Jose Maria College

College of Law

Group 5

Business Organization II

Written Report

Submitted By:

Almeda, Manuel

Delfin, Jennica Gyrl

Erum, Ramon Khalil

Escalante, Leo Balante Jr.

Inok, Erick Jay

Lazo, Artfel

Presto, Jonah Margarette

Romblon, Shirley Kris

 DISSOLUTION AND LIQUIDATION

DISSOLUTION

NATURE OF DISSOLUTION - “Dissolution” signifies the extinguishment of a corporation's franchise

and the termination of its corporate existence for business purpose. As distinguished from the actual
business enterprise operations, dissolution legally affects more the nature and capacity of the “juridical
person” of the corporate being. On the other hand, the mere fact that the corporation has ceased to do
business does not necessarily constitute a dissolution or diminution of the legal power and capacity of
the corporation. A distinction must be made between a dissolution de jure and dissolution de facto

A de jure dissolution is on adjudged and determined by administrative or judicial sentence, r brought

about by an act of the sovereign power. Or which result from the expiration of the charter period of
corporate life.

A de facto dissolution is one which takes place in substance and in fact when the corporation by reason
of insolvency, cessation of business, or suspension of all its operations, as the case may be, goes into
liquidation, still retaining its primary franchise to be a corporation. This is actually a dissolution of only
the “business enterprise” while leaving intact the juridical entity.

MODES/METHODS OF DISSOLUTION

A corporation formed or organized under the corporation Code may be dissolved either voluntarily or
involuntarily. There are (3) Modes of voluntary dissolution.

VOLUNTARY

WHERE NO CREDITORS ARE AFFECTED – Where no creditors are affected by the dissolution, by an
administrative application for dissolution filed with the SEC.

The Juridical entity of a corporation is never considered a property right of the corporation since its
franchise that is within the control of the State. Consequently, the juridical entity cannot be legally
affected except under the terms provided by the State, or by official proceeding mandated by law.

In Vesagas v CA; 371 SCRA 509; (2002), the court held that a board resolution to dissolve the
corporation does not operate to dissolve the juridical entity. The requirements set or mandated by the
Corporation Code should have been strictly complied with.

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PROCEDURE OF DISSOLUTION OF A CORPORATION WHERE CREDITORS ARE AFFECTED:

1. Approval of the stockholders representing at least 2/3 of the outstanding capital stock or by at
least two-thirds (2/3) of the members at a meeting of its stockholders or members called for that
purpose.
2. Filing of Petition for dissolution with SEC, petition must be:
a. Signed by a majority of its board of directors or trustees or other officers having the
management of its affairs;
b. Verified by its president or secretary or one of its directors or trustees;
c. Set forth all Claims and demands against it;d. State that its dissolution was approved by the
required votes of Stockholders or members.
3. SEC shall issue an Order reciting the purpose of the petition and fix a date when objections
thereto may be filed by any person. Said date must not be less than thirty (30) days nor more
than sixty (60) days after the entry of the order.
4. Copy of the order shall be: a. PUblished at least once a week for three (3) consecutive weeks in a
newspaper of general circulation published in the municipality or city where the principal office
of the corporation is situated, or if there be no such newspaper, then in a newspaper of general
circulation in the Philippines, and b. POsted for three (3) consecutive weeks in three (3) public
places in such municipality or city.
5. After expiration of the time to file objections and upon prior 5-day notice to hear the objections,
SEC shall proceed to hear the petition and try any issue made by the Objections file. 6. If no
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 as justice
requires, and may appoint a receiver to collect such assets and pay the debts of the corporation.

NOTE:

Under the RCC, only majority of the board are qualified to sign. And the new code includes additional
matters to be included in the petition. Specifically, it should state the reason for the dissolution the
form, manner and time of the meeting when votes were cast. The corporation must submit to the SEC,
a copy of the resolution authorizing dissolution certified by the majority of the board and countersigned
by the secretary, and list of all creditors. To do away with confusion, the new code states that dissolution
takes effects upon issuance of a certificate of dissolution by the SEC

CREDITOR’S CONSENT IS NOT NECESSARY FOR DISSOLUTION

Consent of creditors is not necessary to approve dissolution for the reason that liquidation proceedings
will be conducted to protect their interest.

PROCEDURE FOR DISSOLVING THE CORPORATION BY SHORTENING OF THE CORPORATE TERM

1. Amending the Articles of Incorporation pursuant to Sec. 16: a. Approved by majority vote of the board
of directors or trustees b. Ratified at a meeting by the stockholders representing at least 2/3 of the
outstanding capital stock or by at least two-thirds (2/3) of the members in case of non-stock
corporations.

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2. Copy of the amended AOI shall be submitted with the SEC.

3. Approval of SEC of the amended AOI. 4. As an additional requirement, the SEC requires to submit
the final audited Financial statement not older than 60 days before the application for shortening the
corporate term (CC, Sec. 120 in relation to Sec. 16)

NOTE:

Under the RCC the dissolution now takes effect from the expiration of the shortened terms stated in the
approved articles, without any further proceedings, And to prevent confusion, the new code now
specifically provides that in case of expiration of corporate term dissolution automatically takes effect in
the day following the last day of the corporate term as stated in the aritcles without need for issuance
by the SEC of a certificate of dissolution.

