the corporation, the settlement and adjustment of claims against it and the

payment of its just debts (China Bank v M Michelin)

Ways in which a corporation is dissolved:

Chapter XVI Dissolution

Sir:
Why was there a dissolution?
Does dissolution result in application of 81?
Key: who initiates the proceedings?
3 parties: State, creditor, SHs
creditors rights: satisfied during winding up period of 3 years when board
undertakes action
only one purpose during liquidation: to wind up

1.

expiration of original, extended or shortened term

life of corporation= not exceed 50 years

once the period in the AOI expires, the corporation is automatically
dissolved without any further proceeding; corporation is deemed
dissolved by such expiration without need for further action on the part
of the corporation or the State
In Sec 11: corporate term may be extended by an amendment of the
AOI but cannot be made earlier than 5 years prior to the original or
subsequent expiry date
o cannot even be considered a de facto corporation
o original term cannot be more than 50 years
o each extension= 50 years
o number of extensions= unlimited
o extension may be accomplished by amending the AOI before
expiration of term
o attempted extension after term has expired: renewal of charter
which is clearly beyond corporate powers
corporation can amend its AOI to shorten its term
o should follow procedure in Sec 37 and 16
notice to each SH or member
holding of meeting
vote of 2/3 OCS
filing certified copy of amended AOI with SEC
approval of amendment within 6 mos by SEC

Nature of dissolution
Signifies the extinguishment of its franchise and the termination of its
corporate existence or business purpose.
May be either de jure or de facto
o De jure: one adjudged and determined by administrative or judicial
sentence or brought about by an act of the sovereign power
o De facto: one which takes place in substance and in fact when the
corporation by reason of insolvency, cessation of business, or suspension
of all its operations, goes into liquidation, still retaining its primary
franchise to be a corporation
Cause of dissolution
Defn of dissolution: the corporation ceases to be a juridical person and
consequently can no longer continue transacting its business, but may
continue its corporate existence for a period of 3 years from such dissolution
for the purpose of winding up and liquidation
Defn of winding up: collection of all assets, payment of all creditors,
distribution of all remaining assets (if any) among the SHs
Defn of liquidation: the settlement of the affairs of the corporation which
consists of adjusting the debts and claims, that is, of collecting all that is due

Sec 120
120: corporation automatically dissolved upon the happening of either
of two events:
1

o approval of amended AOI or

o expiration of shortened term
no need of further proceedings
o expiration before SEC approval: no automatic dissolution
o expiration after SEC approval: dissolution can take effect only upon
the expiration of sich shortened term
SH has appraisal right if he dissents to either the extension or shortening
of term
2.

Certificate of dissolution issued by SEC is the act of State which will

legally effect the dissolution
o Mere resolution not sufficient without the certificate
o Except: expiration of term (no need for certificate)
3.

voluntary dissolution where creditors affected

basis: creditors must be given the opportunity to present their claims

and objections to protect their interests and rights

voluntary dissolution when no creditors affected

Sec 119

Sec 118

a corporation can be dissolved voluntarily where creditors are affect,

through a petition for dissolution filed with the SEC, with due notice and
hearing
o quasi-judicial in nature
o SEC is not mandated to dissolve
Summary of procedural requirements:
o File petition for dissolution:
Signed by majority of the board or corporate officers
Verified by president or corporate secretary or a director
Set forth all claims and demands against it
Resolved upon by vote of 2/3 OCS at a meeting
o SEC determines whether the petition is sufficient in form and
substance
o If satisfied, SEC shall issue an order fixing the date on or before
objections may be filed by any person
30 days<date<60 days
o order published in a newspaper of general circulation at least once
a week for 3 consecutive weeks
o SEC hears petition and try any issue upon 5 days notice
If no objections and material allegations are true
SEC renders judgment dissolving the corporation and
directing disposition of its assets
may appoint a receiver to collect assets and pay the debts

voluntary dissolution requires an act of state to be effective

a corporation can be dissolved voluntarily where no creditors are affected,
through an administrative application for dissolution filed with the SEC
o process is equivalent to an application for amendment of the AOI,
except that dissolution should be published
Summary of procedural requirements
o Majority vote of the board adopting a resolution
o Sending of notices to each SH
By registered mail or special delivery
Time, place, object of meeting
At least 30 days prior to meeting
o Publication of notice of meeting for 3 consecutive weeks
Newspaper published where the principal office is located
Newspaper of general circulation
o Resolution duly approved by vote of 2/3 OCS
o Certified copy of the resolution filed with SEC
o SEC issues certificate of dissolution
SEC will generally not deny an application for dissolution where no
creditors are involved
Sec 130 on the other hand does not require publication for the shortening
of the corporate term

 SEC may direct the manner in which liquidation of corporate assets should
be made by assigning the task to the corporation itself or to a receiver
o SEC retains supervision in either case
Vote of 2/3 OCS is required to signify corporations intent to dissolve
o GR: No member may prevent such dissolution
o Exception: majority SH acted in BF or for the purpose of freezing out
the minority

the minority SHs have nor right and personality to maintain an action for
dissolution, that right belonging only to the State.
H: GR: minority SHs of a corporation cannot sue and demand dissolution.
Exception: if they are unable to obtain redress and protection of their rights
within the corporation (Hall v Piccio). Even the existence of a de jure
corporation may be terminated in a private suit for its dissolution by SHs without
the intervention of the State. The question of the right of minority SHs to ask for
dissolution in Hall was held not to affect the courts jurisdiction over the case,
and that the remedy by the party dissatisfied was to appeal.

Sec 122
4.

dissolution by minority in close corporations

GR: minority SHs cannot ask for dissolution in a private suit, and that action
should be brought by the government through its legal officer. Exception: cases
wherein the intervention of the State cannot be obtained because the complaint
is a matter strictly between the SH and the corporation and does not involve
issues which involve acts/omissions warranting a quo warranto. When such
action is brought, the TC has jurisdiction and has discretion to grant the prayer
or not. Having such jurisdiction, the appointment of e receiver pendent elite is
left to the sound discretion of the TC. In Angeles v Santos, it was held that it is
within the power of the court upon proper showing to appoint a receiver
pendente lite once the action is properly brought and court acquires jurisdiction.

Code requires vote of 2/3 OCS

Two special rules on dissolution of close corporations:
o Deadlocks; in its exercise of power to arbitrate, SEC is authorized to
order dissolution
o Sec 105:
Sec 105
Can the minority group in a non-close corporation petition for dissolution
under the grounds in 105?
o Campos: express grant of such right of the minority in close
corporations should not be interpreted to preclude the right to the
minority in non-close corporations

The appointment of a receiver upon petition by the minority SH is a power that

must be exercised with great caution, and should be exercised when necessary
to protect their rights, especially when they cannot obtain redress through or
within the corporation. SC ruled that the TC had jurisdiction and properly
entertained the original case and had jurisdiction to appoint a receiver pendente
lite.

