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Exception: The corporate mask may be removed or Any application of the doctrine of piercing the
the corporate veil pierced when the corporation is just corporate veil should be done with caution. A court
an alter ego of a person or of another corporation. For should be mindful of the milieu where it is to be
reasons of public policy and in the interest of justice, applied. It must be certain that the corporate fiction
the corporate veil will justifiably be impaled only when was misused to such an extent that injustice, fraud, or
it becomes a shield for fraud, illegality or inequity crime was committed against another, in disregard of
committed against third persons (Sarona v. NLRC, rights (Sarona v. NLRC, supra).
G.R. No. 185280, January 18, 2012).
Mere ownership by a single stockholder or by another
Nature of Piercing the Corporate Veil Doctrine corporation of all or substantially all of the capital stock
. It has no res judicata effect does not justify the application of the doctrine. There
The corporate mask may be removed and the must be other circumstances that must be present
corporate veil pierced when a corporation is the (Francisco v. Mejia, G.R. No. 141617, August 14,
mere alter ego of another. When that happens, the 2001).
corporate character is not necessarily abrogated.
It continues for other legitimate objective The existence of interlocking directors, corporate
(VILLANUEVA-CASTRO, supra at 84, citing officers and shareholders is not enough justification to
Pamplona Planters Company. Inc. v. Tinghil, G.R. pierce the veil of corporate fiction in the absence of
No. 159121, February 03, 2005). fraud or other public policy considerations (PNB v.
. To prevent fraud or wrong and not available Hydro Resources Contractors Corporation, G.R. No.
for other purposes 167530, March 13, 2013).
The doctrine could not be employed by a Guidelines in Piercing the Corporate Veil
corporation to complete its claims against another Any application of the doctrine of piercing the
corporation and cannot therefore be employed by corporate veil should be done with caution. A
the claimant who does not appear to be the victim court should be mindful of the milieu where it
of any wrong or fraud (Traders Royal Bank v. CA, is to be applied. It must be certain that the
G.R. No. 93397, March 3, 1997). corporate fiction was misused to such an
The court must be sure that the corporate fiction extent that injustice, fraud, or crime was
was misused, to such an extent that injustice, committed against another, in disregard of
fraud, or crime was committed upon another, rights (Sarona v. NLRC, supra).
disregarding, thus, his, her, or its rights. It is the Mere ownership by a single stockholder or by
protection of the interests of innocent third another corporation of all or nearly all of the
persons dealing with the corporate entity which capital stock of a corporation is not of itself
the law aims to protect (Traders Royal Bank v. CA, sufficient ground for disregarding the separate
G.R. No. 93397, March 3, 1997). corporate personality (Wensha Spa Center,
Inc. and/or Xu Zhi Jie v. Yung, G.R. No.
185122, August 16, 2010).
. Essentially a judicial prerogative only While ownership by one corporation of all or a
To pierce the veil of corporate fiction, being a great majority of stocks of another corporation
power belonging to the courts, a sheriff who has and their interlocking directorates may serve
ministerial duty to enforce a final and executory as indicia of control, by themselves, these
decision cannot pierce the veil of corporate fiction circumstances are insufficient to establish an
by enforcing the decision against the stockholders alter ego relationship that will justify the
who are not parties to the action (Cruz v. Dalisay, puncturing of corporate cover (PNB v. Hydro
A.M. R-181-P, July 31, 1987). Resources Contractors Corporation, G.R. No.
To pierce the veil of corporate fiction, being a 167530, March 13, 2013).
power belonging to the courts, a sheriff who has
ministerial duty to enforce a final and executory
decision cannot pierce the veil of corporate fiction
Alter Ego Rule v. Instrumentality Rule Cases on Piercing the Corporate Veil
In the Instrumentality rule, a corporation controls . The separate personality of a subsidiary was
another corporation; while in the Alter Ego rule, a disregarded because it was established that the
stockholder or a group of stockholders of a corporation subsidiary was organized for the purpose of
controls another corporation. It can be said that the evading the payment of sales taxes by its parent
instrumentality rule is a species of alter ego doctrine. corporation (Koppel [Phils.] Inc. v. Yatco, G.R. No. Commented [ASPC3]: SOURCE?
47673, October 10, 1946).
Three-pronged Test to Determine the Application . Where a sister corporation is used as a shield to
of Alter Ego Theory: evade a corporation’s subsidiary liability for
. Control Test – Control, not mere majority or damages, the corporation may not be heard to say
complete stock control, but complete dominion, that it has a separate personality separate and
not only of finances but of policy and business distinct from the other corporation (Concept
in respect to the transaction attacked so that the Builders, Inc. v. NLRC, supra).
corporate entity as to this transaction had at the . Petitioner is the operator of Villa Rey Transit and
time no separate mind, will, or existence of its pursuant to an agreement with PANTRANCO, he
own; shall not apply for any competitive service
. Fraud Test – Such control must have been identical with PANTRANCO. However, Villa Rey
used by the defendant to commit fraud or wrong Transit, Inc (VTSI) was incorporated and it
in contravention of plaintiff’s legal rights; and operated buses. The Supreme Court applied the
. Harm Test – The aforesaid control and breach Doctrine of Piercing Corporate Veil and made the
of duty must proximately cause the injury or petitioner and VTSI liable for violation of the
unjust loss complained of (PNB v. Hydro restrictive clause. The involvement of the
Resources Contractors Corporation, supra; petitioner in the complex affairs of the corporation
Concept Builders, Inc. v. NLRC, supra). (PNB v. especially in the management and disposition of
Hydro Resources Contractors Corporation, its funds shows that VTSI is an alter ego of
supra; Saverio v. Puyat, G.R. No. 186433, Villarama (Villa Rey Transit, Inc. v. Ferrer, G.R.
November 27, 2013). No. L-23893, October 29, 1968).
. In any case where the separate corporate identity
. Equity Cases is disregarded, the corporation will be treated
This is applied when piercing the corporate fiction merely as an association of persons and the
is necessary to achieve justice or equity. It is the stockholders or members will be considered as
“dumping ground” where no fraud or alter ego the corporation, that is, liability will attach
circumstances can be culled to warrant piercing personally or directly to the officers and
(VILLANUEVA, supra at 129). stockholders (Umali v. CA, G.R. No. 89561,
September 13, 1990).
How to Pierce the Veil of Corporate Fiction . When the veil of corporate fiction is pierced, the
0. The court must first acquire jurisdiction over the corporate character is not necessarily abrogated.
corporation or corporations involved; and The corporation continues for legitimate
0. It must be raised during a full blown trial (DE objectives (Reynoso IV v. CA, G.R. No. 116124-
LEON & DE LEON Jr., supra at 43-44). 25, November 22, 2000).
