Lebold v.

Inland Steel Company

Digest by Jobar Buenagua

If the majority stockholders have acted in bad faith in dissolving the

corporation for the purpose only of freezing out the minority, said majority
stockholders can be held liable for damages which the minority stockholders
may have suffered as a result of the wrongful dissolution.

Obviously, they were not thinking of the companys interest; they were wholly
ignoring it.

Therefore, they failed to perform their duties as stockholders and directors.

They were faithless to the company and minority stockholders. Hence, it was
rightful for the latter to go to court and complain.

Summary:
Plaintiffs are questioning the decision of the majority stockholders to dissolve the
company. They think that the majority owners would take over the property for
themselves. The LC dismissed it but the SC sided with the plaintiffs because the directors
acted in bad faith. Directors should always put the company first above their personal
interests.
Facts:

Plaintiffs, minority stockholders of the Inland Steamship Company, brought su it

in the District Court to recover damages claimed to have been incurred by them
by reason of alleged fraudulent acts of Inland Steel Company in dissolving
Inland Steamship Company, by buying Inland Steam- ships assets and
appropriating its business.

Thy are questing the position of the majority stockholders to force Inland
Steamship out of business, to just have their company dissolved and then the
majority stockholders take over the companys property which would be
detrimental to the minority stockholders.

The majority stockholder own 80% of the stock and had the power to
determine the actions of the steamship company.

The court dismissed the complaint and the present appeal followed. The district
judge ruled in favor of the minority stockholders.

Issue:
WON the lower court erred in dismissing the complaint. YES
Held:

The directors of a corporation represent it and its stockholders; the majority

stockholders of a corporation represent it and its minority stockholders. The
vote of every director and of every majority stockholder must be directed to
and controlled by the guiding question of what is best for the corporation, for
which he is, to all legal intents and purposes, trustee. His own selfish interest
must be ignored.

If when he votes he does so against the interest of his company, against the
interest of his minority and in favor of his own interest, by such selfish action,
by omission of fidelity to his own duty as trustee, he forfeits approval in a court
of equity.
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August 31, 1953

FINANCING CORPORATION OF THE PHILIPPINES and J. AMADO ARANETA vs.
HON. JOSE TEODORO, Judge of the Court of First Instance of Negros Occidental,
Branch II, and ENCARNACION LIZARES VDA. DE PANLILIO
MONTEMAYOR, J.:
CC
Minority stockholders of FPC alleging gross mismanagement and fraudulent conduct of
affairs by President Araneta, filed a petition for appointment of a receiver. Araneta
opposed contending that the principal remedy sought was actually the dissolution of the
corporation, which minority stockholders cannot do. Court ruled that minority
stockholders may do so in exceptional cases wherein the intervention of the State cannot
be obtained, as when the State is not interested because the complaint is strictly a matter
between the stockholders and does not involve, in the opinion of the legal officer of the
Government, any of the acts or omissions warranting quo warranto proceedings, in
which minority stockholders are entitled to have such dissolution.

respondents, much less the minority stockholders of said corporation, have no

right or personality to maintain the action for dissolution.

General rule: minority stockholders of a corporation cannot sue and demand its
dissolution . However, there are cases that hold that even minority stockholders
may ask for dissolution.

Ratio: minority members, if unable to obtain redress and protection of their

rights within the corporation, must not and should not be left without redress
and remedy.

Although, as a rule, minority stockholders of a corporation may not ask for its
dissolution in a private suit, and that such action should be brought by the
Government through its legal officer in a quo warranto case, at their instance
and request, there might be exceptional cases wherein the intervention of the
State cannot be obtained, as when the State is not interested because the
complaint is strictly a matter between the stockholders and does not involve, in
the opinion of the legal officer of the Government, any of the acts or omissions
warranting quo warranto proceedings, in which minority stockholders are
entitled to have such dissolution.

When such action or private suit is brought by them, the trial court had
jurisdiction and may or may not grant the prayer. Having such jurisdiction, the
appointment of a receiver pendente lite is left to the sound discretion of the trial
court.

Although the appointment of a receiver upon application of the minority

stockholders is a power to be exercised with great caution, nevertheless, it
should be exercised necessary in order not to entirely ignore and disregard the
rights of said minority stockholders, especially when said minority
stockholders are unable to obtain redress and protection of their rights within
the corporation itself.

FACTS:

Three minority stockholders, in their own behalf and in behalf of the other
minority stockholders of the Financing Corporation of the Philippines (FCP),
filed a complaint against FPC and Araneta, its president and general manager,
claiming among other things alleged gross mismanagement and fraudulent
conduct of the corporate affairs by Araneta, and asking that the corporation be
dissolved; that Araneta be declared personally accountable for the amounts of
the unauthorized and fraudulent disbursements and disposition of assets made
by him, and that he be required to account for said assets, and that pending trial
a receiver be appointed to take possession of the books, records and assets
preparatory to its dissolution and liquidation and distribution of the assets.
TC granted the petition for the appointment of a receiver and designated Mr.
Alfredo Yulo.

ISSUES/HELD:

Re: Receivership

WON minority stockholders may ask for dissolution. YES.

WON appointment of the receiver was proper. YES.

Grounds of the prayer for receivership may be briefly stated to be:

DISPOSITIVE: In conclusion, the TC had jurisdiction and properly entertained the

original case; it also had jurisdiction to appoint a receiver pendente lite. The petition for
certiorari is hereby denied, with costs. The writ of preliminary injunction heretofore
issued is hereby ordered dissolved
RATIO:

Petitioners contend that the appointment is merely an auxiliary remedy; that

the principal remedy sought by the respondents was the dissolution of the FCP;
that according to the law a suit for the dissolution of a corporation can be
brought and maintained only by the State through its legal counsel, and that

(1) imminent danger of insolvency;

(2) fraud and mismanagement, such as, particularly:
a) wrongful and unauthorized diversion from corporate purposes and use for
personal benefit of Araneta, for the benefit of the corporations under his
control and of which he is majority stockholder and/or for the benefit of his
relatives, personal friends and the political organization to which he is affiliated
of the funds of the FPC in the form of uncollected allowances and loans and
sometimes with a securities appearing in favor of Araneta as if the funds
advanced or loaned were his own;
b) unauthorized and profitless pledging of securities owned by FPC to secure
obligations of another corporation controlled by Araneta;
2

c)
d)

unauthorized and profitless using of the name of the FPC in the shipping of
sugar belonging to other corporations controlled by Araneta;
refusal by Araneta to endorse to the defendant corporation shares of stock and
other securities belonging to it but which are still in his name;

(3) violations of the corporation law and the by-laws of the corporation such as
a) refusal to allow minority stockholders to examine the books and records of the
corporation;
b) failure to call and hold stockholders' and directors' meetings;
c) virtual disregard and ignoring of the board of directors by defendant Araneta
who has been and is conducting the affairs of the corporation under his
absolute control and for his personal benefit and for the benefit of the
corporations controlled by him, to the prejudice and in disregard of the rights
of the plaintiffs and other minority stockholders; and
d) irregularity in the keeping and
e) errors and omissions in the books and failure of the same to reflect the real and
actual transactions of the defendant corporations;
(4) failure to achieve the fundamental purpose of the corporation;
(5) if administration, possession and control of the affairs, books, etc. of defendant
corporation are left in the hands of the defendant Araneta and the present corporate
officials, under his power and influence, the remaining assets of the corporation are in
danger of being further dissipated, wasted or lost and of becoming ultimately unavailable
for distribution among its stockholders; and
(6) the best means to protect and preserve the assets of FPC is the appointment of a
receiver.