Financing Corporation v Teodoro. F: Lizares et al, minority SHs of the Financing

Corp of the Phils, sued the corporation and J Amado Araneta, its president and
GM, alleging gross mismanagement and fraudulent conduct of the corporate affairs
by Araneta and asking that the corporation be dissolved and Araneta be declared
personally accountable for the unauthorized and fraudulent disbursements of the
corporate assets. Judge Teodoro granted petition for appointment of a receiver
(Yulo). The corporation contends that the appointment is merely an auxiliary
remedy; that the principal remedy was the dissolution of the corporation, and that

5.

failure to organize and commence business; cessation of

business for 5 years

organize: involves the election of officers, providing for subscription

and payment of capital stock, adoption of by-laws, and other such
3

steps as necessary to endow the legal entity with the capacity to transact
the legitimate business for which it was created
organization: the systematization and orderly arrangement of the internal
and managerial affairs and organs of the corporation
commence business: perform preparatory acts geared towards the
fulfillment of the purposes for which it was established such as but not
limited to:
o entering into contracts or negotiations for lease or sale of properties
o making plans for and the construction of the factory
o taking steps to expedite construction

If the corporation fails to commence operation within the 2 year period

but does so only after the 2-year period lapses:
o Doctrine of corporation by estoppel may apply
o Innocent third persons cannot be prejudiced by such dissolution
6.

involuntary dissolution

Sec 121
a corporation may be dissolved by the SEC upon a filing of a
verified complaint and after notice and hearing
Grounds for involuntary dissolution:
a. Does not formally organize and commence business within 2
years from date of incorporationcorporate power ceases and
corporation is deemed dissolved
b. Subsequently becomes continuously inoperative after
commencing business for at least 5 years
c. Failure to adopt by-laws
d. Offended against a provision of law for its creation or renewal
e. Commission/omission of an act tantamount to a surrender of
corporate rights and privileges
f. Misuse of a right, privilege, franchise conferred by law or the
exercise of the same in contravention of law
g. Continuance of business would not be feasible or profitable
nor work to the best interests of SHs, parties, creditors,
general public
i. Based on findings and recommendations of a
management committee or receiver
h. Guilty of fraud in procuring certificate of registration
i. Guilty of serious misrepresentation
j. Refusal to comply or defiance to a lawful order of the SEC
k. Failure to file required reports

Sec 22
by-laws must be adopted within one month of receipt of notice of the
issuance of the certificate of incorporation, otherwise the certificate may
be suspended or revoked
corporate business must be commenced within 2 years, otherwise
corporation deemed dissolved and corporate powers will cease
o corporation would neither be a de jure or de facto corporation
transacting business implies a continuity of acts or dealings in the
accomplishment of the purpose for which the corporation was formed
(Mentholatum case infra)
o even a single act would be sufficient if it is intended to be a series of
acts in pursuance of the corporate business
o but must take place within the 2-year period
Art 3 of Code of Commerce: presumption of habituality
o Rebuttable
Sec 22: corporate powers will cease, and corporation will be deemed
dissolved if not complied with the 2-year requirement
If corporation commenced its business within 2 years but discontinues for
at least 5 continuous years, certificate of incorporation may be revoked by
SEC
o No automatic dissolution
o SEC proceeding necessary
o Notice must be given to the corporation and opportunity to be heard

(1)

revocation of certificate of registration by SEC

 certificate of registration refers to certificate of incorporation

other grounds for suspending or revoking certificate are recognized.
Examples:
o violation by the corporation of any provision in the Corpo Code
o deadlock in a close corporation
o grounds for quo warranto
o Sec 3 Rule 66 of ROC
o Non-compliance with 25% minimum requirement for subscription
and/or paid-up capital
o Continuous inoperation for 5 years
o Non-adoption or non-filing of by-laws within 1 month
o Failure to submit annual report of financial statements of assets
and liabilities

(2)

board and 2/3 SHs acceded to the request to dissolve as the most feasible
remedy to its problems. Republic moves that the matter of implementation of
the dissolution be submitted to the TC for judgment. Cuenco concurs but urges
the appointment of a receiver. Directors not Cuenco filed a motion to withdraw
its previous motion for judgment on consent on the ground that the conditions to
which motion was subject had not been accepted. Cuenco opposes withdrawal
and pressed for appointment of receiver. TC denied motion to withdraw.
Corporation appeals. SolGen Barredo moved to dismiss quo warranto
proceedings, to which Cuenco opposed. TC grants Republics motion but
denies Cuencos crossclaim.
I: W/N the TC should have ordered dissolution upon its motion and not the
Republics, as it amounted to a confession of judgment.
H; A motion for judgment on consent is not to be equated with judgment by
confession. There must be an unqualified agreement among the parties to the
action entered in the record with leave of court. A judgment by confession is not
a plea but an affirmative and voluntary act of the defendant himself. In this
case, there was no meeting of the minds among the parties with respect to the
motion for judgment on consent. Corporation wanted its liquidation to be
effected by its Board. Cuenco wanted the appointment of a receiver in agreeing
to dissolution, and after his cross-claims were considered. Before the parties
could come to an unqualified agreement, the corporation moves to withdraw its
motion for judgment on consent. It is clear that the parties could not agree as to
the terms of dissolution, and the TC correctly rendered judgment dissolving the
corporation.
I: W/n TC was wrong in not granting quo warranto because the evidence
presented fails to constitute grounds for quo warranto
H: TC found that the alleged misuse of funds were committed more particularly
by Dr Manuel Cuenco with the cooperation of Velez, for which they are
personally liable. The alleged illegal corporate acts had not resulted in
substantial injury to the public, nor were they willful and clearly obdurate. It
found that the controversy between the parties was more personal than
anything else and did not at all affect public interest. Such private controversies
can be ventilated in appropriate SHs suit which do not have to occupy the time
and attention of government officials. The SolGen himself admits that his
reason for the MTD is to take the State out of an unnecessary court litigation.

quo warranto proceedings

PD 902-A grants exclusive jurisdiction to the SEC over any

controversy between the corporation and the State
Republic v Bisaya Land Trans Co. F: Government files petition for quo warranto
against the Bisaya Land Tranpo Co and its board, and asks for the appointment of
a receiver pendente lite, alleging that the corporation, through the board, violated
the provisions of the Corporation Law as outlined in 9 causes of action. Miguel
Cuenco, a member of the Board, sets up a cross-claim against the other members
to recover P4M arising for illegal acts of the corporation of which damage was
caused him, and asks for the appointment of a receiver. The other directors argue
that the petition should be dismissed as to Cuenco because his claims did not
arise out of the transactions the subject matter of the quo warranto, which did not
assert any claim against any of the directors. TC denies MTD the quo warranto.
Corporation then filed a motion for judgment on consent, manifesting its consent to
the ordering of the dissolution of the corporation, and ordered the board to proceed
with the liquidation of its assets. It contended that the pendency of the quo
warranto petition had prejudiced the corporation and its business, and that
immediate relied be given the corporation. It also alleged that the majority of the
5

Relief by dissolution would only be awarded where no adequate relief is available,

and is not available where the rights of SHs can be or are protected in some other
way.
I: W/N the SolGen, as the lawyer for the Republic, was vested with full power to
manage and control the States litigation.
H: GR: the SolGen may do so with the approval of the court, subject to well-defined
exceptions. If it is discovered that the action commenced was brought for the
purpose of enforcing a right, the advisability or necessity of which he later
discovers no longer exists, then he should be permitted to withdraw his action.
Courts should not require parties to litigate whey they no longer desire to do so.
Thus the SolGen was within his power to move to dismiss the petition for quo
warranto, and the TC was correct in dismissing Cuencos cross-claim, and
receivership is ordered terminated.