. When the veil of corporate fiction is made as a
Note: Mere motion to pierce the veil of corporate shield to perpetuate fraud or confuse legitimate
fiction is insufficient (Id.). issues such as the relation of employer and
employee (VILLANUEVA-CASTRO, supra at 79,
Effects of Piercing the Corporate Veil citing Claparols v. CIR, G.R. No. L-30822, July 31,
Upon showing that grounds exist, the corporate fiction 1975).
or veil may be lifted through any of the following: . When used as a shield for tax evasion (Id., citing
(SLAC) CIR v. Norton & Harrison Co., G.R. No. L-17618,
a. By disregarding the Separate personality of the August 31, 1964).
corporation; . When used to shield violation of the prohibition
a. By holding the corporate officer Liable for the against forum shopping (Id. at 79-80, citing First
corporate obligation (Francisco v. Mejia, supra);
It is an act committed outside the object for which a 4. Executory contract – neither party can maintain
corporation is created as defined by the law of its an action; and
organization and therefore beyond the powers
conferred upon it by law (Atrium Mgt. Co. v. Court of 5. Part executed and part executory (legal) – party
Appeals, G.R. No. 109491, February 28, 2001). who has received benefits from the performance is
estopped in claiming that the contract is ultra vires
Ultra vires (“beyond powers”) refers only to an act (AQUINO, Corporate Law, supra at 416).
outside or beyond corporate powers, including those
that may ostensibly be within such powers but are, by Note: A corporation engaged in ultra vires business
general or special laws, either prohibited or declared is liable for torts committed by its agents within their
illegal. It is in this context that the Code has used the authority in the course of that business (Pirovano v.
term (Rural Bank of Milaor v. Ocfemia, G.R. No. De la Rama Steamship Co., supra).
137686, February 8, 2000).
Types of Ultra Vires Act (BAI)
An ultra vires act may be that of: 0. Acts done Beyond the powers of the corporation
0. The corporation – if the act is either illegal or as provided in the law or its AOI;
outside of its express, implied or incidental powers 0. Acts or contracts entered into in behalf of a
as may be provided by law or the charter; corporation by persons who have no corporate
0. The Board of Directors – if the act of the Board is Authority; and
within corporate powers but it is done without the
concurrence of the shareholder whose approval is Note: The President is not specifically authorized
required in the manner expressed by law or if the to sell another portion of lot. This is technically an
act is beyond the Board’s competence to do so; ultra vires acts of officers and not of the
and corporation (Woodchild Holdings v. Roxas
0. The corporate officers – if the act of corporate Electric, G.R. No. 140667, August 12, 2004).
officers is within corporate powers but it is done
without any express or implied authority therefor 0. Acts or contracts, which are per se Illegal as being
from the by-laws, board resolutions or corporate contrary to law (VILLANUEVA, supra at 176-180).
practices (VITUG, COMMERCIAL LAWS AND
JURISPRUDENCE (2006), p. 93-96 [hereinafter, Ultra Vires v. Illegal Acts
VITUG, Commercial Laws]).
Ultra Vires Acts Illegal Acts
An ultra vires act of the corporation cannot be ratified As to Nature
by itself. But an ultra vires act of a corporate officer Unlawful; against law,
Not necessarily
may be ratified by the corporation. This is a case of morals, public policy,
unlawful, but outside the
apparent authority or authority by estoppel. or public order.
0. Purpose Clause
Other Limitations The significance of the purpose clause is that it
. Must contain the word “Incorporated” or “Inc.” confers, as well as limits, the powers which a
unless it includes the word “Corporation” or corporation may exercise (VILLANUEVA, supra at
“Corp.”; 195).
. Those prohibited under special laws;
. Use of generic, geographical, and descriptive It must distinguish the primary purpose from that of
terms and names; the secondary. There can only be one primary
. Use of trade name of another corporation; and purpose while the secondary may be several and
. Other policies provided by the SEC need not be related to the main purpose (Id.).
Memorandum No. 14, Series of 2000.
Reason for Classification: To determine which
See: Omnibus Guidelines and Procedure on the investment of corporate funds require the authority
Use of Corporate and Partnership Names, SEC of both the Board of Directors and Stockholders.
Memorandum Circular No. 21 Series of 2013,
December 4, 2013 Significance:
. A person who intends to invest his money in
Doctrine of Secondary Meaning the business will know where and in what kind
General Rule: A corporation whose corporate of business or activity his money will be
name is a word or phrase which is generally invested;
descriptive or geographical cannot prevent another . The directors and the officers of the
corporation, which uses the same word or phrase corporation will know within what scope of
as its corporate name, from using such. business they are authorized to act; and Commented [AM7]: Source
. A third person who has dealings with the
Exception: Under the Doctrine of Secondary corporation may know by perusal of the
Meaning, a word or phrase originally incapable of articles whether the transaction or dealing he
exclusive appropriation with reference to an article has with the corporation is within the authority
on the market because geographically or otherwise of the corporation or not. In the latter case,
descriptive, might nevertheless have been used so they will be known as ultra vires acts
long and so exclusively by one producer with (AQUINO, supra at 165-167).
reference to his article that, in that trade and to that
branch of the purchasing public, the word or phrase Limitations: (ICIN)
has come to mean that the article was his product a. It cannot be created for a purpose of which a
(Lyceum of the Philippines v. CA, G.R. No. 101897, corporate body is Incapable;
March 5, 1993). a. The purpose must not be Contrary to law,
morals, or public policy;
Remedies of Corporation whose Name has a. It cannot be organized for two or more
been Adopted by Another: Incompatible purposes; and
Existing corporations and partnerships whose Note: There is no limit to the number of extensions
Articles indicate only a general address as their that may be made (DE LEON & DE LEON Jr.,
principal office address such as “Metro Manila” supra at 132).
are directed to file an amended AOI in order to
specify their complete address such that, if Upon expiration of the period fixed in the AOI, in
feasible, it has a street number, street name, the absence of compliance with the legal requisites
barangay, city or municipality and if applicable, the for the extension of the period, the corporation
name of the building, the number of the building ceases to exist and is dissolved ipso facto (PNB v.
and name or number of the room or unit (SEC CFI of Rizal, G.R. No. 63201, May 27, 1992).
Memorandum Circular No. 6, February 20, 2014).
Note: The amendment (for extension) must be
Purpose: effected before the expiration of the corporate term
. To fix the residence of the corporation in a of existence (DE LEON & DE LEON Jr., supra at
definite place, instead of allowing it to be 131).
ambulatory (Young Auto Supply Co. v. CA,
G.R. No. 104175, June 25, 1993); Doctrine of Relations or Relating Back Doctrine
. To determine the venue of court cases The filing and recording of a certificate of extension
involving the corporation (SUNDIANG & after the term cannot relate back to the date of the
AQUINO, supra at 208); passage of the resolution of the stockholders to
. For purposes of stockholders’ or members’ extend the life of the corporation. HOWEVER, the
meeting; and Doctrine of Relations applies if the failure to file the
. To determine the place where the books and application for extension within the term of the
records of the corporation are ordinarily kept. corporation is due to the neglect of the officer with
whom the certificate is required to be filed or to a
For purposes of venue in intra-corporate suits, wrongful refusal on his part to receive it (AQUINO,
when the AOI indicates that the principal place of supra at 151-152).
business is “Metro Manila”, then the action must be
filed in the city or municipality where the head office Where the delay in effecting the amendment is due
is actually located (Interim Rules of Procedure for to the neglect of the officer with whom the
Intra-Corporate Controversies, Rule 1, Sec. 1). application is required to be filed or to the wrongful
Provided that at least 25% of the authorized capital Up to 20% Foreign Equity
stock has been subscribed at the time of Private radio communications network (R.A. No.
