TITLE XV: DISSOLUTION AND LIQUIDATION

Gelano v. CA (1981) Digest

Doctrine: when a corporation has a pending action and w/c cannot be
terminated w/in the 3 yr period = the counsel who prosecuted and defended
the interest of a corporation in the instant case and who appeared in behalf
of the corporation may be CONSIERED A TRUSTEE of the corporation at
least with respect to the matter in litigation only.
Facts:
- Insular Sawmill is a corporation organized with a corporate term of
50 yrs. It is engage in general lumber and sawmill business.
- To carry out its business, Insular leases the paraphernal property of
Guillermina Gelano (wife).
o Husband Carlos Gelano received from the corporation cash
advances on account of rentals.
Carlos was only able to partially pay despite the
demands of the corporation.
Wife also refused to pay claiming that the amount
was for the personal account of the husband and
that she had no knowledge or consent re: the debt. It
also did not benefit the family.
- On various occasions, husband and wife also made credit purchases
of lumber materials from Insular.
- Moreover, in order to accommodate/help the petitioners renew
previous loans, Insular executed joint promissory notes with Carlos.
o Wife also rejected this saying she had no knowledge.
- Corporation filed complaint via Atty. Lee.
- Meanwhile Insular amended its AOI to shorten it term of existence.
o It was filed and approved by SEC but the trial court was not
notified of the amendment shortening the corporate
existence.
- 4 years after dissolution, the trial court rendered a decision in favor of
Insular ordering Mr. & Mrs. Gelano to pay the contested amounts.
- Both parties appealed to CA; which modified the judgment raising the
amount from 4k to 8k.
- The Gelanos came to know of the dissolution of Insular and filed a
motion to dismiss on the ground that:
o The case was prosecuted after the dissolution of the
corporation. A defunct corporation cannot maintain any suit
without complying with the requirements of winding up and
the assignment of its property right within the required
period.

Issue:
- W/N the corporation whose life had ceased because of the expiration
of its term could still continue prosecuting and defending suits after
its dissolution and beyond the 3 year period WITHOUT having taken
steps to transfer assets to a trustee or assignee?
Held:
-

Sec 77 of Corp Code provides that the corporation shall continue as

a body corporate for 3 yrs after it has been dissolved for the purpose
of prosecuting and defending suits against.
o At any time during the 3 yrs, the corp can convey all of its
properties to trustees for the benefit of the members,
stockholders and creditors and others interested.
There is no time limit for the trustee to complete
liquidation but the CONVEYANCE to the trustees
must be made w/in the 3yr period.
Trustees to whom the corporate assets have been
conveyed pursuant to the authority of Sec 78 may
sue and be sued in all matters connected to
liquidation.
General Rule: after the expiration of said period, the corp ceased to
exist for all purposes and it can no longer sue or be sued.
o Exception: when a corporation has a pending action and w/c
cannot be terminated w/in the 3 yr period = the counsel who
prosecuted and defended the interest of a corporation in the
instant case and who appeared in behalf of the corporation
may be CONSIERED A TRUSTEE of the corporation at
least with respect to the matter in litigation only.
There is substantial compliance with Sec 78 of the
Corp Code and Insular can still continue prosecuting
the case even beyond the 3 yr period as represented
by its counsel.
The word trustee must be understood in its general concept: w/c
include the counsel to whom was entrusted with the prosecution in
present case.
Insular ceased as a corp on Dec 1960, but the case was instituted in
May 1959 when the corp was still alive.
o Any litigation filed by or against it instituted w/in the 3 yr
period but could not be terminated must necessarily prolong
the said period until final termination of the suit.

No vested rights to corporate fiction

- Juridical persons w/n incorporated may come to an end for a variety
of reasons.
o Fulfillment of abandonment of the business purpose.
o Termination of corporate life
o Dissolution of the corporation
Winding up of its operations
Liquidation of assets
Payment of its obligation and distribution of residual
assets to stockholders
- Dissolution of juridical entity doesn't by itself imply the diminution or
extinction of rights demandable against a juridical entity.
- When assets of a dissolved entity are taken over by another entity =
successor entity must be held liable for the obligations of the
dissolved entity (to the extent of the fair value of assets actually
taken over)
Nature of dissolution
- Dissolution signifies the extinguishment of a corporations franchise
and termination of its corporation existence for business purpose.
- Dissolution legally affects the nature and capacity of the juridical
person of the corporate being.
o The mere fact the corp ceased to do business does not
necessarily constitute dissolution or diminution of the legal
power and capacity of the corporation.
- Distinction between dissolution de jure and de facto
o De jure
Adjudged by or determined by administrative or
judicial sentence.
Brought by act of sovereign
Results from the expiration of charter period of
corporate life.
o De Facto
By reason of insolvency, cessation of business,
suspension of all its operation
Goes into liquidation
Still retains primary franchise
Dissolution only of the business enterprise will
leaving the juridical entity intact.
Methods of dissolution
- Corps are dissolved either voluntarily
o 3 modes of voluntary dissolution
where no creditors are affected = by administrative
application for dissolution filed w/SEC