P 289,260.88. the spouses prayed that the real estate mortgage be cancelled,
and that Philsucom and SRA be required jointly and severally to reimburse the
petitioners the amount of P 289,260.88 + damages. The RPBank, Philsucom
and herein respondent SRA moved to dismiss the complaint upon the ground of
lack of cause of action. Philsucom and respondent SRA through the Solicitor
General, denied any obligation on the part of the Philsucom to return any
amount to petitioners on account of allegedly unauthorized deductions from the
proceeds of petitioners' sugar sold by the Philsucom. For its part, the SRA also
noted that while the deductions complained of were made by the Philsucom
during the period from 1980 to 1984, the SRA itself had been created by
Executive Order No. 18 only on 18 May 1986 and that it was not a party to the
real estate mortgage between petitioners and the RPBank.
H: Executive Order No. 18, promulgated on 28 May 1986, abolished the
Philsucom, created the SRA and authorized the transfer of assets from
Philsucom to SRA. Although the Philsucom is hereby abolished, it shall
nevertheless continue as a juridical entity for three years after the time when it
would have been so abolished, 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 functions for which it was established, under the supervision of
the Sugar Regulatory Administration. (Emphasis supplied). We note that
Executive Order No. 18 did not provide for universal succession, as it were, of
SRA to Philsucom, or more specifically to the assets and liabilities of
Philsucom. The SRA has been authorized to determine which of the assets and
records of Philsucom are required for the carrying out of the activities which the
SRA is to carry on or undertake. The succession of the SRA to the assets and
records of the Philsucom is thus limited in nature; the extent of such succession
is left to the discretionary determination of the SRA itself. More importantly,
Executive Order No. 18 is silent as to the liabilities of Philsucom; it does not
speak of assumption of such liabilities by the SRA.

Dissolution is a serious remedy granted to the courts against

offending corporations. Courts, as a general rule, should not resort to
dissolution when the prejudice is not against the public or not an
outright abuse or violation of the corporate charter. Even if the
prejudice is public in nature, the remedy is to enjoin or rectify the
mistake. Only when it cannot be remedied anymore then that
dissolution can come in.
Gonzales v Sugar Regulatory Administration. F: Spouses Gonzales obtained a
loan from the RPBank in the amount of P 176,000.00 secured by a real estate
mortgage. The proceeds of the loan were released on a staggered basis and the
loan was "payable from [the] 1980-1981 sugar crop, " the amortization payments to
be remitted by the Philsucom to the RPBank. The RPBank is owned and controlled
by the Philsucom. Gonzales received a statement of account from the RPBank
setting forth that they had an outstanding loan balance due to the bank of P
652,446.38. It appeared that the Gonzaleses had received the total amount of P
l,041,610.55 in loan funds from the RPBank and that they had re-paid thereon the
total amount of P 1,051,296.77; in other words, they had already more than fully
repaid their loan. The Gonzales further averred that Philsucom had deducted from
the export sugar proceeds of petitioners the amount of P 421,517.32 without their
authority and consent with the result that the spouses had overpaid the RPBank by

The Philsucom, it will be seen, succeeded as a matter of course to all the

assets, liabilities and records of the Philippine Sugar Institute and the Sugar
Quota Administration. The SRA did not, quite possibly because the Government
wanted the opportunity to examine the assets, liabilities and records carefully
6

and to determine the compatibility of (asserted) liabilities of the Philsucom with

applicable law and relevant requirements of public policy and the public interest.

Petitioners have noted in this connection that the three (3) year period provided
for in the third paragraph of Section 13 of Executive Order No. 18 is about to
expire. There is nothing to prevent Philsucom from appointing a trustee SRA for
instance and conveying all its properties to such trustee, for the benefit of the
Government, creditors and other persons in interest, following at least by
analogy the provisions of the second paragraph of Section 122 of the
Corporation Code. Should Philsucom decline to so appoint SRA as trustee, the
principles set forth above would of course apply, mutatis mutandis, in respect of
whichever public agency may find itself actually holding the assets and records
of Philsucom.

That the assets of the Philsucom must respond for payment of lawful obligations of
Philsucom, does not appear to require demonstration. The assets which, in
accordance with the second paragraph of Section 13 of Executive Order No. 18,
may be taken over by the SRA can thus be only net or residual assets, assets
remaining after payment of the valid and enforceable liabilities of Philsucom has
been made or been adequately provided for. We believe, in other words, that
Section 13 of Executive Order No. 18 is not to be interpreted as authorizing
respondent SRA to disable Philsucom from paying Philsucom's demandable
obligations by simply taking over Philsucom's assets and immunizing them from
legitimate claims against Philsucom. The right of those who have previously
contracted with, or otherwise acquired lawful claims against, Philsucom, to have
the assets of Philsucom applied to the satisfaction of those claims, is a substantive
right and not merely a procedural remedy. Section 13 cannot be read as permitting
the SRA to destroy that substantive right. We think that such an interpretation
would result in Section 13 of Executive Order No. 18 colliding with the nonimpairment of contracts clause of the Constitution insofar as contractual claims are
concerned, and with the due process clause insofar as the non-contractual claims
are concerned. 5 To avoid such a result, we believe and so hold that should the
assets of Philsucom remaining in Philsucom at the time of its abolition not be
adequate to pay for all lawful claims against Philsucom, respondent SRA must be
held liable for such claims against Philsucom to the extent of the fair value of
assets actually taken over by the SRA from Philsucom, if any. To this extent,
claimants against Philsucom do have a right to follow Philsucom's assets in the
hands of SRA or any other agency for that matter. This result appears no more
than a dictate of elementary fairness, particularly when one takes into account that
under Section 11 of Executive Order No. 18, the SRA will continue, "until otherwise
provided, as directed and ordered by the President of the Philippines," to collect
and receive the proceeds of "levies, charges and other impositions as [then]
granted by law, decree and/or executive order, to the [Philsucom]." Whether the
deductions here assailed by petitioners are included among the "levies, charges
and other impositions" then made by Philsucom and now continued by SRA must
be determined by the trial court.