Government of the Phil. V El Hogar

July 13, 1927
Streetfield, J.
JDG
SUMMARY: A petition for quo warranto was filed by the Government of the Philippines
against EL Hogar Filipino. The sixth cause of action alleged that the compensation paid to
the directors of the corporation was excessive and prejudicial to the interests of the
shareholders. It appears that under sec. 92 of the by-laws of El Hogar, 5% of the net
profit shown by the annual balance sheet is distributed to the directors in proportion to
their attendance at meetings of the board. The Supreme Court dismissed the petition.
DOCTRINE: The Corporation Law does not undertake to prescribe the rate of
compensation for the directors of corporations. The power to fix the compensation they
shall receive, if any, is left to the corporation, to be determined in its by-laws. Pursuant to
this authority the compensation for the directors of El Hogar Filipino has been fixed in
section 92 of its by-laws. The justice and property of this provision was a proper matter
for the shareholders to decide when the by-laws were framed
FACTS:

This is a quo warranto proceeding instituted originally in the Supreme Court by

the Government of the Philippine Islands against the building and loan
association known as El Hogar Filipino, for the purpose of depriving it of its
corporate franchise and effecting a final dissolution of said corporation. The
sixth cause of action alleged that the directors of El Hogar Filipino, instead of
serving without pay, or receiving nominal pay or fixed salary, have been
receiving large compensation, varying in amount from time to time, out of
profits of El Hogar. It appears that under sec. 92 of the by-laws of El Hogar, 5%
of the net profit shown by the annual balance sheet is distributed to the
directors in proportion to their attendance at meetings of the board. As a result
of such practice, the attendance in the board meetings has been extraordinarily
good. The Attorney General however argued that the payment of such
compensation is excessive and prejudicial to the interest of the shareholders.
ISSUES/HELD: W/N the payment of said compensation to the directors of the
corporation is a sufficient reason for the cancellation of its franchise. NO
DISPOSITIVE: Petition for quo warranto dismissed.
RATIO:
The question before the Court is not one concerning the propriety and wisdom of the
measure of compensation adopted by the corporation but rather the question of the
validity of the measure. The Corporation Law does not undertake to prescribe the
rate of compensation for the directors of corporations. The power to fixe the
compensation they shall receive, if any, is left to the corporation, to be determined
in its by-laws (Act No. 1459, sec. 21). Pursuant to this authority the compensation for
the directors of El Hogar Filipino has been fixed in section 92 of its by-laws, as already
stated. The justice and property of this provision was a proper matter for the
3

shareholders to decide when the by-laws were framed; and the circumstance that,
with the growth of the corporation, the amount paid as compensation to the directors
has increased beyond what would probably be necessary to secure adequate service
from them is matter that cannot be corrected in this action; nor can it properly be made a
basis for depriving the corporation of its franchise, or even for enjoining it from
compliance with the provisions of its own by-laws. If a mistake has been made, or the
rule adopted in the by-laws has been found to work harmful results, the remedy is
in the hands of the stockholders who have the power at any lawful meeting to
change the rule.

Government vs Philippine Sugar Estate Co.

April 2, 1918
J. Johnson
Digest by: De Veyra
Topic: Involuntary Dissolution > Quo Warranto Proceedings
Summary: Philippine Sugar Estate Co. entered into a contract for the purpose of
engaging in the business of purchasing lands with a view to reselling the same at a profit,
which was not authorized by its charter and at the same time, was contrary to law. The
Government filed an action in the nature of a quo warranto proceeding. The Court
ordered that its franchise be withdrawn because of misuser, which is within the scope of
a quo warranto action, of such franchise as its actions worked or threatened a substantial
injury to the public.
Facts:
-

This is an action in the nature of quo warranto brought by the Attorney-General

for and on the behalf of the Government of the Philippine Islands for the
purpose of having the charter of the defendant corporation declared forfeited.

The complaint alleged that the defendant engaged in the business of buying and
selling real estate when it entered into a contract with the Tayabas Land
Company for the purpose of engaging in the business of purchasing lands with a
view to reselling the same to the Manila Railroad Company at a profit

Philippine Sugar Estates by its charter was authorized, among other things:
o To buy shares of the Compaia de Navegacion, Ferrocarriles, Diques, y
Almacenes de Depositos, and, in this manner or otherwise, to engage
in any mercantile or industrial enterprise.
o With no other restrictions than those provided by law, place funds of
the corporation in hypothecary or pignorative loans, in public
securities of the United States, in stocks or shares issued by firms,
corporations, or companies that are legally organized and operated,
and in rural and urban property. It may also contract and guarantee
all kinds of obligations, in conformity with existing laws.

These powers are limited by section 75 of the Act of Congress and by the
section 13 Act of 1459, the latter being a reproduction of the former, which is as
follows:
o That no corporation shall be authorized to conduct the business of
buying and selling real estate or be permitted to hold or own real
estate except such as may be reasonably necessary to enable it to
carry out the purposes for which it is created. Corporations, however,
may loan funds upon real estate, security, and purchase real estate
when necessary for the collection of loans, but they shall dispose of
real estate so obtained within five years after receiving the title
4

The lower court rendered judgment ordering the defendant to abstain in the
future from engaging in the business of buying and selling lands

Issue: WON the lower court erred in not declaring that the defendant has forfeited its
charter

the burden imposed upon the people by way of additional taxation. The purpose of the
intervention of the defendant was to enrich itself at the expense of the taxpayers, who
had, by a franchise granted, permitted them to exist and do business as a corporation.
The conduct of the defendant in the premises merits the severest condemnation of the
law.

Held: YES. SC orders corporations franchise be withdrawn

Dispositive: The judgment of the lower court should be modified. It is hereby ordered
and decreed that the franchise heretofore granted to the defendant by which it was
permitted to exist and do business as a corporation in the Philippine Islands, be
withdrawn and annulled and that it be disallowed to do and to continue doing business
in the Philippine Islands, unless it shall within a period of six months after final decision,
liquidate, dissolve and separate absolutely in every respect and in all of its relations,
complained of in the petition, with The Tayabas Land Company, without any findings to
costs.
Held:
Section 212 of Act No. 190: When in any such action, it is found and adjudged that the
corporation has, by any act done or omitted surrendered, or forfeited its corporate
rights, privileges, and franchise, or has not used the same during the term of five years,
judgment shall be entered that it be ousted and excluded therefrom and that it be
dissolved; but when it is found and adjudged that a corporation has offended in any
matter or manner which does not by law work as a surrender or forfeiture, or has
misused a franchise or exercised a power not conferred by law, but not of such a
character as to work a surrender or forfeiture of its franchise, judgment shall be
rendered that it be ousted from the continuance of such offense or the exercise of
such power.
The scope of the remedy furnished by it (quo warranto) is to forfeit the franchises
of a corporation for misuser or nonuser. It is therefore necessary in order to secure a
judicial forfeiture of respondent's charter to show a misuser of its franchises justifying
such a forfeiture. The misuser must be such as to work or threaten a substanti al
injury to the public, or such as to amount to a violation of the fundamental
condition of the contract by which the franchise was granted and thus defeat the
purpose of the grant; and ordinarily the wrong or evil must be one remediable in no
other form of judicial proceeding.
While it is true that the courts are given a wide discretion in ordering the dissolution of
corporations for violations of its franchises, etc., yet nevertheless, when such abuses and
violations constitute or threaten a substantial injury to the public or such as to amount to
a violation of the fundamental conditions of the contract (charter) by which the
franchises were granted and thus defeat the purpose of the grant, then the power of the
courts should be exercised for the protection of the people.
The people have guaranteed the payment of the interest upon cost of the construction of
the railroad which occupied or occupies at least some of the lands purchased by the
defendant. Every additional dollar of increase in the price of the land purchased by the
railroad company added that much to the costs of construction and thereby increased
5

