6 Corporate Contract Law PDF

CORPORATION
LAW REVIEWER (2013-‐2014) ATTY. JOSE MARIA G. HOFILEÑA

CORPORATE CONTRACT LAW shall be irrevocable for a period of at least six (6) months from the
date of subscription, unless all of the other subscribers consent to the
I. Pre-‐Incorporation Contracts revocation, or unless the incorporation of said corporation fails to
materialize within said period or within a longer period as may be

stipulated in the contract of subscription: Provided, That no pre-‐
A. Who Are Promoters?
incorporation subscription may be revoked after the submission of the
• “Promoter” is a person who, acting alone or with others, takes
articles of incorporation to the Securities and Exchange Commission.
initiative in founding and organizing the business or enterprise
(n)
of the issuer and receives consideration therefor. (Section 3.10,

Securities Regulation Code [R.A. 8799])
C. Theories on Liabilities for Promoter's Contracts:
• It is necessary to identify the promoters because it fills the gap
• Cagayan Fishing Dev. Co., Inc. v. Teodoro Sandiko, 65 Phil. 223
between the intention to create the corporation, and its actual
(1937).
birth.
o In the normal scheme of things, should the promoter be • Rizal Light & Ice Co., Inc. v. Public Service Comm., 25 SCRA 285
liable for contracts? NO. Because when the corporation (1968).
is born, all contracts are transferred to it. • Caram, Jr. v. CA, 151 SCRA 372 (1987).
o However, where the company was not formed, then the
liability of the promoters become significant. Cagayan Fishing Dev. Co., Inc. v. Teodoro Sandiko

B. Nature of Pre-‐incorporation Agreements (Sections 60 and 61) Facts: Manuel Tabora owns 4 parcels of land covered by three
mortgages which it sold to Cagayan Fisheries Dev. Co. Inc. at a time
Section 60. Subscription contract. when it was still in the process of incorporation for a consideration of P1
Any contract for the acquisition of unissued stock in an existing and under the condition that the company would pay Tabora’s
corporation or a corporation still to be formed shall be deemed a indebtedness to PNB. 5 months later, Cagayan was incorporated, but
subscription within the meaning of this Title, notwithstanding the fact the mortgage loan was not paid. Subsequently the land was sold to
that the parties refer to it as a purchase or some other contract. (n) Sandiko under the name of the corporation with the same conditions.
Sandiko failed to comply with his obligation so Cagayan filed an action
Section 61. Pre-‐incorporation subscription. praying that the judgment be rendered.
A subscription for shares of stock of a corporation still to be formed
Issue: Whether or not Sandiko is liable to Cagayan.

NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)
CORPORATION LAW REVIEWER (2013-‐2014) ATTY. JOSE MARIA G. HOFILEÑA

Securities and Exchange Commission just before the Certificate of Public
Held: NO. The transfer to Cagayan was null because at the time it was Convenience was granted to it. Rizal Light contended that Morong
effected, Cagayan was non-‐existent. If Cagayan could not and did not Electric did not have a corporate personality at the time it was granted a
acquire the 4 parcels of land, it follows that it had no right to sell them franchise by the Municipality and as such was not even a de facto
to Sandiko. A corporation, until organized, has no being, franchise or corporation.
faculties. Nor do those engaged in bringing it into being have any power
to bind it by contract, unless so authorized by the charter. Manuel Issue: Whether or not Morong Electric could validly be granted a
Tabora, his wife and others, as mere promoters of a corporation on the franchise and apply for a Certificate of Public Convenience even when it
other hand. The lands remain inscribed in Tabora’s name. Sandiko did not yet have a separate corporate legal personality at those times
always regarded Tabora as the owner of the lands. He dealt with the
latter directly. The President of Cagayan only intervened to sign the Held: YES. Morong Electric might not yet have a corporate personality at
contract in behalf of Cagayan. Even PNB always treated Tabora as the those times but ultimately, it was granted its certificate of incorporation
owner of the lands. by the SEC and it accepted its franchise according to the terms and
conditions. In effect, the doctrine of ratification was applied in favor of
Doctrine: These promoters could not have acted as agent for a Morong Electric.
projected corporation since that which had no legal existence could
have no agent. A corporation, until organized, has no life and therefore Doctrine: “The fact that a company is not completely incorporated at
no faculties. However, this does not mean that acts of promoters can the time the grant is made to it does not affect the validity of the grant.
never be ratified by the corporation when it is subsequently organized. But such grant cannot take effect until the corporation is organized.”
There are exceptions American courts generally hold that contracts made by the promoters of
a corporation on its behalf may be adopted, accepted, or ratified by the
Rizal Light & Ice Co., Inc. v. Public Service Comm. corporation when organized.