We conclude that dismissal of petitioners' complaint against respondent SRA

was clearly premature. Petitioners have a cause of action against SRA to the
extent that they are able to prove lawful claims against Philsucom, which claims
Philsucom is or may be unable to satisfy, and to the extent respondent SRA did,
or does, in fact take over all or some of the assets of Philsucom. At the very
least, the motion to dismiss was not shown to rest upon indubitable grounds
and should, therefore, have been denied not only in respect of Philsucom but
also in respect of respondent SRA.
H: The termination of the life of a juridical entity does not by itself imply the
diminution of extinction of rights demandable against such juridical entity
among which would be the priority claims of corporate creditors against
corporate assets. Since the assets must respond for payment of lawful
obligations of a dissolved corporation, then it is required that the succeeding
corporation would be liable for all such lawful claims to the extent of the fair
value of assets actually taken over.
No person who assets a claim against a juridical entity can claim any
constitutional right to the perpetual existence of such entity. Juridical persons,
whether incorporated or not, whether owned by the government or the private
sector, may come to any end at one time or another for a variety of reasons, ex
the fulfillment or abandonment of the business purposes for which a corporation
was set up. Thus the Code provides for termination of corporate life, the
dissolution of the corporation, the winding up of its operations, the liquidation of
its assets, the payment of its obligations and distribution of any residual assets
7

to its SHs.

except for the purpose of winding up its affairs

cannot even be a de facto corporation
existence cannot be subject to collateral attack
cannot enter into new contracts
during 3 year period, corporation must collect all debts owing to it
and pay all its creditors
it may sue and be sued
all pending actions by or against the dissolved corporation abate

Termination of life of a juridical entity does not by itself imply the diminution or
extinction of rights demandable against a juridical entity. Consequently, when the
assets of a dissolved entity are taken over by another entity, the successor entity
must be held liable for the obligations of the dissolved entity pertaining to the
assets so assumed, to the extent of the fair value of assets actually taken over.

Effects of dissolution; winding up and liquidation

Pepsi-Cola Products Phils. v CA. F: Pepsi-Cola Products Philippines, Inc.

Employees and Workers Union (PCEWU), a duly- registered labor union of the
employees of the Pepsi-Cola Distributors of the Philippines (PCDP) filed a
Complaint against PCDP for payment of overtime services rendered by fiftythree (53) of its members, for work done during 8 Muslim Holidays. LA held that
workers in Region 12 were entitled, but workers in Region 9 were not. Pepsi
Distributors appeals to NLRC, which affirms. Pending resolution of its MR,
ownership of various Pepsi-Cola bottling plants was transferred to petitioner
Pepsi-Cola Products Philippines, Inc. (PCPPI). The PCDP alleged that it had
ceased to exist as a corporation on July 24, 1989 and that it has winded up its
corporate affairs in accordance with law. It also averred that it was now owned
by PCPPI. NLRC dismisses complaint, holding that with the cessation and
dissolution of the corporate existence of the PCDP, rendering any judgment
against it is incapable of execution and satisfaction. The CA reverses, and
declared that the PCDP was still in existence when the complaint was filed, and
that the supervening dissolution of the corporation did not warrant the dismissal
of the complaint against it. After all, the appellate court ratiocinated, every
corporation is given three (3) years to wind up its affairs. Hence, in case any
litigation is filed by or against the corporation within the three (3)-year period
which could not be terminated within the expiration of the same, such period
must necessarily be prolonged until the final determination of the case.

GR: no personality after dissolution

Exception: liquidation and liquidation only
Termination itself of personality does not cause extinction or
diminution of rights and liabilities of the dissolved entity nor of its
creditors (Gonzales)
During the 3-year liquidation period, the dissolved corporation is
authorized and empowered to convey all of its property to trustees for
the benefit of SHs, creditors, and other persons in interest
o If expired without a trustee or receiver, board may be permitted to
continue as trustees
o In the absence of the board or trustees, those having pecuniary
interest in the assets may make proper representations with the
SEC for working out a final settlement of corporate concerns
All interests which the corporation has in the corporate property
terminates, and legal interest vests in the trustees, and beneficial
interest in the SHs, creditors or other persons in interest
Any asset undistributable to any creditor or SH shall be escheated to
the city or municipality where such assets are located
A corporation in process of liquidation has no legal authority to
engage in any new business, even if consistent with its primary
purpose

H: Under Section 122 of the Corporation Code, a corporation whose corporate

existence is terminated in any manner continues to be a body corporate for
three (3) years after its dissolution for purposes of prosecuting and defending

Sec 122
1.

loss of juridical personality

8

suits by and against it and to enable it to settle and close its affairs, culminating in
the disposition and distribution of its remaining assets. It may, during the three-year
term, appoint a trustee or a receiver who may act beyond that period.

Pore moved to dismiss on the ground that the corporation had no legal capacity
to sue, it having been abolished by EO 372. Corporation contends that the EO
also stipulates that it shall continue as a body corporate for 3 years from date of
effectivity of the EO, for the purpose of defending and prosecuting suits and
enabling the Board of Liquidators to settle and close all its affairs.

At any time during the said three (3) years, the corporation is authorized and
empowered to convey all of its properties to trustees for the benefit of stockholders,
members, creditors, and other persons in interest. From and after any such
conveyance by the corporation of its properties in trust for the benefit of its
stockholders, members, creditors and others in interest, all interest which the
corporation had in the properties terminates the legal interest vests in the trustees,
and the beneficial interest in the stockholders, members, creditors or other persons
in interest.

TC ordered corporation to amend the complaint by including the Board of

Liquidators as co-party plaintiff, otherwise case shall be dismissed. The
corporation fails to submit amended complaint, and the TC dismisses case.
Corporation in seeking reconsideration, said that it was not able to submit the
amended complaint on time because of the negligence of the filing clerk, Ms
Ocampo, and that it was lost despite diligent efforts to look for it. TC denies
motion.

Upon the winding up of the corporate affairs, any asset distributable to any creditor
or stockholder or member, who is unknown or cannot be found, shall be escheated
to the city or municipality where such assets are located.

I: W/n an action, commenced within 3 years after the abolition of the

corporation, may be continued by the same after expiration of the period. NO

Except by decrease of capital stock and as otherwise allowed by this Code, no

corporation shall distribute any of its assets or property except upon lawful
dissolution and after payment of all its debts and liabilities.