INVOLUNTARY DISSOLUTION

Sec 138. Involuntary dissolution – A corporation may be dissolved by the Commission motu proprio
or upon filing of a verified complaint by any interested party. The following may be grounds for
dissolution of the corporation:

[1] Non use of corporate charter as provided under section 21 of this Code;

[2] Continuous inoperation of a corporation as provided under Section 21 of this Code;

[3] Upon receipt of a lawful court order dissolving the corporation;

[4] Upon finding by final judgement that the corporation procured its incorporation through fraud;

[5] Upon finding by final judgement that the corporation:

[a] Was created for the purpose of committing, concealing or aiding the commission of securities
violations, smuggling, tax evasion, money laundering or graft and corrupt practices

[b] Committee or aided in the commission of securities violations, smuggling, tax evasion, money
laundering or graft and corrupt practices and its stockholders knew; and

[c] Repeatedly and knowingly tolerated the commission of graft and corrupt practices or other fraudulent
or illegal acts by its directors, trustees, officers or employees.

If the corporation is ordered dissolved by final judgement pursuant to the ground under subparagraph
5 hereof, its assets, after payment of its liabilities shall, upon petition of the Commission with the
appropriate court, be forfeited in favor of the national government. Such forfeiture shall be without
prejudice to the rights of innocent stockholders and employees for services rendered, and to the
application of other penalty or sanction under this Code or other laws. The Commission shall give
reasonable notice to, and coordinate with the appropriate regulatory agency prior to the involuntary
dissolution of companies under their special regulatory jurisdiction.

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NON-USER, 2 years –

When corporations does not formally organize and commences transaction of its business or the
construction of its works within 2 years from the daye of its incorporation, its coporate powers ceases
and the corporation shall be deemed dissolved ipso jure

NON-USER, 5 years-

When the corporation has commenced the transaction of its business but subsequently becomes
continously iniperative for at least 5 years, the same shall be ground for the suspension or revocation if
it’s corporate franchise. (not automatic because notice and hearing is required.)

LEGISLATIVE DISSOLUTION

A corporation created by special law can be dissolved by an enactment of special law or expiration of its
charter.

Limitations:

1. Under the constitution, the amendment, alteration or repeal of the corporate franchise of a public
utility shall be made only “when the common good so requires.” 2. Section 145. 3. It cannot impair the
obligations of existing contracts between the corporation and third persons, or take away vested rights
of its creditors. However, if effected because the common good so requires, there is no impairment.

DISSOLUTION BY THE SEC ON GROUNDS UNDER EXISTING LAWS

A corporation may be dissolved by the Securities and Exchange Commission upon filing of a verified
complaint and after proper notice and hearing on the grounds provided by existing laws, rules and
regulations (CC, Sec. 121).

The following are some of the grounds, which may result to the issuance of a dissolution order
by the SEC after conduct of appropriate proceedings:

1. Violations of the Corporation committed by the corporation. Such violations are generally penalized
by Sec. 144 as the Code did not specifically penalize the same.

2. Deadlocks in a close corporation (CC, Sec. 104)

3. Mismanagement of a close corporation (CC, Sec. 105)

4. On any of the following grounds, wherein the SEC retains its power to suspend or revoke, after proper
notice and hearing, the franchise or certificate of registration of the corporations, partnerships or
associations:

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a. Fraud or misrepresentation in procuring its Certificate of Registration;

b. Serious Misrepresentation as to what the corporation can do or is doing to the great prejudice of or
damage to the general public;

c. continuous Inoperation for a period of at least 5 years (Sec. 22, CC);

d. Refusal to comply or Defiance with any lawful order, rules or regulations of SEC restraining
commission of acts which would amount to a grave violation of its franchise;

e. Failure to file By-laws within the required period. However, SEC must give the corporation the
opportunity to explain such failure;

f. Failure within the prescribed period to submit required Reports in appropriate forms as determined
by the SEC (e.g. General Information Sheet, Financial Statements) (De Leon, 2010).

NOTE:

All actions filed with the SEC must be prosecuted and defended in the name of the real party-in-interest
(SEC Rules of Procedure, Rule III, Sec. 2).

METHODS OF LIQUIDATION

LIQUIDATION

Process by which all the assets of the corporation are converted into liquid assets (cash) in order to
facilitate the payment of obligations to creditors and the remaining balance if any is to be distributed to
the stockholders (Sundiang Sr. & Aquino, 2014).

METHODS OF LIQUIDATION

1. By the corporation itself or its board of directors or trustees

2. By conveyance to a trustee within a three-year period

3. By a management committee or rehabilitation receiver appointed by SEC

4. By liquidation after three years

1. BY THE CORPORATION ITSELF

Section 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 article 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.

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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 Section 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.

Alhambra Cigar vs. SEC

G.R. No. L-23606, July 29, 1968

FACTS:

On June 20, 1963 — within Alhambra's three-year statutory period for liquidation - Republic Act 3531
was enacted into law. It amended Section 18 of the Corporation Law; it empowered domestic private
corporations to extend their corporate life beyond the period fixed by the articles of incorporation for a
term not to exceed fifty years in any one instance. Previous to Republic Act 3531, the maximum non-
extendible term of such corporations was fifty years.