Facts: Rizal Light and Ice has been distributing electricity in the Morong, General Rule: For corporations that are not yet incorporated, they don’t
Rizal Area since 1949 when it was awarded a Certificate of Public have capacity to act yet.
Convenience by the Public Service Commission. In 1962, Morong Electric
Company was granted a franchise to operate an electric service in the Caram, Jr. v. CA
Municipality of Morong, and it applied for a Certificate of Public
Convenience. Its Certificate of Incorporation was granted by the Facts: The Carams are challenging the validity of the Court of Appeal’s


decision ordering them to pay jointly and severally with Filipinas Orient powers, shall not be inquired into collaterally in any private suit to
Airways and with Barretto and Garcia plaintiff Arellano for his services which such corporation may be a party. Such inquiry may be made by
which helped in the incorporation of Filipinas Orient Airways. The the Solicitor General in a quo warranto proceeding.
Carams claim that they were not the ones who requested the services of
Arellano, and were merely financiers of the airways. As such they • A de facto corporation is one that has not yet been certified as
cannot be held personally liable. existing by the SEC, but who believes in good faith that it has
authority and power to operate as a corporation.
Issue: Whether or not the Carams are also and personally liable for such o You can’t claim to be in good faith if there is no
expenses and, if so, to what extent. certificate of incorporation since you know that it is only
upon the issuance of the certificate by the SEC that the
Held: NO. After a perusal of the decision of the CA, the SC found that corporation is given juridical personality.
the Carams were not really involved in the initial steps that finally led to
the incorporation of the Filipinas Orient Airways. It was Barretto and A. Elements: Arnold Hall v. Piccio, 86 Phil. 634 (1950).
Garcia who handled the preparation of the project study. The said study
being then subsequently presented to the Carams to induce the latter in Arnold Hall v. Piccio
investing to the proposed airlines. The Carams were merely among the
financiers who were persuaded by the strength of the project study to Facts: Arnold and Bradley Hall (petitioners) and Fred and Emma Brown,
invest in the proposed airline. Furthermore, there was no showing that Chapman, and Abella (respondents) signed and acknowledged the
the Filipinas Orient Airways was a fictitious corporation and did not have articles of incorporation of the Far Eastern Lumber and Commercial Co.,
a separate juridical personality, to be able to justify making the Carams, Inc. Attached to the articles of incorporation was an affidavit of the
as principal stockholders thereof, responsible for its obligations. treasurer stating that about 23k of the stocks were subscribed and fully
paid with properties transferred to the corporation.
Doctrine:
Pending action of the SEC concerning the articles, the respondents filed
II. De Facto Corporation (Section 20) a case against petitioners where they claimed that FELC was an
unregistered partnership and now they wished to dissolve it due to
Section 20. De facto corporations. dissension among members. The Halls filed a case, claiming that the
The due incorporation of any corporation claiming in good faith to be a court had no jurisdiction to decree the dissolution of the company,
corporation under this Code, and its right to exercise corporate because it being a de facto corporation, dissolution may only be ordered


in a quo warranto proceeding before the Solicitor General and that the III. Corporation by Estoppel Doctrine (Section 21; Salvatierra v.
respondents, having signed the articles of incorporation, are estopped Garlitos, 103 Phil. 757 [1958]; Albert v. University Publishing Co., 13
from denying that it is a corporation. SCRA 84 [1965]; Asia Banking Corp. v. Standard Products, 46 Phil. 145
[1924]; Madrigal Shipping Co., v. Ogilvie, 55 O.G. No. 35, p. 7331)
Issue: Whether or not the court had jurisdiction to decree the
dissolution Section 21. Corporation by estoppel.
All persons who assume to act as a corporation knowing it to be
Held: YES. The parties very well know that the SEC has not issued the without authority to do so shall be liable as general partners for all
certificate of corporation. Thus, they couldn’t claim in good faith to be a debts, liabilities and damages incurred or arising as a result thereof:
corporation. In this case, there is no de facto corporation immune from Provided, however, That when any such ostensible corporation is sued
collateral attack. Besides, this corporation is not a party to this case. The on any transaction entered by it as a corporation or on any tort
case is a litigation between stockholders, for the purpose of obtaining committed by it as such, it shall not be allowed to use as a defense its
dissolution. Even the existence of a de jure corporation may be lack of corporate personality.
terminated in a private suit for its dissolution between stockholders,
without the intervention of the state. One who assumes an obligation to an ostensible corporation as such,
cannot resist performance thereof on the ground that there was in fact
Doctrine: Personality of a corporation begins to exist only from the no corporation.
moment such certificate is issued. Immunity from collateral attack is
granted to corporations “claiming in good faith to be a corporation” A. Elements of the Doctrine Corporation by Estoppel
under the Corporation Law. When both parties are aware that a 1. One who assumes an obligation to an ostensible corporation as
corporation has not been duly organized, then the corporation by such, cannot resist performance thereof on the ground that
estoppel doctrine does not apply. there was in fact no corporation. Section 21(2)
2. Both parties must recognize the corporate party even when one
• By its failure to submit its by-‐laws on time, the AIIBP may be does not exist. At least one party to the contract was under the
considered a de facto corporation whose right to exercise impression that the other corporate party was a duly
corporate powers may not be inquired into collaterally in any incorporated entity. It can only apply when a certificate is issued
private suit to which such corporations may be a party. but where, for lack of the other criteria, the de facto
Sawadjaan v. Court of Appeals, 459 SCRA 516 (2005). corporation doctrine cannot apply. Arnold Hall v. Piccio, 86 Phil.
634 (1950).