when creditors are affected = by formal petition for

dissolution w/ SEC, due notice and hearing are
conducted.
Shortening of corp term = by amendment of AOI
* another voluntary dissolution = allowing the copr term as provided by AOI.

Vesegas v. CA
- Board resolution to dissolve the corp doesn't operate to dissolve the
juridical entity.
- Juridical entity of a corporation is NEVER considered a property right
of the corp since It is the franchise that is w/in the control of the state.
o The juridical entity cant be legally affected except under the
terms provided by the state or by official proceeding
mandated by law.
Voluntary dissolution where no creditors are affected
- trust fund doctrine would not be adversely affected
- only SEC application for dissolution is required.
- The process is equivalent to the application for the amendment of
AOI except that in addition, there must be publication of the notice of
dissolution.
Sec 118 reqs for dissolution
- majority vote of the Board of Directors/Trustees
- sending of notice to the stockholders 30 days prior meeting
- publication f notice of meeting for 3 consecutive weeks
- ratification of 2/3 OCS or 2/3 members
- filing w/ SEC of a copy of the resolution authorizing dissolution,
countersigned by Corp Secretary
- issuance by SEC of certificate of dissolution

SEC will not deny an application for dissolution when there are no
creditors prejudiced because of:
o Constitution prohibition against involuntary servitude
o Right to form association and right to refuse to continue an
assoc.
rd
Since no 3 parties are involved, state through SEC will grant the
application for dissolution.

Voluntary dissolution where creditors are affected

- file formal petition for dissolution w/ SEC
- proceedings are quasi-judicial in nature
o conducted to ensure that rights of creditors are fully
protected.
- Sec is NOT mandated to dissolve the corp

Creditors may still wish to rehabilitate the operations of the

corp.

Sec 119 procedure

- petition for dissolution shall be filed with SEC signed by majority of
the Board, verified by Pres or Secretary setting forth:
o claims and demands against corp
o affirmative vote of 2/3 OCS or 2/3 members at a meeting
called for a purpose
o copy of order shall be published
o upon 5 days notice, given after the date on w/c the right to
files objection is fixed in the order has expired = the SEC
shall proceed to hear the petition and try any issue made by
objections filed.
o
If no such objection is sufficient, and the material allegations
of the petition are true = it shall render judgment dissolving
the corporation and directing such disposition of its assets.
Receiver may also be appointed to collect assets and pay
the debts of the corp.
Dissolution by Shortening the Cop Term
- effected by amending the AOI
- notice of dissolution of the corporation by shortening of the corporate
term must be published in newspaper of general circulation for 3 wks
- list of corporate creditors with their consent to the shortening must
also be filed
- accompanied with the submission to SEC of the ff:
o undertaking under oath that majority stockholders and
principal offices shall personally answer for any outstanding
obligations of the corp.
o latest audited financial statements of the corporation w/c
must no be earlier than the date of the meeting w/c approved
the amendment of the AOI.
o BIR clearance on tax liabilities of the corp.
- Upon approval of the amended AOI or the expiration of the
shortened term = the corporation is deemed dissolved without further
proceedings
- If the shortened term expires before the SEC approval, the corp will
not be automatically dissolved but only upon approval of the SEC of
such amendment.
- If the SEC gives approval after the shortened term expires, then
dissolution only take effect upon stipulated shortened term.

