DISSOLUTION AND LIQUIDATION

Modes of dissolution

Q: What is dissolution?
A: Dissolution is the extinguishment or cancellation of the corporate franchise and the
termination of its corporate existence for business purposes.

Q: What is the consequence of dissolution?

A: A corporation that has been dissolved, whether voluntarily or involuntarily. It makes no
exemption.

So, regardless of the mode of dissolution, once it has been dissolved, there is no juridical
personality except to do acts that are related to or in furtherance of the liquidation or winding up
of the corporation’s affairs.

Corporation is allowed to exist for 3 years after dissolution to liquidate or wind up the corporate
affairs. If the corporation appoints a trustee, the liquidation can go on beyond the three-year
period.

But even though there is a need to appoint a trustee so that the trustee can carry out the
liquidation beyond three years, the reality is, based on SEC opinion and SC decisions, the three-
year period is nothing. It becomes a mere aspiration to finish everything in three years.

But even though it is not done in three years, the corporation can go on with the liquidation
as long as, the most important thing as said by the SEC, is to finish and conclude the
liquidation, not the time frame within which it should be finished.

Q: May a corporation be dissolved upon mere resolution of the board of directors?

A: A resolution approved by the Board of Directors is not sufficient to dissolve a corporation.
The RCC establishes the procedure and other formal requirements a corporation needs to follow
in case it elects to dissolve and terminate its structure voluntarily.

BAR Q: Barn filed an action to enjoin SN Company's Board of Directors from selling a parcel of
land registered in the corporation's name, to compel the corporation to recognize Barn as a
stockholder with 50 shares, to allow him to inspect the corporate books, and to claim damages
against the corporation and its officers. Subsequently, the corporation and the individual
defendants moved to dismiss the complaint since the corporation's certificate of registration was
revoked by the SEC during the pendency of Barn's case on the ground of non-compliance with
reportorial requirements. The special commercial court granted the motion and reasoned that
only action for liquidation of assets can be maintained when a corporation has been dissolved
and Barn cannot seek reliefs which in effect lead to the continuation of the corporation's
business. The court also ruled that it lost jurisdiction over the intra-corporate controversy upon
the dissolution of the corporation.
A: The court is wrong. The dissolution of the corporation does not extinguish your cause of
action. The dissolution of a corporation does not change the nature of your cause of action. If it
started as intra-corporate action, it shall remain as intra-corporate despite dissolution of the
corporation. Besides the action should continue, because this is not similar to new business or
just because stockholder Barn filed the case to stop the sale of the property, it does not mean that
he wants the corporation to continue with the business.

His cause of action is incompatible with liquidation because the corporation must determine who
the stockholders of the corporation are, and to determine likewise who are the ones entitled to
receive the assets upon payment of claim due to creditors.

So, the action of Barn (Aguirre in the real case) make senses because once you are recognized as
a stockholder, that means he will partake to the assets of the corporation after payment of the
obligations due to the creditors of the corporation.

The last reason that the court cited is Section 145 (now 184) of the Corporation Code, no right or
remedy of the corporation by or against the corporation, stockholders or members should be
impaired or extinguished just because of dissolution.

Q: Four years later, SN Company files an action against Barn to recover corporate assets
allegedly held by the latter for liquidation. Will this action prosper?
A: The action cannot prosper because the corporation has no more legal capacity to sue after
three years from its dissolution.

It was held that ADC filed its complaint not only after its corporate existence was terminated but
also beyond the three-year period allowed by Section 122 of the OCC (now Section 139 of the
RCC).

Thus, it is clearly that at the time of the filing of the subject complaint, ADV lacks the capacity to
sue as a corporation. To allow ADC to initiate the comply and pursue it until final Judgment, on
the ground that such complaint was filed for the sole purpose of liquidating its assets, would be
to circumvent the provisions of the Corporation Code.

Q: What are the methods or modes of dissolution?

A: By voluntary, it is based on the will or initiated by the corporation; it is involuntary if it is
against the will of the corporation or initiated by an aggrieved party or the SEC.

VOLUNTARY DISSOLUTION

Q: What are the voluntary modes of dissolution?

A:
a) Verified request for dissolution which does not prejudice the rights of creditors having a claim
against it;
b) Petition for dissolution where creditors are affected;
c) Shortening of the corporate term;
d) Merger or consolidation; and
e) Affidavit of dissolution by a corporation sole.
Q: What do you mean by a request for dissolution where no creditors are affected?
A:
Either —
1. You have no creditors whatsoever; or
2. You have creditors but without conflicting claims
and the corporate assets are enough to satisfy their claims.

To repeat, therefore, just because the law says “no creditors affected” does not mean there
are no creditors. It is possible to have creditors but they have no conflicting claims between
or among one another and there are enough properties to pay off the claim of the creditors.