REPUBLIC OF THE PHILIPPINES v. SECURITY CREDIT

January 23, 1967
Concepcion, CJ.
Digest by Kiko del Valle

or subscriptions to its capital stock are offered to the public as part of its regular
operations.
b. That out of the funds obtained from the public through the receipt of deposits
and/or the sale of securities, loans are made regularly to any person by the
Security Credit and Acceptance Corporation.

Topic/Provisions: Dissolution > Involuntary Dissolution > Quo Warranto

Short Summary: Security Credit sold its stocks to the public as part of its regular
transactions and lent money from the proceeds thereof. It performed these without the
requisite authority from the monetary board. The bank was ruled to be engaged in illegal
banking activities. The illegal transactions thus undertaken by defendant corporation
warrant its dissolution.
Facts:
1. This is a quo warranto proceeding initiated by the Solicitor General to dissolve the
Security and Acceptance Corporation for allegedly engaging in banking operations
without authority.
2. Named as respondents in the petition are, in addition to said corporation, the alleged
members of its Board of Directors and/or Executive Officers
3. After the bank was registered and it by-laws adopted, the Superintendent of Banks of
the Central Bank of the Philippines asked its legal counsel an opinion on whether or not
the corporation is a banking institution, within the purview of Republic Act No. 337.
4. Legal counsel resolved that Security Credit is a banking institution. His opinion was
sought to be reconsidered but this was denied.

9. Acting upon said memorandum of the Superintendent of Banks, on September 14,

1962, the Monetary Board promulgated its Resolution No. 1095, declaring that the
corporation is performing illegal banking operations, without having first complied with
the provisions of Sections 2 and 6 of Republic Act No. 337.
Issues&Held:
WON Security Credit is performing banking activities? YES
Dispositive:
Wherefore, the writ prayed for should be, as it is hereby granted and defendant
corporation is, accordingly, ordered dissolved. The appointment of receiver herein
issued pendente lite is hereby made permanent, and the receiver is, accordingly, directed
to administer the properties, deposits, and other assets of defendant corporation and
wind up the affairs thereof conformably to Rules 59 and 66 of the Rules of Court. It is so
ordered.
Ratio:

Although defendant corporation has not secured the requisite authority to

engage in banking, defendants deny that its transactions partake of the nature
of banking operations. It is conceded, however, that, in consequence of a
propaganda campaign therefor, a total of 59,463 savings account deposits have
been made by the public with the corporation and its 74 branches, with an
aggregate deposit of P1,689,136.74, which has been lent out to such persons as
the corporation deemed suitable therefor. It is clear that these transactions
partake of the nature of banking, as the term is used in Section 2 of the General
Banking Act.

Accordingly, defendant corporation has violated the law by engaging in banking

without securing the administrative authority required in Republic Act No. 337.

That the illegal transactions thus undertaken by defendant corporation

warrant its dissolution is apparent from the fact that the foregoing
misuser of the corporate funds and franchise affects the essence of its
business, that it is willful and has been repeated 59,463 times, and that its
continuance inflicts injury upon the public, owing to the number of
persons affected thereby.

5. Prior to the opinion, corporation had applied with the Securities and Exchange
Commission for the registration and licensing of its securities under the Securities Act.
6. Before acting on this application, the Commission referred it to the Central Bank,
which, in turn, gave the former a copy of the opinion. The commission advised the
corporation to comply with the requirements of the General Banking Act.
7. Upon application by the Manila Police Department and the Central Bank, the Municipal
Court of Manila issued a search warrant. Hence, the premises of the corporation was
searched and documents and records relative to its business operations were seized.
8. Upon inspecting the documents and records, the Central Bank issued a memorandum
stating that the bank was:
a. Considering the extent of its operations, the Security Credit and Acceptance
Corporation, Inc.,receives deposits from the public regularly. Such deposits are
treated in the Corporation's financial statements as conditional subscription to
capital stock. Accumulated deposits of P5,000 of an individual depositor may be
converted into stock subscription to the capital stock of the Security Credit and
Acceptance Corporation at the option of the depositor. Sale of its shares of stock

Republic of the Philippines v. Bisaya land Transportation Co. MIGUEL CUENCO,

MANUEL CUENCO, LOURDES CUENCO, JOSE P. VELEZ, JESUS P. VELEZ and FEDERICO
A. REYES and ANTONIO V. CUENCO, CARMEN CUENCO, DIOSCORO B. LAZARO and
MANUEL V. CUENCO, JR. (New Directors of respondent corporation), MIGUEL
CUENCO
January 6, 1978
Castro, J.
Digest by Doms Gana

Summary: Republic filed a quo warrant case (corporate dissolution) against Bisaya for
allegedly engaging in criminal acts and running a criminal syndicate with its franchise.
Bisaya filed a motion to dismiss, which was eventually affirmed by the solicitor general
upon reaching an amicable settlement with the officers. The court held that case should
be dismissed and Bisaya may continue to operate as a corporation, seeing as the illegal
acts were committed mainly by 2 persons (Cuenco and Velez) who shall be personally
liable for their illegal acts. It has been held that relief by dissolution will be awarded only
where no other adequate remedy is available, and is not available where the rights of the
stockholders can be, or are, protected in some other way.

Topic and Provision: Chapter 16 (Quo Warranto Proceedings)

Facts:
o

The Bisaya Land Transportation Company (Bisaya) is a corporation organized

on June 10 for the principal purpose of engaging in the business of land and
water transportation, having its domicile and principal place of business in
Cebu City.