W/m the TC was correct in dismissing motion. NO. should have granted the
motion
H: GR: pending actions by or against a corporation are abated upon the
expiration of the period allowed by law for liquidation. The old corpo law
contains no provision authorizing a corporation after 3 years from expiration of
its lifetime, to continue in its corporate name actions instituted by it within a
period of 3 years. It provides that it will continue as a body corporate for 3 years
after the time when it would have been dissolved, for purposes of prosecuting
and defending suit by or against it. During the time which the corporation,
through its officers, may conduct the liquidation of assets and sue and be sued
as a corporation is limited to 3 years from the time period of dissolution
commences, but that there is no time limit within which trustees must complete
a liquidation placed in their hands. The conveyance to the trustees must be
made within the 3 year period. It may be found impossible to complete the work
of liquidation within the 3 year period or to reduce dispute claims to judgment.
Suits by or against a corporate abate when it ceased to be an entity capable of
suing or being sued; but trustees to whom the corporate assets have been

The termination of the life of a corporate entity does not by itself cause the
extinction or diminution of the rights and liabilities of such entity. If the three-year
extended life has expired without a trustee or receiver having been expressly
designated by the corporation, within that period, the board of directors (or
trustees) itself, may be permitted to so continue as "trustees" by legal implication to
complete the corporate liquidation.
National Abaca v Pore. F: National Abaca Corp sued Apolonia Pore to recover
money advanced for the purchase of hemp for the account of the corporation for
which she failed to account therefor. Pore in defense, contends that she made an
accounting of the advances received by her. TC held her accountable and ordered
to her to pay the corporation.

conveyed pursuant to the authority of the code may sue and be sued as such in all
matters connected with the liquidation. The effect of conveyance is to make the
trustees legal owners of the property conveyed, subject to the beneficial interest
therein of creditors and SHs. The complete loss of Abacas corporate existence
after the expiration of 3 year period is what impelled the creation of the Board of
Liquidators, to continue the management of pending matters.

i. authority of the board to manage the corporate affairs

includes the power to undertake the liquidation of
corporate affairs
ii. 3-years to liquidate
b. conveying all corporate assets to trustees who will take
charge of liquidation
i. 3-year limitation does not apply
ii. but trusteeship may be limited in duration by the deed
of trust
iii. trustee may sue even beyond the 3 year period
c. liquidation conducted by a receiver appointed by the SEC
upon decree of dissolution
i. 3-year limitation does not apply
ii. mere appointment of receiver does not result in
dissolution
receiver in liquidation stands on a different legal basis from a
trustee in liquidation
o trusteeship: basically a contractual relationship, governed by
the Law on Trust, such that the trustee assumes naked title to
the property placed in trust
it is a relationship created by a corporation through its
board without need of judicial authorization
trustee in liquidation is not appointed by any court, but
he is actually a transferee who holds legal title to the
corporate assets and is accountable under the trust
agreement
o receivership: created by means of judicial or quasi-judicial
appointment of a receiver
receiver is actually an officer of the court and is
accountable to the court
SEC is empowered to create or appoint a
management committee, board or body to undertake
the management of a corporation

GR: in the absence of statutory rules to the contrary, pending actions by or

against a corporation are abated upon the expiration of the 3-year period
allowed by law for liquidation
2.

executory contracts
executory contracts are not extinguished by dissolution
all rights and obligations in an executory contract pass on to a
liquidating trustee or receiver

Sec 145
3.

methods of liquidation

122
manner of liquidation or winding up may be stipulated in the by-laws
three methods of liquidation:
a. liquidation by the corporation itself through the Boardthe
normal procedure is for directors and officers to have charge of
the winding up operations, though there is the alternative method
of assigning the property to the trustees for the benefit of creditors
and SHs. While the appointment of a receiver rests with the
sound discretion of the court, such discretion must be exercised
with caution and governed by legal and equitable principles
(China Bank v Michelin)

10

 if three year period expires, a creditor may still sue the trustee or
follow the corporate assets in the hands of SHs who may have
received the same as liquidating dividends

4.

Duty of the liquidator to look for creditors with reasonable diligence

o Notice by publication sufficient
o SEC should not order dissolution without giving creditors
opportunity to be heard
o Creditors prejudiced by distribution of assets can attack its
validity for lack of due process

distribution of assets after payments of debts

remaining assets, if any, must be distributed to the SHs in proportion
to their interest
liquidating dividend: share of each SH in the assets upon liquidation
o not a partition of corporate assets among co-owners but a
transfer or conveyance by the corporation to its SHs and therefore
exempt from doc stamps (SHs of Guanzon case)
director or liquidator may be liable for negligence or fraud to a creditor
prejudiced by distribution of dividends
o may follow the assets in the hands of SHs who received them as
dividends (Tan Tiong Bio case)
GR: corporation cannot distribute any of its assets or property
Exception: lawful dissolution and after payment of debts and liabilities
o GR: SH cannot get back any part of his invested capital until
dissolution and liquidation
o Exceptions:
Decrease of capital stock: results in a surplus which can
be distributed to SHs provided no creditors are
prejudiced
Otherwise allowed by the Code:
Appraisal right under 81 and 42
Deadlock in a close corporation (104)
SH of close corp can compel the corp to buy his
shares at fair value for any reason (105)
Corporation repurchases shares of any SH for
legitimate corporate purpose (41)
Corporation validly distributes dividends (43)
Directors/trustees/liquidators must still act with due diligence and GF
in settling corporate affairs

China Banking Corporation v. Michelin & Co. F: George OFarrel & Cie Inc is
a domestic corporation acting as agent and representative of the M Michelin &
Cie, a foreign corporation engaged in the sale and distribution of Michelin tires.
Michelin decided to discontinue their business relations, and it was discovered
that O Farrel failed to account for an amount representing the price of tires sold
by the latter. Michelin claims the money was disposed by O Farrel for its own
use and benefit and without the authority or consent of Michelin. Gaston
OFarrel (the person) and Sanchez executed a mortgage on the house of
OFarrel and shares owned by both to guarantee payment of the amount to the
Michelin, but left a balance which the latter seeks to recover. The board of
OFarrel filed a petition for its dissolution and sought the appointment of Gaston
as receiver and liquidator, which was granted by TC. Michelin filed its claim
against OFarrel Corp with a prayer that its claim be allowed as a preferred one
against the latter. TC grants motion of Michelin. Nobody except Michelin and
Gaston was notified of the order. China Bank intervened and moved that
Michelins claim be allowed as an ordinary one under the Insolvency Law and
sought the nullification of the TC orders.
H: Claims against a corporation in the hands of a receiver should not be
approved and paid without some formal and regular proceeding after a
reasonable opportunity is given to all parties in interest.
The SC held that the provisions of the Insolvency Law should operate. There is
no reason for the corporation to resort to the court for a decree of voluntary
dissolution. If the corporation was under such a financial condition as alleged,
and did not desire to continue doing business, there is no necessity for judicial
intervention in the winding up of affairs coupled with the appointment for a
receiver to deal with creditors as though they were creditors of an insolvent
corporation. Under the old corpo law, with respect to decrees of dissolution
11

upon voluntary application, the court may appoint receivers to collect and take
charge of the assets. It is permissive and not mandatory, because in cases of
voluntary dissolution there is no occasion for the appointment of a receiver except
under special circumstances. Such discretion on the part of the court to appoint
must be exercised with caution. IT does not empower the court to hear and pass
upon the claims of creditors of the corporation at first hand. In such cases, the
receiver does not act as a receiver of an insolvent corporation. Since liquidation
consists of collecting all that is due the corporation, all claims must be presented
for allowance to the receiver or trustees during winding up, within 3 years as
provided in Corpo Law. The rulings of the receiver are subject to judicial review by
the court which appointed him.