On July 15, 1963, at a special meeting, Alhambra's board of directors resolved to amend paragraph
"Fourth" of its articles of incorporation to extend its corporate life for an additional fifty years, or a total
of 100 years from its incorporation.

“FOURTH. That the term for which said corporation is to exist is fifty (50) years from and after the date
of incorporation, and for an additional period of fifty (50) years thereafter.”

On October 28, 1963, Alhambra's articles of incorporation as so amended certified correct by its
president and secretary and a majority of its board of directors, were filed with respondent Securities
and Exchange Commission.

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On November 18, 1963, SEC, however, returned said amended articles of incorporation to Alhambra's
counsel with the ruling that Republic Act 3531 "which took effect only on June 20, 1963, cannot be
availed of by the said corporation, for the reason that its term of existence had already expired when the
said law took effect in short, said law has no retroactive effect."

ISSUE:

Whether or not Alhambra could validly amend its articles of incorporation.

RULING: NO.

A dissolved corporation cannot by amendment of its articles of incorporation extend its corporate life
during the 3-year period liquidation for that would constitute ‘new business’.

Chua vs. NLRC

G.R. No. 81450, February 15, 1990

An insolvency proceeding is similar to the settlement of a decedent's estate in that it is a proceeding in

rem and is binding against the whole world. Therefore, all persons which have interest in the subject
matter involved, whether or not they are given notice are equally bound. Thus, "a liquidation of similar
import or other equivalent general liquidation must also necessarily be a proceeding in rem so that all other
interested persons whether known to the parties or not may be bound by such proceedings."

PVBank EMployees Union vs. Vega

G.R. No. 105364*, June 28, 2001

Liquidation, in corporation law, connotes a winding up or setting with creditors and debtors. It is the
winding up of a corporation so that assets are distributed to those entitled to receive them. It is the
process of reducing assets to cash, discharging liabilities and dividing surplus or loss.

On the opposite end of the spectrum, rehabilitation connotes a reopening or reorganization.

Rehabilitation contemplates a continuance of corporate life and activities in an effort to restore and
reinstate the corporation to its former position of successful operation and solvency.

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It is crystal clear that the concept of liquidation is diametrically opposed or contrary to the concept of
rehabilitation, such that both cannot be undertaken at the same time. To allow the liquidation
proceedings to continue would seriously hinder the rehabilitation of the subject bank.

METHODS OF CORPORATE LIQUIDATION

1. With the Board of Directors supervising the liquidation process, but their authority is good only
within a period of 3 years from corporate dissolution;
2. By transferring all of the assets to a Receiver or a Trustee, who will handle the liquidation process
even beyond the three-year period.

In the matter of the Voluntary Dissolution of George, O’Farrell & Cie., Inc. CHINA BANKING
CORPORATION and LEOPOLDO KAHN vs. M. MICHELIN & CIE.

G.R. No. 36930 June 30, 1933

There can be no doubt that under the Corporation Law, the Legislature intended to let the shareholders
have the control of the assets of the corporation upon dissolution in winding up its affairs.

The normal method of procedure is for the directors and executive officers to have charge of the winding
up of operations, though there is a the alternative method of assigning the property of the corporation
to the trustees for the benefit of its creditors and shareholders.

While an appointment of a receiver rests within the sound judicial discretion of the court, such discretion
must, however, always be exercised with caution and governed by legal and equitable principles, the
violation of which will amount to its abuse, and in making such appointment, the court should take into
consideration all the facts and weigh the relative advantages and disadvantages of appointing a receiver
to wind up the corporate business

PERIOD OF LIQUIDATION

The period of liquidation is three (3) years.

Corporation in the process of liquidation does not have legal authority to engage in any new business

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

2. BY CONVEYANCE TO A TRUSTEE WITHIN A 3-YEAR PERIOD

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At anytime during the 3-year period for liquidation, said corporation is authorized and empowered to
convey all of its property to trustees for the benefit of its stockholders, members, creditors and other
persons in interest.

Meaning of trustee

The word “trustee” as used in the law must be understood in its general concept. It has been held that
a counsel who prosecuted and defended the interest of a corporation and who in fact appeared in behalf
of the corporation before and after its dissolution by amendment of its articles of incorporation may be
considered a trustee of the corporation at least with respect to the matter in litigation only. The purpose
in the transfer of the assets of the corporation to a trustee upon its dissolution is more for the protection
of its creditors and stockholders. The appointment of said counsel can be considered a substantial
compliance. [Gelano v. CA, 103 SCRA 90 (1981)].

PERIOD OF EXISTENCE OF THE TRUSTEESHIP

Where no time limit has been fixed with respect to the existence of the trusteeship, the trustee has
authority to close the affairs of the corporation even after the expiration of the statutory 3-year period
and claims not barred by the statute of limitations can be presented and allowed until the liquidation is
terminated (National Abaca & Other Fibers Corp. v. Pore, G.R. No. L-16779, August 16, 1979).

Suits brought by the corporation within the 3year period but remained pending beyond said
period

A corporation that has a pending action and which cannot be terminated within the 3 year period after
its dissolution is authorized to convey all its property to a trustee to enable it to prosecute and defend
suits by or against the corporation beyond the 3-year period. The trustee may commence a suit which
can proceed to final judgment even beyond the 3-year period. The director may be permitted to continue
as trustees to complete the liquidation (Clemente v. CA, G.R. No. 82407, March 27, 1995).