On March 21, 1959, when the Republic of the Philippines, through the then
Solicitor General Edilberto Barot, filed a petition for quo warranto in the Court
of First Instance of Manila for the dissolution of the Bisaya Land Transportation
Company.
The petition alleges that bisaya, through its officers and controlling stockholder
of the corporation, by conspiring and confabulating together and with the aid
offended their associates, agents and confederates, had violated and continues
to violate, offended and continues to offend the proceeding of the Corporation
Law and other statutes of the Philippines by having committed and continuing
to commit acts amounting to a forfeiture of the present corporation's franchise,
rights and private and, through venous means, misused and continues to and
continues to abuse, the terms of its franchise, palpably in contravention of the
law and public policy
o

FIRST CAUSE OF ACTION: To conceal its illegal transaction,

respondent corporation falsely reconstituted its articles of
incorporation in July 1948 by adding new cattle ranch,
agriculture, and general merchandise;
SECOND CAUSE OF ACTION: On May 25, 1948, respondent
corporation through its Board of Directors, adopted a resolution
authorizing it to acquire 1,024 hectares of public land in

Zamboanga and 10,000 hectares of timber concession in

Mindanao in violation of Section 6, Act No. 143;
THIRD CAUSE OF ACTION: In May, 1949, respondent office
constituting themselves as Board of Directors of respondent
corporation, passed a resolution authorizing the corporation to
lease a pasture land of 2,000 hectares of cattle ranch on a public
land in Bayawan, Negros Occidental;
FOURTH CAUSE OF ACTION: From August 1946 to the end of 1952,
respondent corporation operated a general merchandise store, a
business which is neither for, nor incidental to, the
accomplishment of its principal business for which it was
organized, i.e., the operation of land and water transportation;
FIFTH CAUSE OF ACTION: Respondent corporation snowed Mariano
Cuenco and Manuel Cuenco to act as president in 1945 to 1948 and
1953 to 1954, respectively, when at that time, neither of them
owned a single stock;
SIXTH CAUSE OF ACTION: In violation of its charter and articles of
incorporation, as well as applicable statutes concerning its operation,
it engaged in mining by organizing the Jose P. Velez Coal Mines, and
allowing said corporation to use the facilities and assets of respondent
corporation;
SEVENTH CAUSE OF ACTION: It imported and sold at black market
prices to third persons truck spare parts, the of which were
appropriated by respondent directors;
EIGHTH CAUSE OF ACTION: It paid its laborers and employees
wages below the minimum wage law to the great prejudice of its
labor force, and in violation of the laws of the state, manipulating its
books and records so as to make it appear that its laborers and
employees were and have been paid their salaries and wages in
accordance with the minimum wage law;
NINTH CAUSE OF ACTION: It deliberately failed to maintain
accurate and faithful stock and transfer books since 1945 up to
the filing of the petition, enabling it to defraud the state, mislead the
general public, its creditors, investors and its stockholders by not
accurately and faithfully making an adequate, accurate and complete
record of dividend distribution, and an adequate, accurate and
complete record of transfers of its stocks.

Under date of April 17, 1959, respondents (except Miguel Cuenco) filed a
motion to dismiss the petition for quo warranto on the grounds of lack of cause
of action and prescription. Eventually, the solicitor general as well filed for the
dismissal of the quo warranto.

On April 3, 1968, the lower court issued a resolution granting Bisayas motion
for the dismissal of the action for quo warranto. However, the republic filed an
appeal, claiming that the lower court erred in holding that the evidence was
insufficient to dissolve the corporation and that all the grounds for a quo
warrant were met since it was shown that the Bisaya was being operated
virtually as a crime syndicate.
7

available, and is not available where the rights of the stockholders can be,
or are, protected in some other way.

Issue: WON BISAYA should be dissolved as a corporation? NO!

Dispositive: ACCORDINGLY, without prejudice to the rights of the private parties herein
to take proper steps to enforce whatever causes of action they may have against each
other, the order of the lower court embodied in its "Resolution" dated April 3, 1968,
granting the Solicitor General's motion to dismiss the quo warranto proceedings is
hereby upheld.
Ratio:

After a very careful and deliberate consideration of the evidence adduced

by petitioner, the lower court came to the conclusion that the same did
not really warrant a quo warranto by the State that could truly justify to
decapitate corporate life, and that the corporate acts or missions
complained of had not resulted in substantial injury to the public, nor
were they wilful and clearly obdurate. The court found that the several
acts of misuse and misapplication of the funds and/or assets of the Bisaya
Land Transportation Co., Inc. were committed new particularly by the
respondent Dr. Manuel Cuenco with the cooperation of Jose P. Velez, for
the commission of which they may be personally held liable. There
appears to be no reason for us to disregard the findings of the trial court,
which, applying well settled doctrines, ought to be given due weight and
credit (De la Rama vs. Ma-ao Sugar Central).

The right of the plaintiff to dismiss an action with the consent of the court is
universally recognized with certain well-defined exceptions. If the plaintiff
discovers that the action which he commenced was brought for purposes of
enforcing a right or a benefit, the advisability or necessity of which he later
discovers no longer exists, or that the result of the action would be different
from what he had intended, then he should be permitted to withdraw his
action, subject to the approval of the court. The plaintiff should not be required
to continue the action, subject to some well-defined exceptions, when it is not
to his advantage so to do. Litigation should be discouraged and not encouraged.

Besides, the court a quo found that the controversy between the parties
was more personal than anything else and did not at all affect public
interest. Thus, the Court held:
o

6. That in a large sense, this case involves personal controversies

among the Cuenco's, and their relatives, by consanguinity and affinity,
involving their respective interests as stockholders in the Bisaya Land
Transportation Company, Inc., more than anything else;
7. That, such private controversies can be ventilated in appropriate
stockholders' suits which do not have to occupy the time and
attention of government officials which can be better devoted to
matters of more direct public interest.

The Solicitor General explained that his decision to file for dismissal was since
he believed in all sincerity that the evidence so far presented did not justify the
dissolution of the corporation through a quo warranto proceeding. He admitted
that even after he had filed the motion for dismissal he continued the
negotiation for the settlement of the case, but he explained that it was because
of the request of Bisaya and Miguel Cuenco and his wife that he continue to use
his good offices to effect an amicable settlement between the parties.

Other interested parties who might feel aggrieved, therefore, would not
be without their remedies since they can still maintain whatever claims
they may have against each other. It has been held that relief by
dissolution will be awarded only where no other adequate remedy is
8

Buenaflor v. Camarines Sur Industry Corporation

May 30, 1960
Bengzon
Digest by: Carlo Miguel Romeo Sison Go
Topic: Dissolution Loss of Juridical Personality

As regards the new Camarines Corporation, it is at most a transferee of the properties of

the old corporation. The new corporation has not filed any application for a certificate of
public convenience. Therefore, it was an error to grant preferential treatment to the new
Camarines corporation over Buenaflor.

Summary:
Buenaflor applied to the Public Service Commission (PSC) for a CPC to establish a cold
storage and refrigeration service in Camarines Sur. Camarines Corporation, a
corporation already engaged in ice storage in the same area, submitted its own
application for a cold storage and refrigeration system. Buenaflor opposed the
application stating that its corporate life had expired in accordance with its articles of
incorporation. Supreme Court ruled that Camarines Corporation has no legal capacity
and cannot be awarded the CPC.
Facts:
Buenaflor applied for a certificate of public convenience (CPC) to establish a cold storage
and refrigeration service in Sabang. Camarines Corporation submitted to the
Commission its own applications for cold storage. It opposed Buenaflors application, and
Buenaflor in turn opposed theirs.
Buenfalor presented a motion to dismiss the Camarines Corporations application
challenging its personality since its corporate life had expired four years ago in
accordance with its own articles of incorporation . Camarines Corporation executed new
articles of incorporation and notarized a deed of conveyance assigning all its assets to the
new corporation.
The new Camarines Corporation petitioned the PSC for the approval of the conveyance
and its application. The PSC awarded the CPC to the new Camarines Corporation stating
that it had been serving ice in the area even before Buenaflors application.
Issue/Held: WON Camarines Corporation has legal personality after its corporate
life expired/NO it could only continue to exist to close its affairs.
Dispositive: Wherefore, revoking the appealed decision in so far as it awarded the
certificate to said Corporation, we hereby approve Buenaflor's application for five tons,
instead of one ton, subject to the usual conditions imposed by the Public Service
Commission on ice plant establishments. Costs against Camarines Corporation.
Ratio:
Since the expiration of its corporate life, the old corporation had been illegally plying its
business of selling ice in Sabang. After the expiration, it could only continue to exist for
three years for the purpose of prosecuting and defending suits by or against it, and of
enabling it gradually to settle and close its affairs, to dispose and convey its property and
to divide its capital stock. It could not, without violating the law, continue to sell ice.
When the old Camarines Corporation applied for its CPC, it had no legal personality. It
had ceased to exist as a corporation and could not sue nor apply for such CPC for it was
incapable of receiving a grant. It was not even a corporation de facto.
9