Republic v Marsman Devt Co. F: Marsman is a lumber company. An

investigation was conducted and certain taxes due from logs produced from its
timber concession granted by the government. CIR demanded payment
representing three assessments made on forest charges, deficiency sales tax
and other surcharges and penalties. Counsel for the corporation requested for
reinvestigation, but was denied unless the legal requirements for such a request
were complied with and payment of of total assessments were made, and to
furnish a bond to guarantee payment of the balance. The corporation repeated
failed to comply with the conditions set by the CIR, which was constrained to
make extrajudicial demand for the tax liabilities. Marsman was then
extrajudicially dissolved. BIR files a complaint for its demands after more than 3
years following the corporations dissolution, and the TC sentenced the
corporation to pay the amount demanded by CIR.
H: TC did not err in holding that the period to question the tax assessments had
already expired. By its own omission, the corporation made it possible for the
BIR to act on its own MR. Mere filing of a motion does not suspend the running
of the period for collection of the tax, which implies that any assessment made
by the BIR is supposed to be final and executory as to the taxpayer concerned.
I: w/n present action is barred by prescription, in light of the fact that the
corporation law allows corporations to continue only for 3 years after its
dissolution, for the purpose of presenting or defending suits by or against it, and
to settle its affairs. no
H: Stress given by Marsman on the extinction of corporate personality by virtue
of its extra0judicial dissolution is misplaced. The assessments against the
corporation were made before its dissolution and not later than 6 months after
dissolution. Thus the government became the creditor of the corporation before
the completion of its dissolution. Burgess the liquidator became in law the
trustee of all its assets for the benefit of all person interested, including the
government. It is immaterial that the present action was filed after expiration of
the 3 year period, because the assessment definitely established the
government as a creditor of the corporation for whom the liquidator is supposed
to hold corporate assets.

The normal method is for directors/officers to have charge of the winding up,
though there is the alternative method of assigning property of the corporation to
trustees. The law authorizing voluntary dissolutions are generally held to apply only
to dissolutions brought about by the SHs themselves.
China Banks motion was filed 13 months after the decree of dissolution was
entered, thus the motion was flied on time to have its claim reviewed by the court.
The appointment of Gaston as the receiver, who was also the principal promoter of
the corporation and at one time the majority SH, president, and GM, lends itself to
serious suspicion. His administration of the business left much to be desired and
that he alone ought to be blamed for the shortage claimed by Michelin, but to save
himself he made the corporation shoulder the burden of obligations in exchange for
a simulated conveyance of his house and shares to the corporation. Once
delinquent, Gaston resorted to a judicial proceeding of voluntary dissolution in an
attempt to settle Michelin claim and to free himself from any liability, and allowed
the claim to be a preferred claim without informing or notifying interested parties,
such as China Bank, which also had a claim.
Michelins claim cannot be allowed as a preferred claim, because the merchandise
was no longer in the corporations possession. The rubber tires consigned were to
be sold on order, and the claim for the advance seems to be in the nature of a
current account between the two companies more than anything else.

Code provides for a 3-year period for continuation of the corporate

existence for purposes of liquidation
12

 But there is nothing in the provision which bars an action for recovery of debts
of the corporation against the liquidator himself, after the lapse of the 3-year
period

thus the beneficiaries of the defunct corporation and should be held liable to
pay the taxes, but only in proportion to their respective shares in the distribution
of assets.

Tan Tiong Bio v CIR. F: Tan Tiong Bio et al are incorporators and directors (some
are officersPresident and treasurer) of the Central Syndicate. The company
realized a net profit of close to P300K, and sale of goods was the only transaction
undertaken by it. BIR sues the Tan Tiong et al for deficiency sales taxes and
surcharges on surplus goods purchased by the corporation from the Foreign
Liquidation Commission. Corporation was dissolved, and Tan Tiong and company
substituted themselves as parties, thereby becoming successors-in-interests in the
corporate assets after liquidation. TC rules ifo BIR, and Tan Tiong et al appeals,
claiming that they cannot be held liable for tax liability there being no law
authorizing the government to proceed against SHs of a defunct corporation as
transferees of the corporate assets upon liquidation. If they were liable, it is only to
the extent of the benefits derived by them, and that the action is barred by
prescription due to the 3-year limit in the corpo Law.
I: W/n the sales tax can be enforced against the corporations successors-ininterest, even if corporation has been dissolved by expiration of corporate
existence.
--YES

Even after the 3 year period of liquidation, corporate creditors can still
pursue their claims against corporate assets against the officers or SHs
who have taken over the properties of the corporation
SC held that the State cannot insist on making tax assessments against a
corporation that no longer exists and then turn around and oppose the
appeal questioning the legality of the assessment precisely on the same
ground that the corporation is non-existent
The remedy of corporate creditors after the 3-year period is to race where
the corporate assets have gone, wherever they rested, be he a SH or a
non-SH. Cause of action is to file an action against that person who has
control over the corporate assets.

H: Tan Tiong, as substitute parties-in-interest, cannot now be heard to complain

that they were being held liable for the tax due from the corporation whose
representation they assumed and whose assets are distributed to them.

Method

Initiating party

Action to be taken

Voluntary

SHs

Amendment
of
AOI
(shorten term)
Petition for dissolution
with creditors consent

Involuntary

Minority/majority SHs
State
Creditors

Petition for dissolution

Quo warranto
Petition for dissolution

Inaction

SEC

Revocation of certificate
of registration

Distribution of assets of non-stock corporations

Sec 94
Dissolution

The creditor of a dissolved corporation may follow its assets once they passed into
the hands of a SH. The dissolution of a corporation does not extinguish debts due
or owing to it. A creditor of a dissolved corporation may follow its assets, as in the
nature of a trust fund, into the hands of the SHs. The hands of government cannot
collect taxes from a defunct corporation, it loses thereby none of its rights to
assess taxes due, and to collect the taxes due from the corporation from persons
who by reason of transactions with the corporation, hold property against which the
tex may be enforced. Court ruled that the net profit remained intact and was
distributed among the SHs immediately after sale of surplus. Tan Tiong et al are

SIR:
13

2.
3.