out of such transaction.
Salvatierra v. Garlitos
Doctrine 1: A registered corporation has a juridical personality separate
Facts: Manuela Salvatierra entered into a contract of lease with and distinct from its component members or stockholders and officers
Philippine Fibers Producers Corp. (represented by its President and conversely, a stockholder or member cannot be held personally
Refuerzo) over a parcel of land in Leyte owned by the former. Barely a liable for any financial obligation of the corporation in excess of his
year after the lease, Salvatierra filed for damages, accounting and unpaid subscription. But this rule is understood to refer merely to
rescission; she averred that the corporation violated the provisions in registered corporations and cannot be made applicable to the liability of
the contract. The Court rendered a judgment in favour of Salvatierra, members of an unincorporated association.
and moved to subject parcels of land owned by Refuerzo to attachment
because the corporation had no properties in its name. Refuerzo filed a
motion claiming that the decision rendered was null and void with Issue 2: Whether or not the doctrine of corporation by estoppel is
respect to him, there being no allegation in the complaint pointing to his applicable in this case.
personal liability. His defense was that for while it was stated in the
complaint that he was a signatory to the lease contract, he did so in his Held 2: NO. The doctrine of corporation by estoppel does not apply in
capacity as president of the corporation. this case because fraud was part of the transaction. In the instant case,
on plaintiff's charge that she was unaware of the fact that the Philippine
Issue 1: Whether or not Refuerzo, in his personal capacity, can be held Fibers Producers Co., Inc., had no juridical personality, defendant
liable for corporate debts. Refuerzo gave no confirmation or denial and the circumstances
surrounding the execution of the contract lead to the inescapable
Held 1: YES. A person who acts as an agent without authority or without conclusion that plaintiff Manuela T. Vda. de Salvatierra was really made
a principal is himself regarded as the principal; a person acting or to believe that such corporation was duly organized in accordance with
purporting to act on behalf of a corporation which has no valid law.
existence assumes such obligations and comes personally liable for
contracts entered into. Refuerzo, as president of the unregistered Doctrine 2: While as a general rule a person who has contracted or dealt
corporation Phil. Fibers, was the agent of a non-‐existent principal, his with an association in such a way as to recognize its existence as a
liability cannot be limited or restricted to that imposed upon corporate corporate body is estopped from denying the same in an action arising
shareholders. In acting on behalf of a corporation which he knew to be out of such transaction or dealing, yet this doctrine may not be held to
unregistered, he assumed the risk of reaping the consequential arising be applicable where fraud takes a part in the said transaction.


there is no such entity as University Publishing Co., Inc. The SEC records
• Agency Doctrine: Making the agent of an inexistent principal show that UP Co. was never registered either as a corporation or
liable on the contract entered upon.1 partnership. Aruego claimed he is not a party to the case.
o This agency doctrine applies only where there is fraud
or misrepresentation on the part of one of the contract Issue: Whether or not the judgment may be executed against Jose M.
parties. The doctrine of corporation by estoppel has not Aruego, supposed President of University Publishing Co., Inc., as the real
application to a situation where both parties to the defendant.
contract acted in the honest belief that a contracting
corporate entity did exist. Held: YES. On account of the non-‐registration UP Co. cannot be
o It is in such no-‐fraud or no-‐misrepresentation cases that considered a corporation, not even a corporation de facto. It has
Salvatierra v. Garlitos is clearly inadequate. This is therefore no personality separate from Jose M. Aruego; it cannot be
where the present statutory version of the corporation sued independently. It is patently clear that Jose M. Aruego, acting as
by estoppel doctrine applies, since its applicability does representative of a non-‐existent principal, was the real party to the
not require fault or conscious misrepresentation. contract sued upon, reaping the benefits resulting from it. Responsibility
under the judgment falls on him since partial payments of the
Albert v. University Publishing Co. consideration were made by him, he violated its terms, which
precipitated the previous suit in question.
Facts: UP Co. through Jose Aruego, its President, entered into a contract NOTE: Doctrine of corporation by estoppel did not apply to this case.
with Mariano Albert for the exclusive right to publish his revised
Commentaries on the Revised Penal Code. Because of UP Co.’s failure to Doctrine: In a suit against a corporation with no valid existence, the
pay its installments to Albert, the latter sued UP Co. alleging that it was person who had and exercised the rights to control the proceedings, to
a corporation duly organized and existing under the laws of the make defense, to adduce and to cross-‐examine witnesses, and to appeal
Philippines. UP Co. also admitted to Albert’s allegation of its corporate from a decision, is the real defendant, and the enforcement of a
existence as well as to the execution and terms of the contract. Albert judgment against the corporation upon him is substantial observance of
won the case, and thereafter petitioned for a writ of execution against due process of law.
Aruego as the real defendant because it was recently discovered that
• Albert therefore offers us the "philosophical bridge" between
the two doctrines:
1
Villanueva, C. L., & Villanueva-‐Tiansay, T. S. (2013). Philippine Corporate Law.
(2013 ed.). Manila, Philippines: Rex Book Store.