National Abaca and Other Fibers Corp. v. Apolonia Pore

Aug. 16, 1961
Concepcion, J.
Digest by: Mimi H.
Topic: Chapter 16

though they held that a corporation cannot maintain actions after the expiration of the
period provided under law, the SC still held that the corporations M R should have been
allowed. They held that it was clearly shown that the corporation had prepared an
amended complaint, and the failure to file it was due to the negligence of the mailing
clerk. Also, CFI Tacloban had ruled that Pore clearly owed the corporation money).

Summary: National Abaca filed a collection suit against Pore, and the CFI found for the
corporation. However, Pore appealed and filed a motion to dismiss the complaint,
arguing that the corporation had no legal capacity to sue because it had been abolished
under an EO issued in 1950, while the complaint was filed in 1953. The corporation
argued that under the EO, its corporate existence continues for 3 years after its
dissolution , for the purpose of prosecuting and defending suits by or against it, and
therefore the complaint was timely filed. The SC held that in absence of a statutory
provision to the contrary, pending actions by or against a corporation are abated upon
the expiration of the period allowed by law for the liquidation of corporate affairs.

Ratio:
The settled rule is that in the absence of a statutory provision to the contrary,
pending actions by or against a corporation are abated upon expiration of the
period allowed by law for the liquidation of affairs.

The corporation becomes defunct upon the expiration of said period, so that no
action can afterwards be brought by or against it, and must be dismissed. Actions
pending by or against the corporation when the period allowed by the statute
expires, ordinarily abate. This is an absence of a contrary statutory provision.

Facts:

Our Corporation Law contains no provision authorizing a corporation to continue

in its corporate name actions instituted by it within a period of 3 years after the
expiration of its lifetime. In fact, Sec. 77 of our Corporation Law provides that the
corporation shall be continued as a body corporate for 3 years after the time when it
would have been dissolved, for the purpose of prosecuting and defending suits by or
against it. Therefore, after that period, it shall no longer enjoy corporate existence
for such purpose.

Moreover, it is clear that the President contemplated the creation of a Board of

Liquidators to continue management of pending matters, because plaintiff would lose
its corporate existence after the 3 year period expired.

Nov. 14, 1953: Plaintiff National Abaca filed a complaint against Apolonia Pore, for the
recovery of P1,213.34. The amount was allegedly advanced to her for the purchase of
hemp for account of the corporation. Pore alleged that she had accounted for all the
cash advances she received.
April 1956: CFI Tacloban: Found for the corporation, and ordered Pore to pay P272.49,
as an unaccounted sum.
CFI Leyte: Pore appealed to CFI Leyte, and moved to dismiss the complaint on the
ground that the plaintiff corporation has no legal capacity to sue as it was abolished by
EO 372 dated Nov. 24, 1950.
o

Plaintiff argued that the EO explicitly stated that plaintiff shall nevertheless be
continued as body corporate for a period of three (3) years from the effective
date, November 30, 1950, for the purpose of prosecuting and defending suits by
or against it and of enabling the Board of Liquidators gradually to settles and
close its affairs. As the complaint was filed on Nov. 14, 1953, it was filed before
the expiration period.
The CFI ordered plaintiff corporation to amend its complaint to include the
Board of Liquidators. Plaintiff failed to comply, so the CFI dismissed the
complaint.

CA: Forwarded the case to the SC, on matters purely of law.

Issue: WON an action commenced within 3 years after the abolition of a
corporation may be continued after the expiration of the said period
Held: NO.
Dispositive: Wherefore the orders appealed from are reversed, and the record is
remanded to the lower court for further proceedings. (Note in case Sir asks: Even
10

The Board of Liquidators v. Heirs of Maximo Kalaw

August 15, 1967
Sanchez
Martin Lagmay
Short Summary: NACOCO is suing its general manager Kalaw and the board of directors
for entering into unprofitable contracts. It alleges that since Kalaw did not acquire prior
approval from the board when it entered into the contracts it was ultravires. Relevant
issue in this case is the personality of the board of liquidators to sue
Facts:

National Coconut Corporation (Nacoco), was chartered as a non-profit

governmental organization. On August 1, 1946, NACOCO's charter was amended
[Republic Act 5] to grant that corporation the express power "to buy, sell, barter,
export, and in any other manner deal in, coconut, copra, and dessicated coconut, as
well as their by-products, and to act as agent, broker or commission merchant of the
producers, dealers or merchants" thereof. The charter amendment was enacted to
stabilize copra prices, to serve coconut producers by securing advantageous prices
for them, to cut down to a minimum, if not altogether eliminate, the margin of
middlemen, mostly aliens

NACOCO, embarked on copra trading activities. It entered into contracts, executed

by general manager Kalaw for the delivery of copra. Unfortunately, four typhoons
entered the Philippines and the coconut trees around the country suffered extensive
damage. When it became clear that the contracts would be unprofitable Kalaw
submitted them to the board for approval A meeting was then held. Kalaw made a
full disclosure of the situation, apprised the board of the impending heavy losses. No
action was taken on the contracts. Neither did the board vote thereon at the meeting
of January 7, 1948 following. Not long thereafter, that is, on January 30, 1948, the
board met again with Kalaw, Bocar, Garcia and Moll in attendance. They
unanimously approved the contracts.

The buyers threatened suits and one particular buyer did sue. Louis Dreyfus & Go.
(Overseas) Ltd., filed a case for the undelivered copra. These cases culminated in an
out-of-court amicable settlement when the Kalaw management was already out. The
corporation thereunder paid Dreyfus P567,024.52 representing 70% of the total
claims. NACOCO

All in all the settlements for the different buyers sum up to P1,343,274.52. NACOCO
filed a suit against Maximo Kalaw and the directors for the above-mentioned sum. It
charges Kalaw with negligence under Article 1902 of the old Civil Code (now Article
2176, new Civil Code); and defendant board members, including Kalaw, with bad
faith and/or breach of trust for having approved the contracts. Lower Court
dismissed the complaint and NACOCO appealed to the Supreme Court.