Table Summary: Voluntary Dissolution where Creditors are NOT Affected v. Creditors are
Affected

CREDITORS ARE NOT AFFECTED CREDITORS ARE AFFECTED

As to Voting Requirements
Adopted: at least majority of BOD/T Adopted: at least majority of BOD/T

Approved: at least majority of OCS Approved: at least 2/3 of OCS (stockholders)

(stockholders) or members or members
As to How Initiated
verified request for dissolution verified petition for dissolution

Contents of Request: Requirements for Petition:

a. the reason for the dissolution; the a. signed by majority of BOD/T;
b. form, manner, and time when the notices b. verified by its president or secretary or one
were given; of its directors or trustees; and
c. names of the stockholders and directors or c. shall set forth all claims and demands
members and trustees who approved the against it
dissolution;
d. the date, place, and time of the meeting in
which
the vote was made; and
e. details of publication.
As to Notice/Publication
WHAT: Written notice of meeting to PUBLICATION: publish a copy of the
stockholders or members ORDER of the SEC setting the date and time
of the hearing on the petition (not the notice)
WHEN: at least 20 days prior to the meeting
When to Publish: at least 20 days prior to the
PUBLICATION: notice is published once in a meeting
newspaper — in the place of the principal Where to Publish:
office, or if no newspaper therein, in a newspaper in the city of municipality of the
newspaper of general circulation in the principal office, or if no newspaper therein, in
Philippines a newspaper of general circulation in the
Philippines
 NB: Publication only
POSTING: post a copy of the order setting
the date and time of the hearing on the
petition

When to Post: 3 consecutive weeks

Where to Post: 3 public places in such

municipality or city.

NB: Publication + posting

As to SEC Action
Approve the request for dissolution within 15 The SEC shall render judgment dissolving the
days from receipt of the verified request corporation only AFTER hearing on the
(request under oath) for dissolution. petition and determination that the material
allegations in the petition are true.
If no withdrawal within the 15-day period, the
SEC shall approve the request and issue the It requires hearing because there are various
certificate of dissolution. claims against the corporation.
And we will discuss later, the SEC shall also
appoint a receiver to collect assets and pay the
debts of the corporation.

Q: What is the procedure for the dissolution of the corporation through the shortening of
corporate term?

a. The articles of incorporation should be amended to shorten the corporate term.

b. The amendment should be approved by at least the majority vote of the board of directors or
trustees, and ratified at a meeting by the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock or of its members in a meeting duly called for the purpose.

c. A copy of the amended articles of incorporation shall be submitted to the SEC in accordance
with the SEC.

d. Upon the expiration of the shortened term, as stated in the approved amended articles of
incorporation, the corporation shall be deemed dissolved without any further proceedings,
subject to the provisions of the RCC on liquidation.

e. In the case of expiration of corporate term, dissolution shall automatically take effect on the
day following the last day of the corporate term stated in the articles of incorporation, without
the need for the issuance by the SEC of a certificate of dissolution.

When the shortening of the corporate term has the effect of immediate dissolution, it is submitted
that there should be publication similar to a request for dissolution where creditors are not
affected. If creditors will be affected, the rules similar to petition for voluntary dissolution should
be followed.

Q: Is there any distinction between expiration of the original term and expiration of the shortened
term as a ground to dissolve the corporation?
A: Expiration of the shortened term ipso facto results in the automatic dissolution of the
corporation. This is clear under Section 136 of the RCC which provides that upon the expiration
of the shortened term, as stated in the approved amended articles of incorporation, the
corporation shall be deemed dissolved without any further proceedings, subject to the provisions
of the RCC on liquidation.

The Supreme Court decision in Philippine National Bank v. The Court of First Instance of
Rizal, Pasig, et al. that upon the expiration of the period fixed in the articles of
incorporation, the corporation ceases to exist and is dissolved ipso facto and there is no need for
the institution of a proceeding for quo warranto to determine the time or date of the dissolution
of a corporation should now be construed to refer to corporations that shortened their corporate
term to dissolve the corporation.

Withdrawal of Dissolution

Q: Discuss the right of incorporator, director, trustee, shareholder or member to withdraw the
request for dissolution of the corporation in cases where creditors are not affected.
A: Withdrawal of dissolution is another revision under the RCC. Any incorporator, director,
trustee, shareholder, or member may write a letter to the SEC to withdraw the request for
dissolution approved by majority of the BOD.

So the request for withdrawal can be done or made by any incorporator, director, or trustee. It
need not be by the entire majority of the BOD.

The request for withdrawal must be submitted no later 15 days likewise because the request for
dissolution must be approved within 15 days and similarly, the request for withdrawal shall be
done likewise with the same 15-day period.

Q: May a petition for dissolution where creditors are affected be withdrawn?

A: Yes. But this time, in the form of a motion. Not just a request but in the form of a motion. A
motion, although similar in substance to a withdrawal of a request for dissolution, but it should
be verified and filed before the publication of the order setting the deadline for the filing of
objections to the petition.

INVOLUNTARY DISSOLUTION

Q: What are the grounds for the involuntary dissolution of the corporation? (A-E)

a. Non-use of the corporate charter as provided under Section 21 of the RCC.

Under Section 21 of the RCC, if a corporation does not formally organize and commence its
business within five (5) years from the date of its incorporation, its certificate of incorporation
shall be deemed revoked as of the day following the end of the five (5)-year period.

b. Continuous in operation of a corporation as provided under Section 21 of the RCC.

Under Section 21 of the RCC, if a corporation does not formally organize and commence its
business within five (5) years from the date of its incorporation, its certificate of incorporation
shall be deemed revoked as of the day following the end of the five (5)-year period.