Suits brought by the corporation beyond the 3year period are not barred

The trustee of a dissolved corporation may commence a suit which can proceed to final judgment even
beyond the 3-year period. The expiration of 3 years after the dissolution of a corporation does not affect
its right to enforce a favorable judgment, because under Sec. 145 of the CC (Sec 184, RCC), no right or
remedy in favor or against any corporation shall be removed or impaired either by subsequent
dissolution of said corporation or by any subsequent amendment or repeal of the CC or any part thereof
(Knecht v. United Cigarette Corp., G.R. No. 139370, July 4, 2002).

WHERE NO RECEIVER OR TRUSTEE HAS BEEN DESIGNATED AFTER DISSOLUTION:

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1. The board of directors or trustees itself may be permitted to so continue as “trustees” by legal
implication.

2. In the absence of the BoD or BoT, those having a pecuniary interest in the corporate assets,
stockholders or creditors, may make a proper representations with SEC for working out a final
settlement of the corporate concerns [Clemente v CA, 242 SCRA 717 (1995)].

3. The only surviving stockholder or director (SEC Opinion No. 10-96, Jan 29 2010)

4. The counsel who prosecuted and defended the interest of the corporation (Reburiano v CA, G.R. No.
102965, January 21, 1999).

3. BY MANAGEMENT COMMITTEE OR REHABILITATION RECEIVER

Liquidation by a receiver

In the case of a dissolution order where creditors are affected, the SEC may appoint a receiver to take
charge of the liquidation of the corporation (CC, Sec. 119).

NOTE:

Thus, the appointment of receiver is addressed to the sound discretion of the court or the SEC.

Appointment of receiver for a going corporation

The appointment of a receiver for a going corporation is a last resort remedy, and should not be employed
when another remedy is available. Relief by receivership is an extraordinary remedy and is never
exercised if there is an adequate remedy at law or if the harm can be prevented by an injunction or a
restraining order. Bad judgment by directors, or even unauthorized use and misapplication of the
company’s funds, will not justify the appointment of a receiver for the corporation if appropriate relief
can otherwise be had (Rev. Ao-As v. CA, G.R. No. 128464, June 20, 2006).

Even without dissolution, the court has authority to appoint a receiver for a corporation to protect and

preserve its properties for the use and benefit of its creditors and others who may have similar interests
in the property as where there is already a final and executory judgment against the corporation, which
is in a precarious financial condition [Central Sawmills, Inc. v Alto Surety and Ins. Co., 27 SCRA 247
(1969)].

Where corporate directors are guilty of breach of trust, minority stockholders may ask for receivership
[Chase v. CFI, 18 SCRA 602 (1966)].

The corporation, through its president cannot condone penalties and charges after it had been placed
under receivership.

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The appointment of a receiver operates to suspend the authority of a corporation and of its directors
and officers over its property and effects, such authority being reposed in the receiver (Yam v. CA, G.R.
No. 104726, February 11, 1999).

Corporate Rehabilitation

It refers to the restoration of the debtor to a condition of successful operation and solvency, if it is shown
that its continuance of operation is economically feasible and its creditors can recover by way of the
present value of payments projected in the plan, more if the debtor continues as a going concern than
if it is immediately liquidated [Sec. 4(gg), FRIA].

NATURE OF REHABILITATION PROCEEDINGS

Rehabilitation proceedings are summary and nonadversarial in nature, and do not contemplate
adjudication of claims that must be threshed out in ordinary court proceedings.

The jurisdiction of the rehabilitation court is over claims against the debtor that is under rehabilitation,
not over claims by the debtor against its own debtors or against third parties. The corporation under
rehabilitation must file a separate action against its debtors/insurers to recover whatever claim it may
have against them (Steel Corp. v. Mapfre Insular Insurance Corp., G.R. No. 201199, October 16, 2013,
in Divina, 2014).

Stay order and appointment of rehabilitation receiver

Under Section 6(c) of PD 902-A, receivers may be appointed whenever:

1) Necessary in order to preserve the rights of the parties-litigants; and/or 2) Protect the interest of the
investing public and creditors.

The stay order and appointment of a rehabilitation receiver is an "extraordinary, preliminary, ex parte
remedy." The effectivity period of a stay order is only "from the date of its issuance until dismissal of the
petition or termination of the rehabilitation proceedings." It is not a final disposition of the case. It is an
interlocutory order defined as one that "does not finally dispose of the case, and does not end the Court’s
task of adjudicating the parties’ contentions and determining their rights and liabilities as regards each
other, but obviously indicates that other things remain to be done by the Court."

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The Interim Rules does not require a hearing before the issuance of a stay order. What it requires is an
initial hearing before it can give due course to or dismiss a petition. Nevertheless, while the Interim
Rules does not require the holding of a hearing before the issuance of a stay order, neither does it
prohibit the holding of one. Thus, the trial court has ample discretion to call a hearing when it is not
confident that the allegations in the petition are sufficient in form and substance, for so long as this
hearing is held within the five (5)-day period from the filing of the petition — the period within which a
stay order may issue as provided in the Interim Rules (Pryce Corp. v. China Banking Corp., G.R. No.
172302, February 18, 2014, in Divina, 2014).