Issue: WON the Board of Liquidators has personality to sue

Held: Yes

Dispositive: Viewed in the light of the entire record, the judgment under review must
be, as it is hereby, affirmed.
Ratio:

Defendants argueh that plaintiff Board of Liquidators has lost its legal personality to
continue with this suit

Accepted in this jurisdiction are three methods by which a corporation may wind up
its affairs: (1) under Section 3, Rule 104, of the Rules of Court whereby, upon
voluntary dissolution of a corporation, the court may direct "such disposition of its
assets as justice requires, and may appoint a receiver to collect such assets and pay
the debts of the corporation;" (2) under Section 77 of the Corporation Law, whereby
a corporation whose corporate existence is terminated, "shall nevertheless be
continued as a body corporate for three years after the time when it would have
been so dissolved, for the purpose of prosecuting and defending suits by or against it
and of enabling it gradually to settle and close its affairs, to dispose of and convey its
property and to divide its capital stock, but not for the purpose of continuing the
business for which it was established;" and (3) under Section 78 of the Corporation
Law, by virtue of which the corporation, within the three year period just
mentioned, "is authorized and empowered to convey all of its property to trustees
for the benefit of members, stockholders, creditors, and others interested."

It is defendants' pose that their case comes within the coverage of the second
method. They reason out that suit was commenced in February, 1949; that by
Executive Order 372, dated November 24, 1950, NACOCO, together with other
government-owned corporations, was abolished, and the Board of Liquidators was
entrusted with the function of settling and closing its affairs; and that, since the
three year period has elapsed, the Board of Liquidators may not now continue with,
and prosecute, the present case to its conclusion, because Executive Order 372
provides in Section 1 thereof that
Sec.1. The National Abaca and Other Fibers Corporation, the National Coconut
Corporation, the National Tobacco Corporation, the National Food Producer
Corporation and the former enemy-owned or controlled corporations or
associations, . . . are hereby abolished. The said corporations shall be liquidated
in accordance with law, the provisions of this Order, and/or in such manner as
the President of the Philippines may direct; Provided, however , That each of the
said corporations shall nevertheless be continued as a body corporate for a
period of three (3) years from the effective date of this Executive Order for the
purpose of prosecuting and defending suits by or against it and of enabling the
Board of Liquidators gradually to settle and close its affairs, to dispose of and,
convey its property in the manner hereinafter provided.

Defendants proceed to argue that even where it may be found impossible within the
3 year period to reduce disputed claims to judgment, nonetheless, "suits by or
against a corporation abate when it ceases to be an entity capable of suing or being
sued"

11

We, however, express the view that the executive order abolishing NACOCO and
creating the Board of Liquidators should be examined in context. The proviso in
Section 1 of Executive Order 372, whereby the corporate existence of NACOCO was
continued for a period of three years from the effectivity of the order for "the
purpose of prosecuting and defending suits by or against it and of enabling the
Board of Liquidators gradually to settle and close its affairs, to dispose of and
convey its property in the manner hereinafter provided", is to be read not as an
isolated provision but in conjunction with the whole. So reading, it will be readily
observed that no time limit has been tacked to the existence of the Board of
Liquidators and its function of closing the affairs of the various government owned
corporations, including NACOCO

By Section 2 of the executive order, while the boards of directors of the various
corporations were abolished, their powers and functions and duties under existing
laws were to be assumed and exercised by the Board of Liquidators. And nowhere in
the executive order was there any mention of the lifespan of the Board of
Liquidators

By Executive Order 372, the government, the sole stockholder, abolished NACOCO,
and placed its assets in the hands of the Board of Liquidators. The Board of
Liquidators thus became the trustee on behalf of the government. It was an express
trust. The legal interest became vested in the trustee the Board of Liquidators.
The beneficial interest remained with the sole stockholder the government. At no
time had the government withdrawn the property, or the authority to continue the
present suit, from the Board of Liquidators. If for this reason alone, we cannot stay
the hand of the Board of Liquidators from prosecuting this case to its final
conclusion . The provisions of Section 78 of the Corporation Law the third method
of winding up corporate affairs find application.

China Banking Corporation et al v. Michelin

June 30, 1933
Ostrand, J.
Digest by Monique
Topic: Effects of Dissolution, Winding Up, and Liquidation
Short Summary:
George OFarrel & Cie Inc. (GCI) is an agent of M. Michelin & Cie (MMC) which sells tires.
When MMC discontinued its business, with GCI, GCI still owed MMC money. Upon the
voluntary dissolution of GCI, MMC filed its claim praying that it be maie into a preferred
claim. The court granted. China Bank protested this payment since it prejudiced other
creditors. The SC ruled in favor of China Bank holding that during the winding up
proceedings after dissolution, no creditor shall be permitted by legal process or
otherwise to acquire property held for distribution as against the rights of other
creditors. In this case, MMC colluded with GCIs president and liquidator to have the
formers claim preferred - this cannot be allowed since this would prejudice other
creditors.
Facts
George OFarrel & Cie Inc. (GCI), a domestic corporation is the representative of M.
Michelin & Cie (MMC) in the Philippines for the sale and distribution of rubber tires
known as Michelin tires. MMC wanted to discontinue its business with GCI, and it was
then found that GCI still owed it P23,268.83. MMC claimed that the said amount
represented the price of tires sold by Gaston OFarrel, GCIs president and general
manager, which he did not remit to MMC since he used it for his own benefit. Gaston then
executed a mortgage over his house and a number of shares in favor of MMC.
The BOD of GCI then filed a petition for dissolution and for the appointment Gaston as
receiver and liquidator to wind up the affairs of the corporation. MMC then filed its
claim before the lower court against the corporation with a prayer that the claim
be allowed as a PREFERRED one against the other creditors. The court granted
this.
China Bank protested before the lower court and prayed that MMCs court order be
set aside, that MMCs claim be allowed as an ORDINARY claim. The court denied this.
Thus, this case.
Issue / Held:
WON the lower court erred in determining MMCs claim to be a preferred claim / YES.
Dispositive:
The order appealed from is reversed, and the appellees claim is hereby declared to be an
ORDINARY claim.
Ratio:
Statutes authorising voluntary dissolutions are generally held to apply only to a
dissolution brought about by the stockholders themselves, and while the appointment of
12

a receiver rests within the sound judicial discretion of the court, such discretion must be
exercised with caution and governed by legal and equitable principles.
The appointment of a receiver by the court to wind up the affairs of the corporation upon
petition of voluntary dissolution does not empower the court to hear and pass on 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 as applied to the
settlement of the affairs of a corporation consists of adjusting the debts and claims,
that is, of collecting all that is due the corporation, the settlement and adjustment
of claims against it and the payment of its just debts, all claims must be presented
for allowance to the receiver or trustees or proper persons during the winding-up
proceedings within the three years provided by the Corporation Law as the term for
the corporate existence of the corporation, and if a claim is disputed sot that the
receiver cannot safely allow the same, it should be transferred to the proper court
for trial and allowance, and the amount so allowed then presented to the receiver
or trustee for payment. The rulings of the receiver on the validity of claims submitted
are subject to review by the court appointing such receiver though no appeal is taken to
the latter ruling, and during the winding-up proceedings after dissolution, no
creditor will be permitted by legal process or otherwise to acquire priority, or to
enforce his claim against the property held for distribution as against the rights of
other creditors.
China Banks contention that MMCs claim cannot be allowed as a preferred claim is well
taken. It is to be noted that SECURED creditors are entitled to enforce their claims
against the assets of the company to the extent that they are subject to a VALID security
interest. Gaston OFarrel executed the mortgage to save himself from personal liability
and made the corporation shoulder the burden in exchange for a simulated conveyance
of his house to the corporation. When the corporation became delinquent in the payment
of the obligation, MMC and Gaston OFarrel colluded to have MMCs claim allowed
summarily as a preferred claim. Therefore, since the security was not valid, such claim
cannot be allowed as preferred.