incorporation, and at least 25% of the total 3846).
subscription has been paid upon subscription. In
no case shall the paid-up capital be less than Up to 25% Foreign Equity
P5,000 (CORPORATION CODE, Sec. 13). . Private recruitment, whether for local or
overseas employment (P.D. No. 442, Art. 27);
Filipino Ownership Percentage Requirement . Contracts for the construction and repair of
Since a specific class of shares may have rights locally-funded public works (C.A. 541, Sec. 1;
and privileges or restrictions different from the rest LOI 630) except:
of the shares in a corporation, the 60-40 ownership . Infrastructure/development projects (R.A. No.
requirement in favor of Filipino citizens in Section 7718); and
11, Article XII of the Constitution must apply not . Projects which are foreign funded or assisted
only to shares with voting rights but also to shares and required to undergo international
without voting rights. Thus, if a corporation, competitive bidding (R.A. No. 7718, Sec. 2a);
engaged in a partially nationalized industry, issues . Contracts for the construction of defense-
a mixture of common and preferred non-voting related structures (C.A. 541, Sec. 1).
shares, at least 60 percent of the common shares
and at least 60 percent of the preferred non-voting Up to 30% Foreign Equity
shares must be owned by Filipinos. In short, the Advertising (CONST., Art. XVI, Sec. 11).
60-40 ownership requirement in favor of Filipino
citizens must apply separately to each class of Up to 40% Foreign Equity (C2AP-MO5DE)
shares, whether common, preferred non-voting, a. Culture, production, milling, processing,
preferred voting or any other class of shares (E.O. trading excepting retailing, of rice and corn and
No. 584, December 8, 2006; Gamboa v. Teves, acquiring, by barter, purchase or otherwise,
supra). rice and corn and the by-products thereof (P.D.
No. 194, Sec. 5; R.A. No. 8762, Sec. 15);
Pre-Incorporation Minimum Subscription and Note: The minimum 25% subscription and
Paid-up Capital Requirements: 25% paid-up capital is required also in case of
. At least 25% of the authorized capital stock as increase of the authorized capital stock but
stated in the Articles of Incorporation must be only to the amount of increase and not the total
subscribed at the time of incorporation; and increased amount (CORPORATION CODE,
. At least 25% of the total subscription must be Sec. 38(4)).
paid upon subscription. (CORPORATION
CODE, Sec. 13). Numerical Value for the Minimum Authorized,
Subscribed and Paid-up Capital Stock:
Reason: To give assurance to the investing public a. Paid-up capital stock – P5,000
dealing with the corporation that it is financially and (CORPORATION CODE, Sec. 13).
actually able to operate and undertake to do the a. Subscribed capital stock – P5,000 as the
business and meet its obligations as they arise phrase used is “at least 25%”. Thus, it is valid
from the start of its operations (DE LEON & DE to pay 100% of the subscribed capital stock of
LEON Jr., supra at 137). P5,000.00.
Exception:
Treasury shares, not having been retired by the Note: Just like treasury shares, escrow shares are
corporation reacquiring it, are subject to the not reflected in the AOI (AQUINO, supra at 132).
following rules:
. They may be re-issued or sold again as long e. Over-issued stock / Spurious stock
as they are held by the corporation as Stock issued in excess of the amount prescribed
treasury shares; or limited by its AOI. It is void even in the hands of
. As long as they are held by the corporation, a bona fide purchaser for value (DE LEON & DE
they cannot participate in dividends because LEON Jr., supra at 339.
dividends cannot be declared by the
corporation to itself; f. Watered stock
. They cannot be represented during Stocks of a corporation issued for less than their
stockholders’ meeting for otherwise equal par or issued value or in any other form other than
distribution of voting powers will be lost; and cash valued in excess of its fair value
. The amount of unrestricted retained earnings (CORPORATION CODE, Sec. 62 & 65).
equivalent to the cost of treasure shares
being held shall be restricted from being
If the AOI do not reflect the convertibility feature, Reason: To secure the State and all concerned
it is necessary that the Articles be amended first against the possibility of any fictitious names
before the conversion is formalized (SEC SGC being subscribed to the articles, and to furnish
Opinion No. 10-18, April 12, 2010). proof of the genuineness of the signatures
(Fletcher, p. 506).
Conversion is also subject to appraisal right as it
varies the right of the stockholders (SEC Opinion, . Commencement of Corporate Existence
December 16, 1986). Certificate of Incorporation
A corporation commences to have corporate
Conversion may be mandated by law. Preferred existence and juridical personality and is deemed
stocks of government financial institutions are incorporated only from the moment the SEC
sold to private shareholders the same may be issues to the incorporators a certificate of
converted into common stocks (R.A. No. 7353, incorporation under its official seal
Sec. 8). (CORPORATION CODE, Sec. 19). The date
Term of Office
One year until their successors are elected and
qualified (CORPORATION CODE, Sec 23). Proxy Not Allowed
Holdover Principle Directors or trustees cannot validly act by proxy
Upon failure of a quorum at any annual meeting, (CORPORATION CODE, Sec. 25).
the directorate naturally holds over and continues
to function until another directorate is chosen and Disqualified Director
qualified. Unless the law or the charter of a A director who is disqualified by reason of personal
corporation expressly provides that an office shall interest (CORPORATION CODE, Sec. 32-33) in
become vacant at the expiration of the term of the matter before a director’s meeting, loses, pro
office for which the officer was elected, the general hac vice, his capacity as a director and he cannot
rule is to allow the officer to holdover until his be counted for the purpose of making a quorum,
successor is duly qualified (Government of the nor can the vote of such director be counted for the
Philippine Islands v. El Hogar Filipino, supra). purpose of determining whether passed by a
majority vote (SEC Opinion, July 21, 1994).
Note: Although the members of the Board are
holdover directors or trustees, they still possess the Removal of Board Members
powers of bona fide members until their successors General Rule: Removal of directors or trustees
are duly qualified. The rule applies to a going may be with or without cause (CORPORATION
concern where there is no break in the exercise of CODE, Sec. 28).
duties of directors.
Exception: Removal without cause may not be
It must be noted that holdover is a situation that used to deprive minority stockholders or members
arises when no successor is elected due to a valid of the right of representation to which they may be
and justifiable reason (e.g. pending election protest entitled under the Code (CORPORATION CODE,
on the outcome of the annual election), in which Sec. 28).
