CLASSIFICATIONS OF CORPORATIONS

In Relation to the State:

1. Public Corporation (Sec. 3, Act No. 1459).
- one formed or organized for the government or a portion of the state
- its purpose is for general good and welfare

2. Quasi-public Corporation
- it is granted the same powers as a private corp. but they have no incorporators,
SH’s or members, has its own charter
- example: A water district, although established as a corporation, it was
established for the greater good and with no stockholdersGOCC. They are also
placed under the jurisdiction of the LWUA not the SEC

3. Private Corporation (Sec. 3, Act 1459).

- formed for some private purpose, benefit, aim, or end

 Government’s majority shares does not make an entity a public corporation.

 A corporation is created by operation of law under the Corporation Code while a
government corporation is normally created by special law referred to often as a
charter.
 Manner of Creation: The test to determine whether a corporation is government
owned or controlled, or private in nature is simple. Is it created by its own charter
for the exercise of a public function, or by incorporation under the general
corporation law? Those with special charters are government corporations subject
to its provisions, and its employees are under the jurisdiction of the Civil Service
Commission, and are compulsory members of the GSIS.
 While public benefit and public welfare may be attributable to the operation of the
Bases Conversion and Development Authority (BCDA), yet it is certain that the
functions it performs are basically proprietary in nature—the promotion of
economic and social development of Central Luzon, particularly, and the country’s
goal for enhancement. Therefore, the rule that prescription does not run against
the State will not apply to BCDA, it being said that when title of the Republic has
been divested, its grantees, although artificial bodies of its own creation, are in the
same category as ordinary persons.
 Although Boy Scouts of the Philippines does not receive any monetary or financial
subsidy from the Government, and its funds and assets are not considered
government in nature and not subject to audit by the COA, the fact that it received
a special charter from the government, that its governing board are appointed by
the Government, and that its purpose are of public character, for they pertain to
the educational, civic and social development of the youth which constitute a very
substantial and important part of the nation, it is not a public corporation in the
same sense that municipal corporation or local governments are public
corporation since its does not govern a portion of the state, but it also does not
have proprietary functions in the same sense that the functions or activities of
government-owned or controlled corporations, is may still be considered as such,
 or under the 1987 Administrative Code as an instrumentality of the Government,
and it employees are subject to the Civil Service Law.
 But being a GOCC makes it liable for laws and provisions applicable to the
Government or its entities and subject to the control of the Government.
 Beyond cavil, a GOCC has a personality of its own, distinct and separate from that
of the government, and the intervention in a transaction of the Office of the
President through the Executive Secretary does not change the independent
existence of a government entity as it deals with another government entity.
 The doctrine that employees of GOCCs, whether created by special law or formed
as subsidiaries under the general corporation law are governed by the Civil
Service Law and not by the Labor Code, has been supplanted by the 1987
Constitution. The present doctrine in determining whether a GOCC is subject to
the Civil Service Law is the manner of its creation, such that government
corporations created by special charter are subject the Civil Service Law, while
those incorporated under the general corporation law are governed by the Labor
Code
 Section 31 of Corporation Code (Liability of Directors and Officers) is applicable to
corporations which have been organized by special charters since Sec. 4 of
Corporation Code renders the provisions supplementarily applicable to all
corporations, including those with special or individual charters, such as
cooperatives organized under P.D. 269, so long as those provisions are not
inconsistent with such charters.
 Water districts can validly exists as corporate entities under PD 198, and provided
they are government-owned or controlled, and their board of directors and other
personnel are government employees subject to civil service laws and anti-graft
laws.

As to Place of Incorporation:
1. Domestic Corporation - incorporated in the Philippines
2. Foreign Corporation (Sec. 140)
- SEC. 140. Definition and Rights of Foreign Corporations. For purposes
of this Code, a foreign corporation is one formed, organized or existing under
laws other than those of the Philippines' and whose laws allow Filipino
citizens and corporations to do business in its own country or State. It shall
have the right to transact business in the Philippines after obtaining a license
for that purpose in accordance with this Code and a certificate of authority
from the appropriate government agency.
- incorporated in another country and that country grants the same rights to
Filipinos in terms of doing business there; it shall have the right to transact
business in the Philippines after it shall have obtained a license to transact
business in this country in accordance with this code & a certificate of
authority from the appropriate government agency (SEC license after
obtaining BOI certificate)
As to Purpose of Incorporation:
1. Municipal Corporation – LGU’s
- can sue be sued without their consent (as provided for by the LGC)
- in certain instances considered as an adjunct to the national government but
has been recognized to have a personality separate and distinct from the
national government.
2. Religious Corporation (Secs. 107 and 114)

SEC. 107. Classes of Religious Corporations. - Religious corporations may

be incorporated by one (1) or more persons. Such corporations may be
classified into corporations sole and religious societies.
Religious corporations shall be governed by this Chapter and by the
general provisions on nonstock corporations insofar as applicable.

SEC. 114 Religious Societies. -Unless forbidden by competent authority, the

Constitution, pertinent. rules, regulations, or discipline of the religious
denomination, sect or church of which it is a part, any religious society, religious
order, diocese, or synod, or district organization of any religious denomination,
sect or church, may, upon written consent and/or by an affirmative vote at a
meeting called for the purpose of at least two -thirds of (2/3) of its membership,
incorporate for the administration of its temporalities or for the the management
of its affairs, properties, and estate by filing with the Commission, articles of
incorporation verified by the affidavit of the presiding elder, secretary, or clerk
or other member of such religious society or religious order, or diocese, synod,
or district organization of the religious denomination, sect or church, setting forth
the following:
a. That the religious society or religious order, or diocese, synod, or district
organization is a religious organization of a religious denomination, sect
or church;
b. That at least two-thirds (2/3) of its membership has given written consent
or has voted to incorporate, at a duly convened meeting of the body;
c. That the incorporation of the religious society or religious order, or
diocese, synod, or district organization is not forbidden by competent
authority or by the Constitution, rules, regulations or discipline of the
religious denomination, sect or church of which it forms part;
d. That the religious society or religious order, or diocese, synod, or district
organization desires to incorporate for the administration of its affairs,
properties and estate;
e. The place within the Philippines where the principal office of the
corporation is to be established and located; and
f. The names, nationalities, and residence addresses of the trustees, not
less than five (5) nor more than fifteen (15), elected by the religious society
or religious order, or the diocese, synod, or district organization to serve
for the first year or such other period as may be prescribed by the laws of
the religious society or religious order, or of the diocese, synod, or district
organization.
  Since in matters purely ecclesiastical the decisions of the proper church
tribunals are conclusive upon the civil tribunals, then a church member who is
expelled from the membership by the church authorities, or a priest or minister
who is by them deprived of his sacred office, is without remedy in the civil courts.

3. Educational Corporations (Secs. 105, 106; Sec. 25, B.P. Blg. 232)

SEC. 105. Incorporation. - Educational corporations shall be governed by

special laws and by the general provisions of this Code.

SEC. 106. Board of Trustees. - Trustees of educational institutions organized

as nonstock corporations shall not be less than five (5) nor more than fifteen
(15): Provided, That the number of trustees shall be in multiples of five (5).
Unless otherwise provided in the articles of incorporation or bylaws, the
board of trustees of incorporated schools, colleges, or other institutions of
learning shall, as soon as organized, so classify themselves that the term of
office of one-fifth (1/5) of their number shall expire every year. Trustees
thereafter elected to fill vacancies, occurring before the expiration of a particular
term, shall hold office only for the unexpired period. Trustees elected thereafter
to fill vacancies caused by expiration of term shall hold office for five (5) years.
A majority of the trustees shall constitute a quorum for the transaction of
business. The powers and authority of trustees shall be defined in the bylaws.
For institutions organized as stock corporations, the number and term of
directors shall be governed by the provisions on stock corporations.

Section 25. Establishment of Schools - All schools shall be established in

accordance with law. The establishment of new national schools and the
conversion of existing schools from elementary to national secondary or tertiary
schools shall be by law: Provided, That any private school proposed to be
established must incorporate as an non-stock educational corporation in
accordance with the provisions of the Corporation Code of the Philippines. This
requirement to incorporate may be waived in the case of family-administered
pre-school institutions.

4. Charitable, Scientific or Vocational Corporations

5. Business Corporation

As to Number of Members:
1. Aggregate Corporation - separate legal entity formed by several individual
persons
2. Corporation Sole (Secs. 107 to 113 CC)

SEC. 107. Classes of Religious Corporations. - Religious corporations may

be incorporated by one (1) or more persons. Such corporations may be
classified into corporations sole and religious societies.
Religious corporations shall be governed by this Chapter and by the
general provisions on nonstock corporations insofar as applicable.
SEC. 108. Corporation Sole. - For the purpose of administering and managing,
as trustee, the affairs, property and temporalities of any religious denomination,
sect or church, a corporation sole may be formed by the chief archbishop,
bishop, priest, minister, rabbi, or other presiding elder of such religious
denomination, sect or church.

SEC. 109. Articles of Incorporation. - In order to become a corporation sole,

the chief archbishop, bishop, priest, minister, rabbi, or presiding elder of any
religious denomination, sect or church must file with the Commission articles of
incorporation setting forth the following:
a. That the applicant chief archbishop, bishop, priest, minister, rabbi, or
presiding elder represents the religious denomination, sect or church
which desires to become a corporation sole;
b. That the rules, regulations and discipline of the religious denomination,
sect or church are consistent with becoming a corporation sole and do not
forbid it;
c. That such chief archbishop, bishop, priest, minister, rabbi, or presiding
elder is charged with the administration of the temporalities and the
management of the affairs, estate and properties of the religious
denomination, sect or church within the territorial jurisdiction, so described
succinctly in the articles of incorporation;
d. The manner by which any vacancy occurring in the office of chief
archbishop, bishop, priest, minister, rabbi, or presiding elder is required to
be filled, according to the rules, regulations or discipline of the religious
denomination, sect or church; and
e. The place where the principal office of the corporation sole is to be
established and located, which place must be within the territory of the
Philippines.