TIBURCIO SUMERA, as receiver of the corporation "Devota de Nuestra Seora de la

Correa", plaintiff-appellant, vs. EUGENIO VALENCIA, defendant-appellee.
May 3, 1939
VILLA-REAL, J.:
Digest by Eugenio Leynes
Topic and Provisions: Distribution of Assets After Payment of Debts
Summary: Valencia was discovered to have withdrawn P600 (P200 of which was paid
later by Valencia) from the assets of the corporation. The corporation was subsequently
dissolved and an assignee was appointed on Sept. 26, 1927. The assignee (SUMERA) filed
a case to collect the amount (P400 balance) on June 5, 1936 (almost 9 years after
dissolution). The lower court said the action prescribed since the corporation may sue
only up to 3 years after dissolution. SC said that law does not apply since a assignee was
appointed.
Facts:

Issue:
Held:

"Devota de Nuestra Seora de la Correa" was organized in 1920 in Bulacan,

Philippines for the promotion of the filing industry or business for a period of
twenty years.
On petition of various stockholders thereof, an investigation into its financial
condition was made by the provincial auditor in which it was discovered that
Eugenio Valencia, manager of the corporation, had withdrawn the amount of
P600 from the remaining assets of the corporation.
On September 26, 1927, a petition was filed for the voluntary dissolution of
the corporation.
The court approved the voluntary dissolution in an order dated February
14, 1928, ordering the liquidation of the properties of the corporation and
appointing Damaso P. Nicolas assignee to take charge of sue liquidation.
Damaso P. Nicolas, who had resigned from the office of assignee, was
substituted by the herein appellant, Tiburcio Sumera, who filed a motion with
the court asking that Eugenio Valencia be ordered to deliver to him the P400
belonging to the funds of the corporation.
The Court of First Instance of Bulacan denied said motion in an order dated
March 5, 1936, reserving, however, to said assignee the right to bring the
proper action.
On June 5, 1936, Tiburcio Sumera filed the present case against Eugenio
Valencia for the recovery of the sum of P400
The Court dismissed the case because of prescription.
1)

WON the case prescribed for being brought beyond the three year period
after the dissolution of the corporation.

1)

No. Since there was an assignee appointed, the three year period was not
applicable.

Ratio:
13

Section 77 of Act No. 1459 provides that "Every corporation whose charter
expires by its own limitation or is annulled by forfeiture or otherwise, or whose
corporate existence for other purposes is terminated in any other manner, shall
nevertheless be continued as a body corporate for three years after the time
when it would have been so dissolved, for the purpose of prosecuting and
defending suits by or against it and of enabling it gradually to settle and
close its affairs to dispose of and convey its property and to divide its
capital stock, but not for the purpose of continuing the business for which it
was established."
And section 77 of the same Act provides, "At any time during said three years
said corporation is authorized and empowered to convey all of its
property to trustees for the benefit of members, stockholders, creditors, and
others interested. From and after any such conveyance by the corporation of its
property in trust for the benefit of its members, stockholders, creditors, and
others in interest, all interest which the corporation had in the property
terminates, the legal interest vests in the trustees, and the beneficial interest in
the members, stockholders, creditors, or other persons in interest."
It is to be noted that the time during which the corporation, through its
own officers, may conduct the liquidation of its assets and sue and be sued
as a corporation is limited to three years from the time the period of
dissolution commences; but that there is no time limited within which the
trustees must complete a liquidation placed in their hands.
It is provided only (Corp. Law, sec. 78) that the conveyance to the trustees must
be made within the three-year period.
Trustees to whom the corporate assets have been conveyed pursuant to the
authority of section 78 may sue and be sued as such in all matters connected
with the liquidation.
If the corporation carries out the liquidation of its assets through its own
officers and continues and defends the actions brought by or against it, its
existence shall terminate at the end of three years from the time of
dissolution;
o But if a receiver or assignee is appointed, as has been done in the
present case, with or without a transfer of its properties within
three years, the legal interest passes to the assignee, the
beneficial interest remaining in the members, stockholders,
creditors and other interested persons; and said assignee may
bring an action, prosecute that which has already been
commenced for the benefit of the corporation, or defend th e
latter against any other action already instituted or which may
be instituted even outside of the period of three years fixed for
the offices of the corporation.
For the foregoing considerations, we are o the opinion and so hold that when a
corporation is dissolved and the liquidation o its assets is placed in the hands of
a receiver or assignee, the period of three years prescribed by section 77 of Act
No. 1459 known as the Corporation Law is not applicable, and the assignee
may institute all actions leading to the liquidation of the assets of the
corporation even after the expiration of three years.

REPUBLIC v MARSMAN DEVELOPMENT CO.

April 27, 1972
Barredo, J.
Digest by: Cocoy Licaros
LIQUIDATION
Summary
Marsman was assessed by the BIR for tax deficiencies but was later extrajudicially
dissolved. It now claims that the action filed by the BIR has already prescribed since it
was filed beyond the 3 year period after dissolution as stated in Section 77 of the Code.
SC ruled that the action has not yet prescribed. While section 77 of the Corporation Law
provides for a three-year period for the continuation of the corporate existence of the
corporation for purposes of liquidation, there is nothing in said provision which bars an
action for the recovery of the debts of the corporation against the liquidator thereof,
after the lapse of the said three-year period.
Facts:

Marsman Development Corporation (Marsman) was a timber licensee with

concessions in Basud and Mondazo, Camarines Norte.

Investigations were conducted sometime October 1953 on the business and

activities of Marsman leading to the discover that certain taxes were due from it on
logs produced from its concession

BIR assessed Marsman 3 times (October 15, 1953, September 13, 1954 and
November 8, 1954) for unpaid taxes totaling P59,133.78.
o The 2 assessments were received by Atty. Moya in behalf of Marsman. He
requested for reinvestigations but these were denied due to noncompliance
with statutory requirements for such requests. As a result, Marsman failed to
pay within the prescribed period.

On April 27, 1956, BIR after numerous warnings, BIR issued final tax notices and
after 3 years of futile notifications, BIR sued the corporation on September 8,
1958 and amended their complaint on August 26, 1956

Marsman was extra-judicially dissolved on April 23, 1954. The liquidator of the
company is Mr. F. Burgess.

Marsman contends that the action is barred under Sec. 77 of the Corporation Law
which allows the corporate existence of a corporation to continue only for 3 years
after its dissolution, for the purpose of presenting or defending suits by or against it
and to settle or close its affairs

The lower court ruled in favor of the BIR although Marsman was
extrajudicially dissolved, there is no claim that its affairs had already been finally
liquidated or settled. Evidently Mr. Burgess is still continuing in his capacity as
liquidator.
14

Issue: WON LC erred in not declaring that the suit against the liquidator of Marsman has
prescribed NO. The action has not yet prescribed.
Dispositive: ACCORDINGLY, the judgment of the trial court is affirmed with costs against
the appellants.