case, the incumbent holds over and continues to
function until another officer is chosen and qualified Requisites for Removal:
(SEC Opinion, June 24, 1998). 0. The removal should take place at a regular or
special meeting duly called for the purpose;
Illustration: Suppose the directors are under a 0. The director or trustee can only be removed by
holdover capacity and later one of the directors a vote of the stockholders representing at least
died. Can the holdover directors elect a director to 2/3 of the outstanding capital stock or 2/3 of the
replace him? members entitled to vote in case of non-stock
corporations;
Answer: No, they are merely in a hold-over 0. There must be a previous notice to
capacity. There must be an election by the stockholders or members of the corporation of
stockholders. the intention to propose such removal at the
meeting;
Quorum Requirement in Board Meetings 0. The removal without cause may not be used to
50% + 1 of the number of directors as fixed in the deprive minority stockholders or members of
AOI. The quorum in the meeting of the board of the right of representation to which they may
directors does not change even though there may be entitled under Sec. 24 of the Code; and
be vacancies (CORPORATION CODE, Sec. 25). 0. The special meeting of the stockholders or
members of a corporation for the purpose of
General Rule: A majority of the number of removal must be called by the secretary on
directors or trustees, as fixed in the AOI, shall order of the president or on the written demand
constitute a quorum for the transaction of corporate of the stockholders representing or holding at
Compensation of Board Members The Board may create appointive positions other than
General Rule: Directors, in their capacity as such, positions of corporate officers but the persons
are not entitled to receive any compensation occupying such positions are not considered as
except for reasonable per diems. corporate officers within the meaning of Section 25
and are not empowered to exercise the functions of
Exceptions: the corporate officers, except those functions lawfully
0. When their compensation is fixed in the by- delegated to them. In view thereof, this Court holds
laws; and that unless and until petitioner corporation’s by-laws is
0. When granted by the vote of stockholders amended for the inclusion of General Manager in the
representing at least a majority of the list of its corporate officers, such position cannot be
outstanding capital stock at a regular or special considered as a corporate office within the realm of
stockholders’ meeting (CORPORATION Section 25 of the Corporation Code (Marc II
CODE, Sec. 30). Marketing, Inc. v. Joson, G.R. No. 171993, December
12, 2011).
Limitation on Compensation
The amount to be given shall not exceed 10% of Although the by-laws of the corporation provided that
the net income before income tax of the the BOD “can appoint such other officers from time to
corporation during the preceding year. Thus, the time,” the SC still considered this insufficient to allow
compensation can be given only if there are profits. the BOD to create a corporate officer (e.g. General
The intent of the legislators is that if the corporation Manager). It must still be specifically stated in the by-
did not earn profits, the directors may not be given laws Code (Marc II Marketing, Inc. v. Joson, supra).
salaries except per diems (AQUINO, supra at 285-
286). The removal of officers is a corporate act which can
be done by the Board (Tabang v. NLRC, G.R. No.
Note: Per diems received without proper 121143, January 21, 1997).
authorization or unreasonably excessive may
ordinarily be recoverable in a stockholders’ or a A Corporation shall not permit or allow any person, not
members’ suit (SEC Opinion, January 20, 1994). possessing the qualifications required by the
Constitution, or existing laws to acquire, use, exploit
A. Corporate Officers or enjoy a right, franchise, privilege, property or
Those who may represent and bind the business, the exercise and enjoyment of which are
corporation in transactions with third persons to expressly reserved by the Constitution or existing laws
the extent that the authority to do so has been to citizens of the Philippines or of any other specific
conferred upon him (VILLANUEVA, supra at 355). country, to intervene in the management, operation,
administration or control thereof, whether as an
Mandatory Corporate Officers officer, employee or laborer therein with or without
0. President – must be a director; he shall not be remuneration except technical personnel whose
concurrently the treasurer or secretary; employment may be specifically authorized by the
0. Treasurer – may or may not be a director but Secretary of Justice(C.A. No. 108 as amended by P.D.
as a matter of sound corporate practice, must No. 715).
be a resident of the Philippines;
0. Secretary – need not be a director unless Director or Trustee v. Corporate Officer
required by the by-laws; must be a resident and Director or Trustee Corporate Officer
citizen of the Philippines (CORPORATION As to Basis
CODE, Sec. 25). The Corporation Code
The Corporation Code
mandates the election
Note: Any 2 or more positions may be held mandates the election
of a president,
concurrently by the same person, except that of directors or trustees.
secretary and
Inapplicability
0. Where a director is engaging in a distinct C ORPORATE P OWERS
enterprise of the same general class of
business as that which his corporation is
Classes of Corporate Powers
engaged in, so long as he acts in good faith.
0. Express – those expressly authorized by the
0. Where the opportunity is one which is not
Corporation Code and other laws, and its AOI or
essential to the corporation’s business, or
Charter.
where the director or officer does not exploit
0. Incidental – those which a corporation can
opportunity by employment of company’s
exercise by the mere fact of its being a corporation
resources.
or powers which are necessary to its corporate
3. Where the corporation is no longer able to avail
existence.
itself of the opportunity which may “arise from
financial insolvency or from legal restrictions”
Examples:
(DE LEON & DE LEON Jr., supra at 302-303).
. Right to succession;
. Right to have a corporate name;
Executive Committee
. Right to make by-laws for its government;
It is a body created by the by-laws and composed
. Right to sue and be sued
of not less than 3 appointed members of the board
. Right to acquire and hold properties for the
which, subject to the statutory limitations, has all
purposes authorized by the charter
the authority of the board to the extent provided in
. The right to contract
the board resolution or by-laws (CORPORATION
CODE, Sec. 35).
0. Implied – those that can be inferred from or
necessary for the exercise of the express powers
Note: Non-members of the board may be
(SUNDIANG & AQUINO, supra at 213-214).
appointed as members of the executive committee
provided that there are at least 3 members of the
Doctrine of Necessary Implication
board who are members of the committee (SEC
Reference must be made to a corporation’s AOI and
Opinion, Sept. 16, 1986).
unless the power to carry a particular business is
either expressly or impliedly conferred thereby, it does
Authority
not exist (SEC Opinion, December 5, 2005).
To the extent provided in the resolution of the
board or in the by-laws (CORPORATION CODE,
Express v. Implied Powers
Sec. 35).
Express Powers Implied Powers
As to coverage
Quorum
Majority (CORPORATION CODE, Sec. 35). Refers to the main Refers to the means
business, objects and and methods of
purposes of the attaining those objects
Appeal corporation. and purposes.
Its decisions are not subject to appeal to the board. As to the source of the power
However, if the resolution of the Executive
Committee is invalid, i.e. not one of the powers
Nature of the Power Note: Such issue is ultra vires and the stock so
0. Power to extend term – not inherent since the life issued is void even in the hands of a bona fide
of the corporation is just a concession of the State purchaser for value.
(DE LEON & DE LEON Jr., supra at 132).
0. Power to shorten term – an inherent right An over issued stock is also known as a spurious
because the decision to shorten the business life stock (DE LEON & DE LEON Jr., supra at 339).
of a certain endeavor should really be addressed
to the decision of the co-venturers. It may be 0. It must follow the manner and conditions provided
designed to have the effect of dissolving of the by the law (DE LEON & DE LEON Jr., supra at
corporation (DE LEON & DE LEON Jr., supra at 337).
333).
Reasons for Increasing Capital Stock:
Note: Although Section 81 expressly allows the 0. To generate more working capital;
exercise of appraisal right even in case of 0. To have more shares with which to pay for
shortening of corporate term, nevertheless, acquisition of more assets; and
Section 37, governing the extension or shortening 0. To have extra shares to meet the requirement for
of corporate life, provides for appraisal right only deduction of stock dividend (Miravite, Bar Review
"in case of extension of corporate term" Materials in Commercial Law (2002)). Commented [ASPC19]: Find page number.
(VILLANUEVA, supra at 467).