FRIA is prospective in application

Sec. 146 of the FRIA, which makes it applicable to “all further proceedings in insolvency, suspension of
payments and rehabilitation cases x x x except to the extent that in the opinion of the court their
application would not be feasible or would work injustice,” still presupposes a prospective application.
The wording of the law clearly shows that it is applicable to all further proceedings. In no way could it
be made retrospectively applicable to the Stay Order issued by the rehabilitation court in 2002. At the
time of the issuance of the Stay Order, the rules in force were the 2000 Interim Rules of Procedure on
Corporate Rehabilitation. Under those rules, one of the effects of a Stay Order is the stay of the
"enforcement of all claims, whether for money or otherwise and whether such enforcement is by court
action or otherwise, against the debtor, its guarantors and sureties not solidarily liable with the debtor.
Nowhere in the Interim Rules is the rehabilitation court authorized to suspend foreclosure proceedings
against properties of thirdparty mortgagors (Situs Development Corp., et al. v. Asiatrust Bank, et al.,
G.R. No. 180036, January 16, 2013).

Execution of rehabilitation plan

The Interim Rules on Corporate Rehabilitation provides for means of execution of the rehabilitation plan,
which may include, among others, the conversion of the debts or any portion thereof to equity,
restructuring of the debts, dacion en pago, or sale of assets or of the controlling interest. The
restructuring of the debts of PALI is part and parcel of its rehabilitation (Puerto Azul Land, Inc. v. Pacific
Wide Realty Development Corp., G.R. No. 184000, September 17, 2014).

RULES OF COURT APPLIES IN CASES OF APPEALS AND REVIEWS

Under Rule 3, Section 5 of the Rules of Procedure on Corporate Rehabilitation, the review of any order
or decision of the rehabilitation court or on appeal therefrom shall be in accordance with the Rules of
Court, unless otherwise provided (Robinson's Bank Corp v. Gaerlan, et al., G.R. No. 195289, September
24, 2014).

CRAM-DOWN CLAUSE

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Section 23.Approval of the Rehabilitation Plan.– The court may approve a rehabilitation plan over the
opposition of creditors, holding a majority of the total liabilities of the debtor if, in its judgment, the
rehabilitation of the debtor is feasible and the opposition of the creditors is manifestly unreasonable
(Sec. 23, Rule 4, Interim Rules of Procedure on Corporate Rehabilitation).

This provision, which is currently incorporated in the FRIA, is necessary to curb the majority creditors’
natural tendency to dictate their own terms and conditions to the rehabilitation, absent due regard to
the greater long-term benefit of all stakeholders. Otherwise stated, it forces the creditors to accept the
terms and conditions of the rehabilitation plan, preferring long-term viability over immediate but
incomplete recovery (BPI v. Sarabia Manor Hotel, G.R. no. 175844, July 29, 2013).

CONFIRMATION OF REHABILITATION PLAN BY THE COURT

Notwithstanding the rejection of the Rehabilitation Plan by the creditors, the court may confirm
the Rehabilitation Plan if all of the following circumstances are present:

1. The Rehabilitation Plan complies with the requirements specified in this Act;

2. The rehabilitation receiver recommends the confirmation of the Rehabilitation Plan;

3. The shareholders, owners or partners of the juridical debtor lose at least their controlling interest as
a result of the Rehabilitation Plan; and

4. The Rehabilitation Plan would likely provide the objecting class of creditors with compensation which
has a net present value greater than that which they would have received if the debtor were under
liquidation (Sec. 64, FRIA).

A corporation’s material financial commitment is significant for purposes of rehabilitation

A material financial commitment becomes significant in gauging the resolve, determination, earnestness
and good faith of the distressed corporation in financing the proposed rehabilitation plan. This
commitment may include the voluntary undertakings of the stockholders or the would-be investors of
the debtor-corporation indicating their readiness, willingness and ability to contribute funds or property
to guarantee the continued successful operation of the debtor corporation during the period of
rehabilitation (Philippine Bank of Communications v. Basic Polyprinters and Packaging Corp., G.R. No.
187581, October 20, 2014).

Claims against the corporation are suspended during rehabilitation

The suspension of all actions and/or claims against a corporation under rehabilitation does not only
cover cases which are pending in court. The automatic suspension of an action for claims embraces all
phases of the suit, that is, the entire proceedings of an action or suit and not just the payment of the
claims. The actions that were suspended cover all claims against a distressed corporation whether for

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damages founded on a breach of contract of carriage, labor cases, collection suits or any other claims of
a pecuniary nature. A claim arising from illegal dismissal is a claim covered by the suspension order
issued by the SEC, as it is one for pecuniary consideration.

Furthermore, jurisprudence is settled that the suspension of proceedings referred to in the law uniformly
applies to “all actions for claims” filed against a corporation xxx under management or receivership,
without distinction, except only those expenses incurred in the ordinary course of business (Molina v.
Pacific Plans, Inc., G.R. No. 165476, August 15, 2011, in Divina, 2014).

The stay order is effective on all creditors of the corporation without distinction, whether secured or
unsecured (Veterans Philippine Scout Security Agency, Inc. v. First Dominion Prime Holdings, Inc., G.R.
No. 190907, August 23, 2012, in Divina, 2014).