Tan Tiong Bio v. CIR

Bautista Angelo, J.
April 23, 1962
Digest by: Kara Marcelo

Ratio:

TOPIC: Dissolution
Summary: Central Syndicate requested a refund for excess payment of sales tax but was
denied by the Collector. CTA dismissed appeal for lack of personality of Central Syndicate
due to expiration of its corporate existence. SC held that case should not be dismissed
because the officers of Central Syndicate may still be held liable instead of the defunct
corporation. The sales tax in question can be enforced against Central Syndicates
successors-in-interest even after the corporations dissolution because of the expiration
of its corporate existence.

While section 771 of the Corporation Law provides for a three-year period for
the continuation of the corporate existence of the corporation for purposes of
liquidation, there is nothing in said provision which bars an action for the
recovery of the debts of the corporation against the liquidator thereof, after
the lapse of the said three-year period.

The assessments against appellant corporation for deficiency taxes due for its
operations since 1947 were made by the Bureau of Internal Revenue on October
15, 1953, September 13, 1954 and November 8, 1954, such that the first was
before its dissolution and the last two not later than six months after such
dissolution.
o In whatever way the matter may be viewed, the Government became the
creditor of the corporation before the completion of its dissolution by the
liquidation of its assets.

Extrajudicial dissolution is permitted only when it "does not affect the rights of any
creditor having a claim against the corporation." (Section 62)
o It is immaterial that the present action was filed after the expiration of three
years after April 23, 1954, for at the very least, and assuming that judicial
enforcement of taxes may not be initiated after said three years despite the
fact that the actual liquidation has not been terminated and the one in charge
thereof is still holding the assets of the corporation, obviously for the benefit
of all the creditors thereof, the assessment aforementioned, made within the
three years, definitely established the Government as a creditor of the
corporation for whom the liquidator is supposed to hold assets of the
corporation.

SECTION 77: Every corporation whose charter expires by its own limitation or is annulled by
forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any other
manner, shall nevertheless be continued as a body corporate for three years after the time when it
would have been so dissolved, for the purpose of prosecuting and defending suits by or against it
and of enabling it gradually to settle and close its affairs, to dispose of and convey its property and
to divide its capital stock, but not for the purpose of continuing the business for which it was
established.
Clarified by
SECTION 78: At any time during said three years said corporation is authorized and empowered to
convey all of its property to trustees for the benefit of members, stock-holders, creditors, and others
interested. From and after any such conveyance by the corporation of its property in trust for the
benefit of its members, stockholders, creditors, and others in interest, all interest which the
corporation had in the property terminates, the legal interest vests in the trustee, and the beneficial
interest in the members, stockholders, creditors, or other persons in interest.

FACTS:

Central Syndicate, a domestic corporation, thru its General Manager, David

Sycip, sent a letter to the CIR advising the latter that it purchased from Dee
Hong Lue the entire stock of surplus properties which the said Dee Hong Lue
had bought from the Foreign Liquidation Commission and that as it assumed
Dee Hong Lue's obligation to pay the 3-1/2% sales tax on said surplus goods.

Central Syndicate remitted P43,750.00 as deposit to answer for the payment of

said sales tax with the understanding that it would later be adjusted after the
determination of the exact consideration of the sale.

Central Syndicate again wrote the Collector requesting the refund of P1,103.28
representing alleged excess payment of sales tax due to the adjustment and
reduction of the purchase price in the amount of P31,522.18.

Said letter was referred to an agent for verification and the agent reported his
findings upon which the CIR decided that Central Syndicate was the importer
and original seller of the surplus goods in question and, therefore, the one liable
to pay the sales tax. Accordingly, the Collector assessed against the syndicate
the amount of P33,797.88 and P300.00 as deficiency sales tax and also denied
the request of the syndicate for the refund of the sum of P1,103.28.

Central Syndicate elevated the case to the CTA.

CTA: dismissed the appeal for lack of personality to maintain action since the
syndicate is already a non-existing entity due to the expiration of its corporate
existence.

Central Syndicate then appealed to the SC.

SC: the appeal should not be dismissed because the officers and directors of
syndicate may be substituted and may be held personally liable for the unpaid
deficiency assessments made by the Collector of Internal Revenue against the

15

defunct syndicate (as contended by Central Syndicate). The matter was referred
back to the CTA.

CTA: affirmed CIR and held syndicates officers and directors jointly and
severally liable for the payment of the deficiency sales tax.

Hence, present appeal by the officers and directors.

ISSUE: (only the third issue was discussed by Campos)

WON the sales tax in question can be enforced against Central Syndicates successors-ininterest even after the corporations dissolution because of the expiration of its
corporate existence
HELD:
YES!
DISPOSITIVE:
WHEREFORE, with the above modification, we hereby affirm the decision appealed from,
with costs against petitioners.

and collecting them from his administrator, who holds the property which the decedent
had formerly possessed" (Wonder Bakeries Co. v. U.S.). Bearing in mind that our
corporation law is of American origin, the foregoing authorities have persuasive effect in
considering similar cases in this jurisdiction.
Considering that the Central Syndicate realized from the sale of the surplus goods a net
profit of P229,073.83, and that the sale of said goods was the only transaction
undertaken by said syndicate, there being no evidence to the contrary, the conclusion is
that said net profit remained intact and was distributed among the stockholders when
the corporation liquidated and distributed its assets on August 15, 1948, immediately
after the sale of the said surplus goods. Petitioners are therefore the beneficiaries of
the defunct corporation and as such should be held liable to pay the taxes in
question. However, there being no express provision requiring the stockholders of the
corporation to be solidarily liable for its debts which liability must be express and cannot
be presumed, petitioners should be held to be liable for the tax in question only in
proportion to their shares in the distribution of the assets of the defunct
corporation. The decision of the trial court should be modified accordingly.

RATIO:
It should be stated at the outset that it was petitioners themselves who caused
their substitution as parties in the present case, being the successors -in-interest of
the defunct syndicate, when they appealed this case to the SC for which reason the
latter Court declared that "the respondent Court of Tax Appeals should have allowed the
substitution of its former officers and directors is parties-appellants, since they are
proper parties in interest insofar as they may be (and in fact are) held personally liab le
for the unpaid deficiency assessments made by the Collector of Internal Revenue against
the defunct Syndicate." They cannot, therefore, be now heard to complain if they are
made responsible for the tax liability of the defunct syndicate whose representation they
assumed and whose assets were distributed among them.
In the second place, there is good authority to the effect that the creditor of a
dissolved corporation may follow its assets once they passed into the hands of the
stockholders. Thus, recognized are the following rules in American jurisprudence: The
dissolution of a corporation does not extinguish the debts due or owing to it (Bacon v.
Robertson; Curron v. State). A creditor of a dissolve corporation may follow its assets, as
in the nature of a trust fund, into the hands of its stockholders (MacWilliams v. Excelsier
Coal Co.). An indebtedness of a corporation to the federal government for income and
excess profit taxes is not extinguished by the dissolution of the corporation (Quinn v.
McLeudon).
And it has been stated, with reference to the effect of dissolution upon taxes due from a
corporation, "that the hands of the government cannot, of course, collect taxes from a
defunct corporation, it loses thereby none of its rights to assess taxes which had been
due from the corporation, and to collect them from persons, who by reason of
transactions with the corporation, hold property against which the tax can be enforced
and that the legal death of the corporation no more prevents such action than would the
physical death of an individual prevent the government from assessing taxes against him
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