Requirements: (PDAF-CART)
Increasing or Decreasing Capital Stock 0. Prior written notice of the proposed increase or
Ways of Increasing/Decreasing Authorized Capital decrease of the capital stock indicating the time
Stock: (CRAC-PaNuNu) and place of meeting addressed to each
0. Cancelling or retiring its shares, including treasury stockholder must be made either by mail or
shares (CORPORATION CODE, Sec. 9); personal service;
0. Redeeming redeemable shares (CORPORATION 0. In case of Decrease in capital stock, the same
CODE, Sec. 8); must not prejudice the right of the creditors;
0. It may Accept a surrender of shares and give the
holders in exchange therefore proportionate Reason: Trust Fund Doctrine
amount of its assets, provided no rights of
creditors are involved; 0. Approval by the majority vote of the board of
0. Cancelling shares which have not yet been directors;
issued; 0. Filing of the certificate with the SEC;
0. By increasing/decreasing the Par value of existing 0. A Certificate in duplicate signed by a majority of
shares without increasing/ decreasing the number the directors of the corporation, countersigned by
of shares; the chairman and the secretary of the
0. By increasing/decreasing the Number of shares stockholders meeting;
and retaining the par value; 0. Approval thereof by the SEC;
0. By increasing/decreasing the Number of shares 0. Ratification by the stockholders holding or
and increasing/decreasing the par value (DE representing at least 2/3 of the outstanding capital
LEON & DE LEON Jr., supra at 342); stock at a meeting duly called for that purpose;
and
Limitations: 0. In case of increase in capital stock, there must be
0. A corporation cannot lawfully decrease its capital a Treasurer’s affidavit showing that at least 25%
stock if such decrease will have the effect of of the approved increase in the capital must be
relieving existing subscribers from the obligation subscribed and that at least 25% of the amount
Validity of the By-laws The amended by-laws must be filed with the SEC
0. Must not be contrary to law nor with the and must be attached to the original AOI
Corporation Code; (CORPORATION CODE, Sec. 48).
Note: The Court declared invalid the automatic Binding Effects of By-laws
and permanent seat in the Board of Directors of 0. As to members and shareholders
the petitioner school, which is contrary to Sec. 23 . They have the force of contract between the
of the Corporation Code stating that the board of members themselves.
directors must be elected from among the . There is a conclusive presumption that they
stockholders or members, who shall hold office for know the provisions of the corporate by-laws
1 year until their successors are elected and by the fact of their being such is charged with
qualified (Grace Christian High School v. CA, notice of by-laws. If he remains actually
supra). ignorant of the provision, he does so at his
peril (DE LEON & DE LEON Jr., supra at 452).
0. Must not be contrary to morals and public policy;
0. Must not impair obligations and contracts; 0. As to Corporate Directors and its Officers
0. Must be general and uniform in their operation and . They are bound by and must comply with
not directed against particular individuals; them unless and until they are changed.
0. Must be consistent with the charter or AOI; and . Subordinate employees without actual
0. Must be reasonable, not arbitrary or oppressive knowledge of the by-laws are not bound
(DE LEON & DE LEON Jr., supra at 447-448). (AQUINO, supra at 426).
Effects of Merger and Consolidation under other It exists when a parent corporation organizes a
laws and jurisprudence subsidiary, to which the parent corporation transfers
0. There is automatic assumption of the liabilities of parts of its assets to a new corporation and stock of
the absorbed corporation or constituent transferee is distributed to shareholders of transferor
corporations which are dissolved (DE LEON & DE without surrender by them of stock in transferor (Id.).
LEON Jr., supra at 645);
Persons authorized to call a meeting: Once a quorum is called, and the meeting was called
0. The person or persons designated in the by-laws to order, even if some people walked out and the
have the authority to call stockholder’s or people left are less than the majority, the proceedings
member’s meeting; will be valid so long as there is a quorum when the
0. In the absence of such provision in the by-laws, meeting was called to order. A minority group cannot
the meeting may be called by a director or trustee prevent corporation by walking out (DE LEON & DE
or by an officer entrusted with the management of LEON Jr., supra at 476).
the corporation unless otherwise provided by law;
or For stock corporations, the “quorum” referred to (for
0. Whenever there is no person authorized to call a stockholders or members meeting) is based on the
meeting, the SEC, upon petition of a stockholder number of outstanding voting stocks (Tan v. Sycip,
or member, and on the showing of good cause, supra).
may issue an order to the petitioning stockholder
or member directing him to call a meeting of the For non-stock corporations, only those who are actual,
corporation by giving proper notice (AQUINO, living members with voting rights shall be counted in
supra at 436). determining the existence of a quorum during
members’ meetings (Tan v. Sycip, supra).
Note: Even if the meeting be improperly held or
called, all proceedings and any business Any matter or transaction must necessarily fail if the
transacted at such meeting shall be valid if within number of votes attained is less than what is
the powers or authority of the corporation, and prescribed for the particular transaction. If an issue to
provided that all the stockholders or members of be resolved requires a majority for it to be passed and
the corporation are present or duly represented at there is a deadlock, the issue or proposition simply
the meeting (CORPORATION CODE, Sec. loses. There, is therefore, no need to break the
51(3)). deadlock (SEC Opinion August 23, 1991 & August 4,
Quorum of Meetings of Shareholders or Members 1995).
Quorum
It is that number of members of a body which, when Other means of voting of D/T:
legally assembled in their proper places, will enable 0. Internet voting
the body to transact its proper business or that number The SEC has ruled that a trustee may be allowed
which makes a lawful body and gives it power to pass to vote through the internet provided that the
upon a law or ordinance or do any valid act (La Carlota internet medium to be used is akin to or similar to
City v. Rojo, G.R. No. 181367, April 24, 2012). the one being used in video-conferencing or
teleconferencing, where a participant can see or
General Rule: A quorum shall consist of the hear the actual proceedings of board meetings
stockholders representing a majority of the and actively participate in the deliberation of the
outstanding capital stock or a majority of the members Board (SEC Opinion, August 9, 2001).
in the case of non-stock corporations.
0. Teleconference or Video-Conference
Exception: Unless otherwise provided for in the Code The Supreme Court has recognized the practice,
or in the by-laws (CORPORATION CODE, Sec. 52). thus: “in the Philippines, tele-conferencing and
video-conferencing of members of the board of
A corporation is authorized to provide in its by-laws a directors of private corporations is a reality in the
quorum less than majority. However, the provision in light of R.A. No. 8792 or the Electronics
the by-laws relative to quorum will not hold true in Commerce Act (Expertravel & Tours, Inc. v. Court
those instances where the Corporation Code or of Appeals, G.R. No. 152392, May 26, 2005).
applicable special law explicitly prescribes the
proportion of stockholders or members necessary to Although the Supreme Court recognized tele-
resolve or carry out a particular corporate proposal conferencing as a form of board meeting, such
(SEC Opinion dated April 13, 2011). method is insufficient to be considered as a
substitute for a written board resolution (Id.).