o First. That a corporation can be deemed to exist when in corporate existence. Under these circumstances it was unnecessary for
fact none may exist, in order to validate a contract; and the plaintiff to present other evidence of the corporate existence of
o Second. That although the veil of corporate fiction is set either of the parties.
up, it will be pierced to enforce the contract, to hold the
actors behind such misrepresentation liable for the Doctrine: The general rule is that in the absence of fraud a person who
obligations arising from such contract.1 has contracted or otherwise dealt with an association in such a way as
to recognize and in effect admit its legal existence as a corporate body is
Asia Banking Corp. v. Standard Products thereby estopped to deny its corporate existence in any action leading
out of or involving such contract or dealing, unless its existence is
Facts: Standard Products, Co., Inc. was indebted to Asia Banking attacked for cause which have arisen since making the contract or other
Corporation and secured its indebtedness through a promissory note. dealing relied on as an estoppel and this applies to foreign as well as to
Upon demand for the balance due, Standard failed to pay. Hence an domestic corporations.
action was brought by Asia Banking Corporation, which it won. But,
Standard Products, Inc. contended that Asia Banking Corp failed to NOTE: Atty. Hofileña à The doctrines in three cases were laid down
prove affirmatively the corporate existence of the parties, and the before the Corporate Code. As such, these doctrines were embodied in
appellant insists that under these circumstances the court erred in the Section 21 of the Corporation Code.
finding that the parties were corporations with juridical personality and
assigns same as reversible error. B. Nature of Doctrine
• Founded on principles of equity and designed to prevent
Issue: Whether or not respondent Standard Products is estopped from injustice and unfairness, the doctrine applies when persons
denying the corporate existence of the plaintiff Asia Banking Corp. assume to form a corporation and exercise corporate functions
and enter into business relations with third persons. Where no
Held: YES. The defendant having recognized the corporate existence of third person is involved in the conflict, there is no corporation
the plaintiff by making a promissory note in its favor and making partial by estoppel. A failed consolidation therefore cannot result in a
payments on the same is therefore estopped to deny said plaintiff's consolidated corporation by estoppel. Lozano v. De Los Santos,
corporate existence. It is, of course, also estopped from denying its own 274 SCRA 452 (1997)
• The doctrine is meant to hold contractual parties to their
representations or expectations at the time the contract was
1
Villanueva, C. L., & Villanueva-‐Tiansay, T. S. (2013). Philippine Corporate Law.
perfected; and it does not allow parties to draw on a basic