Claims which are not suspended during rehabilitation:

a. Criminal actions

The suspension of claims in corporate rehabilitation does not extend to criminal actions against the
distressed corporations or its directors and officers. It would be absurd for one who has engaged in
criminal conduct to escape punishment simply because the corporation of which he is director or officer
filed a petition for rehabilitation. The prosecution of the officers of the corporation has no bearing on the
pending rehabilitation of the corporation (Panlilio v. RTC, Branch 51, City of Manila, GR No. 173846,
February 2, 2011, in Divina, 2014).

b. Return of the subject of writ of replevin

The return of the car subject of the writ of replevin is correct notwithstanding the pendency of the
rehabilitation proceedings. This is the necessary consequence of the dismissal of the replevin case for
failure to prosecute without prejudice. Upon the dismissal of the replevin case, the writ of seizure, which
is merely ancillary in nature, became functus officio and should have been lifted. There was no
adjudication on the merits, which means that there was no determination of the issue who has the
better right to possess the subject car. Returning the seized vehicle is not an enforcement of a claim
against the distressed corporation which must be suspended by virtue of the stay order issued by the
rehabilitation court. The issue in a replevin case is who has a better right of possession. So long as the
respondent is not interposing a monetary claim, respondent’s prayer for the return of the car subject of
the replevin suit is not in any way violative of the Rules on Corporate Rehabilitation (Advent Capital and
Medical Corp. v. Young, G.R. No. 183018, August 3, 2011, in Divina, 2014).

The prevailing rule now categorically provides that awards for moral damages, exemplary damages, and
attorney’s fees in intra-corporate controversies are not immediately executor (Heirs of Santiago
Divinagracia v. Ruiz, G.R. No. 172023, July 7, 2010, in Divina, 2014).

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Qualifications under the Rules must be strictly complied with

It is well to emphasize that the remedy of rehabilitation should be denied to corporations that do not
qualify under the Rules. Neither should it be allowed to corporations whose sole purpose is to delay the
enforcement of any of the rights of the creditors, which is rendered obvious by:

(a) the absence of a sound and workable business plan;

(b) baseless and unexplained assumptions, targets, and goals; and

(c) speculative capital infusion or complete lack thereof for the execution of the business plan.

Right of the creditor-mortgagee to foreclose corporate property

The court has already settled and upheld the right of the secured creditor to foreclose the mortgages in
its favor during the liquidation of a debtor corporation.

The creditor-mortgagee has the right to foreclose the mortgage over a specific real property whether or
not the debtor-mortgagor is under insolvency or liquidation proceedings. The right to foreclose such
mortgage is merely suspended upon the appointment of a management committee or rehabilitation
receiver or upon the issuance of a stay order by the trial court. However, the creditormortgagee may
exercise his right to foreclose the mortgage upon the termination of the rehabilitation proceedings or
upon the lifting of the stay order (Yngson, Jr. [in his capacity as Liquidator of Arcam & Company, Inc.]
v. Philippine National Bank, G.R. No. 171132, August 15, 2012, in Divina, 2014).

LIQUIDATION AFTER 3 YEARS

If the 3-year extended life has expired without a receiver or trustee having been expressly designated by
the corporation within that period:

1. The BOD/BOT itself may be permitted to so continue as ‘trustees” by legal implication to complete
the liquidation;

2. Still, in the absence of BOD/BOT, those having a pecuniary interest in the corporate assets, including
not only the stockholders but likewise the creditors of the corporation, acting for and in its behalf, may
make proper representations with the SEC which has primary and sufficiently broad jurisdiction in
matters of this nature, for working out a final settlement of the corporate concerns;

3. The only surviving stockholder or director of a corporation whose term of existence has expired may
act as trustee-in-liquidation after the 3-year period to liquidate has expired without the appointment of
a trustee-inliquidation; or

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4. The counsel who prosecuted and defended the interest of the corporation and who, in fact, appeared
in behalf of the corporation, may be considered a trustee of the corporation at least with respect to the
matter in litigation only (De Leon, supra, pgs. 768-769, citing: Sec. 145, CC; Clemente vs. CA, supra;
SEC Opinion No. 10-96, January 29, 2010, Reburiano vs. CA, G.R. No. 102965, January 21, 1999).

MERGER AND CONSOLIDATION

1. DEFINITIONS AND CONCEPT

Common forms of corporate combinations

1. Sale of assets – One corporation sells all or substantially all of its assets to another. Such sale, usually,
though not necessarily made in the course of the dissolution of the vendor corporation.

2. Lease of assets – A corporation, without being dissolved, leases its property to another corporation
for which the lessor merely receives rental paid by the lessee. This is similar to the sale of assets, except
that under a lease, nothing passes, except the right to use the property leased.

3. Sale of stock – The purpose of a holding corporation is to acquire a sufficient amount of the stock of
another corporation for the purpose of acquiring control. The acquiring corporation is called the parent/
holding company. The corporation whose stocks were acquired is the subsidiary.

4. Merger – Merger is the absorption of one or more corporations by another existing corporation, which
retains its identity and takes over the rights, privileges, franchises and properties, and assumes all the
liabilities and obligations of the absorbed corporation(s) in the same manner as if it had itself incurred
such liabilities or obligations. The absorbing corporation continues its existence while the life or lives of
the other corporation(s) is/are terminated.