However, if a corporation has commenced its business but subsequently becomes inoperative for
a period of at least five (5) consecutive years, the SEC may, after due notice and hearing, place
the corporation under delinquent status.

A delinquent corporation shall have a period of two (2) years to resume operations and comply
with all requirements that the SEC shall prescribe. Upon compliance by the corporation, the SEC
shall issue an order lifting the delinquent status. Failure to comply with the requirements and
resume operations within the period given by the SEC shall cause the revocation of the
corporation’s certificate of incorporation.

Q: The remedy available to the corporation to be placed on delinquent status — is that applicable
to non-use of the corporate charter?
A: No. It is only available to a corporation that commenced business but becomes inoperative for
a 5-year continuous period and not a situation where the corporation did not do anything at all
within 5 years from incorporation.

c. Upon receipt of a lawful court order dissolving the corporation.

This may involve or arise from a quo warranto proceeding involving a de facto corporation (Sec.
19, RCC) or a liquidation proceeding involving an insolvent debtor under Republic Act No.
10142, otherwise known as the Financial Rehabilitation and Insolvency Act (FRIA). One of the
effects of a liquidation order under FRIA is to dissolve the corporation. (Sec. 113, R.A. No.
10142).

Q: What could be a good example of a lawful court order dissolving a corporation?

A:
1. Quo warranto proceeding in case of a de facto corporation. As previously discussed on de
facto corporations, it has to be a direct proceeding, that is, a quo warranto. The court will
be the one to dissolve the corporation.
2. Under FRIA, an insolvent debtor may file either a petition for rehabilitation or a petition
for liquidation — those two remedies.

d. Upon finding by final judgment that the corporation procured its incorporation through
fraud.
This may happen when the corporation misrepresented its purpose of incorporation and/or the
incorporators used fictitious names.

e. Upon finding by final judgment that the corporation:

1. 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;
2. Committed or aided in the commission of securities violations, smuggling, tax evasion, money
laundering, or graft and corrupt practices, and its stockholders knew of the same; and
3. Repeatedly and knowingly tolerated the commission of graft and corrupt practices or other
fraudulent or illegal acts by its directors, trustees, officers, or employees.

Q: Are there other grounds to dissolve the corporation upon order of the SEC? (Enumeration is
not exclusive)
A: The SEC may also suspend or revoke, after proper notice and hearing, the certificate of
registration of private corporations upon any of the following grounds:

a. Fraud in procuring its certificate of incorporation.

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. Refusal to comply or defiance of any lawful order of the SEC restraining commission of acts
which amount to a grave violation its franchise.
d. Failure to file bylaws. **
e. Failure to file required reports in appropriate forms as determined by the SEC within the
prescribed period. (P.D. No. 902-A Section 6(i).)

IN OTHER WORDS, any violation of the law administered by the SEC is a ground to
dissolve the corporation. It's now clear under Section 158 of the RCC.

Q: May Congress provide for the dissolution of a private corporation?

A: Yes. Congress can dissolve all private corporations. It can repeal the RCC, BUT without
prejudice to vested rights acquired by parties concerned. RCC is only a law, it can be repealed by
any law to the contrary. Theoretically, Congress can repeal the RCC and so dissolve all
corporations organized under it, but without prejudice to vested rights that have been acquired by
parties concerned. Not that they will do it, but for academic discussion, Congress can dissolve all
private corporations.

In fact, the Congress can also dissolve corporations organized under special law by repealing the
special law creating that corporation. But then of course, you have that remedy under Section
184 which provides that “No right or remedy available to a corporation, stockholder or members
shall be impaired on account of dissolution or the subsequent amendment or repeal of the
corporation.”

METHODS OF LIQUIDATION

Q: What is Liquidation?
A: Liquidation is the process of settling the affairs of the corporation after its dissolution

This consists of:

1. Collection of all that is due the corporation
2. The settlement and adjustment of claims against it
3. The payment of its debt
4. The distribution of the remaining assets, if any among the stockholders thereof in
accordance with their contracts, or if there be no special contract

The manner of liquidation or winding up may be provided for in the corporate bylaws and this
would prevail unless it is inconsistent with the law.

The continued existence of the corporation even after dissolution is for the purposes of
1. prosecuting and defending suits by or against it
2. enabling it to settle and close its affairs
3. to dispose and convey its property
4. to distribute its assets.

Q: Do liquidation and winding up of corporate affairs automatically follow after dissolution?

A: Usually, if there is dissolution, there comes liquidation or the liquidation is the consequence
of dissolution.

Q: How?
A: Stockholders of the defunct corporation will assign the right to the properties of the defunct
corporation as their contribution to the subscriptions to the capital stock of the new corporation.

Q: There is one exception where liquidation does not come despite dissolution — what is that?
A: In case of Merger where the surviving corporation acquires the absorbed corporation and that
absorbed corporation ceases to exist and it is dissolved effectively and the assets of the absorbed
corporation are transferred to the surviving corporation without any further act or deed. There is
no need for liquidation despite the dissolution of the corporation given that the properties
anyway will be assigned or transferred automatically to the surviving corporation.