The articles of incorporation may include any other provision not contrary
to law for the regulation of the affairs of the corporation.

SEC. 110. Submission of the Articles of Incorporation. - The articles of

incorporation must be verified, by affidavit or affirmation of the chief archbishop,
bishop, priest, minister, rabbi, or presiding elder, as the case may be, and
accompanied by a copy of the commission, certificate of election or letter of
appointment of such chief archbishop, bishop, priest, minister, rabbi, or
presiding elder, duly certified to be correct by any notary public.
From and after filing with the Commission of the said articles of incorporation,
verified by affidavit or affirmation, and accompanied by the documents
mentioned in the preceding paragraph, such chief archbishop, bishop, priest,
minister, rabbi, Qr presiding elder shall become a corporation sole and all
temporalities, estate and properties of the religious denomination, sect or church
theretofore administered or managed as such chief archbishop, bishop, priest,
minister,
rabbi, or presiding elder shall be personally held in trust as a corporation sole,
for the use, purpose, exclusive benefit and on behalf of the religious
denomination · sect or church including hospitals, schools, colleges, orphan
asylums'. parsonages, and cemeteries thereof.

SEC. 111. Acquisition and Alienation of Property. - A corporation sole may

purchase and hold real estate and personal property for its church, charitable,
benevolent, or educational purposes, and may receive bequests or gifts for such
purposes. Such corporation may sell or mortgage real property held by it by
obtaining an order for that purpose from the Regional Trial Court of the province
where the property is situated upon proof that the notice of the application for
leave to sell or mortgage has been made through publication or as directed by
the Court, and that it is in the interest of the corporation that leave to sell or
mortgage be granted. The application for leave to by sell the or mortgage must
be made by petition, duly verified, by the chief archbishop, bishop, priest,
minister, or rabbi, or presiding elder acting as corporation sole, and may be
opposed by any member of the religious denomination, sect or church
represented by the corporation sole: Provided, That in cases where the rules,
regulations, and discipline of the religious denomination, sect or church,
religious society, or order concerned represented by such corporation sole
regulate the method of acquiring, holding, selling, and mortgaging real estate
and personal property, such rules, regulations and discipline shall govern, and
the intervention of the courts shall
not be necessary.

SEC. 112. Filling of Vacancies. - The successors in office of any chief

archbishop, bishop, priest, minister, rabbi, or presiding elder in a corporation
sole shall become the corporation sole on their accession to office and shall be
permitted to transact business as such upon filing a copy of their commission,
certificate of election or letters of appointment, duly certified by any notary public
with the Commission.
During any vacancy in the office of chief archbishop, bishop, priest,
minister, rabbi, or presiding elder of any religious denomination, sect or church
incorporated as a corporation sole, the person or persons authorized by the
rules, regulations or discipline of the religious denomination, sect or church
represented by the corporation sole to administer the temporalities and manage
the affairs, estate, and properties of the corporation sole shall exercise all the
powers and authority of the corporation sole during such vacancy.

SEC. 113. Dissolution. -A corporation sole may be dissolved and its affairs
settled voluntarily by submitting to the Commission a verified declaration of
dissolution, setting forth:
a. The name of the corporation;
b. The reason for dissolution and winding up;
c. The authorization for the dissolution of the corporation by the particular
religious denomination, sect or church; and
 d. The names and addresses of the persons who are to supervise the
winding up of the affairs of the corporation.

Upon approval of such declaration of dissolution by the Commission, the

corporation shall cease to carry on its operations except for the purpose of
winding up its affairs.

 The doctrine in Republic v. Villanueva, 114 SCRA 875 (1982) and Republic v.
Iglesia ni Cristo, 127 SCRA 687 (1984), that a corporation sole is disqualified to
acquire/hold alienable lands of the public domain, because of the constitutional
prohibition qualifying only individuals to acquire land and the provision under
the Public Land Act which applied only to Filipino citizens or natural persons,
has been expressly overturned in Director of Land v. IAC, 146 SCRA 509 (1986)

3. One Person Corporation

ONE PERSON CORPORATIONS

SEC. 115. Applicability of Provisions to One Person Corporations. -The

provisions of this Title shall primarily apply to One Person Corporations. Other
provisions of this Code apply suppletorily, except as otherwise provided in this
Title.

SEC. 116. One Person Corporation. -A One Person Corporation is a

corporation with a single stockholder: Provided, That only a natural person,
trust, or an estate may form a One Person Corporation.
Banks and quasi-banks, preneed, trust, insurance, public and publicly-
listed companies, and non-chartered government-owned and -controlled
corporations may not incorporate as One Person Corporations: Provided,
further, That a natural person who is licensed to exercise a profession may not
organize as a One Person Corporation for the purpose of exercising such
profession except as otherwise provided under special laws.

SEC. 117. Minimum Capital Stock Not Required for One Person
Corporation. - A One Person Corporation shall not be required to have a
minimum authorized capital stock except as otherwise provided by special law.

SEC. 118. Articles of Incorporation. - A One Person Corporation shall file

articles of incorporation in accordance with the requirements under Section 14
of this Code. It shall likewise substantially contain the following:
a. If the single stockholder is a trust or an estate, the name, nationality, and
residence of the trustee, administrator, executor, guardian, conservator,
custodian, or other person exercising fiduciary duties together with the
proof of such authority to act on behalf of the trust or estate; and
b. Name, nationality, residence of the nominee and alternate nominee, and
the extent, coverage and limitation of the authority.
SEC. 119. Bylaws. - The One Person Corporation is not required to submit and
file corporate bylaws.

SEC. 120. Display of Corporate Name. - A One Person Corporation shall

indicate the letters "OPC" either below or at the end of its corporate name.

SEC. 121. Single Stockholder as Director, President. - The single

stockholder shall be the sole director and president of the One Person
Corporation.

SEC. 122. Treasurer, Corporate Secretary, and Other Officers. - Within

fifteen (15) days from the issuance of its certificate of incorporation, the One
Person Corporation shall appoint a treasurer, corporate secretary, and other
officers as it may deem necessary, and notify the Commission thereof within
five (5) days from appointment.
The single stockholder may not be appointed as the corporate secretary.
A single stockholder who is likewise the self-appointed treasurer of the
corporation shall give a bond to the Commission in such a sum as may be
required: Provided, That the said stockholder/treasurer shall undertake in
writing to faithfully administer the One Person Corporation's funds to be
received as treasurer, and to disburse and invest the same according to the
articles of incorporation as approved by the Commission. The bond shall be
renewed every two (2) years or as often as may be required.

SEC. 123. Special Functions of the Corporate Secretary. - In addition to

the functions designated by the One Person Corporation, the corporate
secretary shall:
a. Be responsible for maintaining the minutes book and/or records of the
corporation;
b. Notify the nominee or alternate nominee of the death or incapacity of the
single stockholder, which notice shall be given no later than five (5) days
from such occurrence;
c. Notify the Commission of the death of the single stockholder within five
(5) days from such occurrence and stating in such notice the names,
residence addresses, and contact details of all known legal heirs; and
d. Call the nominee or alternate nominee and the known legal heirs to a
meeting and advise the legal heirs with regard to, among others, the
election of a new director, amendment of the articles of incorporation, and
other ancillary and/or consequential matters.

SEC. 124. Nominee and Alternate Nominee. - The single stockholder shall
designate a nominee and an alternate nominee who shall, in the event of the
single stockholder's death or incapacity, take the place of the single stockholder
as director and shall manage the corporation's affairs.
The articles of incorporation shall state the names, residence addresses
and contact details of the nominee and
alternate nominee, as well as the extent and limitations of their authority in
managing the affairs of the One Person Corporation.
The written consent of the nominee and alternate nominee shall be
attached to the application for incorporation. Such consent may be withdrawn
in writing any time before the death or incapacity of the single stockholder.

SEC. 125. Term of Nominee and Alternate Nominee. -When the incapacity of
the single stockholder is temporary, the nominee shall sit as director and
manage the affairs of the One Person Corporation until the stockholder, by self
determination, regains the capacity to assume such duties.
In case of death or permanent incapacity of the single stockholder, the
nominee shall sit as director and manage the affairs of the One Person
Corporation until the legal heirs of the single stockholder have been lawfully
determined, and the heirs have designated one of them or have agreed that the
estate shall be the single stockholder of the One Person Corporation.
The alternate nominee shall sit as director and manage the One Person
Corporation in case of the nominee's inability, incapacity, death, or refusal to
discharge the functions as director and manager of the corporation, and only for
the same term and under the same conditions applicable to the nominee.

SEC. 126. Change of Nominee or Alternate Nominee. - The single

stockholder may, at any time, change its nominee and alternate nominee by
submitting to the Commission the names of the new nominees and their
corresponding written consent. For this purpose, the articles of incorporation
need not be amended.

SEC. 127. Minutes Book. - A One Person Corporation shall maintain a minutes
book which shall contain all actions, decisions, and resolutions taken by the One
Person Corporation.

