Ms. Yolanda B. Padilla

March 21, 1990 Ms. Yolanda B. Padilla Ilocandia Tobacco Trading Center Corporation Bo. San Eugenio Aringay, La Union M a d a m : This refers to your letter dated December 4, 1989 requesting opinion on the queries posed therein. prcd As stated, the dissolution of Ilocandia Tobacco Trading Corporation (ITTRACCO) has been approved by this Office on August 26, 1989. Among its assets at the time of dissolution are shares of LUTORCO amounting to P12,000,000.00. The stockholders of ITTRACCO who are also the stockholders of LUTORCO agreed to declare liquidating dividends thru distribution of said shares of stock proportionately to them and the set-off against their residual capital investment in the dissolved corporation. Your queries are: 1. Is the act of the stockholders valid? 2. What are the possible liabilities of the stockholders in connection with and related to the above agreement? The usual procedure in the liquidation of corporate assets is through the board of directors and creditors of the corporation. Thus, our Supreme Court has held that the "normal method of procedure is for the creditors and executive officers to have charge of winding up operations, though there is an alternative method of assigning the property of the corporation to a trustee for the benefit of its creditors and shareholders. (Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines 1988 Edition p. 630, citing China Banking Corp. vs. Michelin & Cie, G.R. No. 36930, June 30, 1933, 058 Phil 261) This method is authorized by Section 122 of the Corporation Code, quoted in part as follows: "SECTION 122. Corporate Liquidation . Every corporation whose charter expires by its own limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any other manner, shall nevertheless be continued as a body corporate for three (3) years after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its assets , but not for the purpose of continuing the business for which it was established. At any time during said three (3) years, said 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 . From and after any such conveyance but 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. . . . ." (Emphasis supplied) However, an agreement among stockholders as to how the assets of the corporation shall be distributed among themselves on dissolution, after all the claims of creditors are satisfied, is valid . (16 A Fletcher, Sec. 8225) In the case of a voluntary dissolution without court action, modern corporation statute generally requires that debts and liabilities of the corporation to its creditors must be paid or adequately provided for in the dissolution proceedings before the distribution of corporate assets to stockholders . (15 A Fletcher Sec. 8219). It has to be emphasized that the liability of a subscriber for the amount of his unpaid subscription is contractual. "Such liability is a debt, and the subscriber is a debtor to the corporation." (4 Fletcher, Sec. 1415) Accordingly, any unpaid subscription of ITTRACCO in LUTORCO, if there is any, should be fully paid from the assets of the dissolved corporation prior to the distribution of the shares covered by said subscription. cdlex In the light of the foregoing, so long as all corporate creditors are paid and no one is prejudiced by the distribution of the shares, the act of the stockholders distributing the shares among themselves may be considered valid. Please be advised accordingly. Very truly yours, (SGD.) RODOLFO L. SAMARISTA Associate Commissioner