To determine what constitutes quorum for purposes of
election of directors or trustees under Sec. 24, the Rule on Teleconferencing or Video-Conferencing
phrase “entitled to vote” should be applied to both the
“majority of outstanding capital stock” in stock Teleconferencing
corporations and “majority of the members” of non- An interactive group communication (3 or more people
in 2 or more locations) through an electronic medium
Rule on Abstention Exception: The by-laws may provide for a record date
General Rule: In case of abstention during a board which means that only those stockholders on record
meeting on a vote taken on any issue, the general rule on the date when the notices were given shall have
is that an abstention is counted in favor of the issue the right to receive notices and attend the meeting. Commented [AM20]: Source
The right to vote by proxy may be exercised in any Right to Execute Voting Trust Agreements
of the following instances: Voting Trust Agreement
1. Election of the board of directors or trustees; It is an agreement whereby a stockholder of a stock
1. Voting in case of joint ownership of stock; corporation confers upon a trustee/s the right to vote
1. Voting by trustee under voting trust agreement; and other rights pertaining to the shares for a period
1. Voting by members in a non-stock corporation; not exceeding 5 years at any time.
1. Pledge or mortgage of shares; and
Trade secrets are those which the corporation may Purpose: To enable the shareholder to retain his
undoubtedly keep secret notwithstanding the right of proportionate control in the corporation and to retain
inspection given to stockholders. his equity in the surplus (SEC Opinion, August 11,
1997).
It covers all books of the corporation including journal,
ledger, financial statements, income tax returns, Instances when Pre-emptive Right is Available:
vouchers, receipts, contracts and all papers pertaining 0. All issues and disposition;
to the operation of the corporation which are of interest 0. Issuance of unsubscribed shares which are part
to its stockholders. of the original capital stock;
0. Increase if capital stock to the extent of the
The right to inspect extends to books and records of additional amount;
wholly owned subsidiary of the corporation 0. Issuance of unissued shares; and
(Gokongwei v. SEC, supra). 0. Treasury shares.
It is the RTC and NOT the Sandiganbayan which has Reason: When a corporation acquires treasury
jurisdiction over a stockholders’ suit to enforce its shares, they become retired and even cease to
rights of inspection under the Corporation Code where affect the outstanding capital stock. However,
the case does not involve a sequestration-related when reissued by the corporation, these shares
incident, but an intra-corporate controversy (Abad v. re-acquire their voting rights, hence will affect the
PHILCOMSAT, G.R. No. 200620, March 18, 2015). voting control of the stockholders over the
outstanding capital stock.
Limitations on the Right of Inspection:
A corporation cannot issue its stock as a gratuity but it Remedies to Enforce Payment of Subscription
is lawful for a corporation to issue watered stock as a 0. Delinquency Sale
bonus to officers or employees as incentives or for Put up the unpaid shares for sale and dispose it in
services actually rendered to the corporation for in a delinquency sale for the account of the
such case, the stock cannot be considered gratuitous delinquent stockholder.
(SEC Opinion, Dec. 1, 1988; Sabalvaro v. Erlanger &
Galinger, Inc., G.R. No. L-43045, August 17, 1937). The shares subscribed are first-hand shares and
their consideration shall form part of the capital
Amount of Consideration asset. Thus, if it is delinquent, the corporation must
Shares of stock shall not be issued for a consideration still pay for it to avoid diminution of its assets.
less than the par or issued price thereof
(CORPORATION CODE, Sec. 65) except treasury 0. Court action
shares so long as the price is reasonable Forfeiture of delinquent stock, without the
(CORPORATION CODE, Sec. 9). corporation paying for it under Sec. 68, is not
authorized under the Code. It cannot forfeit in its
Note: It is implied from Sec. 62 that a corporation may favor delinquent shares to be taken up in the
issue shares of stock at a price above the par or corporation’s books as treasury shares, in case no
issued value. Such value does not necessarily reflect bidder in a delinquent sale.
the true or actual value of stock since book or market
value normally fluctuates. The prescriptive period is 10 years from the time
the right of action accrues if based on a written
Deposit on Stock Subscription subscription contract (CIVIL CODE, Art. 1144(1))
It is an amount of money received by the corporation or within 6 years if based on a verbal subscription
as a deposit with the possibility of applying the same contract.
as payment for future issuance of capital stock (CIR v.
First Express Pawnshop Company, G.R. Nos.
172045-46, June 16, 2009).
Effects of Delinquency
2, Mining or oil companies, stock exchanges, banks, Close v. Closed Corporation and Closely Held
Corporation
insurance companies, public utilities, educational
A close corporation is different from a “closed
institutions, and corporations to be declared vested corporation” and a “closely held corporation.”
with public interest. (Corporation Code, Sec. 96)The
following cannot be a close corporation: “Closed” emphasizes a determination on the part of
the participants in the enterprise to keep outsiders
(PIPE-BOMS) from acquiring any interest in the business and may
indicate that they have taken steps to accomplish that
1. Corporations declared to be vested with Public objective by shareholders’ agreement or provision in
interest; the Articles or by-laws.
Reason: It is only a shift from one kind of non- The mere fact that the corporation has ceased to do Formatted: Font: (Default) Arial, 10 pt, Italic
stock corporation to another kind of non-stock business does not necessarily constitute a dissolution Formatted: Font: (Default) Arial, 10 pt, Italic
corporation (Iglesia Evangelica Metodista v. or dimunition of the legal power and capacity of the
Formatted: Font: (Default) Arial, 10 pt, Italic
Bishop Lazaro, supra). corporation. (VILLANUEVA, supra at 817)
Formatted: Font: Italic
2. Religious Societies/Corporate Aggregate
It is a non-stock corporation governed by a board
but with religious purposes. It is incorporated by De Jure Dissolution De Facto Dissolution
an aggregate of persons, e.g. religious order, A dissolution in law
diocese, synod, sect, etc. (DE LEON & DE LEON One which takes place
adjudged and
Jr., supra 708). in substance and in fact
determined by judicial
when the corporation
sentence, or brought
Contents of AOI (PATRIC) by reason of
about by an act of or
a. The religious society or religious order, or insolvency, cessation
with the consent of the
diocese, synod, or district organization is a of business or
sovereign power, or
religious organization of a religious otherwise, suspends all
which results from the
denomination, sect or church; its operations and goes
expiration of the
b. At least 2/3 of its membership have given into liquidation still
charter period of
their written consent or have voted to retaining its primary
corporate life (DE
incorporate, at a duly convened meeting of franchise to be a
LEON & DE LEON Jr.,
the body; corporation (Id.).
supra at 713).
c. The incorporation is not forbidden by
competent authority or by the constitution, De jure Dissolution
rules, regulations or discipline of the religious A dissolution in law adjudged and determined by
denomination, sect, or church of which it judicial sentence, or brought about by an act of or with
forms a part; the consent of the sovereign power, or which results
d. Desires to incorporate for the administration from the expiration of the charter period of corporate
of its affairs, properties and estate; life (DE LEON & DE LEON Jr., supra at 713).
e. Place where the principal office; and
f. Names, nationalities, and residences of the De facto Dissolution
trustees elected to serve for the first year or One which takes place in substance and in fact when
such other period as may be prescribed by the corporation by reason of insolvency, cessation of
the laws of the religious society or religious business or otherwise, suspends all its operations and
order, or of the diocese, synod, or district goes into liquidation still retaining its primary franchise
organization, the board of trustees to be not to be a corporation (Id.).