SEC. 128. Records in Lieu of Meetings. - When action is needed on any

matter, it shall be sufficient to prepare a written resolution, signed and dated by
the single stockholder, and recorded in the minutes book of the One Person
Corporation. The date of recording in the minutes book shall be determined to
be the date of the meeting for all purposes under this Code.

SEC. 129. Reportorial Requirements. - The One Person Corporation shall

submit the following within such period as the Commission may prescribe:
a. Annual financial statements audited by an independent certified public
accountant: Provided, That if the total assets or total liabilities of the
corporation are less than Six hundred thousand pesos (P600,000.00), the
financial statements shall be certified under oath by the corporation's
treasurer and president;
b. A report containing explanations or comments by the president on every
qualification, reservation, or adverse remark or disclaimer made by the
auditor in the latter's report;
 c. A disclosure of all self-dealings and related party transactions entered into
between the One Person Corporation and the single stockholder; and
d. Other reports as the Commission may require.

For purposes of this provision, the fiscal year of a One Person Corporation
shall be that set forth in its articles of incorporation or, in the absence thereof,
the calendar year.
The Commission may place the corporation under delinquent status
should the corporation fail to submit the reportorial requirements three (3) times,
consecutively or intermittently, within a period of five (5) years.

SEC. 130. Liability of Single Shareholder. - A sole shareholder claiming

limited liability has the burden of affirmatively showing that the corporation was
adequately financed.
Where the single stockholder cannot prove that the property of the One
Person Corporation is independent of the stockholder's personal property, the
stockholder shall be jointly and severally liable for the debts and other liabilities
of the One Person Corporation.
The principles of piercing the corporate veil applies with equal force to
One Person Corporations as with other corporations.

SEC. 131. Conversion from an Ordinary Corporation to a One Person

Corporation. - When a single stockholder acquires all the stocks of an ordinary
stock corporation, the latter may apply for conversion into a One Person
Corporation, subject to the submission of such documents as the Commission
may require. If the application for conversion is approved, the Commission shall
issue a certificate of filing of amended articles of incorporation reflecting the
conversion. The One Person Corporation converted from an ordinary stock
corporation shall succeed the latter and be legally responsible for all the latter's
outstanding liabilities as of the date of conversion.

SEC. 132. Conversion from a One Person Corporation to an Ordinary

Stock Corporation. - A One Person Corporation may be converted into an
ordinary stock corporation after due notice to the Commission of such fact and
of the circumstances leading to the conversion, and after compliance with all
other requirements for stock corporations under this Code and applicable rules.
Such notice shall be filed with the Commission within sixty (60) days from the
occurrence of the circumstances leading to the conversion into an ordinary
stock corporation. If all requirements have been complied with, the Commission
shall issue a certificate of filing of amended articles of incorporation reflecting
the conversion.
In case of death of the single stockholder, the nominee or alternate
nominee shall transfer the shares to the duly designated legal heir or estate
within seven (7) days from receipt of either an affidavit of heirship or self-
adjudication executed by a sole heir, or any other legal document declaring the
legal heirs of the single stockholder and notify the Commission of the transfer.
Within sixty (60) days from the transfer of the shares, the legal heirs shall notify
 the Commission of their decision to either wind up and dissolve the One Person
Corporation or convert it into an ordinary stock corporation.
The ordinary stock corporation converted from a One Person Corporation
shall succeed the latter and be legally responsible for all the latter's outstanding
liabilities as of the date of conversion.

As to Legal Status:
1. De Jure Corporation
2. De Facto Corporation (Sec. 19)

SEC. 19. De facto Corporations. - The due incorporation of any corporation

claiming in good faith to be a corporation under this Code, and its right to
exercise corporate powers, shall not be inquired into collaterally in any private
suit to which such corporation may be a party. Such inquiry may be made by
the Solicitor General in a quo warranto proceeding.

3. Corporation by Estoppel (Sec. 20)

SEC. 20. Corporation by Estoppel. - All persons who assume to act as a

corporation knowing it to be without authority to do so shall be liable as general
partners for all debts, liabilities and damages incurred or arising as a result
thereof: Provided, however, That when any such ostensible corporation is sued
on any transaction entered by it as a corporation or on any tort committed by it
as such, it shall not be allowed to use its lack of corporate personality as a
defense. Anyone who assumes an obligation to an ostensible corporation as
such cannot resist performance thereof on the ground that there was in fact no
corporation.

Q. Why is there piercing in a de facto corporation?

A. Piercing is allowed because the intention of the law is to protect the contracts
entered into by the corporation.

As to Existence of Shares (Secs. 3 and 5):

1. Stock Corporation
2. Non-Stock Corporation

SEC. 3. Classes of Corporations. - Corporations formed or organized under this

Code may be stock or nonstock corporations. Stock corporations are those which
have capital stock divided into shares and are authorized to distribute to the holders
of such shares, dividends, or allotments of the surplus profits on the basis of the
shares held. All other corporations are nonstock corporations.

SEC. 5. Corporators and Incorporators, Stockholders and Members. -

Corporators are those who compose a corporation, whether as stockholders or
shareholders in a stock corporation or as members in a nonstock corporation.
Incorporators are those stockholders or members mentioned in the articles of
incorporation as originally forming and composing the corporation and who are
signatories thereof.

CORPORATE CONTRACT LAW

 In the levels of the legal relationship, corporate contract law is used to resolve
issues between the different levels – between the juridical entity level, the
contract relationship level and the business entity level.

Q: Why is there a need to distinguish corporate contract law from contract law?
A: There is a need to distinguish between the two because there are certain instances
where an application of corporate contract law principles are in direct conflict with
contract law principles. An example would be in the situation where a corporation
is being incorporated, the corporation code in certain instances recognize the
binding effect of contracts entered into in the pre-incorporation stage. But if contract
law was strictly applied such a contract would be void since it lacks one vital
element which is consent of the contracting parties. How does a corporation that
does not exist yet give consent? This is where corporate contract law find its
relevance. The conflict between the juridical entity level is reconciled with the
contractual relationship level. (DOCTRINE: to validate the contract entered into by
the supposed corporation)

Q: In order to reach the level of corporation by estoppel, what is the essential

ingredient of such doctrine?
A: When there is a representation that a corporation exists when in fact there is none
and at least one party thought that there was a corporation.

Q: Distinguish promoter’s contract principles from the corporation by estoppel

doctrine?
A: In both the corporation does not exist. But in promoter’s contracts there is no
misrepresentation that the corporation does not yet exist. When the contracts are
entered into by persons who in behalf of the corporation, acknowledging that the
corporation does not yet exist and is still in the process of incorporation, you do not
apply the doctrine of corporation by estoppel. It is still what one may call as the
promoter’s contract. (The moment there is no corporation and contracts are entered
into under the representation that the corporation does exist then that is the only
time you apply the doctrine of corporation by estoppel.)

Pre-Incorporation Contracts
- Who Are Promoters?

“Promoter” is a person who, acting alone or with others, takes initiative in founding
and organizing the business or enterprise of the issuer and receives consideration
therefor.

CLV: The definition of promoter is important to determine the liability for promoter’s
contract. Before you can make a promoter liable, you must be able to determine
 who is the promoter. He must be the one who takes initiative on the founding and
organization of the business venture which eventually ends up as the corporation
being organized.

Q: At the promoter’s stage there is no juridical personality until the SEC issues the
certificate of incorporation. Until the certificate is issued, the stage of the de facto
corporation has not yet been reached. Prior to the de facto corporation stage what
then is the status of the contract entered into by a promoter for and in behalf of the
person or agent who had undertaken the transaction?
A: Unenforceable. It is not binding upon the corporation because it has not given
consent to the authority of the person or agent who had undertaken the transaction.

Q: How can ratification be done?

A: Ratification can be done in two ways:
1. Express ratification – a mere board resolution making the corporation liable by
accepting the contract and
2. Implied ratification – by accepting of benefits

Nature of Pre-incorporation Agreements

SEC. 59. Subscription Contract. - Any contract for the acquisition of unissued stock
in an existing corporation or a corporation still to be formed shall be deemed a
subscription within the meaning of this Title, notwithstanding the fact that the parties
refer to it as a purchase or some other contract.

SEC. 60. Pre-incorporation Subscription. - A subscription of shares in a corporation

still to be formed shall be irrevocable for a period of at least six (6) months from the
date of subscription, unless all of the other subscribers consent to the revocation, or
the corporation fails to incorporate within the same period or within a longer period
stipulated in the contract of subscription. No pre-incorporation subscription may be
revoked after the articles of incorporation is submitted to the Commission.

CLV: Sec. 61 of the Corp. Code governs a pre-incorporation subscription agreement.