5. Consolidation is the union of two or more corporations into a single new corporation, called the
consolidated corporation, all the constituent corporations thereby ceasing to exist as separate entities.
The consolidated corporation shall thereupon and thereafter possess all the rights, privileges,
immunities, franchises and properties, and assume all the liabilities and obligations of each of the
constituent corporations in the same manner as if it had itself incurred such liabilities or obligations.

2. CONSTITUENT CORPORATION VS CONSOLIDATED CORPORATION

Constituent Corporation

One of the parties to a merger or consolidation

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Consolidated Corporation

A completely new corporation formed when two or more corporations combined

3. PLAN OF MERGER AND CONSOLIDATION

The plan of merger or consolidation is a plan created by the representatives of the constituent
corporations, providing for the details of such merger.

Contents of a plan of merger or consolidation

The BOD/ BOT of each corporation party to the merger or consolidation must set forth the following in
their plan of merger or consolidation:

1. The names of the corporations proposing to

merge or consolidate, hereinafter referred to

as the constituent corporations;

2. The terms of the merger or consolidation and

the mode of carrying the same into effect;

3. A statement of the changes, if any, in the AOI of the surviving corporation in case of a merger; and,
with respect to the consolidated corporation in case of consolidation, all the statements required to be
set forth in the AOI

for corporations organized under the CC; and

4. Such other provisions with respect to the proposed merger or consolidation as are

deemed necessary or desirable (CC, Sec. 76).

Approvals required for an effective plan of

merger or consolidation

The plan of merger or consolidation must be approved by:

1. Majority vote of each of the BOD/ BOT of the

constituent corporation; and

2. Submitted for approval by the stockholders or

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members of each of such corporations at separate corporate meetings duly called for the purpose. The
affirmative vote of the stockholders representing at least 2/3 of the outstanding capital stock of each
corporation in the case of stock corporations or at least 2/3 of the members in the case of non-stock
corporations, shall be necessary for the approval of such plan (CC, Sec. 77).

Amendment of a plan of merger or consolidation

Any amendment may be made, provided such amendment is approved by majority vote of the respective
BOD / BOT of all the constituent corporations and ratified by the affirmative vote of stockholders
representing at least 2/3 of the outstanding capital stock or 2/3 of the members of each of the
constituent corporations (CC, Sec. 77).

NOTE: Such plan, together with any amendment, shall be considered as the agreement of merger or
consolidation.

Appraisal right is available to a dissenting stockholder to a plan of merger or consolidation

Any dissenting stockholder in stock corporations may exercise his appraisal right in accordance with
this Code: Provided, that if after the approval by the stockholders of such plan, the BOD should decide
to abandon the plan, the appraisal right shall be extinguished (CC, Sec. 77).

4.ARTICLES OF MERGER OR CONSOLIDATION

After approval of the plan of merger or consolidation, an article of merger or consolidation is executed
by each of the constituent corporations to be signed by the president or vice-president of the each
corporation and signed by their secretary or assistant secretary setting forth:

1. The plan of the merger or the plan of consolidation;

2. As to stock corporations, the number of shares outstanding, or in the case of non-stock corporations,
the number of members; and

3. As to each corporation, the number of shares or members voting for and against such plan,
respectively (CC, Sec. 78).

5.PROCEDURE OF MERGER OR CONSOLIDATION

1. The Board of each corporation shall draw up a plan of merger or consolidation.

2. The plan of merger or consolidation shall be approved by majority vote of each board of the concerned
corporations at separate meetings.

3. The plan of merger or consolidation shall be submitted for approval by the stockholders or members
of each such corporation at separate corporate meetings duly called for the purpose. Notice should be

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given to all stockholders or members at least two (2) weeks prior to date of meeting, either personally or
by registered mail.

4. Affirmative vote of 2/3 of the outstanding capital stock in case of stock corporations, or 2/3 of the
members of a non-stock corporation shall be required.

5. Dissenting stockholders may exercise the right of appraisal. But if the Board abandons the plan to
merge or consolidate, such right is extinguished.

6. The plan may still be amended before the same is filed with the SEC; however, any amendment to the
plan must be approved by the same votes of the board members of trustees and stockholders or members
required for the original plan.

7. After such approval, Articles of Merger or Articles of Consolidation shall be executed by each of the
constituent corporations, signed by president or VP and certified by secretary or assistant secretary,
setting forth:

a. Plan of merger or consolidation;

b. In stock corporation, the number of shares

outstanding; in non-stock, the number of

members; and

c. As to each corporation, number of shares or

members voting for and against such plan,

respectively.

8. Four copies of the Articles of Merger or

Consolidation shall be submitted to the SEC for approval. Special corporations like banks, insurance
companies, building and loan associations, etc., need the prior approval of the respective government
agency concerned.

9. If SEC is satisfied that the merger or consolidation is not inconsistent with the provisions of the
Corporation Code and existing laws, it shall issue the Certificate of Merger or the Certificate of
Incorporation, as the case may be.

10. If, upon investigation, the SEC has reason/s to believe that the proposed merger or consolidation is
contrary to or inconsistent with the Corporation Code or other existing laws, it shall set a hearing to give
the corporations the opportunity to be heard and written notice of said hearing shall be given to each
constituent corporation at least two weeks prior to the said hearing (CC, Secs. 76- 79).