less than 5 nor more than 15
(CORPORATION CODE, Sec. 116). Two Legal Steps in Corporate Dissolution:
Revocation of Certificate of Incorporation by SEC Notes: The trustee of a corporation may continue to
There can be no automatic dissolution after prosecute a case commenced by the corporation
incorporation has been approved by the SEC. It shall within three years from its dissolution until rendition of
continue to exist as a juridical entity notwithstanding the final judgment, even if such judgment is rendered
uts non-operational status until its certificate of beyond the three-year period allowed by Section 122
registration is formally revoked by the SEC after due of the Corporation Code. But a defunct corporation
notuce and hearing. (SEC Opinion, 5 July 1979, XXXII cannot initiate a suit after the lapse of the said three-
SEC Quarterly Bulletin 12 (No. 1, June 1979)) year period. (Alabang Development Corporation
v. Alabang Hills Village Association, June 2, 2014)
Corporate Liquidation The Court that has jurisdiction over the liquidation
It is the process by which all the assets of the proceedings shall, in proper cases, issue Liquidating
corporation are converted into liquid assets (cash) in
Order which includes, among others:
order to facilitate the payment of obligations to
creditors, and the remaining balance, if any, is to be
distributed to the stockholders or members (AQUINO, 1. Declaring that the debtor is insolvent;
supra at 648).
2. Ordering the liquidation of the debtor;
General Rule: Liquidation period is for 3 years only
and not extendable (Id. at 650). 3. In case of a juridical person, declaring it dissolved;
Exception: When a trustee is appointed, there is no 4. Prohibiting payments and/or transfer of property by
time limit within which liquidation should be completed the debtor; and
(Id.).
5. Directing all claims to be filed with the liquidator.
Note: The dissolution of a corporation does not (Section 112, FRIA) Formatted: Level 2, Keep with next
extinguish the debts due or owing to it. Dissolution or
even the expiration of the 3-year liquidation period Effects of Liquidating Order
does not bar a corporation from enforcing its rights as The assets of the insolvent debtor shall be divided
a corporation (DE LEON & DE LEON Jr., supra at among the creditors in accordance with the
739). Liquidation Plan submitted by the Liquidator and
approved by the Court. The rules on concurrence and
Period preference of credits under the New Civil Code and
Within three years. However, if full liquidation can only other relevant laws shall be observed in the
be effected after the three-year period and there is no Liquidation Plan. (Sec. 113, FRIA)
trustee, the directors may be permitted to complete
Methods of Liquidation or Winding Up
Note: However, a petition for rehabilitation does not Effects on Contracts of Suspension of Claims
always result in the appointment of a receiver or the Does not result in amendment of contracts However,
creation of a management committee. Suspension of a Rehabilitation Plan may impose dacion en pago
actions for claims commences only from the time a provided that no compulsion is involved. (AQUINO,
management committee or receiver is appointed by Corporate Law, supra at 642)
the SEC (RCBC v. IAC, G.R. No. 7851, December 9,
1999). Cram Down Rule
The Rehabilitation Plan confirmed by the Court shall
Exceptions to the Stay or Suspension Order be binding upon the debtor and all persons who may
The Stay or Suspension Order shall not apply: be affected by it, including creditors, whether or not
1. To cases already pending appeal in the Supreme such persons have participated in the proceedings, or
Court as of commencement date; opposed the Plan , or whether or not their claims have
There is no showing that petitioner performed within Effects of Lack of License on Suits
the Philippine territory the specific act of doing 1. Foreign corporation doing business in the
business in Sec. 3(d) of R.A. No. 7042. Petitioner did Philippines:
not also open an office here in the Philippines, appoint a. May not sue or intervene in any action in any
a representative, or distributor, or manage or court or administrative agency of the
supervise or control a local business. While petitioner Philippines; but
and respondent entered into a series of transactions b. May be sued on any valid cause of action
implying a continuity of commercial dealings, the recognized in the Philippines
perfection and consummation of the transactions were (CORPORATION CODE, Sec. 133).
done outside the Philippines (B. Van Zuiden v. GTVL 2. Foreign corporation not doing business in the
Manufacturing Industries, supra). Philippines:
a. May sue for isolated transactions, as well as
If a foreign corporation that is engaged in selling of for those which are casual or incidental
goods has local distributor, the foreign corporation can thereto (Agilent Technologies v. Integrated
still be considered as not doing business if the Silicon Technology Philippines Corp., supra);
distributor is transacting in its own name and
independently of the foreign corporation and in its own b. May be sued on any valid cause of action
account and not in the name or for the account of the recognized in the Philippines (VILLANUEVA,
foreign corporation. (La Chemise Lacoste v. Corporate Law, supra at 946).
Fernandez; G.R. Nos. 63796-97; May 21, 1984)
Effect of Subsequent Acquisition of License
The subsequent acquisition of the license will cure the
Doctrine of Isolated Transactions lack of capacity at the time of the execution of the
contract. Hence, the foreign corporation can re-file the
Notes: A corporation with debts that have already Executory Nature of Orders
matured may still file a petition for rehabilitation under Any order issued by the court under these Rules is
the Interim Rules of Procedure on Corporation immediately executory (RULE 3, Sec. 5)
Rehabilitation. (Metropolitan Bank and Trust .
Company v. Liberty Corrugated Boxes Manufacturing Steps:
Corporation, G.R. No. 184317, January 25, 2017) 1. Filing a verified petition with the appropriate
RTC by:
a. Corporate debtor who foresees the
impossibility of meeting its debts when they
respectively fall due (RULE 4, Sec. 1);
Rehabilitation in case there is perceived insolvency of b. A group of companies, when one or more of
the company is not inappropriate because the basic its constituent corporations foresee the
issues in rehabilitation proceedings concern the impossibility of meeting debts when they
viability and desirability of continuing the business respectively fall due, and the financial distress
operations of the petitioning corporation. would likely adversely affect the financial
condition and/or operations of the other
Moreso, FRIA has defined a corporate debtor as companies of the group under the terms of the
corporation duly organized and existing under proposed rehabilitation plan (RULE 4, Sec. 1);
Philippine laws that has become insolvent. The term or
“insolvent” term insolvent is defined as the financial c. Creditor or creditors holding at least 20% of
condition of a debtor that is generally unable to pay its the debtor’s total liabilities when the debtor
or his liabilities as they fall due in the ordinary course
2. The following shall be annexed to the petition: 4. Publication of the stay order in a newspaper of
a. Audited financial statements at end of its last general circulation once a week for 2
fiscal year; consecutive weeks (RULE 3, Sec. 7);
b. Interim financial statement; 4.
c. Schedule of debts and liabilities; 5. Referral of rehabilitation plan to rehabilitation
d. Inventory of assets; receiver
e. Rehabilitation plan;
f. Schedule of payments and disposition of Rehabilitation Plan shall include: (a) the desired
assets effected within 3 months preceding the business targets or goals and the duration and
filing of the petition; coverage of the rehabilitation; (b) the terms and
g. Schedule of cash flow for the last 3 months; conditions of such rehabilitation; (c) the material
h. Statement of possible claims; financial commitments; (d) the means for the
i. Affidavit of general financial condition; execution; (e) a liquidation analysis; and (f) such
j. At least 3 nominations for rehabilitation other relevant information (Rule 3, Sec. 18);
receiver; and
k. Certificate under oath that directors and Note: Material financial commitments is material in
stockholders have irrevocably rehabilitation plan. It becomes significant in gauging Formatted: Highlight
approved/consented to all actions/matters the reesolve determination, earnestness, and good
necessary under the rehabilitation plan faith of the distressed corporation in financing the
(RULE 4, Sec. 2). proposed. rehabilitation plan. (VILLANUEVA-
CASTRO, Take Note, supra at 133)
Note: A petition filed by the debtor must be
verified by an affidavit of a responsible officer 6. Initial and additional hearings (RULE 4, Secs.