Sec. 61 says that a pre-incorporation subscription agreement is irrevocable. The only
manner by which you can revoke it is if ALL of the other subscribing stockholders
consent to the revocation. Sec. 61 is a clear demonstration of the fact that a
promoter’s contract can be valid and even irrevocable. In the case of a pre-
incorporation subscription agreement that contract is valid because there are in fact
two parties. The party subscribed and all of the other parties who have subscribed to
the other incorporators and all of them bind themselves together to form the
corporation. That is why it is irrevocable unless the other party which is all of the other
subscribers, agree.
CASE: BAYLA vs SILANG TRAFFIC CO. INC

FACTS: Sofronio Bayla, along with the other petitioners in this case, individually
purchased shares of stock of Silang Traffic Co. Each of the petitioners had different
specified terms and conditions of payment. Similar among them is that 5% is to be
paid upon the execution of the contract, and the remainder in installments of 5%
quarterly due within the first month of the quarter. Deferred payments will incur 6%
interest per annum until paid, and failure to pay any of said installments when they
are due will revert the shares back to the seller and the payments already made are
to be forfeited in favor of the company, without resort to court proceedings.
Petitioners have already paid sums of money for the shares of stock they
wanted to purchase. However, they failed to pay the installment which fell due on or
before July 31, 1937. On August 1, 1937, the board of directors of Silang Traffic Co.
released a resolution stating a rescission was to be made for the good of the
corporation and in order to terminate the then pending civil case involving the validity
of the sale of the shares in question. Those who would agree can refund the
installments already paid. The petitioners agreed to the rescission and demanded for
the refund of the amounts they had paid. Silang Traffic Co. refused to refund the
petitioners’ money stating that because of their failure to pay the installment due on
or before July 31, the clause stating that their shares would revert back to the
corporation and their payments forfeited had taken effect, and that there was nothing
to refund. Moreover, a later resolution on August 22 already cancelled the resolution
of August 1.
The trial court absolved the corporation and forfeited the petitioners’ shares and
payments to the corporation. The Court of Appeals affirmed the decision but allowed
the petitioners 30 days to pay the arrears in their subscription. From this decision,
petitioner and respondent appealed to the Supreme Court.

ISSUE: Were the petitioners’ shares of stock automatically forfeited in favor of Silang
Traffic Corporation upon their failure to pay the installment due on or before July 31?

RULING: No. The Court held that for their stocks to be forfeited to the corporation, a
demand must first be given by the corporation for the payments due on or before July
31. It did not automatically revert to the corporation. Under Article 1100 of the Civil
Code, persons obliged to deliver or do something are not in default until the moment
the creditor demands of them judicially or extra-judicially the fulfillment of their
obligation. The current situation does not fall under the any of the exceptions. The
contract itself did not expressly provide that the failure of the purchaser to pay any
installment would give rise to forfeiture and cancellation without the necessity of any
demand from the seller. In fact, it states that there would be a 6% interest on deferred
payments which shows that there was no intention of automatic forfeiture and
cancellation of contract. As such, the Court reversed the decision of the Court of
Appeals and ordered Silang Traffic Co. to refund the petitioners’ money.
LIABILITIES FOR PROMOTER’S CONTRACTS

CASE: CAGAYAN FISHING DEVELOPMENT CO. INC. v. TEODORO SANDIKO

Facts: Manuel Tabora , as owner of four parcels of land in Cagayan mortgaged the
said properties to secure his loan – 1st mortgage to PNB: P8000; 2nd mortgage to
PNB: P7000; and 3rd mortgage to Bauzon: P2900 which was registered and
annotated on the titles of the property. In 1930 Tabora sold said parcels to Cagayan
Fishing Development Co., said to be under process of incorporation, subject to the
mortgages and with the condition that title will not be transferred until the corporation
has paid Tabora’s indebtedness. Cagayan Fishing filed its Articles of Incorporation
with the Bureau of Commerce. The Board of Directors adopted a resolution
authorizing its President Ventura to sell the four parcels of land to Sandiko with the
condition that he would shoulder the mortgage debts. Sandiko issued promissory
notes to that effect. When Sandiko failed to comply with the obligation, the corporation
filed a recovery suit. The lower court held that the contract is void since it was entered
into with a corporation that has no corporate existence at the time the properties were
transferred to it.

Issue: WON Sandiko can be held liable for the mortgage debt?

Held: The SC affirmed the decision of the TC. The fact of the matter is Sandiko cannot
be held liable for the mortgage debt since there was no valid sale of the property,
since at the time when Cagayan supposedly acquired the property, it still had no
juridical personality to acquire property. There was no transfer of lots from Tabora to
Cagayan since Cagayan was only incorporated five months after the sale.
1. A corporation should have full and complete organization and existence as an
entity before it can enter into any kind of contract or transact any business. A
corporation until organized has no being, franchises or faculties nor do those
engaged in bringing it into being have no power to bind it by contract, unless so
authorized by the charter.
2. The contract entered into was not between Tabora and the corporation instead it
was between Tabora, as owner and Tabora, wife, plus others, as promoters of a
corporation, since the corporation was still non-existent. These promoters could
not have acted as agents for a projected corporation since that which had no legal
existence could have no agent. Although a corporation has no life until organized,
it does not mean that under no circumstances may the act of promoters of a
corporation be ratified by the corporation if and when subsequently organized. But
said doctrine of ratification is not applicable here.
3. Cagayan could not have and did not acquire the four parcels of land. It follows that
it did not possess any reluctant right to dispose of them by sale to Sandiko. It was
not even a de facto corporation at the time of transfer so that it does not have the
personality to enter into contracts.
4. Some peculiar circumstances:
a. Tabora formed a corporation by himself, wife and others but subscribed to
P45,000 of P48,700 (capital stock subscribed);
 b. the lands remained in Tabora’s name despite the sale to the corporation and
Sandiko regarded Tabora as the owner;
c. Ventura signed the contract in behalf of Tabora;
d. P/N issued by Sandiko was payable to the corporation to avoid being attached
by Tabora’s creditors.

Q: Why are we studying Cagayan?

A: This case espouses the element of contract law which is the lack of the element of
consent; there being one party, the corporation, lacking a juridical personality; the
contract was thus declared void. Cagayan and Rizal provides us the doctrine that
promoter’s contract must be adopted and ratified by the corporation. If the act of
the promoter’s is ratified then that act is binding on the corporation.

CLV: The court here dismissed the action against Sandiko on the basis that at the
time the properties were sold to the corporation, it had no legal existence, therefore,
it could not purchase anything.
Having bought nothing when it sold the said properties to Sandiko, it had in fact
nothing to sell – therefore there was no valid assumption of loans and neither were
there promissory notes supported by valid consideration.

Q: What if Sandiko was aware at the time that the contract was entered that the
corporation did not exist? What if the corporation invokes the doctrine of the
corporation by estoppel so that Sandiko could not raise the defense that at the time
the fraud was committed, the corporation has no juridical personality?
A: Remember that the doctrine of corporation by estoppel is only applicable if at least
one of the parties knew that a corporation existed when in fact it did not. In this
case, the doctrine cannot apply because nobody was in the belief that it existed at
the time when fraud was being committed. Even Tabora himself knew from the start
that at the time of the transfer, the corporation did not exist.

RIZAL LIGHT & ICE CO. INC. v. MUNICIPALITY OF MORONG

Facts: Rizal Light and Ice Co. Inc. is a domestic corporation granted by the Public
Service Commission, a certificate of public convenience for the installation, operation
and management of an electric light, heat, and power service in Morong, Rizal. PSC
required Rizal light to show cause why it should not be penalized for violation of the
conditions of its CPC and for failure to comply with directions to raise its service
voltage, etc. Rizal failed to comply so the PSC ordered the cancellation and revocation
of Rizal’s CPC and forfeiture of its franchise. The order of revocation was set aside
when it was known that the company representative failed to appear due to illness.
The municipality of Rizal formally asked the PSC to revoke Rizal’s CPC and
forfeiture of its franchise. PSC found that Rizal failed to comply with its directive and
violated the conditions of the CPC. PSC ordered the cancellation and revocation of
Rizal’s CPC and the forfeiture of its franchise.
Later, Morong Electric, having been granted a franchise by the Municipality of
Morong, filed with the PSC an application for CPC. It later brought up the issue that
Morong Electric had no legal personality because its certificate of incorporation was
issued only on October 17, 1962, while the application was filed on September
10,1962. The motion to dismiss was denied on the ground that Morong Electric is a
de facto corporation. Thus, the PSC granted Morong Electric a CPC. Thus, this
petition.

Held: Decision affirmed.

Under the law, before any CPC may be granted, three requisites must be
present: (1) citizen of the Philippines or the US or a corporation, co-partnership,
association or joint-stock co. constituted and organized under the laws of the
Philippines, 60% at least of the stock or paid up capital of which belongs entirely to
citizens of the Philippines or the US; (2) financially capable of undertaking the service;
(3) prove that the operation of the public service proposed will promote public interest.
Petitioner contend that until a corporation has come into being, by the issuance of a
certificate of incorporation by the SEC, it cannot enter into any contract as a
corporation and that its application was null and void for being done prior to said
issuance.
Its contention that Morong Electric, at the moment of application and grant of
franchise did not yet have a legal personality is correct. The legal existence of Morong
Electric began upon issuance of the certificate of incorporation before said time, the
incorporators cannot be considered as de facto corporation.
But the fact that Morong Electric at the moment of the application and grant of
franchise was granted does not render the franchise invalid because Morong later
obtained its certificate of incorporation and accepted the franchise in accordance with
the terms and conditions thereof. While a franchise cannot take effect until the grantee
corporation is organized, the franchise, may, nevertheless be applied for before the
company is fully organized.
The incorporation of Morong and its acceptance of the franchise as shown by
its action in prosecuting the application filed with the PSC for the approval of said
franchise, not only perfected a contract between the Municipality of Morong and
Morong Electric.