METHODS OF LIQUIDATION (there are 4)

1. By the corporation itself

The corporation has a three-year period to liquidate and wind up its corporate affairs.
There is no need to formally appoint a trustee because the corporation can conclude the
liquidation within three years. They have a three-year period to finish the winding up
process.

The reality, though, is that it cannot be concluded usually in three years. That is why the
law makes a provision for the appointment of a trustee. During the three-year liquidation
period, the corporation may appoint a trustee and the trustee is not bound by the three-
year period.
 Situation: There are 15 directors in the corporation. They did not appoint a trustee, and
the board of directors shall be deemed trustees of the corporation.

Q: What if you cannot get a quorum? The 15 don’t show up? How do you now decide to
liquidate or wind up the affairs of the corporation?
A: At that point, they are not bound by the quorum requirement anymore because there is
no more corporation. Whoever trustee is available shall be the one to carry out the
liquidation process. Ideally, they should get the quorum, but it is no longer important.
What is important is to conclude the liquidation process. So whoever is the
remaining director shall be deemed trustees of the corporation.

2. By the trustee appointed by the corporation

If the corporation, during the three-year liquidation period appoints a trustee, legal title of
the properties of the corporation shall be transferred to the trustee and the trustee holds
these properties for the benefit of the stockholders and creditors of the corporation.

The trustee is not bound by the three-year liquidation period.

3. By the receiver appointed by the SEC

Q: What is the basis of the power of the SEC to appoint a receiver?

A: This is done if a petition is filed by the corporation where creditors are affected. The
SEC shall hear the petition filed by the corporation and if the material allegations are
found to be true, it shall render judgment dissolving the corporation and appoint a
receiver to collect assets and pay debts of the corporation. That is the basis of the
appointment of receiver insofar as SEC is concerned.
Q: How do we reconcile this? The SC said it should have been the RTC, but the RCC
retained that authority on the part of the SEC to appoint a receiver.
A: The SEC can still appoint the receiver especially if there are no conflicting claims or
the claims can be settled among the parties. There are enough properties, the creditors’
claims can be all satisfied. So even though there are conflicting claims, it can be resolved
by the receiver.

If at the outset, they cannot be resolved — at the outset, it is already contentious, and no
solution is in sight for the receiver to resolve these conflicting claims, then the RTC
should have jurisdiction.

4. By the rehabilitation receiver or the liquidator appointed by the competent RTC in cases
involving insolvent debtor under FRIA

The fourth (4th) one is a rehab receiver appointed by the RTC in cases involving
insolvent debtors under FRIA.

There are two (2) remedies available for a juridical insolvent debtors i.e., a corporation.
 Q: What are these 2 remedies?
A: Rehabilitation and liquidation.

Q: How are the assets of the corporation distributed during the liquidation process?
A: The assets of the corporation shall be used to pay off the claims of various creditors based on
the law on concurrence and preference of credit. The residual assets shall then be distributed to
the holders of the preferred shares of stock, if any, then to the holders of common shares based
on their agreement, if any, otherwise, in proportion to their respective shareholdings in the
corporation.

Note that SEC approval is not required in the approval of the distribution or liquidation of the
assets of the dissolved corporation. This falls within the authority of the directors and
stockholders or the duly appointed trustee or receiver.

Q: Does the SEC have a say in the distribution of the assets of the corporation after dissolution?
A: The SEC doesn’t have a say when it comes to the liquidation of the properties of the
corporation. Once it is dissolved, the task of liquidation is for the stockholders of the
corporation. That's why they don't have to get the consent of the SEC on how to carry out the
liquidation process.

Q: Within what period should liquidation of the corporation be concluded?

A: No more 3-year period because the board of directors are deemed trustees and the liquidation
process can go on despite 3 years from dissolution. As we said, the most important thing is to
finish and conclude the liquidation process.

ACTIONS THAT CAN GO BEYOND 3 ACTIONS THAT CANNOT GO BEYOND

YEARS 3 YEARS
Whether it’s a case during the lifetime of the The only thing that cannot be done is to file a
corporation, a case filed during the 3-year case more than 3 years from dissolution as
liquidation period — these cases can go on you saw in Alabang Development
even beyond 3 years from liquidation period. Corporation v. Alabang Hills Village
Association (G.R. No. 187456, 02 June
Q: Why? 2014).
A: Because no right or remedy available to
or against the corporation, stockholder, Because Justice Peralta explained that 3 years
director, or members shall be impaired on from the dissolution of the corporation, the
account of dissolution. (Section 170, RCC.) corporation has no more juridical
personality. So therefore, it has no more
legal capacity to sue for lack of juridical
personality.

LIQUIDATION ATER THREE YEARS

Q: May a corporation be allowed to dispose of its remaining assets after three (3) years from the
time of its dissolution?
A: Yes, a corporation may still dispose of its assets despite the lapse of the three-year period for
liquidation of assets provided under Section 139 of the RCC.

Accordingly, it should be allowed to continue liquidating its remaining assets in order to

complete the process of dissolving the corporation. Likewise, it should be allowed to distribute
the proceeds from the said disposition to its stockholders or creditors if any. A contrary
interpretation would have unjust and absurd result.