6. EFFECTIVITY

The merger or consolidation shall become effective upon issuance by the SEC of the certificate of merger
and consolidation.

In the case of merger or consolidation of banks or companies, public utilities, educational institutions
and other special corporations governed by special laws, the favorable recommendation of the
appropriate government agency shall first be obtained (CC, Sec. 79).

7.EFFECTS AND LIMITATIONS

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Effects of a merger or consolidation

1. The constituent corporations shall become a single corporation which:

a. In case of merger, shall be the surviving

corporation designated in the plan of

merger.

b. In case of consolidation, shall be the

consolidated corporation designated in the

plan of consolidation.

2. The separate existence of the constituent

corporations shall cease, except that of the

surviving or the consolidated corporation.

3. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and
powers and shall be subject to all the duties and liabilities of a corporation

organized under this Code.

4. The surviving or the consolidated corporation

shall thereupon and thereafter possess:

a. All the rights, privileges, immunities and franchises of each of the constituent

corporations;

b. All property, real or personal, and all

receivables due on whatever account, including subscriptions to shares and other choses in action, and
all and every other interest of, or belonging to, or due to each constituent corporation.

5. These shall be deemed transferred to and vested in such surviving or consolidated corporation without
further act or deed.

6. The surviving or consolidated corporation shall:

a. Be responsible and liable for all the liabilities and obligations of each of the constituent corporations
in the same manner as if such surviving or consolidated corporation had itself incurred such liabilities
or obligations;

b. Any pending claim, action or proceeding brought by or against any of such constituent corporations
may be prosecuted by or against the surviving or consolidated corporation

c. The rights of creditors or liens upon the property of any of such constituent corporations shall not be
impaired by such merger or consolidation (CC, Sec. 80; BPI v. Lee, G.R. No. 190144, August 1, 2012).

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Garnishment upon the surviving corporation for the liabilities of the absorbed corporation

Citytrust was dissolved, no winding up of its affairs or liquidation of assets, privileges, powers and
liabilities took place. As the surviving corporation, BPI simply continued the combined businesses of the
two banks and absorbed all the rights, privileges, assets, liabilities and obligations of City Trust,
including the latter’s obligation over the garnished deposits of the defendants.

Through the service of the writ of garnishment, the garnishee becomes a “virtual party” to, or a “forced
intervenor” in the case and the trial court thereby acquires jurisdiction to bind him to compliance with
all orders and processes of the trial court with a view to the complete satisfaction of the judgment of the
court.

Citytrust, therefore, upon service of the notice of garnishment and its acknowledgment that it was in
possession of defendants’ deposit accounts became a “virtual party” to or “forced intervenor” in the civil
case. As such, it became bound by the orders and processes issued by the trial court despite not having
been properly impleaded therein. Consequently, by virtue of its merger with BPI, the latter, as the
surviving corporation, effectively became the garnishee, thus the “virtual party” to the civil case (BPI v.
Lee, G.R. No. 190144, August 1, 2012).

Transfer of employees of the absorbed corporation to the surviving corporation

It is contrary to public policy to declare the former employees of the absorbed corporation as forming
part of its assets or liabilities that were transferred to and absorbed by the surviving corporation in the
Articles of Merger. Assets and liabilities, in this instance, should be deemed to refer only to property
rights and obligations and do not include the employment contracts of its personnel. A corporation
cannot unilaterally transfer its employees to another employer like chattel. Certainly, if the surviving
corporation as an employer had the right to choose who to retain among the employees of the absorbed
corporation, the latter employees had the concomitant right to choose not to be absorbed by the
corporation. Even though the employees of the absorbed corporation had no choice or control over the
merger of their employer, they had a choice whether or not they would allow themselves to be absorbed
by the surviving corporation. Certainly nothing prevented the employees of the absorbed corporation
from resigning or retiring and seeking employment elsewhere instead of going along with the proposed
absorption (BPI v. BPI Employees Union – Davao Chapter, G.R. No. 164301, October 19, 2011).

8.SPIN-OFFS

What is a Spin-off?

A corporate spin-off is an operational strategy used by a company to create a new business subsidiary
from its parent company. A spin-off occurs when a parent corporation separates part of its business
into a second publicly-traded entity and distributes shares of the new entity to its current shareholders.
The new entity takes assets, employees, or existing product lines and technologies from the parent in
exchange for a pre-determined amount of cash. The spin entity may take on debt to provide a distribution
to the parent in exchange for those assets or loss of cash flow.

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Reasons to do a Spin-off

A spin-off may be a method for the parent to reduce agency costs and create tax shields or to enter a
new industry while retaining a close relationship with the spun-off company. It is a way of reorganizing
a company’s administrative structure in order to improve its profitability. When a company plans to
consolidate or streamline its workflow, it can spin off a less productive division to form a new
independent company. In other words, a company creates a new business entity out of its existing
divisions, subsidiaries, or the sub-units.

The new individual company is expected to be more profitable and worth more alone than it would be
as a part of the larger business entity.

When a spin-off occurs, the shareholders of the parent corporation are not required to surrender any of
their parent corporation stock in exchange for the subsidiary’s stock.

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