnership or associations,
but not with respect to individuals.

(b) The RTC order of suspension of payment suspended the judicial proceedings initiated by
First Bank. According to the Supreme Court in a line of cases, the suspension order
applies to secured creditors and to the action to enforce the security against the
corporation regardless of the stage thereof.

(c) The order of suspension of payments suspended the foreclosure proceedings initiated by
Second Bank. While the foreclosure is against the property of a third party, it is in reality
an action to collect the principal obligation owed by the corporation. During the time that
the payment of the principal obligation is suspended, the debtor corporation is considered
to be not in default and, therefore, even the right to enforce the security, whether owned
by the debtor corporation or of a third party, has not yet risen.

(d) For the same reason as in (3), the order of suspension of payments suspended the suit
filed by Third Bank against the principal stockholders.

(e) Under PD 902-A, the appointment of a rehabilitation receiver will suspend all actions for
claims against the corporation and the corporation will be placed under rehabilitation in
accordance with a rehabilitation plan approved by the Commission.

(f) To preserve the assets of the Debtor Corporation, the receiver may take custody of , and
control, all the existing assets and property of the corporation; evaluate existing assets
and liabilities, earnings and operations of the corporation and determine the best way to
salvage and protect the interest of the investors and creditors.

164. X Corporation applied for its rehabilitation and submitted a rehabilitation plan
which called for the entry by it into a joint venture agreement with Y Corporation.
Under the agreement, Y Corporation was to lend to X Corporation its credit
facilities with certain banks to obtain funds not only to operate X Corporation but
also for a part thereof in the amount of P1 million as initial deposit in a sinking
38

fund to be augmented annually in amounts equivalent to 10% of its operation of

the business of X Corporation. From this fund, the creditors of X Corporation
Page
 were to be paid annually, starting from the second year of operations, with the
entire indebtedness to be liquidated in 15 years.

The creditors of X Corporation objected to the plan because Y Corporation

would be taking over the business and assets of X Corporation.

a) Could the court approve the plan despite the objection of the creditors of X
Corporation and could the creditors be compelled to follow the plan?

b) Could Y Corporation, in managing the business of X Corporation in the

meantime, be deemed to have taken over X Corporation itself?

Answer. (a) Yes, it could. The interim Rules of Procedure on Corporate Rehabilitation (2000)
expressly provides for the “cram-down” power of the court, particularly the RTC, having
jurisdiction over the petition for rehabilitation.

This “cram-down” power of the RTC enables it to approve the rehabilitation plan even
over the opposition of creditors holding a majority of the total liabilities of the debtor if, in its
judgment, the rehabilitation of the debtor is feasible and the opposition of the creditors is
manifestly unreasonable.

(b) No. it could not. In the rehabilitation plan, Y Corporation is envisaged merely as a
rehabilitation receiver. A rehabilitation receiver implements the rehabilitation plan after its
approval by the court. Its primary task is to study the best way to rehabilitate the debtor and
to ensure that the value of the debtor’s property is reasonably maintained pending the
determination of whether or not the debtor should be rehabilitated. It does not take over the
management and control of the corporate debtor but simply oversees and monitors closely
the operations of the latter during the pendency of the proceedings.

165. The jurisdiction of the SEC DOES NOT extend to the liquidation of a corporation –
while it has jurisdiction to order the dissolution of a corporation, jurisdiction over the liquidation of
a corporation belongs to the RTC (Special Commercial Court) because liquidation requires the
settlement of claims for and against the corporation, which clearly falls under the jurisdiction of
the regular court, It is in a better position to convene all the creditors of the corporation to
ascertain their claims and determine their preferences. (BPI vs. Eduardo Hong, February 15,
2012)

0–0–0–0–0–0-0

JPL/2022 ALL RIGHTS RESERVE.

39
Page