10. Dissolution and Liquidation

Dissolution

Extinguishment of the franchise of a corporation and the termination of its corporate existence.

However, the corporation shall nevertheless be continued as a body corporate for three (3) years after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the business for which it was established. (Sec. 139, Revised Corporation Code)¹

Procedure where no creditors are affected by the dissolution of the corporation:

• A meeting must be held on the call of directors or trustees;
• At least twenty (20) days prior to the meeting, notice should be given to each shareholder or member of record personally, by registered mail, or by any means authorized under the bylaws, whether or not entitled to vote at the meeting;
• The notice of meeting should also be published once prior to the meeting in a newspaper published in the place where the corporation’s principal office is located, or, if none, in a newspaper of general circulation in the Philippines
• The resolution to dissolve must be approved by the majority of the directors/trustees and approved by the stockholders representing at least majority of the outstanding capital stock or majority of members;
• A verified request for dissolution is then filed with the SEC stating:
• the reason for dissolution
• the form, manner and time when the notices were given
• names of the stockholders and directors or members and trustees who approved the dissolution
• the date, place, and time of the meeting in which the vote was made; and
• details of publication
• In addition, the following shall be submitted to the SEC:
• Copy of the resolution authorizing the dissolution, certified by a majority of the board and countersigned by the secretary;
• Proof of publication
• Favorable recommendation from the appropriate regulatory agency, when necessary.
• The SEC shall, within 15 days from the receipt of the verified request for dissolution, and in the absence of any withdrawal within said period, approve the request and issue the certificate of dissolution, upon which the dissolution will take effect. (Sec. 134)²

Procedure where the dissolution of the corporation may prejudice the rights of any creditor:

• A verified petition for dissolution shall be filed with the SEC.
• The petition shall be:
• signed by a majority of the corporation’s board of directors or trustees
• verified by its president or secretary or one of its directors or trustees
• shall set forth all claims and demands against it
• that its dissolution was resolved upon by the affirmative vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or at least two-thirds (2/3) of the members at a meeting of its stockholders or members called for that purpose.
• The petition shall likewise state:
• the reason for the dissolution;
• the form, manner, and time when the notices were given;
• the date, place, and time of the meeting in which the vote was made.
• The corporation shall submit to the SEC the following:
• a copy of the resolution authorizing the dissolution, certified by a majority of the board of directors or trustees and countersigned by the secretary of the corporation; and
• list of all its creditors.
• By an order reciting the purpose of the petition, the SEC shall fix a deadline for filing objections to the petition (shall not be less than thirty (30) days nor more than sixty (60) days after the entry of the order).
• Publication: Before such the deadline, a copy of the order shall be published at least once a week for three (3) consecutive weeks in a newspaper of general circulation published in the municipality or city where the principal office of the corporation is situated, otherwise, in a newspaper of general circulation in the Philippines
• Posting: A similar copy shall be posted for three (3) consecutive weeks in three (3) public places in such municipality or city.
• After the expiration of the time to file objections, a hearing shall be conducted upon prior five (5) day notice to hear the objections;
• Judgment shall be rendered dissolving the corporation and directing the disposition of assets; the judgment may include appointment of a receiver.
• The dissolution shall take effect only upon issuance by the SEC of a certificate of dissolution\ (Sec. 135)³

Procedure on voluntary dissolution by shortening of the corporate term (Sec. 36):

• A private corporation may extend or shorten its term by amending the the articles of incorporation when approved by a majority vote of the board of directors or trustees, and ratified at a meeting by the stockholders or members representing at least two-thirds (2/3) of the outstanding capital stock or of its members.
• Written notice of the proposed action and the time and place of the meeting shall be sent to stockholders or members
• In case of extension of corporate term, a dissenting stockholder may exercise the right of appraisal under the conditions provided in this Code. (Sec. 11)⁴

Under Sec. 11⁵ of the Revised Corporation Code, a corporation whose term has expired may apply for revival of its corporate existence.