CLV: The theory used here by the SC to validate the contract is the continuing offer
theory. A grant of the franchise according to the SC, prior to the time that the
corporation actually existed is like a conditional grant that will be effective upon the
corporation’s becoming a legal entity. Prior to that, it is merely a continuing offer (on
the part of the government).
CARAM Jr. v CA

Facts: Baretto and Garcia contracted the services of plaintiff Arellano to prepare a
project study for the organization of Filipinas Orient Airways. For failure to pay such
services, Arellano sued the corporation, Baretto and Garcia and petitioner Fermin and
Rosa Caram as stockholders. They were held solidarily liable with their co-
defendants. Hence, this petition.
Petitioner Canson claims that said decision finds no support because they were
mere investors in the corporation later created. They should not be held solidarily
liable with the corporation, who has a separate juridical personality.
Held: Petition granted.
The services were acquired by virtue of the request of Baretto and Garcia so
that a report can be represented to financiers. Petitioners are not really involved in
the initial steps that finally led to the incorporation of Filipinas Orient Airways which
were being directed by Baretto. Petitioners were merely among the financiers whose
interest was to be invited and who were persuaded to invest in the airline.
There was no showing that Filipinas was a fictitious corporation and did not have
a separate juridical personality to justify making the petitioner, as principal
stockholders, responsible for its obligations. As a bona fide corporation, Filipinas
should alone be liable for its corporate acts as duly authorized by its officers and
directors. Thus, petitioner could not have been personally liable for the compensation
claimed by Arellano.

CLV: The case tried to distinguish participation of a promoter from that of a promotee,
in a venture that actually becomes a corporation late on. Not every person, who
participates in a venture that will later become a corporation is a promoter.

Q: How do you distinguish a participation of a promoter from that of a promotee who

acts together to form a corporation?
A: The promotees are merely passive investors. A plan is given to them and if they
like it, they invest. Promoters are the active participants. They found and they
organize the corporation.

According to Caram only the promoters should be liable. The SC held that a
mere promotee (those who merely subscribe to the shares of stock) should not be
held liable for a promoter’s contract (just as an ordinary stockholder after a corporation
has already been incorporated cannot be held liable for more that beyond his
investment).

CLV: Remember that once a corporation is formed, it usually follows that all
promoter’s contracts get ratified because the corporation actually arises out of these
contracts. The corporation usually has no choice. It rarely rejects the contracts for
such would be commercial suicide. Once the corporation is formed, the promoter’s
contract of the corporation (if the latter accepts) and not the promoter’s. This is why
the promoter, once the corporation accepts, escapes liability. Remember that a
promoter in a promoter’s contract signs not in his own name but always for and in
behalf of the corporation.
Q: What are the three theories in pre-incorporation contracts?
Theory #1 – Therefore, since a promoter’s contract is really the promoter’s own, the
only reason why the corporation, once it is organized becomes liable is when the
corporation adopts it as its own. The promoter’s real contract theory is one of the
three theories by which to validate a contract prior to incorporation.
Theory #2 – The 2nd theory as adopted by Jurisprudence is what is termed as a
continuing offer. The continuing offer that exists as to the time of the issuance of
the certificate of incorporation. And if it is accepted, then the offer means the
acceptance, and there arises a contract.
Theory #3 – Once the promoter enters into a contract for and in behalf of a non-
existent principal, the promoter becomes personally liable like an agent who acts
without authority from the principal. The contract entered into then is valid unless
the agent acted without authority. But it is possible for the contract to be adopted
by the principal by accepting it.
In all three instances, there is deemed to be a valid contract of a valid offer. That
is the basis of the promoter’s contract – so that the people will be willing to risk without
much fear, investing their money into a venture prior to the incorporation of a company
or a corporation.

Q: Promoter v. Agent
A: The promoters are not the corporation itself, and although they may be regarded,
for certain purposes as sustaining to the corporation a relationship similar to that of
an agent, strictly speaking they cannot be regarded as such, there being at that
time no existing principal.

Q: Promoter v. Trustee
A: A promoter is also sometimes likened to a trustee. But a trustee is supposed to be
entirely disinterested, while persons engaged in promotion expect to receive and
seek to obtain a liberal award or profit for their initiative.

De Facto Corporation (Sec. 19)

SEC. 19. De facto Corporations. - The due incorporation of any corporation claiming
in good faith to be a corporation under this Code, and its right to exercise corporate
powers, shall not be inquired into collaterally in any private suit to which such
corporation may be a party. Such inquiry may be made by the Solicitor General in a
quo warranto proceeding.

 Every corporation is deemed de jure until proven otherwise.

De Jure Corporation – formed in accordance with law; perfectly incorporated;

consequences: separate juridical personality and perfect liability.

De Facto Corporation – formed also in accordance with law but falls short of the
requirements provided by law. Such is awarded a separate juridical personality, it
may thus enter into contracts, it may sue and be sued (note: third parties may sue
the corporation, incorporators may sue but the corporation cannot sue). Note also
that such has imperfect liability à only the actors will be held liable. In proceeding
against such, compliance with due process must be had.

 The doctrine of de facto corporation applies as to the first level relationship (as
between the State and corporations) and also to the third level of relationship (as
between third persons and corporations). If it primarily concerns the first level, why
does it draw its vitality from the third level? Because without such, transactions
shall have no effect but with such, despite the defects, the contracts are valid and
enforceable. But because of its primary relation to the first level, third persons
cannot question the legal personality of such de facto corporation.

Only the State through a quo warranto proceeding may do such.

 Not all corporations which lack elements are de facto corporations.

Elements for Existence of De Facto Corporation:

1. Valid law under which it is incorporated: The Corporation Code
2. Attempt in good faith to incorporate – colorable compliance: The corporation
must have filed its Articles of Incorporation and the SEC duly issued a
Certificate of Incorporation. The minimum requirement for this requisite is the
issuance of a certificate such that even if you honestly believed that you
incorporated (and all the other requisites are present), it is still not a de facto
corporation.

 The above is need to prove reliance in good faith.

 If any of the above element is absent can the principle be invoked by third
persons? No, but they may have a remedy under the principle of corporation by
estoppel. Can such be used in all instances? No, when both parties knew that
no corporation existed, such may not be invoked.
 Issuance of certificate of incorporation – minimum requirement under this
number.

Assumption of corporate powers: Minimum requirement: election of the Board of

Directors.

Q: Why must there be an election of the BoD?

A: The basic principle is a de facto corporation is a mutual going about of the
transaction in good faith. Since the corporation has a juridical personality, the only
way by which it can be said that there was good faith in entering a transaction is
that there must be a BoD by which a corporation can act. If there is no BoD there
is no good faith on the part of the corporation because it knows that it can only act
through the BoD not on the part of the parties dealing with the corporation because
it knows that there must be BoD for the corporation to bind itself. This is also
important because this is by which the corporation manifests itself. (Remember:
notion of a ghost – A ghost manifest itself through signs, in the same manner, a
corporation manifests its existence through the existence of the BoD).
Elements

ARNOLD HALL v. PICCIO

Facts: Petitioner Arnold Hall and Bradley Hall and respondent Fred Brown, Emma
Brown, Hipolita Chapman and Ceferino Abella signed and acknowledged the Articles
of Incorporation of the Far Eastern Lumber and Commercial Co., Inc. a general lumber
business. 23,428 shares of stock were subscribed and fully paid for and certain
properties were transferred to the corporation.
The Articles of Incorporation were filed with the SEC for the issuance of the
corresponding certificates of incorporation. The corporation proceeded to do
business.
Pending the issuance of the certificates by SEC, the respondents Brown et. al.
filed before the CFI of Leyte a civil case entitled “Fred Brown v. Arnold Hall” alleging
among others, that the Far Eastern Lumber and Commercial Co. was an unregistered
partnership; that they wish to have it dissolved because of a bitter dissension among
the members, mismanagement and fraud by the managers and heavy financial
losses. Hall, et. al. filed a motion to dismiss alleging the lack of jurisdiction by the
court. Judge Piccio ordered the dissolution of the company.

Held: The SEC had not issued the corresponding certificate of incorporation. All of
them know or ought to know that the personality of a corporation begins to exist only
from the moment such certificate is issued, not before. Here, the complaining
associate have not represented to the others that they were incorporated any more
than the defendant had made similar representations. Since nobody was led to
believe anything to his prejudice and damage, the principle of estoppel does not apply.
The section on de facto corporations does not apply in this case:
1. First, Far Eastern Lumber, even its stockholders, may not probably claim in “good
faith” to be a corporation not having obtained the certificate of incorporation. Thus
the immunity of collateral attack granted to corporations claiming in good faith to
be a corporation does not apply here.
2. Second, this suit is not one in which the corporation is a party. This is a litigation
between stockholders of the alleged corporation for the purpose of obtaining its
dissolution. Even the existence of a de jure corporation may be terminated in a
private suit for its dissolution between stockholders, without intervention of the
State.

CLV: The de facto doctrine was formulated to safeguard the security of commercial
transactions whenever they involve the corporation. Parties dealing with said
corporation are secured by the fact that the transactions entered into with said
corporations may be sued upon and they can recover. That is why aside from the
other two requisites there must be a set of officers (i.e. assumption of corporate
powers) or directors because of the principle that a corporation can only act through
its officers.
 Effect as to both parties: (1) cannot deny its existence (2) liable as general
partners.
  Not applicable to intra-corporate disputes, why? (1) it is a third level doctrine (2)
public is not expected to know, while the above are expected to know.
 If the other party knows of the non-existence of the corporation à there is no
estoppel.

Corporation by Estoppel

SEC. 20. Corporation by Estoppel. - All persons who assume to act as a corporation
knowing it to be without authority to do so shall be liable as general partners for all
debts, liabilities and damages incurred or arising as a result thereof: Provided,
however, That when any such ostensible corporation is sued on any transaction
entered by it as a corporation or on any tort committed by it as such, it shall not be
allowed to use its lack of corporate personality as a defense. Anyone who assumes
an obligation to an ostensible corporation as such cannot resist performance thereof
on the ground that there was in fact no corporation.