SHs do not have unconditional right to determine whether a dissolution should

happen, neither can they enjoin the State to dissolve
Is dissolution sought to enforce obligations, or satisfy liabilities?
Can creditors sue for dissolution to enforce obligations? GR: No!
Exceptions: insufficiency of assets; inability to pay obligations
Trust fund doctrine continues until every obligation is satisfied
Result of dissolution: mandatory institution of actions to enforce obligations
Is dissolution limited to distressed corporations? Apparently yes.
Dissolution is a step-by-step process
Omit one, you dont proceed!
Sale of substantially all assets does not mean dissolution
Liquidating dividends: assumes these are properties remaining for distribution
among SHs as dividends
o May even be the assets themselves! Distribution still based on
shares/aliquot ownership
In Teodoro: minority wanted out, but did not have representation on the board!
Personal action sought to be enforced. (compare with Republic and Cease)
Should a derivative suit be filed in Teodoro? No. its purpose is to seek redress
for a wrong done to the corporation, by the SHs in behalf of the corporation;
Teodoro was a personal action
In Bisaya: dissolution is also a remedy for intra-corporate squabbles between
SHs
Pore, Chinabank, Marsman: involve enforcement of obligations by and against
the corporation
Tan Tiong was a short-cut; involves the BIR going after SHs for unpaid taxes
Board
Winding Up

3-yr period
Board of Trustees

limited corporate existence

1.

collation of property/assets
14

enforcement of contractual rights

settlement of obligations

Chapter XVII Corporate Combinations

Old law contained no express provision on merger or consolidation

Reyes v Blouse paved the way for de facto mergers/consolidations
o Even without express provisions authorizing mergers or
consolidations, the effects of such could be obtained by the ff:
Sale of all corporate assets of the absorbed to the
absorbing
Subsequent dissolution of the selling corporation by
shortening its corporate term
Amendment of the AOI of the absorbing
o No automatic assumption by the absorbing corporation of the
liabilities of the absorbed
o Creditor consent is indispensable

Purposes of Combinations; Methods

Merger and Consolidation
Parties to a merger or consolidation are called constituent corporations
o No liquidation of assets of dissolved corporations
o Surviving or consolidated corporation acquires all their properties, rights,
and franchises
o The SHs of the dissolved corporation become SHs of the consolidated
corporation
Consolidation is the union of two or more existing corporations to form a new
corporation called the consolidated corporation.
o A combination by agreement between two or more corporations by which
their rights, franchises, privileges, and properties are united and become
those of a single new corporation
o All constituents are dissolved and absorbed by the new consolidated
enterprise
Merger is a union whereby one or more existing corporations are absorbed by
another corporation which survives and continues the combined business
o All constituent corporations are dissolved, except the surviving corporation
o May be horizontal (competing firms), vertical (corporation acquired is a
user of products of the absorbing corporation), or conglomerate
In both cases, there is no liquidation of the assets of the dissolved
corporations
The surviving or consolidated corporation assumes ipso jure the liabilities of
dissolved corporations
1.

3.

Secs 76-80
Procedures in Merger or Consolidation:
Plan of Merger or Consolidation
o Under Sec 76, the board is expressly empowered to approve a
plan of merger or consolidation which shall set forth the ff:
Names of constituent corporations
Terms of the merger and mode of carrying it into
effect
A statement of changes in the AOI of the surviving
corporation in case of merger; all statements required
to be set forth in the AOI in the case of consolidation
Such other provisions as are deemed necessary
o Approval by majority vote of the board
SHs approval
o at separate corporate meetings of SHs of each corporation
o notice given to all SHs at least 2 weeks prior to the meetings
o vote of 2/3 of OCS
Appraisal right

Nature; distinction
The power to merge or consolidate is not among the inherent powers
of corporations and must be expressly granted by law

2.

Express authority to merge granted by Code; requirements

Only de facto merger under corporation law

15

Available to dissenting SHs (of the absorbing or absorbed

corporations or both?)
o Extinguished when the board decides to abandon its merger
plans
Amendment of Plan
o Amendment must be approved by majority vote of the board
o Ratified by at least 2/3 OCS
Articles of Merger (AOM)
o Executed by each of the constituent corporations
o Signed by president or VP
o Certified by secretary
o Sets forth:
Merger plan
Number of shares outstanding or number of members
Number of shares or members voting for and against the
plan
o AOM must be filed not more than 120 days from date of long form
audit report of each corporation
Submission of financial statements
Approval by SEC
o SEC issues a certificate of merger or consolidation
o Date of issuance makes merger effective
o Merger does not become effective upon the mere agreement of
the constituent corporations
Once all requirements in 76-80 are complied with, combination gains
legal recognition
Apply to stock and non-stock
Steps to accomplish a merger/consolidation:
(1) board draws up plan of merger or consolidation
a. includes any amendment to the AOI or statements required
therein
(2) submission of plan to SHs of each corporation for approval, at a meeting
(2 weeks notice)
a. vote of 2/3 representing 2/3 OCS
(3) execution of formal agreementArticles of Merger or Consolidation

(4) submission of AOM to Sec for approval

(5) SEC sets hearing
(6) Issuance of certificate of merger or consolidation
a. Only upon issuance of certificate would the merger become
effective

Effects of merger:
o All constituent corporations, except the surviving corporation in
case of merger, shall be dissolved
o There is no winding up or liquidation of assets of the absorbed
absorbing automatically acquires rights, privileges, powers and
liabilities
o Creditors rights are not impaired
4.

Remedies of creditors and dissenting SHs; appraisal right

Creditors cannot prevent the merger or consolidation, even if the new

entity is unacceptable a debtor as the old corporation
o Remedy: enforce claims against the surviving or consolidated
corporation
o Fraudulent conveyance: follow the assets of the dissolved
constituents in the hands of the surviving or consolidated
corporation
SHs who dissent cannot prevent the merger or consolidation
o Remedy: exercise their appraisal right
o Fraud or gross unfairness: can enjoin the merger
If merger already executed: sue for the value of their
interests
Rescission not granted, generally
o Only a derivative suit in behalf of the corporation is proper
Exception: personal action may be allowed
o If new stock as are issued by the absorbing to SHs of the
absorbed, SHs of the absorbing cannot exercise preemptive right
Why? Consideration is for property. No preemptive right

16

 only if there is unrestricted retained earnings

if sale is fraudulent and entered into to freeze out the minority
o remedy: sue in court to enjoin the sale
if sale already executed:
o remedy: sue for value of proportionate interest in the new
corporation
majority SHs do not have appraisal right
o GR: corporation can purchase assets of another corporation
by mere resolution and no need for SH approval
o Exceptions:
where amendment to AOI would be necessary to
effect it or
Where investment in the selling corporations
business is not reasonable necessary for the
accomplishment of the purpose

Sale of substantially all corporate assets

Other ways to effect a merger or combination (other than in code)
Sale of all its assets to the other in exchange for stock
o Acquiring corporation assumes selling corporations liabilities
o Selling corporation shortens its term, dissolves, and liquidates and
distributes stock received form the acquiring
o Consideration must be stocks if the intent is to combine
No intent to combine: consideration for the sale would be in cash or other
properties and selling corporation may still continue in existence or remain in
suspended animation
Sec 40
1.

legal requirements
sale of all or substantially all assets: one which will render the
corporation incapable of continuing the business or accomplishing the
purpose= SH action required
short of substantially all= no SH action required

2.