Dissolution by expiration of the corporate term

- when the corporate life stated in the AOI is allowed to expire w/o
extension, the corp is deemed dissolved by such expiration without
further action.
- The corp cannot extend its life by amending the AOI w/in the 3 yr
period of liquidation when its original term has already expired.
- The 3yr period for liquidation is not for continuing the business, it is
limited to liquidation
o The extension of corporate life IS DEEMED to constitute
NEW BUSINESS and cannot be validly pursued during
liquidation stage.
- Sec 11: the corporate term as originally stated in the AOI may be
extended in any SINGLE instance by amendment of AOI. It cannot
be made earlier than 5 years prior to the original expiry date.
- The privilege of amendment of the corp term is purely statutory
- Extension must be taken during the life of the corporation and
BEFORE the expiration of its term.
- The corp is IPSO FACTO dissolved as soon as the term expires.
Obtaining tax clearance
- w/in 30 days after the adoption of a resolution or plan for
dissolution/liquidation or when corps are notified of involuntary
dissolution by the SEC = it is necessary to file return w/ BIR.
- When corp undergoes dissolution it is required to submit a tax return
on income earned form the beginning of the year up to the date of
dissolution and also to pay the taxes due.
- SEC is required to furnish CIR a copy of the order or involuntary
dissolution or suspension of the primary franchise
- SEC shall issue the final order of dissolution only after the certificate
of tax clearance has been submitted by the dissolving corp.
o In the case of involuntary dissolution, SEC may still proceed
with the dissolution If 30 days after the receipt of the
suspension order no tax clearance has been issued.
Involuntary Dissolution
- dissolved by the SEC upon filling of a verified complaint and after
notice and hearing.
- Grounds:
o Corp doesn't formally organize or commence transaction of
its business w/in 2 yrs from the date of incorporation
o Corp becomes continuously inoperative for at least 5 yrs
o Fails to adopt bylaws
o Offends a provision of law for its creation or renewal
o Committed or omitted an act w/c amounts to surrender of
corporate right, privileges, franchise

o
o
o
o
o
o

Misuse of corporate right/privilege; use of franchise in

contravention of law; commission of ultra vires or illegal acts.
Based on the finding of Management Committee or SEC
continuance of business of the corp would not be feasible or
profitable
Corp is guilty of fraud in procuring certificate of registration
Guilty of serious misrepresentation
Refusal to comply or defiance of SEC order
Failure to file required reports in appropriate forms.

When corporation deemed organized

- election of officers, subscription and payment of capital stock,
adoption of by laws and other steps necessary to endow legal entity
the capacity to transact legitimate business
o organization = systemization of internal managerial affairs
and organs of the corp.
- SEC Rules: corporation deemed formally organized when:
o Adoption of bylaws after filing and approval of SEC
o Election of Board/Trustees
o Establishment of principal office
o Providing for the subscription and payment of the capital
stock and taking other steps to endow legal entity with
capacity to transact.
When corporation deemed to have commenced business
- when it has performed preparatory acts geared towards fulfillment of
purposes established in charter (not limited to the following):
o entering into contracts or negotiations for lease/sale of
properties to be used as business site
o making plans for and the construction of the factory
o taking steps to expedite the construction of the company
working equipment.
Procedure for Involuntary Dissolution
- Under old rule:
o Soll Gen or public prosecutor when directed by Pres or when
upon complaint or if he has good reason to believe that
dissolution is warranted = he may pursue quo warranto
proceeding against the corp.
o RTC special commercial courts do not provide for rules
governing dissolution because quasi judicial jurisdiction of
the SEC in case of involuntary dissolution is provided under
Sec 121 of Corp Code.
- Under PD 902-A
o Management committee can be created

No automatic dissolution of a corporation after its

incorporation has been approved by the SEC. it shall
continue to exist as a juridical entity notwithstanding its nonoperational status until certificate of registration is formally
revoked by SEC after due notice and hearing.

Right of Minority stockholders to demand dissolution

- minority stockholders don't have common law rights or statutory right
to demand dissolution of corporation
o they invest in the copr aware that the corporate affairs will be
subject to the control of the majority.
- General Rule: minority stockholders cannot sue and demand for
dissolution
o Except: they are unable to obtain redress and protection of
their rights w/in the corporation.
Cases when Government doesn't want to intervene
because the complaint is strictly intra-corporate
Private interest ruling finds statutory support from
title XII on close corp w/c provides that in cases of
deadlock or illegal/ fraudulent acts = stockholder
may seek dissolution of corp.
Jurisprudential attitude towards involuntary dissolution
- dissolution is a serious remedy granted by the courts only in
EXTREME cases and only to ensure that prejudice to the PUBLIC is
avoided.
- Even when the prejudice is public in nature, the remedy is to enjoin
or correct the mistake and only when it cannot be remedied anymore
that dissolution should be imposed.
- Dissolution was imposed on banking corp because it risked the
savings of numerous people. (Public interest)
Legal Effects of dissolution
- Corp which reached dissolution is no longer qualified to receive a
secondary franchise
- Corp cant extend itself by amendment after expiration of orig term.
- Board resolution to dissolve corp doesn't operated to dissolve the
juridical entity. For dissolution to be effective the requirements
mandated by Corp Code should be strictly complied with.
- Dissolution of juridical entity doesn't by itself cause the extinction or
diminution of rights and liabilities since it is allowed to continue as a
juridical entity for 3 yrs to wind up.