SALVATIERRA v. GARLITOS

Facts: Salvatierra owned a parcel of land in Leyte. She entered into a contract of
lease with Philippine Fibers Producers Co., Inc. allegedly a corporation duly organized
and existing under the Philippine laws, as represented by its President Refuerzo. The
land will be leased for ten years and the lessor would be entitled to 30% of the net
income accruing from the harvest of any crop.
The alleged corporation did not comply with said obligation. Salvatierra filed with
the CFI a complaint against PFPC for accounting, rescission and damages. The
corporation defaulted and the court rendered judgment in favor of Salvatierra. The
court issued a writ of execution and the three parcels of land under the name of
Refuerzo were attached because no property of PFPC was found available.
Refuerzo filed a motion claiming that the decision was null and void since there was
no allegation of his personal liability. The court granted the motion and released his
land from attachment. Hence, this petition by Salvatierra.

Held: The failure of Salvatierra to specify Refuerzo’s personal liability was due to the
fact that Salvatierra was under the impression that PFPC, represented by Refuerzo
was a duly registered corporation, but subsequently, inquiry with the SEC yielded
otherwise. While as a general rule, a person who has contracted or dealt with an
association in such a way as to recognize its existence as a corporate body is
estopped from denying the same in an action arising out of such transaction or
dealing. Yet, this doctrine is inapplicable where fraud takes a part in said transaction.
Here Refuerzo gave no confirmation of denial as to PFPC’s juridical personality and
Salvatierra was made to believe that the corporation was duly organized.
The grant of separate juridical personality to corporations refer merely to
registered corporations and cannot be made applicable to the liability of members of
an unincorporated association. Since an organization which, before the law, is non-
existent and has no personality and would be incompetent to act and appropriate for
itself the power and attributes of a corporation, it cannot create agents or confer
authority on another to ct in its behalf, thus, those who act or purport to act as its
representatives or agents do so without authority and at their own risk.
A person acting or purporting to act in behalf of a corporation which has no valid
existence assumes such privileges and obligations and becomes personally liable for
contracts entered into or for other acts performed as such agent.
Here, Refuerzo as president of the unregistered corporation was the spirit
behind the consummation of the lease contract, thus, his liability cannot be limited or
restricted to that imposed upon corporate SH’s. In acting on behalf of a corporation,
which he knew to be unregistered, he assumes the risk of reaping the consequential
damages or resultant rights, if any arising from the transaction.

ALBERT v. UNIVERSITY PUBLISHING CO.

Facts: The University Publishing Co. Inc. through its President Jose Aruego entered
into a contract with Mariano Albert whereby the corporation agreed to pay a certain
sum in installments for the exclusive right to publish his revised commentaries in the
RPC and for his share in the previous sale of the book’s first edit edition. The
corporation failed to pay the second installment thereby making the whole amount
due and demandable (i.e. there was an acceleration clause). Albert then sued the
corporation.
The lower court rendered judgment in favor of Albert and a writ of execution was
issued against the corporation. Albert however, petitioned for a writ of execution
against Aruego, as the real defendant, stating that there is no such entity as University
Publishing Co. Inc. Albert annexed to his petition a certification from the SEC saying
that their records contain no such registered corporation.
The corporation countered by saying that Aruego is not a party to this case and
that, therefore, Albert’s petition should be denied. The corporation countered by
saying that Aruego is not a party to this case, and that therefore, Albert’s petition
should be denied. The corporation, actually did not want Aruego to be declared a party
to the present case is because there would be no need to institute a separate action
against Aruego to be declared a party to the present case is because there would
then be a need to institute a separate action against Aruego; and if this is done,
Aruego can set up the defense of prescription under the Statute of Limitations.

Held:
1. The corporation cannot invoke the doctrine of estoppel. The fact of non-
registration of the corporation has not been disputed because the corporation
only raised the point that it and not Aruego is the party defendant thereby
assuming that the corporation is an existing corporation with an independent
juridical personality. HOWEVER, precisely on account of non- registration, it
cannot be considered a corporation not even a corporation de facto. It has
therefore no personality separate from Aruego; it cannot be sued independently.
The estoppel doctrine has not been invoked and even if it had been, it is not
applicable to the case at bar:
a. Aruego had represented a non-existing entity and induced not only Albert
but also the court to believe in such representation
 b. He signed the contract as president of the corporation stating that this was
a corporation duly organized and existing under the laws of the Philippines.
One who induced another to act upon his willful misrepresentation that a
corporation was duly organized and existing under the law, cannot thereafter
set up against his victim the principle of corporation by estoppel.

2. Aruego is the real defendant as he had control over the proceedings. Had Aruego
been named as party defendant instead of or together with the corporation, there
would be no room for debate as to his personal liability. Since he was not so
named, matters of due process have arisen. Parties to a suit are persons who
have a right to control the proceedings, to make defense, to adduce and cross-
examine witnesses and to appeal from a decision. In the case at bar, Aruego,
was and in reality, the one who answered and litigated through his own firm as
counsel. He was in fact, if not on name, the defendant. Clearly then Aruego had
his day in court as the real defendant and due process of law has been
substantially observed.
3. Aruego is the real party in interest because he reaped the benefits from the
contract.

Nature of Doctrine
 Founded on principles of equity and designed to prevent injustice and
unfairness, the doctrine applies when persons assume to form a corporation
and exercise corporate functions and enter into business relations with third
persons. Where no third person is involved in the conflict, there is no corporation
by estoppel. A failed consolidation therefore cannot result in a consolidated
corporation by estoppel.
 A party cannot challenge the personality of the plaintiff as a duly organized
corporation after having acknowledged same when entering into the contract
with the plaintiff as such corporation for the transportation of its merchandise.
 A person who accepts employment in an unincorporated charitable association
is estopped from alleging its lack of juridical personality.
 One who deals with an organization which is not duly incorporated is not
estopped to deny its corporate existence when his purpose is not to avoid
liability.
LOZANO v DE LOS SANTOS

DOCTRINE: Jurisdiction is fixed by law and is not subject to the agreement of the
parties. It cannot be acquired through or waived, enlarged or diminished by, any act
or omission of the parties, neither can it be conferred by the acquiescence of the court.

FACTS:
• Petitioner Lozano was the president of the Kapatirang Mabalacat-Angeles Jeepney
Drivers' Association, Inc. (KAMAJDA) while respondent Anda was the president of
the Samahang Angeles-Mabalacat Jeepney Operators' and Drivers' Association,
Inc. (SAMAJODA);
• Upon the request of the Sangguniang Bayan of Mabalacat, petitioner and private
respondent agreed to consolidate their respective associations and form the Unified
Mabalacat-Angeles Jeepney Operators' and Drivers Association, Inc. (UMAJODA);
• They also agreed to elect one set of officers who shall be given the sole authority
to collect the daily dues from the members of the consolidated association;
• Elections were held. Both of them ran for president. Petitioner won.
• Private respondent protested and, alleging fraud, refused to recognize the results
of the election; he also refused to abide by their agreement and continued
collecting the dues from the members of his association despite several demands
to desist.
• Petitioner was thus constrained to file a civil case at the MCTC to restrain private
respondent from collecting the dues and to order him to pay damages and
attorney's fees.
• Private respondent moved to dismiss the complaint for lack of jurisdiction, claiming
that jurisdiction was lodged with the (SEC).

MCTC: denied M2D. MR denied.

RTC: in favor of private respondent De los Santos. Found the dispute to be
intracorporate, hence, subject to the jurisdiction of the SEC, and ordered the MCTC
to dismiss.
ISSUE: WON SEC has jurisdiction over the case? NO

HELD: The grant of jurisdiction to the SEC must be viewed in the light of its nature
and function under the law. This jurisdiction is determined by a concurrence of two
elements:
1. The status or relationship of the parties; - Requires that the controversy must
arise out of intracorporate or partnership relations between and among
stockholders, members, or associates; between any or all of them and the
corporation, partnership or association of which they are stockholders, members
or associates, respectively; and between such corporation, partnership or
association and the State in so far as it concerns their individual franchises
2. The nature of the question that is the subject of their controversy. - Requires that
the dispute among the parties be intrinsically connected with the regulation of the
corporation, partnership or association or deal with the internal affairs of the
corporation, partnership or association.
 There is no intracorporate nor partnership relation between petitioner and private
respondent. The controversy between them arose out of their plan to consolidate their
respective jeepney drivers' and operators' associations into a single common
association. This unified association was, however, still a proposal. It had not been
approved by the SEC, neither had its officers and members submitted their articles of
consolidation is accordance with Sections 78 and 79 of the Corporation Code.
Consolidation becomes effective not upon mere agreement of the members but only
upon issuance of the certificate of consolidation by the SEC.
The KAMAJDA and SAMAJODA to which petitioner and private respondent
belong are duly registered with the SEC, but these associations are two separate
entities. The dispute between petitioner and private respondent is not within the
KAMAJDA nor the SAMAJODA. It is between members of separate and distinct
associations. Petitioner and private respondent have no intracorporate relation much
less do they have an intracorporate dispute. The SEC therefore has no jurisdiction
over the complaint.
The doctrine of corporation by estoppel advanced by private respondent cannot
override jurisdictional requirements. Jurisdiction is fixed by law and is not subject to
the agreement of the parties. It cannot be acquired through or waived, enlarged or
diminished by, any act or omission of the parties, neither can it be conferred by the
acquiescence of the court.
Corporation by estoppel is founded on principles of equity and is designed to
prevent injustice and unfairness. It applies when persons assume to form a
corporation and exercise corporate functions and enter into business relations with
third person. Where there is no third person involved and the conflict arises only
among those assuming the form of a corporation, who therefore know that it has not
been registered, there is no corporation by estoppel.