defect — lack of one contracting party — to avoid the • Under the law on estoppel including that under Section 21 of
enforcement of the contract.1 Corporation Code, those acting on behalf of an ostensible
o A party cannot challenge the personality of the plaintiff corporation and those benefited by it, knowing it to be without
as a duly organized corporation after having valid existence, are held liable as general partners. Lim Tong Lim
acknowledged same when entering into the contract v. Philippine Fishing Gear Industries, Inc., 317 SCRA 728 (1999).
with the plaintiff as such corporation for the
transportation of its merchandise. Ohta Dev. Co. v. Lim Tong Lim v. Philippine Fishing Gear Industries, Inc.
Steamship Pompey, 49 Phil. 117 (1926).2
o A person who accepts employment in an Facts: Chua and Yao, on behalf of Ocean Quest Fishing Corp., entered
unincorporated charitable association is estopped from into a contract for the purchase of fishing nets from respondent-‐PFGI.
alleging its lack of juridical personality. Christian They claimed that they were engaged in a business with petitioner-‐Lim
Children’s Fund v. NLRC, 174 SCRA 681 (1989). who was not a signatory of the agreement. However, the buyers failed
• The doctrine has evolved in Corporate Law primarily as a rule to to pay for their purchases; hence, PFGI filed a collection suit against
promote the integrity of commercial contracts; the basic role of Chua, Yao and Lim with a prayer for a writ of preliminary attachment.
the doctrine of corporation by estoppel is to promote the The trial court ruled that a partnership existed among the Lim, Chua and
public's underlying faith in contracts drawn with corporate Yao and held them jointly liable to pay PFGI based on the testimonies of
entities, rather than to promote corporate principles.3 witnesses presented and the Compromise Agreement executed by the
o One who deals with an unincorporated association three. Lim claims that he should not be held liable for the purchase price
which is not duly incorporated is not estopped to deny since he was not part of the negotiations with respondent-‐PFGI.
its corporate existence when his purpose is not to avoid
liability, but precisely to enforce the contract against Issue: Whether or not under the doctrine of corporation by estoppel,
the action for the purported corporation. Int’l Express liability can be imputed only to Chua and Yao and not to Lim.
Travel v. Court of Appeals, 343 SCRA 674 (2000).
Held: NO. Unquestionably, petitioner benefited from the use of the nets
1
Villanueva, C. L., & Villanueva-‐Tiansay, T. S. (2013). Philippine Corporate Law. found inside F/B Lourdes, the boat that has earlier been proven to be an
(2013 ed.). Manila, Philippines: Rex Book Store. asset of the partnership. Although it was never legally formed for
2
The same principle applied in Compania Agricole de Ultramar v. Reyes, 4 Phil.
1 (1911), but that case pertained to a commercial partnership which required unknown reasons, this fact alone does not preclude the liabilities of the
registration in the registry under the terms of the Code of Commerce). three as contracting parties in representation of it. Technically, it is true
3
Villanueva, C. L., & Villanueva-‐Tiansay, T. S. (2013). Philippine Corporate Law. that petitioner did not directly act on behalf of the corporation.


However, having reaped the benefits of the contract entered into by thereof. People v. Garcia, 271 SCRA 621 (1997); People
persons with whom he previously had an existing relationship, he is v. Pineda, G.R. No. 117010, 18 April 1997 (unpub).
deemed to be part of said association and is covered by the scope of the 2. On the other hand, when no fraud or misrepresentation occurs,
doctrine of corporation by estoppel. although it does not make persons acting for the purported
corporation liable personally, it would prevent both sides from
Doctrine: Clearly, under the law on estoppel, those acting on behalf of a raising the non-‐existence of the corporation as a means to avoid
corporation and those benefited by it, knowing it to be without valid enforcement of the contract.2
existence, are held liable as general partners. o In no-‐fraud or no-‐misrepresentation cases, the estoppel
doctrine under Section 21 would create a corporation
C. Two Levels: (i) With “Fraud;” and (ii) Without “Fraud” when none exists to uphold the validity and
1. When fraud or misrepresentation occurs with the perfection of enforceability of the contract
the contract with a purported corporation, then section makes o Limited Partner liability à One who acts for a purported
the actor personally liable on the contract as a general partner.1 corporation not knowing that it had no authority to do
o General Partners à liable not only with what he so would be liable, by way of distinction, only as a
purported to invest in the venture, but he could be held limited partner; that is, he would be liable only to the
liable to all his properties, even those not actually extent of his investment or promised investment in the
invested or promised to be invested in the venture. purported corporate venture. In a no-‐fraud or no-‐
o When the incorporators represent themselves to be misrepresentation case, the persons acting in good faith
officers of the corporation which was never duly for the purported corporation would still be personally
registered with SEC, and engage in the name of the liable, but only to the extent of their actual or promised
purported corporation in illegal recruitment, they are investment in the corporate venture. This logically ties
estopped from claiming that they are not liable as in with the limited liability feature of a purported
corporate officers under Section 25 of Corporation Code corporation given legal recognition in the estoppel
which provides that all persons who assume to act as a doctrine.
corporation knowing it to be without authority to do so 3. When there was clear intention to form a partnership venture
shall be liable as general partners for all the debts, through a corporate vehicle, which essentially means that the
liabilities and damages incurred or arising as a result partners had intended to be active participants in the business

1 2
Villanueva, C. L., & Villanueva-‐Tiansay, T. S. (2013). Philippine Corporate Law. Villanueva, C. L., & Villanueva-‐Tiansay, T. S. (2013). Philippine Corporate Law.
(2013 ed.). Manila, Philippines: Rex Book Store. (2013 ed.). Manila, Philippines: Rex Book Store.