If a corporation’s term has expired, it may apply for a revival of its corporate existence, together with all the rights and privileges under its certificate of incorporation and subject to all of its duties, debts and liabilities existing prior to its revival. Upon approval by the SEC, the corporation shall be deemed revived and a certificate of revival of corporate existence shall be issued, giving it perpetual existence, unless its application for revival provides otherwise. (Sec. 11)

Procedure on Withdrawal of Request for Dissolution:

• Withdrawal of Request of Dissolution: Not later than 15 days from the receipt by SEC of the request for dissolution, the withdrawal thereof shall be made in writing, duly verified by any incorporator, director, trustee, shareholder, or member and signed by the same number of incorporators, directors, trustees, shareholders, or members necessary to request for dissolution.
• Upon receipt of a withdrawal of request for dissolution, the SEC shall withhold action on the request for dissolution and shall, after investigation:
• Make a pronouncement that the request for dissolution is deemed withdrawn;
• Direct a joint meeting of the board of directors or trustees and the stockholders or members for the purpose of ascertaining whether to proceed with dissolution; or
• Issue such other orders as it may deem appropriate. (Sec. 137)⁷

Procedure on Withdrawal of Petition for Dissolution

A withdrawal of the petition for dissolution shall be in the form of a motion and similar in substance to a withdrawal of request for dissolution but shall be verified and filed prior to publication of the order setting the deadline for filing objections to the petition. (Sec. 137)⁸

Involuntary

A corporation may be dissolved by the SEC motu proprio or upon filing of a verified complaint by any interested party. (Sec. 138)⁹

Grounds for dissolution of the corporation:

• Non-use of corporate charter as provided under Section 21 of this Code¹⁰;
• Continuous inoperation of a corporation as provided under Section 21 of this Code;
• Upon receipt of a lawful court order dissolving the corporation;
• Upon finding by final judgment that the corporation procured its incorporation through fraud;
• Upon finding by final judgment that the corporation:
• Was created for the purpose of committing, concealing or aiding the commission of securities violations, smuggling, tax evasion, money laundering, or graft and corrupt practices;
• Committed or aided in the commission of securities violations, smuggling, tax evasion, money laundering, or graft and corrupt practices, and its stockholders knew of the same; and
• Repeatedly and knowingly tolerated the commission of graft and corrupt practices or other fraudulent or illegal acts by its directors, trustees, officers, or employees. (Sec. 138)

If the corporation is ordered dissolved by final judgment pursuant to the grounds set forth in subparagraph (e) hereof, its assets, after payment of its liabilities, shall, upon petition of the SEC with the appropriate court, be forfeited in favor of the national government. Such forfeiture shall be without prejudice to the rights of innocent stockholders and employees for services rendered, and to the application of other penalty or sanction under this Code or other laws. (Sec. 138)

The SEC shall give reasonable notice to, and coordinate with, the appropriate regulatory agency prior to the involuntary dissolution of companies under their special regulatory jurisdiction.(Sec. 138)

Demands of Minority for Dissolution

Corporate dissolution due to mismanagement of majority stockholder is too drastic a remedy, especially when the situation can be remedied such as giving minority stockholders a veto power to any decision (Chase v. Buencamino, G.R. No. L-20395, 13 May 1985)¹¹.

Effects of Dissolution

• On dissolution, the corporation retains its property for liquidation during the statutory three-year period and may convey it to trustees for persons in interest. Remaining assets are distributed only after liabilities are settled (RA 11232, Sec. 139).
• The corporation ceases to be a body corporate to continue the business for which it was established.

The termination of the life of a juridical entity does not by itself cause the extinction or diminution of the rights and liability of such entity, since it is allowed to continue as a juridical entity for three (3) years for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property, and to distribute its assets (Republic v. Tancinco, G.R. No. 139256, 27 December 2002)¹².

A board resolution to dissolve the corporation does not operate to so dissolve the juridical entity. For dissolution to be effective “the requirements mandated by the Corporation Code should have been strictly complied with” (Vesagas v. Court of Appeals and Delfino Raniel and Helenda Raniel, G.R. No. 142924, 24 March 2003)¹³

When the period of corporate life expires, the corporation ceases to be a body corporate for the purpose of continuing the business for which it was organized (PNB v. Court of First Instance of Rizal, Pasig, Br. XXI, G.R. No. 63201)¹⁴.