Q: May the following legal actions involving the corporation be enforced by or against the
corporation beyond the three-year liquidation period?
a. Action filed during the lifetime of the corporation?

The trustee (of a dissolved corporation) may commence a suit which can proceed to final
judgment even beyond the three-year period of liquidation.

Indeed, the rights of a corporation that has been dissolved pending litigation are accorded
protection by Section 145 other OCC (now Section 184 of the RCC) which provides “no
right or remedy in favor of or against any corporation, its stockholders, members,
directors, trustees, or officers, nor any liability incurred by any such corporation,
stockholders, members, directors, trustees, or officers, shall be removed or impaired
either by the subsequent dissolution of said corporation.” (Rene Knecht and Knecht, Inc.
v. United Cigarette Corp., represented by Encarnacion Gonzales Wong, and Eduardo
Bolima, Sheriff, Regional Trial Court, Branch 151, Pasig City, G.R. No. 139370, 04 July
2002).

A dissolved corporation may also maintain actions in court for the protection of its rights
including the right to appeal from an adverse decision. (Paramount Insurance Corp. v.
A.C. Ordonez Corporation and Franklin Suspine, G.R. No. 175109, 06 August 2008)

b. Action filed during the three-year liquidation period?

Yes, the trustee appointed by the corporation may initiate a suit during the three-year
liquidation period, which may continue even beyond the said period. As pointed out, in
Gelano v. Court of Appeals, it was held that the lawyer handling the case for the
corporation is deemed a trustee with respect to that case. In Clemente v. Court of
Appeals, it was held that in the absence of a trustee formally appointed, the board of
directors shall be deemed the trustees of the corporation to carry out the liquidation of the
corporation.”

c. Action filed more than three years from the dissolution of the corporation?

An action filed more than three (3) years from the dissolution of the corporation should
be dismissed since by that time the corporation lacks the capacity to sue because it no
longer possesses juridical personality by reason of its dissolution.
 While there are cases that a corporation may still sue, even after it has been dissolved and
despite the lapse of the three-year liquidation period, the corporations involved in those
cases filed their respective complaints while they were still in existence. In other words,
they already had pending actions at the time that their corporate existence was
terminated. (Alabang Corporation Development v. Alabang Hills Village Association and
Rafael Tinio, G.R. No. 187456, 02 June 2014)

FOREIGN CORPORATIONS

Q: What is a foreign corporation?

A: 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.

There are two (2) features of a corporation:

1. Place of Incorporation – incorporated, organized
or existing under a foreign country; and

2. Principle of Reciprocity – the laws of a foreign country where the corporation operates should
allow Filipino citizens to do business in the country or state.

Q: What happens if the laws if that foreign country, where the foreign company operates, do not
allow or permit Filipinos to do business in the country or state? Does that mean it is no longer a
foreign corporation?
A: It is remains to be a foreign corporation but because there is no reciprocity, then that foreign
corporation can never be permitted to do business in the Philippines.

BAR Q: A corporation, composed entirely of Filipino citizens, is formed, organized and existing
under the laws of the USA. Is this a foreign or domestic corporation?

A: It is a foreign corporation. Whether the corporation is domestic or foreign is determined by

the country or State of incorporation. Thus, a corporation is foreign if it is formed, organized or
existing under the laws of a foreign country regardless of the nationality of the stockholders.

Personality to Sue

Q: What confers upon the foreign corporation the legal capacity to sue in the Philippines?
A: As we said, in Signetics Corp v. C.A. and reiterated in the case of Llortente v. Star City, for
the court to acquire jurisdiction over a foreign corporation that is filing a suit in the Philippines
before any court, administrative body, or tribunal, it must allege any of two things:

1. it is suing in a casual transaction; or

2. it has a license to do business in the Philippines.

Suability of Foreign Corporations

Q: State the principles governing the right to sue and suability of foreign corporations.
A:

The following principles governing a foreign corporation's right to sue in local courts have long
been settled, to wit:

a. if a foreign corporation does business in the Philippines without a license, it cannot sue before
the Philippine courts;
b. if a foreign corporation is not doing business in the Philippines, it needs no license to sue
before Philippine courts on an isolated transaction or on a cause of action entirely independent of
any business transaction; and
c. if a foreign corporation does business in the Philippines with the required license, it can sue
before Philippine courts on any transaction.

Instances When Unlicensed Foreign Corporations May Be Allowed to Sue (Isolated

Transactions)

Q: What are the instances when an unlicensed foreign corporation may be allowed to sue?
What are the exceptions — meaning what are the cases where an unlicensed foreign corporation
may be allowed to sue without the need of obtaining a license to do business from the SEC?
A: The following are the instances when an unlicensed foreign corporation may be allowed to
sue in the Philippine courts.

FIRST XPN: Casual or Isolated Transaction

The first one, if it is suing on a casual or isolated transaction — the opposite of doing business.

Q: What do you mean by this phrase "isolated transaction"?

A: The SC said that it is a transaction or series of transactions set apart from the common
business of the foreign enterprise in the sense that there is no intention to engage in the
progressive pursuit of the purpose and object of the business organization. No relation at all to
the purpose of its incorporation.

