Jon Lopez & Co., CPA'S

September 7, 1982 Jon Lopez & Co.,CPA'S c/o Mr. Antonio S. Jon Benedicto Bldg.,Iznart St. Iloilo City Sir : This pertains to your letter dated June 7, 1982, requesting opinion on whether stock dividends declared out of retained earnings can be used for the payment of unpaid subscription of stockholders. In reply, please be informed that Section 43 of the Corporation Code categorically provides: "The Board of Directors of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, property or in stock to all stockholders on the basis of outstanding stock held by them: Provided, that any cash dividends due on delinquent stock shall first be applied to the unpaid balance of the subscription plus costs and expenses while stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid ..." (Emphasis supplied) Additionally, unpaid subscription which is not declared delinquent, is not likewise compensable by stock dividends for it is well settled in this jurisdiction that: "When a person subscribes to the capital stock of a corporation he becomes indebted to the corporation for the value of the shares subscribed for. He therefore becomes the debtor of the corporation to the extent of his subscription. This indebtedness of his cannot, however, be compensated with the amount of his shares in the same corporation as there is no relationship of debtor and creditor with respect to the shares of stock." ( Ltr. to Aboitiz & Co.,Inc. citing the case of Garcia vs. Lim Chu Sing, 59 Phil. 562, SEC Folio pp. 309-310, reiterated in our letter to Mr. Erasto B. Catipay, SEC Folio, pp. 419-420.) Based on the foregoing, this Commission is of the opinion that stock dividends cannot be applied as payment for unpaid subscription of a stockholder, whether declared delinquent or not. Very truly yours, (SGD.) JULIO A. SULIT, JR. Associate Commissioner