A party’s stockholding in a corporation, whether existing or dissolved, is a property right which he may vindicate against another party who has deprived him thereof.

Stockholders may convey their respective shareholdings toward the creation of a new corporation to continue the business of the old or they may reincorporate by filing new articles of incorporation and by-laws.

Liquidation

Process by which all the assets of the corporation are converted into liquid assets in order to facilitate the payment of obligations to creditors, and the remaining balance if any is to be distributed to the stockholders.

There is no time limit within which the trustees must complete a liquidation placed in their hands¹⁵.

Modes of Liquidation

• Through Board of Directors or Trustees – normal method of procedure

Even if no trustee is appointed or designated during the three-year period of the liquidation of the corporation, the Court has held that the Board of Directors may be permitted to complete the corporate liquidation by continuing as trustees by legal implication (Vigilla v. Philippine College of Criminology Inc)¹⁶

Note: This only concerns the matters/actions that are initiated during the 3 year grace period. The Board cannot be considered as trustees for matters initiated after the 3-year period.

• Through Trustee – at any time during the three years of liquidation, a corporation is authorized and empowered to convey all of its property to trustees for the benefit of stockholders, members, creditors, and other persons in interest. The three (3)-year limitation will not apply provided the designation of the trustee is made within said period.
• Through Receiver – created by means of judicial or quasi-judicial appointment of the receiver. The receiver is actually an officer of the court and must therefore be accountable to the court.

Note: If there is no Board of Directors or Trustees, those having pecuniary interest in the assets, including not only the shareholders but likewise the creditors of the corporation, acting for and in its behalf, may liquidate (Alabang Dev’t v. Alabang Hills Village Ass’n, G.R. No. 196950)¹⁷

Liquidation after Three Years

If full liquidation can only be effected after the 3- year period and there is no trustee, the directors may be permitted to complete the liquidation by continuing as trustees by legal implication (Reburiano v. Court of Appeals, G.R. No. 102965, 6 March 2000)¹⁸.

The trustee may continue to prosecute a case commenced by the corporation within three years from its dissolution until rendition of the final judgment, even if such judgment is rendered beyond the three-year period allowed by Section [139]¹⁹. However, an already defunct corporation cannot initiate a suit after the lapse of the three year period. (Alabang Dev’t v. Alabang Hills Village Ass’n, G.R. No. 196950)²⁰

Note: When a corporation threatened by bankruptcy is taken over by a receiver, the receiver must not arbitrarily prefer one creditor over another; distribution remains subject to the Civil Code provisions on concurrence and preference of credits.

The Civil Code provisions on concurrence and preference of credits are applicable to the liquidation proceedings.

A corporation in the process of liquidation has no legal authority to engage in any new business, even if the same is in accordance with the primary purpose stated in its articles of incorporation.

When a Corporation Must Wind Up (Sec. 139)

If it is dissolved by:

• By expiry of term or
• Is annulled by forfeiture, or otherwise, or
• Is terminated In any other manner

Effects of Winding Up of Affairs: (Sec. 139²¹)

• Continues as a corporate body for 3 years to prosecute and defend suits against it, close its affairs, dispose and convey its property and distribute assets
• Cannot continue business for which it was established
• Can convey property to trustees for the benefit of the stockholders/members, creditors and other persons in interest
• Upon conveyance of corporate property in trust, legal title vests in the trustees for the benefit of stockholders, members, creditors, and other persons in interest.
• Beneficial interest remains with stockholders/ members, creditors
• Assets distributable to a creditor, stockholder, or member who is unknown or cannot be found shall be escheated in favor of the national government.
• Distribution of assets only upon lawful dissolution and payment of all debts and liabilities.

Exceptions:

• Decrease of capital stock
• As otherwise allowed under the Revised Corporation Code (RA 11232)²²