Two Levels: (i) With “Fraud;” and (ii) Without “Fraud”

 When the incorporators represent themselves to be officers of the corporation
which was never duly registered with the SEC, and engage in the name of the
purported corporation in illegal recruitment, they are estopped from claiming that
they are not liable as corporate officers under Sec. 25 of Corporation Code
which provides that all persons who assume to act as a corporation knowing it
to be without authority to do so shall be liable as general partners for all the
debts, liabilities and damages incurred or arising as a result thereof.

TRUST FUND DOCTRINE

 The capital stock of the corporation especially its unpaid subscriptions is a trust
fund for the benefit of the general creditors of the corporation.

 Commercial/Common Law Premise: Equity versus Debts (Art. 2236, Civil

Code): Art. 2236 The debtor is liable with all his property, present and future, for
the fulfillment of his obligations, subject to the exceptions provided by law.
Nature of Doctrine:
- Under the trust fund doctrine, the capital stock, property and other assets of
the corporation are regarded as equity in trust for the payment of the
corporate creditors.
- The “trust fund” doctrine considers the subscribed capital stock as a trust fund
for the payment of the debts of the corporation, to which the creditors may
look for satisfaction. Until the liquidation of the corporation, no part of the
subscribed capital stock may be turned over or released to the stockholder
(except in the redemption of the redeemable shares) without violating this
principle. Thus dividends must never impair the subscribed capital stock;
subscription commitments cannot be condoned or remitted; nor can the
corporation buy its own shares using the subscribed capital as the
consideration therefore.
- The requirement of unrestricted retained earnings to cover the shares is
based on the trust fund doctrine which means that the capital stock, property
and other assets of a corporation are regarded as equtiy in trust for the
payment of corporate creditors. The reason is that creditors of a corporation
are preferred over the stockholders in the distribution of corporate assets.
There can be no distribution of assets among the stockholders without first
paying corporate creditors. Hence, any disposition of corporate funds to the
prejudice of creditors is null and void. Boman Environmental Dev. Corp. v. CA

BOMAN ENVIRONMENTAL DEV. CORP. V. CA

Facts: Respondent Fajilan offered in writing to resign as President of petitioner

BEDECO and to sell to the company all his shares, rights, and interests therein plus
the transfer to him of the company’s Isuzu truck which he had been using. The Board
of Directors approved his resignation and promised to pay him on a staggered basis.
BEDECO was able to pay twice but defaulted in paying the balance. Respondent
Fajilan then filed a complaint for collection which the trial court dismissed ruling that
the controversy arose out of intra-corporate relations hence SEC has jurisdiction. On
appeal, CA ruled for respondent Fajilan.

Issue: Whether or not SEC has jurisdiction in the exercise of respondent’s appraisal
right.

Ruling: YES. Fajilan’s suit against the corporation to enforce the latter’s promissory
note or compel the corporation to pay for his shareholdings is cognizable by the SEC
alone which shall determine whether such payment will not constitute a distribution of
corporate assets to a stockholder in preference over creditors of the corporation. The
SEC has exclusive supervision, control and regulatory jurisdiction to investigate
whether the corporation has unrestricted retained earnings to cover the payment for
the shares, and whether the purchase is for a legitimate corporate purpose as
provided in Sections 41 and 122 of the Corporation Code.
The requirement of unrestricted retained earnings to cover the shares is based
on the trust fund doctrine which means that the capital stock, property and other
assets of a corporation are regarded as equity in trust for the payment of corporate
creditors. The reason is that creditors of a corporation are preferred over the
stockholders in the distribution of corporate assets. There can be no distribution of
assets among the stockholders without first paying corporate creditors. Hence, any
disposition of corporate funds to the prejudice of creditors is null and void.

NTC vs CA

FACTS: NTC served on the PLDT the following assessment notices and demands for
payment: 1. The amount of P7,495,161.00 as supervision and regulation fee under
sec. 40(e) of the Public Service Act (PSA) of 1988, computed at P0.50 per P100.00
of the PLDT’s outstanding capital stock as at Dec. 31, 1987 which then consisted of
Serial Preferred Stock amounting to P1,277,934,390.00 and Common Stock of
P221,097,785.00 or a total of P1,499,032,175.00 2. The amount of P9,000,000.00 as
permit fee under Sec. 40(f) of the PSA for the approval of the PLDT increase of its
authorized capital stock from P2.7B to P4.5B; and 3. The amounts of P12,261,600.00
and P33,472,030.00 as permit fees under sec. 40(g) of the PSA in connection with
the Commissions decisions, approving the PLDT equity participation in the Fiber Optic
Interpacific Cable systems and X-5 Service Improvement and Expansion Program.
PLDT challenged the aforesaid assessments that these were being made to 1. Raise
revenues and not as mere reimbursements 2. The assessments should only have
been on the basis of the par values PLDT’s outstanding capital stock and 3. NTC has
no authority to compel PLDT of the assessed fees under Sec. 40(f) for the increase
since NTC did not render any supervisory or regulatory activity and incurred no
expenses in relation thereto. NTC denied the protest of PLDT for lack of merit, MR
denied. PLDT appealed with the CA, CA modified the NTC decision changing the
basis of the computation of supervision and regulation fees under sec. 40(f) of the
PSA.

ISSUE: whether the court of appeals erred in holding that the computation of
supervision and regulation fees under section 40 (f) of the public service act should
be based on the par value of the subscribed capital stock.

RULING: The law in point is clear and categorical. The basis for computation of the
fee to be charged by NTC on PLDT is the capital stock subscribed or paid and not the
property and equipment.
It bears stressing that it is not the NTC that imposed such a fee. It is the
legislature itself. Since Congress has the power to exercise the State inherent powers
of Police Power, Eminent Domain and Taxation, the distinction between police power
and the power to tax, which could be significant if the exercising authority were mere
political subdivisions, would not be of any moment when, as in the case under
consideration, Congress itself exercises the power. All that is to be done would be to
apply and enforce the law when sufficiently definitive and not constitutional infirm.
To Purchase Own Shares

SEC. 8. Redeemable Shares. - Redeemable shares may be issued by the

corporation when expressly provided in the articles of incorporation. They are shares
which may be purchased by the corporation from the holders of such shares upon the
expiration of a fixed period, regardless of the existence of unrestricted retained
earnings in the books of the corporation, and upon such other terms and conditions
stated in the articles of incorporation and the certificate of stock representing the
shares, subject to rules and regulations issued by the Commission.

SEC. 40. Power to Acquire Own Shares. - Provided that the corporation has
unrestricted retained earnings in its books to cover the shares to be purchased or
acquired, a stock corporation shall have the power to purchase or acquire its own
shares for a legitimate corporate purpose or purposes, including the following cases:
a. To eliminate fractional shares arising out of stock dividends;
b. To collect or compromise an indebtedness to the corporation, arising out of
unpaid subscription, in a delinquency sale, and to purchase delinquent shares
sold during said sale; and
c. To pay dissenting or withdrawing stockholders entitled to payment for their
shares under the provisions of this Code.

SEC. 42. Power to Declare Dividends. -The board of directors of a stock corporation
may declare dividends out of the unrestricted retained earnings which shall be
payable in cash, property, or in stock to all stockholders on the basis of outstanding
stock held by them: Provided, That any cash dividends due on delinquent stock shall
first be applied to the unpaid balance on the subscription plus costs and expenses,
while stock dividends shall be withheld from the delinquent stockholders until their
unpaid subscription is fully paid: Provided, further, That no stock dividend shall be
issued without the approval of stockholders representing at least two-thirds (2/3) of
the outstanding capital stock at a regular or special meeting duly called for the
purpose.
Stock corporations are prohibited from retaining surplus profits in excess of one
hundred percent (100%) of their paid-in capital stock, except:
a. when justified by definite corporate expansion projects or programs approved
by the board of directors; or
b. when the corporation is prohibited under any loan agreement with financial
institutions or creditors, whether local or foreign, from declaring dividends
without their consent, and such consent has not yet been secured; or
c. when it can be clearly shown that such retention is necessary under special
circumstances obtaining in the corporation, such as when there is need for
special reserve for probable contingencies.

SEC. 139. Corporate Liquidation. -Except for banks, which shall be covered by the
applicable provisions of Republic Act No. 7653, otherwise known as "The New Central
Bank Act", as amended, and Republic Act No. 3591, otherwise known as the
Philippine Deposit Insurance Corporation Charter, as amended, every corporation
whose charter expires pursuant to its articles of incorporation, is annulled by forfeiture,
or whose corporate existence is terminated in any other manner, shall nevertheless
remain as a body corporate for three (3) years after the effective date of dissolution,
for the purpose of prosecuting and defending suits by or against it and enabling it to
settle and close its affairs, dispose of and convey its property, and distribute its assets,
but not for the purpose of continuing the business for which it was established.
At any time during said three (3) years, the corporation is authorized and
empowered to convey all of its property to trustees for the benefit of stockholders,
members, creditors and other persons in interest. After any such conveyance by the
corporation of its property in trust for the benefit of its stockholders, members,
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
stockholders, members, creditors or other persons-in-interest.
Except as otherwise provided for in Sections 93 and 94 of this Code, upon the
winding up of corporate affairs, any asset distributable to any creditor or stockholder
or member who is unknown or cannot be found shall be escheated in favor of the
national government.
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.