of the corporation, then even those who did not directly capital stock, property and other assets of a corporation are
participate in the contract or transaction being sued upon, but regarded as equity in trust for the payment of corporate
benefited therefrom may be held liable as general partners creditors. The reason is that creditors of a corporation are
under the corporation by estoppel doctrine. On the other hand, preferred over the stockholders in the distribution of corporate
when the investors intended only to invest in a corporate assets. There can be no distribution of assets among the
venture with no intention of participating in its corporate stockholders without first paying corporate creditors. Hence,
affairs, and the corporation was not formed, no partnership any disposition of corporate funds to the prejudice of creditors
relation is deemed established by the failure to incorporate, and is null and void. Boman Environmental Dev. Corp. v. CA, 167
such investors cannot even be held liable for the contracts and SCRA 540 (1988).
transaction sued upon even when such contracts and • Under the trust fund doctrine, the capital stock, property and
transactions were entered into by the corporate actors in the other assets of the corporation are regarded as equity in trust
name of an ostensible corporation.1 Lim Tong Lim v. Philippine for the payment of the corporate creditors. Comm. of Internal
Fishing Gear Industries, Inc., 317 SCRA 728 (1999). Revenue v. Court of Appeals, 301 SCRA 152 (1999).

IV. TRUST FUND DOCTRINE B. Nature and Coverage of the Trust Fund Doctrine:
• The subscriptions to the capital stock of a corporation constitute
A. Commercial/Common Law Premise: Equity versus Debts; Preference a fund to which the creditors have a right to look for satisfaction
of Creditors over Equity Holders (Art. 2236, Civil Code) of their claims and that the assignee in insolvency can maintain
an action upon any unpaid stock subscription in order to realize
CIVIL CODE assets for the payment of its debts. Phil. Trust Co. v. Rivera, 44
Article 2236. Phil. 469 (1923).
The debtor is liable with all his property, present and future, for the o Atty. Hofileña à a shareholder cannot be compelled to
fulfillment of his obligations, subject to the exemptions provided by pay more than what they subscribed to in order to
law. (1911a) address the debts of the corporation.
• Even when the foreclosure on the corporate assets was
• The requirement of unrestricted retained earnings to cover the wrongfully done, stockholders have no standing to recover for
shares is based on the trust fund doctrine which means that the themselves moral damages; otherwise, it would amount to the
appropriation by, and the distribution to, such stockholders of
1
Villanueva, C. L., & Villanueva-‐Tiansay, T. S. (2013). Philippine Corporate Law. part of the corporation’s assets before the dissolution of the


corporation and the liquidation of its debts and liabilities. APT v. Halley v. Printwell, Inc.
Court of Appeals, 300 SCRA 579 (1998).
• The “trust fund” doctrine considers the subscribed capital stock Facts: BMPI (Business Media Philippines Inc.) is a corporation under the
as a trust fund for the payment of the debts of the corporation, control of its stockholders, including Donnina Halley. In the course of its
to which the creditors may look for satisfaction. Until the business, BMPI commissioned PRINTWELL to print Philippines, Inc. (a
liquidation of the corporation, no part of the subscribed capital magazine published and distributed by BMPI). BMPI placed several
stock may be turned over or released to the stockholder (except orders amounting to P316,000 but was only able to pay P25,000.
in the redemption of the redeemable shares) without violating PRINTWELL sued BMPI for collection of the unpaid balance and later on
this principle. Thus dividends must never impair the subscribed impleaded BMPI’s original stockholders and incorporators to recover on
capital stock; subscription commitments cannot be condoned or their unpaid subscriptions.
remitted; nor can the corporation buy its own shares using the
subscribed capital as the consideration therefore. NTC v. Court Issue: Whether or not a stockholder (Halley in this case) who was in
of Appeals, 311 SCRA 508 (1999). active management of the business of the corporation and still has
o Atty. Hofileña à the creditors have no right to compel unpaid subscriptions should be made liable for the debts of the
the company to sell the unsubscribed shares it has left corporation by piercing the veil of corporate fiction
of the authorized capital stock.
• We clarify that the trust fund doctrine is not limited to reaching Held: YES. Such stockholder should be made liable up to the extent of
the stockholders’ unpaid subscriptions. The scope of the her unpaid subscription. It was found that at the time the obligation was
doctrine when the corporation is insolvent encompasses not incurred, BMPI was under the control of its stockholders who know fully
only the capital stock, but also other property and assets well that the corporation was not in a position to pay its account (thinly
generally regarded in equity as a trust fund for the payment of capitalized). And, that the stockholders personally benefited from the
corporate debts. All assets and property belonging to the operations of the corporation even though they never paid their
corporation held in trust for the benefit of creditors that were subscriptions in full.
distributed or in the possession of the stockholders, regardless
of full payment of their subscriptions may be reached by the Doctrine: TRUST FUND DOCTRINE. Under which corporate debtors
creditors in satisfaction of its claim. Halley v. Printwell, Inc. 649 might look to the unpaid subscriptions for the satisfaction of unpaid
SCRA 116 (2011), citing VILLANUEVA, PHILIPPINE CORPORATE corporate debts. Subscriptions to the capital of a corporation
LAW (2001), p. 558. constitutes a trust fund for the payment of the creditors (by mere
analogy) In reality, corporation is a simple debtor. The creditor is


