Marcelino C. Cabucana Jr.

October 22, 2002 SEC OPINION Marcelino C. Cabucana Jr. 377 Panganiban St.,Centro East, Santiago City, Isabela, Philippines S i r : This is a reply to your letter dated July 11, 2002 regarding the status of the members of the board of directors and the administrative officers of Northeastern College Inc. after its term of existence has expired in 1997. When a corporation is dissolved by expiration of the time limited in its charter, by a voluntary surrender of its charter, by a judgment forfeiting its charter, or in any other mode, it ceases to exist unless there is some statutory provision continuing its existence. By statutes in most states, its existence continues for windup purposes and the directors in office at the time of dissolution as statutory trustees or directors are empowered to collect the assets, pay liabilities and distribute the surplus to the shareholders. (Ballentine, p. 722) It is a basic principle in corporate law that the Corporate entity can only act through the board, and conversely, the board can only act and represent itself as a legitimate governing body if there is an existing corporate entity within which it could operate. In the instant case, the term of existence of the subject corporation expired on January 14, 1997; and from that moment, it is deemed to have lost the juridical capacity to act as an entity separate and distinct from the individuals or members which comprised it. Consequently, the board of trustees is said to have lost the power to continue the business or activity for which the corporation was established save for the instance as explained in Gelano vs. Court of Appeals (103 SCRA 90) when it may be permitted to so continue as "trustees" by legal implication to complete the corporate liquidation. The same principle applies in the case of the administrative officers, whose terms of office are inextricably linked to the life of the corporate entity. However, under paragraph 1, Section 122 of the Corporation Code, a dissolved corporation 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." The rationale for extending the period of existence of a dissolved corporation is explained in Castle's Administrator v. Acrogen Coal, Co. (145 Ky 591, 140 SW 1034 [1911]) as follows: "This continuance of its legal existence for the purpose of enabling it to close up its business is necessary to enable the corporation to collect the demands due it as well as to allow its creditors to assert the demands against it. If this were not so, then a corporation that became involved in liabilities might escape the payment of its just obligations by merely surrendering its charter, and thus defeat its creditors or greatly hinder and delay them in the collection of their demands. Regarding the third query on who becomes liable for the disbursements effected after the term of the corporation has ended, a distinction must be drawn as to the nature of the transaction for which the said disbursement is obtained before a determination can be made on who becomes ultimately liable for the same. If the transaction entered into after the expiration of the term is for the purpose of liquidating the affairs of the corporation then, said disbursements are chargeable against the corporate property under liquidation; but if the disbursements were made pursuant to the ordinary business of the corporation, for which it has lost the primary license to engage in, then the said disbursement is chargeable against the personal property of the director or officer responsible for the same because by then there is no more legal authority to engage in the primary purpose of the corporation. To quote Ballentine: cSDHEC "Where the assets of a dissolved corporation have been distributed among the stockholders, a creditor of the dissolved corporation may follow such assets as in the nature of a trust fund into the hands of stockholders. The creditors have the right to subject such assets to their debts and for that purpose the stockholders hold them as though they were trustees. In other words, the assets of the dissolved corporation are a trust fund against which the corporate creditors have a claim superior to that of the stockholders. A stockholder who receives only a portion of the assets is liable to respond only for that portion ...Where the trust property has been used by the stockholder for his own purpose, or disposed of by him, he may be held personally liable for the full value thereof." (Ballantine on Corporations, p. 733) Very truly yours, (SGD.) BENITO A. CATARAN Director Company Registration and Monitoring Department June 28, 2002 THE CHIEF Legal Department Securities and Exchange Commission SEC BLDG.,EDSA, San Juan, M.M. Dear Sir, I am one of the stockholders of the Northeastern College, Incorporated, an educational corporation engaged in operating a school in Santiago City. On January 14, 1972, the Securities and Exchange Commission issued a certification approving the Articles of Incorporation of the said corporation. Under Article IV of its articles, Northeastern College shall have a term of existence of twenty (25) years or until 1997. At present, the said corporation continues to operate notwithstanding the fact that it has not yet renewed its corporate existence. In view of this, may I respectfully solicit your legal opinion on the following matters: 1. What is the status of the members of the board of directors? 2. What is the status of the administrative officers of the school? 3. Who is liable for the disbursements made after the term of the corporation has ended. ADaSEH Thank you very much. Very truly yours, (SGD.) MARCELINO C. CABUCANA, JR.