SECOND XPN: Action to enforce intellectual property right

The second exception, an action to enforce intellectual property right.

There are many cases on trademark.

Example: Harvard is not registered in the Philippines.

Q: Can Harvard sue if another establishment, college, school, or similar establishment adopts the
word “Harvard” as a part of its tradename or service name?
A: Yes. The USA and the Philippines are both signatories to the Paris Convention. We have the
obligation to enforce, honor, and recognize Harvard's intellectual property rights because it's
owned by an establishment operating in the USA.

THIRD XPN: Venue is stipulated in the contract

There are two kinds of stipulation with respect to venue:
(1) exclusive; and
(2) permissive.

If the stipulation says, "to the exclusion of all other courts," then a foreign corporation has no
other choice but to sue here in the Philippines.

FOURTH XPN: License is granted subsequent to the transaction; May sue on contracts before
grant of license

This is controversial because this will lead or encourage foreign corporations to transact business
without the need of obtaining a license because, anyway, they can get a license later on, and that
license will retroact to the date of the transaction.

So tira ka ng tira. Pag na agrabyado ka, that's the only time you get a license because anyway the
SC said in Home Insurance v. Eastern Shipping Lines (123 SCRA 424) that that license retroacts
to the date of the transaction.

Q: What is the status of a contract by a foreign corporation that transacts business without a
license from the SEC? Is it void or voidable?
A: SC said that it's not void because it can be cured by the subsequent act of obtaining a license.
It's only VOIDABLE, but without prejudice to criminal prosecution under Section 144 [now Sec.
170] of the RCC. That's the consequence

A foreign corporation that transacts business without a license is liable criminally under Section
144, now Section 170 of the RCC, which provides that any violation of this Code other than
those expressly penalized herein shall be criminal in nature.

Home Insurance v. Eastern Shipping Lines is 1983. In 2017, IENT v. Tullet Prebon, the SC said
that the pronouncement in Home Insurance v. Eastern Shipping Lines, that “a foreign corporation
that transacts business without license commits a crime," is only an obiter dictum.
Can you imagine that it took the SC 47 years to say that our ruling in Home Insurance is merely
an obiter dictum. So, there is no crime committed because the Corporation Code, then and now,
is not a penal statute, but it is administrative in nature. Therefore, the pronouncement that there is
a crime is no longer valid.

Q: What does it mean?

A: It means “Go ahead, foreign corporation, just transact business right and left; and only if
you're aggrieved that you'll get a license from the SEC because anyway, that license retroacts to
the date of the transaction.”

FIFTH XPN: Has domestic corporation as co-plaintiff/petitioner

This is necessary to prevent multiplicity of suits.

SIXTH XPN: Estoppel

The domestic corporation dealt with the foreign corporation, reaped or obtained the benefit from
that contract or transaction. Therefore, it is estopped or precluded from questioning or assailing
the lack of legal capacity to sue on the part of the foreign corporation.

Q: When may the SEC revoke or suspend the license of a foreign corporation to transact business
in the Philippines?

Dean: Basically, violation of the terms and conditions for the grant of the license. As simple as
that. I don't think this would be asked in the Bar anyway. It's more on practice. Just keep this in
mind — violations of the terms of the license enables or allows the SEC to revoke or
suspend the license to do business.

FOREIGN INVESTMENT ACT

R.A. No. 7042 as amended by R.A. No. 11674

It is the policy of the State to attract, promote and welcome productive foreign investments that
contribute to national industrialization and socio-economic development as long as they are
compatible with the limitations set forth by the Constitution and other relevant laws. That is
basically the policy: to attract, promote, and welcome productive foreign investments.

PURPOSE: For the purpose of industrialization and socio- economic development as long as
those investments will be consistent with the Constitution and other relevant laws.

The term Philippine national shall mean:

a. a citizen of the Philippines; or
b. a domestic partnership or association wholly owned by citizens of the Philippines; or
c. a corporation organized under the laws of the Philippines of which at least 60% of the capital
stock outstanding and entitled to vote is owned and held by citizens of the Philippines; or
d. a corporation organized abroad and registered as doing business in the Philippines under
the Corporation Code of which 100% of the capital stock outstanding and entitled to vote is
wholly owned by Filipinos; or
e. a trustee of funds for pension or other employee retirement or separation benefits, where
the trustee is a Philippine national and at least 60% of the fund will accrue to the benefit of
Philippine nationals.

Q: What is the prevailing mode of determining the nationality of a corporation?

A: The CONTROL TEST is still the prevailing mode. When in the mind of the Court there is
doubt, based on the attendant facts and circumstances of the case, in the 60-40 Filipino -equity
ownership in the corporation, then it MAY APPLY the grandfather rule.

Doctrine of “Doing Business”

The term “doing business” is not specifically defined by the OCC and the RCC. There are certain
activities, however, which are deemed as doing business under Republic Act No. 7042, otherwise
known as the Foreign Investments Act of 1991 (“FIA”). Under the FIA, doing business shall
include:

a. Soliciting orders
b. Service contracts
c. Opening offices, whether called "liaison" offices or branches;
d. Appointing representatives or distributors domiciled in the Philippines or who in any calendar
year stay in the country for a period or periods totaling one hundred eighty (180) days or more;
e. Participating in the management, supervision or control of any domestic business, firm, entity
or corporation in the Philippines; and
f. Any other act or acts that imply a continuity of commercial dealings or arrangements and
contemplate to that extent the performance of acts or works, or the exercise of some of the
functions normally incident to, and in progressive prosecution of, commercial gain or of the
purpose and object of the business organization. (Section 3 (d), R.A. No. 7042.)