allowed to maintain an action upon any unpaid subscriptions and § Decision to issue stock dividends is made by 2/3
thereby steps into the shoes of the corporation for the satisfaction of its of the stockholders and majority of the Board.
debt. The trust fund doctrine is not limited to reaching the stockholder’s o Cash Dividend à liquidated cash
unpaid subscriptions. The scope of the doctrine when the corporation is § Distribution is decided upon by the Board of
insolvent encompasses not only the capital stock but also other Directors.
property and assets generally regarded in equity as a trust fund for the • Redeemable shares need to be classified from the beginning
payment of corporate debts. that they are redeemable.
o This is the exception to the general rule that you need
C. To Purchase Own Shares (Sections 8, 41, 43 and 122, last paragraph) URE in order to buy-‐back shares.

Section 8. Redeemable shares. Section 41. Power to acquire own shares.
Redeemable shares may be issued by the corporation when expressly A stock corporation shall have the power to purchase or acquire its
so provided in the articles of incorporation. They may be purchased or own shares for a legitimate corporate purpose or purposes, including
taken up by the corporation upon the expiration of a fixed period, but not limited to the following cases: Provided, That the corporation
regardless of the existence of unrestricted retained earnings in the has unrestricted retained earnings in its books to cover the shares to
books of the corporation, and upon such other terms and conditions as be purchased or acquired:
may be stated in the articles of incorporation, which terms and
conditions must also be stated in the certificate of stock representing 1. To eliminate fractional shares arising out of stock dividends;
said shares.
2. To collect or compromise an indebtedness to the corporation,
• Unrestricted Retained Earnings à These are earnings which is arising out of unpaid subscription, in a delinquency sale, and to
not earmarked for any particular purpose. purchase delinquent shares sold during said sale; and
• Dividends come from the unrestricted retained earnings.
Otherwise, you will impair the capital of the corporation. 3. To pay dissenting or withdrawing stockholders entitled to payment
o Stock Dividend à instead of giving you cash dividend to for their shares under the provisions of this Code. (n)
which you are entitled to, you will be given a stock as
equivalent. It’s like reinvesting your dividends to the • The URE is also what the corporation can use to buy-‐back its
corporation. shares from its stockholders.


Section 43. Power to declare dividends. be continued as a body corporate for three (3) years after the time
The board of directors of a stock corporation may declare dividends when it would have been so dissolved, for the purpose of prosecuting
out of the unrestricted retained earnings which shall be payable in and defending suits by or against it and enabling it to settle and close
cash, in property, or in stock to all stockholders on the basis of its affairs, to dispose of and convey its property and to distribute its
outstanding stock held by them: Provided, That any cash dividends assets, but not for the purpose of continuing the business for which it
due on delinquent stock shall first be applied to the unpaid balance on was established.
the subscription plus costs and expenses, while stock dividends shall
be withheld from the delinquent stockholder until his unpaid At any time during said three (3) years, the corporation is authorized
subscription is fully paid: Provided, further, That no stock dividend and empowered to convey all of its property to trustees for the benefit
shall be issued without the approval of stockholders representing not of stockholders, members, creditors, and other persons in interest.
less than two-‐thirds (2/3) of the outstanding capital stock at a regular From and after any such conveyance by the corporation of its property
or special meeting duly called for the purpose. (16a) in trust for the benefit of its stockholders, members, creditors and
others in interest, all interest which the corporation had in the
Stock corporations are prohibited from retaining surplus profits in property terminates, the legal interest vests in the trustees, and the
excess of one hundred (100%) percent of their paid-‐in capital stock, beneficial interest in the stockholders, members, creditors or other
except: (1) when justified by definite corporate expansion projects or persons in interest.
programs approved by the board of directors; or (2) when the
corporation is prohibited under any loan agreement with any financial Upon the winding up of the corporate affairs, any asset distributable
institution or creditor, whether local or foreign, from declaring to any creditor or stockholder or member who is unknown or cannot
dividends without its/his consent, and such consent has not yet been be found shall be escheated to the city or municipality where such
secured; or (3) when it can be clearly shown that such retention is assets are located.
necessary under special circumstances obtaining in the corporation,
such as when there is need for special reserve for probable Except by decrease of capital stock and as otherwise allowed by this
contingencies. (n) Code, no corporation shall distribute any of its assets or property
except upon lawful dissolution and after payment of all its debts and
Section 122. Corporate liquidation. liabilities. (77a, 89a, 16a)
Every corporation whose charter expires by its own limitation or is
annulled by forfeiture or otherwise, or whose corporate existence for • Under common law, there were originally conflicting views on
other purposes is terminated in any other manner, shall nevertheless whether a corporation had the power to purchase its own


