Corporate liquidation

March 25, 2004 SEC OPINION NO. 20-04 Corporate liquidation Atty. Rodolfo V. Romero 10th Flr.,National Life Insurance Building, Ayala Avenue, Makati, Metro Manila P.O. Box 2039 Makati Central Post Office 1200 Philippines Gentleman : This refers to your letter dated 19 March 2004 requesting opinion on the following in the light of involuntary dissolution of Celebrity Travel & Tours Inc. on 11 August 2003 by the Securities and Exchange Commission.: 1. To whom should payment be made by the Government bank in question? 2. What steps should be taken by the Government bank apart from the publication of a Notice to Creditors and the posting of bonds, to ensure the rights of other possible creditors are not prejudiced by the payment of the Government bank's settlement funds directly to the pre-revocation stockholders of record? In reply, please be informed that under Section 122 of the Corporation Code of the Philippines it is specifically provided thus: "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 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 by 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. Upon winding up of the corporate affairs, any asset distributable to any creditor or stockholder or members who is unknown or cannot be found shall be escheated to the city or municipality where such assets are located. xxx xxx xxx." The Supreme Court, in the case of Clemente et al. vs. The Hon. Court of Appeals ,G.R. No. 82407, March 27, 1995, 242 SCRA 717 [1995] set a corporate dissolution rule in this wise: "...The corporation continues to be a body corporate for three (3) years after its dissolution for purposes of prosecuting and defending suits by and against it and for enabling it to settle and close its affairs, culminating in the disposition and distribution of its remaining assets. It may during the three-year term, appoint a trustee or a receiver who may act beyond that period. The termination of the life of a juridical entity does not by itself cause the extinction or diminution of the rights and liabilities of such entity (see Gonzales vs. Sugar Regulatory Administration ,174 SCRA 377) nor those of its owners and creditors. If the three-year extended life has expired without a trustee or receiver having been expressly designated by the corporation within that period, the board of directors or (trustees) itself, following the rationale of the Supreme Court decision in Gelano vs. Court of Appeals (103 SCRA 90) may be permitted to so continue as "trustees" by legal implication to complete the corporate liquidation .Still in the absence of a board of directors or trustees, those having any pecuniary interest in the assets, including not only the shareholders but likewise the creditors of the corporation, acting for and in behalf, might make proper representation with the Securities and Exchange Commission, which has primary and sufficiently broad jurisdiction in matters of this nature, for working out a final settlement of the corporate concerns." Normally, corporate liquidation is effected by the corporation itself through the directors or trustees and executive officers who are charged with the winding-up of corporate affairs. To borrow the language of the Supreme court in China Banking Corp. v. M. Michelin & Cie ,58 Phil. 261 (1933): The normal method or procedure is for the directors and executive officers to have charge of the winding up operation, though there is the alternative method of assigning the property of the corporation to the trustees for the benefit of its creditors and shareholders. xxx xxx xxx ...while the appointment of receiver rests within the sound judicial discretion of the court, such discretion, must however, always be exercised with caution and governed by legal and equitable principles, the violation of which will amount to its abuse, and in making such appointment, the court should take into consideration all the facts and weigh the relative advantages and disadvantages of appointing a receiver to wind up the corporate business. It should be emphasized that under existing law, SEC approval is not required in the distribution or liquidation of assets. As aptly ruled in SEC opinion of July 23, 1993: "there is nothing in Section 122 which requires SEC's approval of distribution or liquidation of the assets of a dissolved corporation. The same is a matter of internal concern of the corporation and falls within the power of the directors and stockholders or duly appointed liquidation trustee. Liquidation of assets, however, is subject to the payment of debts of the corporation." In fine, it is only in the absence of the board of directors or trustees, and officers of the corporation that shareholders or creditors or those who have pecuniary interest in the assets of the dissolved corporation may call upon the SEC, in appropriate cases, to finally settle the affairs of a dissolved corporation. The government bank may thus course the payment to the board of directors or any person designated by the board of directors ,not directly to the stockholders of record, who shall act as trustees and hold the assets and properties of the corporation for the benefit of members, stockholders, creditors and other persons in interest. From the date of such conveyance of corporate property to the trustees, all interests which the corporation had in the property ceases, the legal interest is vested in the trustees while the beneficial interest is lodged in the stockholders, members, creditors or other persons in interest. Very truly yours, (SGD.) VERNETTE G. UMALI-PACO General Counsel