Q: Again, why is this relevant? Why is it important to determine if the foreign corporation is
doing business?
A: Because if it is doing business, it needs a license to transact business in the Philippines, issued
by the SEC. Without that license, it cannot have access to Philippine courts. It will not have the
legal capacity to sue before Philippine courts or admin tribunals.

That is why it is important for us to know what you mean by “doing business.” You all know that
under Foreign Investments Act and the Revised Corporation Code, in fact, the Old Code even,
they did not define what “doing business” means. But the FIA enumerated the activities that are
deemed as “doing business.”

The following acts shall NOT BE DEEMED “doing business” in the Philippines:

a. Mere investment as a shareholder by a foreign entity in domestic corporations duly registered

to do business, and/ or the exercise of rights as such investor;
b. Having a nominee director or officer to represent its interest in such corporation;
c. Appointing a representative or distributor domiciled in the Philippines which transacts
business in the representative’s or distributor’s own name and account;
d. The publication of a general advertisement through any print or broadcast media;
e. Maintaining a stock of goods in the Philippines solely for the purpose of having the same
processed by another entity in the Philippines;
f. Consignment by a foreign entity of equipment with a local company to be used in the
processing of products for export;
g. Collecting information in the Philippines; and
h. Performing services auxiliary to an existing isolated contract of sale which are not on a
continuing basis, such as installing in the Philippines machinery it has manufactured or exported
to the Philippines, servicing the same, training domestic workers to operate it, and similar
incidental services (IRR of RA 7042)

Q: Air Canada is a foreign corporation organized and existing under the laws of Canada. It was
granted an authority to operate as an offline carrier by the Civil Aeronautics Board. As an off-line
carrier, Air Canada does not have flights originating from or coming to the Philippines and does
not operate any airplane in the Philippines. Air Canada engaged the services of Aerotel Ltd.,
Corp. (Aerotel) as its general sales agent in the Philippines. Aerotel sells Air Canada's passage
documents in the Philippines.

Air Canada was subsequently subjected to regular corporate income tax. The BIR reasoned that a
foreign corporation engaged in business in the Philippines is classified as a resident foreign
corporation under the Tax Code. Thus, considering that Air Canada is doing business in the
Philippines through Aerotel, it should be subject to the regular corporate income tax applicable
for resident foreign corporation.

Is the BIR correct in classifying Air Canada as a resident foreign corporation for taxation
purposes?
A: Yes, the BIR is correct considering that Air Canada is doing business in the Philippines. R.A.
No. 7042 or the Foreign Investments Act of 1991 provides guidance with its definition of “doing
business” with regard to foreign corporations.

Q: When is the appointment of a distributor or representative considered to be "doing business"

insofar as the foreign corporation is concerned?
A: The Implementing Rules and Regulations of R.A. No. 7042 clarifies that “doing business”
includes “appointing representatives or distributors, domiciled in the Philippines or who in any
calendar year stay in the country for a period or periods totaling one hundred eighty (180) days
or more operating under full control of the foreign corporation.

In our discussion of Steelcase v. Design, the key consideration was, "is that distributor exclusive
to the foreign corporation? is it acting on behalf of the foreign corporation? Is it under the full
control of the foreign corporation?”

If the answer to the question is "yes," then the appointment of that distributor is
tantamount to "doing business" in the Philippines.
It's not enough that the distributor is domiciled in the country for 180 days or more. It
should be exclusive to the foreign corporation. If it transacts business in its own account and
for its own name, then it's not exclusive to the foreign corporation. Thus, the appointment of that
distributor will not be considered as "doing business" in the Philippines.

Q: Antonio D. Todaro (Todaro) filed a complaint for sum of money and damages with
preliminary attachment against Pioneer International, Ltd. (PIL), Pioneer Concrete Philippines,
Inc. (PCPI), and Pioneer Philippines Holdings, Inc. (PPHI). Todaro alleged that PIL is a
corporation duly organized under Australian laws, while PCPI and PPHI are corporations duly
organized under Philippine laws. PIL is engaged in the ready-mix and concrete aggregates
business and has established a presence worldwide. PIL established PPHI as the holding
company of the stocks of its operating company in the Philippines, PCPI.

According to Todaro, PIL contacted him and asked if he could join it in establishing a pre-mixed
concrete plant and in overseeing its operations in the Philippines. Todaro confirmed his
availability and expressed interest in joining PIL. For not fulfilling the contractual obligation to
employ Todaro on a permanent basis in PIL's Philippine office, Todaro initiated the present case.