stocks. Only a few American jurisdictions adopted the strict
English rule forbidding a corporation from purchasing its own Ong Yong v. Tiu
shares. In some American states where the English rule used to
be adopted, statutes granting authority to purchase out of Facts: The Tiu family members are the owners of First Landlink Asia
surplus funds were enacted, while in others, shares might be Development Corporation (FLADC). One of the corporation’s projects is
purchased even out of capital provided the rights of creditors the construction of Masagana Citimall in Pasay City. However, due to
were not prejudiced. The reason underlying the limitation of financial difficulties (they were indebted to PNB for P190 million), the
share purchases sprang from the necessity of imposing Tius feared that the construction would not be finished. So to prevent
safeguards against the depletion by a corporation of its assets the foreclosure of the mortgage on the two lots where the mall was
and against the impairment of its capital needed for the being built, they invited the Ongs to invest in FLADC. The two parties
protection of creditors. Turner v. Lorenzo Shipping Corp., 636 entered into a Presubscription Agreement whereby each of them would
SCRA 13 (2010). hold 1,000,000 shares each and be entitled to nominate certain officers.
The Tiu’s contributed a building and two lots, while the Ongs
D. Rescission of Subscription Agreement contributed P100M.
• The violation of terms embodied in a subscription agreement,
with are personal commitments, do not constitute legal ground Two years later, the Tui’s filed for rescission of the Presubscription
to rescind the subscription agreement since such would violate Agremement because the Ongs refused to issue them their shares of
the Trust Fund Doctrine and the procedures for the valid stock and from assuming positions of VP and Treasurer to which they
distribution of assets and property under the Corporation Code. were entitled to nominate. The Ongs contended that they could not
“In the instant case, the rescission of the Pre-‐Subscription issue the new shares to the Tius because the latter did not pay the
Agreement will effectively result in the unauthorized capital gains tax and the documentary stamp tax of the lots. And
distribution of the capital assets and property of the because of this, the SEC would not approve the valuation of the
corporation, thereby violating the Trust Fund Doctrine and the property contribution of the Tius. The Court of Appeals ordered
Corporation Code, since the rescission of a subscription liquidation of FLADC to enforce rescission of the contract.
agreement is not one of the instances when distribution of
capital assets and property of the corporation is allowed.” Issue: Whether or not the liquidation of FLADC violated the Trust Fund
Distribution of corporate assets among the stockholders cannot Doctrine
even be resorted to achieve “corporate peace.” Ong Yong v.
Tiu, 401 SCRA 1 (2003). Held: YES. In this case, the rescission would certainly be a violation of


the doctrine and also of the Corporation Code because the rescission
would result in the unauthorized distribution of the assets of the
corporation. Rescission based on a breach in the terms of a subscription
agreement is not one of the instances when distribution of a
corporation’s assets and property is allowed (Section 122). It would not
only be unlawful but it would also be prejudicial to the corporate
creditors who enjoy absolute priority of payment over any individual
stockholder.

Doctrine: This doctrine enunciates that subscriptions to the capital stock
of a corporation constitute a fund to which the creditors have a right to
look for the satisfaction of their claims. This doctrine is the underlying
principle in the procedure for the distribution of capital assets,
embodied in the Corporation Code, which allows the distribution of
corporate capital only in three instances: (1) amendment of the Articles
of Incorporation to reduce the authorized capital stock, (2) purchase of
redeemable shares by the corporation, regardless of the existence of
unrestricted retained earnings, and (3) dissolution and eventual
liquidation of the corporation.

NOTE:
Atty. Hofileña à To release a person from his obligation to pay his
subscribed shares is offensive to the Trust Fund Doctrine.
• Trust Fund Doctrine applies to all properties of the company,
and not limited to simply the unpaid subscriptions.
• A company may do what it wills with its properties, but
creditors are protected.


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LAW REVIEWER (2013-‐2014) ATTY. JOSE MARIA G. HOFILEÑA

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LAW REVIEWER (2013-­‐2014) ATTY. JOSE MARIA G. HOFILEÑA

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LAW REVIEWER (2013-‐2014) ATTY. JOSE MARIA G. HOFILEÑA