Ms. Amelia C. Manalastas

April 11, 1988 Ms. Amelia C. Manalastas Integrated Air Corporation Andrews Avenue, Manila International Airport Pasay City, Metro Manila Madam : This refers to your letter dated March 16, 1988, requesting opinion on the query posed therein. prcd It appears from the facts stated in your letter that Integrated Air Corporation (IAC) is a wholly-owned subsidiary of the National Steel Corporation (NSC) with authorized capital stock in the amount of P31 Million divided into 310,000 shares with a par value of P100.00 per share. Other than the qualifying shares held by the Directors of the Board of IAC, NSC, a wholly-owned subsidiary of National Development Company (NDC) which is a government corporation is the only majority stockholder with a total subscription of 274,994 shares. In consonance with the government's policy on privatization and in anticipation of such eventuality, it was decided that the subscription agreement between NSC and IAC be amended to decrease the subscription of the former to the capital stock of the latter and release the subscriber from the payment of its unpaid subscriptions thereby maintain its exposure at P12.5 Million. The amendment of the subscription agreement was ratified by the stockholders during the IAC's annual stockholders' meeting held on June 15, 1987. Likewise, the major creditors of the corporation have been notified of the decrease of subscription and allegedly the decrease will not prejudice the interest of the creditors of IAC. Your query is whether the NSC can be released as subscriber to the shares corresponding to the unpaid subscription. The rule is that a corporation has no power to release a subscriber from the payment of his unpaid subscription. Thus, it was held: "A corporation has no power to release an original subscriber of its capital stock from the obligation of paying for his shares, and as against creditors a reduction of the capital stock can only take place in the manner and under the conditions prescribed by the statutes. The capital stock constitutes the sole fund to which creditors look for liquidation of their demands; it is regarded in law as a trust fund, pledged for the payment of the debts of the corporation . And, subscribed shares cannot be cancelled by the board of directors, without justifiable cause which vitiates a simple contract as this is tantamount to relieving an original subscriber from his subscription which a corporation has no power to do." (Velasco v. Poizat, G.R. No. L-11528, March 15, 1918, 37 Phil. 802 (1923) Phil. Trust Co. v. Rivera, G.R. No. 19761, January 29, 1923, 44 Phil. 469). The only exception to the foregoing rule is when the release from his unpaid subscription is approved by all the stockholders of the corporation as decided in the case of Lingayen Gulf Electric Power Co., vs. Baltazar,GR. No. L-4824, June 30, 1953; but even then, such a release must not prejudice creditors of the corporation . ( SEC Opinion dated July 12, 1965 addressed to Clemente Tiampo, Inc. ) Thus, with the consent of all the stockholders and all existing creditors of the corporation , NSC may be released from his subscription corresponding to the unpaid balance thereof, in which event the cancelled shares shall revert back to the unsubscribed and unissued portion of the capital stock of IAC. LexLib Please be advised accordingly. Very truly yours, (SGD.) JULIO A. SULIT, JR. Chairman