Among others, PIL alleges that no personal judgment

could be rendered by the trial court against PIL because PIL is a foreign corporation not doing
business in the Philippines. PIL insists that its sole act of "transacting" or "doing business" in the
Philippines consisted of its investment in PPHI.
Is the contention of PIL proper?
A: The acts of negotiating someone to be employed in a company to run its pre-mixed concrete
operations are not just the acts as a passive investor in a domestic corporation.
Basically, the hiring of a manager to run the affairs of the foreign corporation is tantamount to
"doing business." That shows the intention of the foreign corporation to establish long presence
in the Philippines.

Q: A Philippine Corporation is fully owned by a foreign company. It has for its primary purpose:
"To own shares of stock of companies registered outside the Philippines; provided that, the
corporation shall neither produce goods nor render services for the domestic market.”

Can the Philippine Corporation be considered a domestic market enterprise subject to the
minimum paid up capital requirement of the Philippine Peso equivalent of USD200,000.00?
A: In view of the foregoing, a 100% foreign-owned Philippine registered corporation, whose sole
purpose is to own shares of stock of companies registered outside the Philippines, and shall
neither produce goods nor render services for the domestic market, is still deemed as a domestic
market enterprise as defined under R.A. No. 7402, and is subject to the minimum paid-up
capital requirement of the equivalent of USD200,000.00.

Registration of Investment of Non-Philippine Nationals

Q: To what regulatory bodies should foreign investments be registered?

A: Under Section 5 of the FIA, as amended, a non-Philippine national, not otherwise disqualified
by law, and upon registration with the SEC, or with the Department of Trade and Industry
(“DTI”) in the case of single proprietorships, is allowed to do business or invest in a domestic
enterprise up to 100% of its capital, unless participation of non-Philippine nationals in the
enterprise is prohibited or limited under the Foreign Investments Negative List.

Foreign investments registered with the BSP are entitled to full repatriation of capital and
remittance of dividends/profits using foreign exchange sourced/purchased from authorized agent
banks and/or their subsidiary/affiliate foreign exchange corporations. All applications for
registration of foreign direct investments shall be filed with the BSP within one (1) year from the
date of inward remittance/actual transfer of assets to the Philippines.

Foreign Investment Negative List

Q: What is the Foreign Investment Negative List?

A: The “Foreign Investments Negative List” or List” refers to the list of areas of economic
activity whose foreign ownership is limited to a maximum of 40% of the equity capital of the
enterprises engaged therein.

This Foreign Investment Negative List basically provides for two (2) component lists:
a. List A - which enumerates the areas of activities reserved to Philippine nationals by mandate
of the Constitution and specific laws; and
b. List B - which contains the areas of activities and enterprises regulated pursuant to law for
reasons of security, defense, risk to health and morals, and protection to small and medium- scale
enterprises.

The latest 12th Foreign Investment Negative List promulgated under EO No. 175 issued on
June 12, 2022, within your cutoff date.

To recall, the amendments to the PSA limited the sectors considered as public utilities only to
these six categories or industries: (P-E-W-E-S-P):
a. Petroleum product transmission system
b. Electricity distribution
c. Water and waste transmission or distribution system
d. Transmission of electricity
e. Seaport operation
f. Public Service vehicles

LIST A:
Foreign ownership is limited by mandate of the Constitution and specific laws
100% FILIPINO; NO FOREIGN EQUITY

1. Mass media, except recording and internet business; 2. Practice of professions, including
radiologic and x- ray technology, criminology, law, and marine deck officers and marine engine
officers, subject to the Annex on Professions indicating the professions
where:
a. foreigners are allowed to practice in the
Philippines subject to reciprocity; and b. where corporate practice is allowed.
Foreigners may teach at higher education levels, provided the subject being taught is not a
professional subject (i.e., included in a government board or bar examination);
3. Retail trade enterprises with paid-up capital of less than Php25 million.
4. Cooperatives unless investments of former natural- born citizens of the Philippines;
5. Organization and operation of private detective, watchmen or security guards agencies;
6. Small-scale mining;
7. Utilization of marine resources in archipelagic
waters, territorial sea and exclusive economic zone;
8. Ownership, operation, and management of cockpits;
9. Manufacture, repair, stockpiling, and distribution of
nuclear weapons;
10. Manufacture, repair, stockpiling, and/or distribution
of biological, chemical, and radiological weapons,
and antipersonnel mines; and
11. Manufacture of firecrackers and other pyrotechnic
devices.

LIST B:
Foreign Ownership is Limited by Reasons of Security, Defense, Risk to Health and Morals,
and Protection of Small and Medium Scale Enterprises
Up to Forty Percent (40%) Foreign Equity

1. Manufacture, repair, storage, and/or distribution of products and/or ingredients requiring

Philippine National Police clearance;
2. Manufacture and distribution of dangerous drugs;
3. Sauna and steam bathhouses, massage clinics and other like activities regulated by law
because of risks posed to public health and morals, except wellness centers;
4. All forms of gambling except those covered by investment agreements with the state-run
Philippine Amusement and Gaming Corp.
5. Micro and small domestic market enterprises with paid in equity capital of less than the
equivalent of USD200,000.
6. Micro and small domestic market enterprises:
i. that involve advanced technology; or
ii. are endorsed as startup or startup
enablers by state agencies; or
iii. those whose majority of direct employees were Filipinos provided that their employees
should not be less than fifteen (15), and with a paid equity capital of less than the equivalent of
USD100,000.