4.

merger v sale of all corporate assets:

o merger:
short cut to the accomplishment of various
transactions
avoid difficulty of dissolution
constitutes a transfer of property and business of one
corporation to another in exchange for securities
issued by the absorbing corp to the absorbed
automatic assumption of liabilities
o sale:
there must be sufficient funds reserved by the
absorbed to pay its liabilities
chance that sale may be attacked by creditors
alleging fraud
lesser problems in securing SH approval and
recognizing appraisal rights

no assumption of liabilities; exceptions

GR: purchasing corporation will not be liable for the debts of the
selling corporation if it acted in GF and paid adequate consideration
Exceptions:
o Purchasing corp impliedly agreed to assume such debts
o Transaction amounts to a consolidation or merger
o Purchasing corp is merely a continuation of the selling
o Transaction entered into fraudulently

3.

compared with merger and consolidation

remedies of dissenting SHs: appraisal right

minority SH cannot prevent sale if approved by the required vote
o remedy: appraisal right
17

Reyes v. Blouse et al. F: Minority SHs of the Laguna Tayabas Bus Co file an
action to enjoin Blouse et al from executing its resolution approved by 99 % of
SHs to consolidate the properties and franchises of Laguna Tayabas with
Batangas Transport. Blouse believes it is merely an exchange of properties and not
a consolidation.
I: W/n the real purpose of the resolution is merger or consolidation, and if so,
whether it can be carried out under the old Corpo Law.
H: The questioned resolution charges the board of Laguna to consolidate
properties and franchises thereof with that of Batangas Transport. Both
corporations have passed similar resolutions to take steps to effect the
consolidation. It is apparent that the purpose of the resolution is not to dissolve but
to merely transfer its assets to a new corporation in exchange for its shares. This
comes within the purview of the old corporation law, which provides that a
corporation may sell, exchange, lease or otherwise dispose of all its property and
assets when authorized by affirmative vote of 2/3 of SHs. The phrase otherwise
dispose of covers mergers and consolidations. The transaction in this case cannot
be considered, strictly speaking, as a merger or consolidation because a merger
implies the termination or cessation of the merged corporations and not merely a
merger of assets and properties. The two companies will not lose their corporate
existence but will continue to exist after consolidation. What is intended to be
managed and operated by a new corporation, and not a merger.

H: GR: where the corporation sells or otherwise transfers all of its assets to
another corporation, the latter is not liable for the debts and liabilities of the
former.
Exception: (1) purchaser expressly or impliedly assumes such debts; (2)
transaction amounts to a consolidation or merger; (3) purchasing corporation is
merely a continuation of the selling corp; (4) there is fraud to escape liability for
the debts
In the present case, no proof was submitted that Pacific expressly agreed to
assume the debts of Insular or that it is a continuation of Insular, or that the
transaction was tainted in fraud of creditors, or that the two parties merged or
consolidated. In fact, the sales took place, not only over 6 months before
judgment, but also over a month before the filing of the case. Pacific also
purchased the shares as the highest bidder at an auction sale held at the
instance of a bank to which shares have been pledged as security by Insular.
Nell Cos theory that Pacific is the alter ego of Insular negates the fact of
consolidation/merger, because a corporation cannot be its own alter ego.
As to the allegation that the selling price of the assets of P10K was grossly
inadequate and thus tainted with fraud, the SC held that the sale was approved
by the SEC and that it should be presumed that the price was fair and
reasonable, and should be a matter litigated in another venue.

The court added that the merger/consolidation (if any) would still be carried out
under the Public Service Law. It does not impose any qualification other that it shall
be done with the approval of the PSC.

SC: since there is neither proof nor allegation that the transferee-corporation
expressly or impliedly agreed to assume the debt of the corporation, or that the
sale of either the shares or the assets to the appellee has been entered into
fraudulently, in order to escape liability for the debt of the subject corporation,
there was no basis to hold the transferee liable for the debts and liabilities of the
subject corporation

Edward Nell Company v Pacific Farms Inc. F: The Edward Nell Co secured a
judgment representing the unpaid balance of the price of a pump sold to Insular
Farms. Pacific Farms then purchased all or substantially all of shares of stock as
well as real and personal property of Insular, selling the shares to certain
individuals who reorganized Insular. The board of the reorganized Insular then sold
its assets to be sold to Pacific for P10000. The writ of execution was returned,
stating that Insular had no leviable property. Nell Co sued Pacific Farms, on the
ground as a result of the purchase of all or substantially all assets of Insular, Pacific
became the alter ego of Insular Farms.

Rules on enforceability of liabilities of the transferor against the transferee after

the transfer
1. pure assets-only transfer: transferee not liable
2. transfer of business enterprise: transferee liable

18

3.

transfer of equity: not liable except where transferee expressly or impliedly

agrees to assume the same

Combinations can happen to distressed corporations

Blouse was NOT a merger/consolidation!
Each corporation still had personality
They shared assets, business operations; neither absorbed the
other
There was no new corporation formed
All of the elements below must be present!

Exchange of stocks
yet another method of corporate combination
acquisition of all or substantially all stock of one corporation from SHs
in exchange for stock of another corporation
o SHs of the acquiring become SHs of the acquired
o Once completed, acquired corp becomes a subsidiary of the
acquiring (parent)
Right of dissenting SHs: depends on whether the mother decides to
retain the acquired corporation as a subsidiary, merges with it, or buys
all its assets
o If parent retains as subsidiary:
No appraisal right
No express provision in the Code, but
Campos: SH can sell his stocks to another
corporation, but may be liable for damages if in BF or if it
damages the corporation
o If parent merges or purchases: provisions of the Code
Same rights as dissenting SHs in a merger or sale
appraisal right

Merger/Consolidation
1. dissolution/organization and establishment of new corporation
2. consolidation of equity ownership
3. transfer/conveyance of assets + unconditional assumption of liabilities

SIR:
You have to comply with the provisions of the Code to legally effect
mergers/consolidations; short of that, no merger, no consolidation!
Parties to a merger/consolidation are the corporations, not the SHs!
Merger: marriage of assets and assumption of liabilities
SHs of absorbing become SHs of the absorbed
Isa lang ang patay; or maraming patay pero buhay and kumain!
Consolidation: lahat ng sumali, patay! Why? Objective is to put up a new one,
which shall own all combined assets and is the successor-in-interest to all
obligations
19