of the debtor (RULE 4, Sec. 3). 5-6)
7. Meetings between corporate debtor and
3. The court shall issue the stay order not later creditors. Discussions on the rehabilitation
than 5 days from the filing of the petition, plan (RULE 4, Sec. 8);
which among others, shall: 8. Submission of final rehabilitation plan to the
a. Appoint a rehabilitation receiver and fix his RTC for approval (RULE 4, Sec. 10);
bond; 9. The petition shall be dismissed (which results
b. Stay all actions for claims against the debtor, into the automatic lifting of the stay order
which shall cover both secured and unless RTC ordered otherwise) if no
unsecured creditors. rehabilitation plan is approved after 180 days
from initial hearing; and
Provided, that the stay order shall not cover 10. Approval or disapproval of the rehabilitation
claims against letters of credit and similar plan by RTC. The court shall decide the
security arrangements issued by a third party petition within 1 year from the date of filing of
to secure the payment of the debtor's the petition (RULE 4, Secs. 11-12).
obligations;
Note: The rehabilitation plan is an indispensable
Provided, further, that the stay order shall not requirement in corporate rehabilitation
cover foreclosure by a creditor of property not proceedings (Siochi Fishery v. BPI, G.R. No.
belonging to a debtor under corporate 193872, October 19, 2011).
rehabilitation;
Stay Order/Automatic Stay
However, that where the owner of such Effect of appointment of a management committee or
property sought to be foreclosed is also a rehabilitation receiver (RULE 3, Sec. 7).
guarantor or one who is not solidarily liable,
said owner shall be entitled to the benefit of All actions for claims against the corporation shall be
excussion as such guarantor; suspended accordingly (RULE 3, Sec. 7).
c. Set an initial hearing for the petition (not Execution is included in the stay order in rehabilitation
earlier than 45 days but not later than 60 days proceedings (Molina v. Pacific Plans, G.R. No.
from filing of the petition); and 165476, August 15, 2011).
d. Direct the creditors to file their verified
comment or opposition not later than 15 days
before the initial hearing; their failure to do so
The suspension of all actions for claims against the The suspension also covers employees’ claims
corporation embraces all phases of the suit, be it (Lingkod ng Manggagawa sa Rubberworld v.
before the trial court or any tribunal or before the Rubberworld, Phils. Inc., supra).
Supreme Court. What are automatically stayed or
suspended are the proceedings of a suit and not just The suspension embraces all phases of the suit,
the payment of claims during the execution stage after be it before the trial court or any tribunal or before
the case had become final and executor (Garcia v. the Supreme Court, not just payment of claims but
PAL, supra). also proceedings of a suit are automatically
suspended (Garcia v. PAL, supra).
The rehabilitation of a corporation and the settlement
of claims against it is not a legal ground for the 2. This suspension shall not prejudice or render
extinction of criminal liabilities. The prosecution of the ineffective the status of a secured creditor as
officers of the corporation has no bearing on the compared to a totally unsecured creditor. P.D.
pending rehabilitation of the corporation, especially No. 902-A does not state anything to this
since they are charged in their individual capacities effect. What it merely provides is that all actions
(Panlilio v. RTC, supra). for claims against the corporation, partnership or
association shall be suspended. This should give
Purpose: To enable the management committee or the receiver a chance to rehabilitate the
the rehabilitation receiver to effectively exercise its corporation if there should still be a possibility for
powers free from any judicial or extrajudicial doing so. However, in the event that rehabilitation
interference that might unduly hinder or prevent the is no longer feasible and claims against the
rescue of the debtor company (Rubberworld v. NLRC, distressed corporation would eventually have to
GR No. 126773, April 14, 1999). be settled, the secured creditors shall enjoy
preference over the unsecured creditors, subject
No definite duration; deemed to apply during the entire only to the provisions of the Civil Code on
period that the corporate debtor is under management Concurrence and Preferences of Credit (RCBC v.
committee or the rehabilitation receiver (BF Homes v. IAC, G.R. No. 74851, December 9, 1999).
CA, GR No. 30690, November 19, 1982).
The order prohibits the debtor from selling,
Procedure for a Valid Stay Order encumbering, transferring, or disposing in any
1. All claims against corporations, partnerships, or manner any of its properties except in the ordinary
associations that are pending before any court, course of business; and from making any payment
tribunal, or board, without distinction as to whether of its liabilities outstanding as at the date of filing of
or not a creditor is secured or unsecured, shall be the petition.
suspended effective upon the appointment of a
management committee, rehabilitation receiver, The order likewise prohibits the debtor’s suppliers
board, or body in accordance P.D. No. 902-A of goods or services from withholding supply of
(RULE 3, Sec. 7). goods and services in the ordinary course of
business for as long as the debtor makes
The purpose for the suspension of the payments for the services and goods supplied after
proceedings is to prevent a creditor from obtaining the issuance of the stay order (RULE 6, Sec. 2(k),
an advantage or preference over another and to A.M. No. 00-8-10-SC).
protect and preserve the rights of party litigants as
well as the interest of the investing public or
Note: The Board shall have the authority to discipline Special Audit
the CEO, or order the removal from office, upon a When required:
majority vote of the members of the Board who 1. The 30 GOCCs with the highest total assets shall
actually took part in the investigation and deliberation be subject to periodic special audit by the COA.
(Sec. 22). The periodic audit shall, at the minimum make a
determination whether:
Fit and Proper Rule a. Accounting records of the GOCCs are
To maintain the quality of management of the GOCCs, complete and in accordance with generally
the GCG, in coordination with the relevant government accepted accounting practices and
agencies shall, subject to the approval of the standards; and
President, prescribe, pass upon, and review the b. The statements prepared from the accounts
qualifications and disqualifications of individuals present fairly and comprehensively their
appointed as officers, directors or elected CEO of the GOCCs financial position and the results of its
GOCC and shall disqualify those found unfit (Sec. financial operations.
16(2)). 2. As may be necessary or convenient in the
performance by the GCG of its functions, the
In determining whether an individual is fit and proper Chairman of the GCG may direct at any time a
to hold the position, due regard shall be given to one’s special COA audit of any other GOCC for any
Civil Liability
Under the SRC, the following acts shall give rise to
civil liabilities:
1. On account of false registration statement (SRC,
Sec. 56).
2. In connection with prospectus, communication,
and reports:
a. Sale of security in violation of registration
requirements
b. Sale of security by mean of prospectus or
communication with untrue statement (SRC,
Sec. 57).
3. For fraud in connection with securities transaction
(SRC, Sec. 58).
4. For manipulation of security prices (SRC, Sec.
59).
5. With respect to commodity futures contracts and
pre-need plans (SRC, Sec. 60).
6. On account of insider trading (SRC, Sec. 61).