Nature of Liquidation
- settlement of affairs of Corp
o adjusting debt claims
o distribution of assets
o discharging liabilities
o dividing surplus or loss
- in rem proceeding = all other interested persons are bound
- dissolution ALWAYS precedes liquidation
o in accordance with the trust fund doctrine
o except by decrease of capital stock, no corp shall distributed
any of its assets or property except upon lawful dissolution
and after payment of debts and liabilities.
Methods of Liquidation
- old method:
o old corp code didn't contain provision that allowed action
after 3yr period of liquidation = all actions for or against the
corp is abated after the expiration
- present rule:
o even after 3yr period, creditors can still pursue their claims
against corp assets against officers or stockholders who
have taken over the corporation
o although general rule is corp officer is not liable to corporate
obligations = when he seizes corporate properties and
applies to his own obligation, he takes advantage of his
position and must be liable.
o There is nothing in the Corp Law that bars an action for the
recovery of debts of the corporation against the liquidator
after the lapse of the 3yr period.
- 3 recognized methods
o liquidation through Board/Trustees
o through a trustee
o through a receiver
Liquidation via Board/Trustee
- Sec 122 ( then sec 77 and 78 of the Old Corp Code)
o Normal method is for directors/executive officers to have
charge in the winding up operations
Alternative = assigning the property to the trustees
for the benefit of creditors and shareholders
Appointment of receiver is w/in discretion of the
court.

Liquidation via Trustee

- Sec 122
- during the 3 years of liquidation the corp is authorized to convey all
its property to trustees for the benefit of stockholder, members,
creditors and other persons w/ interest.
o When this happens, legal interest of corporation in the
property terminates and is vested in the trustees. The
beneficial interest is with the stockholder, creditors, members
and other persons w/ interest.
o Even after the lapse of 3 yr period = power of the Board
doesn't terminate to continue liquidation process because
the Board of Liquidators became the trustees.
There is no time limit as to the existence of the
board and its functions of closing the affairs of the
corporation.
- Term trustee should be understood in its general concept = to
include counsel entrusted w/ pending case.
- If a pending case against a dissolved corporation cannot be
terminated w/in the 3 yr period, any person, agency or entity
appointed by la to supervise the closing of its affairs is considered a
trustee who cannot be made jointly and severally liable.
Liquidation via receiver
- receiver has been appointed by the courts
- the appointment of a receiver by the court to wind up the affairs of
the corp upon petition for voluntary dissolution does not empower the
court to hear and pass claims of the creditors.
o All claims must be presented for allowance to the receiver or
trustee or other proper persons during the winding up
proceedings
- A receiver in liquidation stands on a different legal basis from a
trustee in liquidation.
o Trusteeship is contractual and governed by law on trust. It is
generally centered upon property such that trustee assume
naked/legal title
it is a relationship that could be created by the Board
without need of judicial authorization.
Trustee in liquidation is not appointed by the court
o A receivership is created by means of judicial or quasi
judicial appointment of the receiver.
The receiver is actually an officer of the court
SEC is empowered to create the management
committee
or
rehabilitation
receiver
which
manages/facilitates or takes custody of the corp
assets.

Also the 3 yr period does not apply because the

corporation is substituted by the receiver who may
sue or be sued.
When the liquidation is pursued either by the trustee or receiver, the
corporate personality is not important.
The trustee or receiver may lawfully proceed with liquidation even if
the corp no longer exists because he has legal title to the assets.

Disposition of Pending claims against dissolved corporation

- 3 year period for abatement to set in has been discarded by recent
SC rulings.
o Court held that dissolution or even the expiration of the 3
year liquidation period should not be a bar to the
corporations enforcement of its rights as a corporation.