Rescission of Subscription Agreement Based on Breach

- The violation of terms embodied in a subscription agreement, with are personal
commitments, do not constitute legal ground to rescind the subscription
agreement since such would violate the Trust Fund Doctrine and the procedures
for the valid distribution of assets and property under the Corporation Code. “In
the instant case, the rescission of the Pre-Subscription Agreement will effectively
result in the unauthorized distribution of the capital assets and property of the
corporation, thereby violating the Trust Fund Doctrine and the Corporation Code,
since the rescission of a subscription agreement is not one of the instances when
distribution of capital assets and property of the corporation is allowed.”

Distribution of Corporate Assets

 “The distribution of corporate assets and property cannot be made to depend
on the whims and caprices of the stockholders, officers or directors of the
corporation, or even, for that matter, on the earnest desire of the court a quo ‘to
prevent further squabbles and future litigations’ unless the indispensable
conditions and procedures for the protection of the corporate creditors are
followed. Otherwise, the ‘corporate peace’ laudably hoped for by the court will
remain nothing but a dream because this time, it will be the creditors’ turn to
engage in ‘squabbles and litigations’ should the court order an unlawful
distribution in blatant disregard of the Trust Fund Doctrine.”
 The trust fund doctrine applies in the following cases:
1. where the corporation has distributed its capital among the stockholders
without providing for the payment of creditors
2. where it had released subscribers to capital stock from their subscription
receivables
3. where it had transferred corporate property in fraud of its creditors and
 4. where the corporation is insolvent.

Statutory references:
1. Sec. 122 of the Corp. Code governing dissolution of corporations and their
liquidation when it provides that “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.”
2. SEC Rules governing Redeemable and Treasury Shares expressly adopts the
doctrine as follows, “the outstanding capital stock of a corporation, including
unpaid subscriptions, shall constitute a trust fund for the benefit of its creditors
which shall not be returned to the stockholders by repurchase of shares or
otherwise, except in the manner as provided for under the Corporation Code and
this rules.

Coverage of Trust Fund Doctrine – adopted the two precursors of the trust fund
doctrine which is the a.) capital impairment rule and the b.) profit rule. A fixed capital
must be preserved for protecting the claims of creditors so that dividend distributions
to stockholders should be limited to profits earned or accumulated by the corporation.
In a solvent corporation, the trust fund doctrine encompasses only the capital stock.
1. Coverage of capital stocks – covers “capital stock;” the protection by the doctrine
upon corporation not in a state of insolvency but only up to the extent of the
“capital stock” of the corporation.
2. Retained earnings – although part of the stockholder’s equity, do not constitute
part of the “capital stock.” It is not covered by the doctrine. The corporation is at
liberty to declare and pay out dividends from its assets.
3. Outstanding capital stock – total shares of stock issued to subscribers or
stockholders whether or not fully or partially paid (as long as there is a binding
subscription agreement) except treasury shares (Sec. 137 ).
4. Par value stock – capital stock represented by aggregate par value of all shares
issued and subscribed. If par value shares are sold at premium, excess is not
treated as legal capital/capital stock but can be declared as stock dividends. This
stock dividends fall within the ambit of the Trust Fund doctrine.
5. No par value stock – legal capital = total consideration received for the shares of
stock. Entire consideration for no par value stock treated as capital and not
available for distribution as dividends.

Funds received by a corporation – to cover subscription payment on increase in

authorized capital stock prior to approval thereof of the SEC would not be covered by
the TFD. As a TF, this money is still withdrawable by any of the subscribers at any
time before issuance of the corresponding shares of stock, unless there is a pre-
subscription to the contrary.
PHILTRUST CO VS RIVERA

Facts:
• Action instituted on November 21, 1921 in the CFI of Manila by Phil. Trust Co.
against Marciano Rivera.
• The case was for recovery of balance iao P22,500.00, alleged due upon
defendant’s subscription to the capital amount of insolvent La Cooperativa Naval
Filipina.
• CFI ruled in favor of the plaintiff, hence the appeal of the defendant.
• The reason for the failure of Mr. Rivera to pay his 450 subscription or iao 45,000.00
(par value is P100) is that not long after the cooperative has been incorporated, a
stockholder meeting occurred, at which a resolution was adopted to effect that the
capital should be reduced 50% and the subscribers released from obligation to
pay any unpaid balance in excess of 50% of their subscription.
• After which, certificates of full payment were released to the respective
subscribers one-half of his fully paid original subscription.
• It does not appear that the acts was done correlating to the formalities prescribed
in Sec.17 of the Corporation Law (Act No. 1459)
• In time, the company went bankrupt and went into the hands of Phil. Trust Co, as
assignee in bankruptcy.

Issue: Whether or not the releasing of 50% of the subscription and issuance of full
payment for one-half of his fully paid original subscription is valid.

Ruling: No. It is not valid.

A corporation has no power to release an original subscriber to its capital stock
from the obligation of paying for his shares, without a valuable consideration for such
release; and as against the creditors a reduction of the capital stock can take place
only in the manner and under the conditions prescribed by the statute or the charter
or the articles of incorporation. Moreover, strict compliance with the statutory
regulations is necessary.
In the case before us, the resolution releasing the shareholders from their
obligation to pay 50% of their respective subscriptions was an attempted withdrawal
of so much capital from the fund upon which the company’s creditors were entitled
ultimately to rely and, having been effected without compliance with the statutory
requirements, was wholly ineffectual.

Corporation Law (Act No. 1459)

Section 17. No corporation shall increase or diminish its capital stock, or incur, create,
or increase any bonded indebtedness unless, at a stockholders' meeting regularly
called for the purpose, two-thirds of the entire corporate capital stock subscribed shall
favor the increase or diminution of the capital stock, or a majority of the subscribed
capital stock shall favor the incurring, creating, or increasing of any bonded
indebtedness. Written or printed notice of the proposed increase or diminution of the
capital stock or of the incurring, creating, or increasing of any bonded indebtedness
and of the time and place of the stockholders' meeting at which the proposed increase
or diminution of the capital stock or the incurring, creating, or increasing of any bonded
indebtedness is to be considered must be addressed to each stockholder at his place
of residence as shown by the books of the corporation and registered and deposited
so addressed in the post-office with postage prepaid.
A certificate in duplicate must be signed by a majority of the directors of the
corporation and countersigned by the chairman and secretary of the stockholders'
meeting showing compliance with the requirements of this section, the amount of the
increase or diminution of the capital stock, or the bonded indebtedness to be incurred,
created, or increased, the actual indebtedness of the corporation on the day of the
meeting, the amount of stock represented at the meeting, and the vote authorizing
the increase or diminution of the capital stock or the incurring, creating, or increasing
of any bonded indebtedness. One of the duplicate certificates shall be kept on file in
the office of the corporation and the other shall be filed in the office of the Chief of the
Division of Archives, Patents, Copyrights, and Trade-Marks of the Executive Bureau
and attached by him to the original articles of incorporation. From and after the filing
of the duplicate certificate with the chief of the said division the capital stock shall
stand increased or diminished and the incurring, creating, or increasing of any bonded
indebtedness authorized as the certificate may declare.
The Chief of the said Division of Archives, Patents, Copyrights, and Trade-
Marks shall be entitled to collect the sum of twenty pesos for filing said duplicate
certificate.

STEINBERG VS VELASCO

Facts: Steinberg (P) is the receiver of Sibuguey Trading Corp. P alleges that
[Velasco, as president, Del Castillo, as vice-president, Navallo, as secretary-
treasurer, and Manuel, as director of the trading Company][R], at a meeting of the
board of directors held on July 24, 1922, approved and authorized various lawful
purchases already made of a large portion of the capital stock of the company from
its various stockholders, thereby diverting its funds to the injury of the creditors of the
corp. At the time of such purchase, the corporation had debts amounting to
P13,807.50, most of which were unpaid at the time petition for the dissolution of the
corporation was financial condition, in contemplation of an insolvency and dissolution.
P also alleges that R approved a resolution for the payment of P3,000 as dividends
to its stockholders, which was done in bad faith, and to the injury and fraud of its
creditors since it had accounts less in amount than the accounts receivable. R argues
that the distribution of dividends was authorized by the board of directors and they
constitute surplus profit of the corp. The lower court found out that R authorized the
purchase of, purchased and paid for, 330 shares of the capital stock of the corporation
at the agreed price of P3,300, and that at the time the purchase was made, the
corporation was indebted in the sum of P13,807.50, and that according to its books,
it had accounts receivable in the sum of P19,126.02.

Issue: Whether R can declare dividends.

Ruling: No. The action of the board in purchasing the stock from the corporation and
in declaring the dividends on the stock was all done at the same meeting of the board
of directors. The directors were permitted to resign so that they could sell their stock
to the corporation. The authorized capital stock was P20,000 divided into 2,000
shares of the par value of P10 each, which only P10,030 was subscribed and paid.
Deducting the P3,300 paid for the purchase of the stock, there would be left P7,000
of paid up stock, from which deduct P3,000 paid in dividends, there would be left
P4,000 only. R acted on assumption that it appeared from the books of the corporation
that it had accounts receivable of the face value of P19,126.02, therefore it had a
surplus over and above its debts and liabilities. However, there is no stipulation as to
the actual cash value of those accounts, and it does appear from the stipulation that,
P12,512.47 of those accounts had but little value. The corporation did not then have
an actual bona fide surplus from which the dividends could be paid, and that the
payment of them in full at the time would affect the financial condition of the
corporation. Because of this, the directors did not act in good faith or that they were
grossly ignorant of their duties. Creditors of a corporation have the right to assume
that so long as there are outstanding debts and liabilities, the board of directors will
not use the assets of the corporation to purchase its own stock, and that it will not
declare dividends to stockholders when the corporation is insolvent.