RE : Dividends Due to a Dissolved Corporate Stockholder

December 23, 2005 SEC OPINION NO. 23-05 Ms. Stella Marts R. Pelino Vice President and Head Support Services Division UCPB Rural Bank Inc. 135-136 A.R. Building, Yacapin cor. Daumar Sts. Cagayan de Oro City RE : Dividends Due to a Dissolved Corporate Stockholder M a d a m : This refers to your letter of November 2, 2005 requesting opinion on the query posed therein. As stated in your letter, your client, the defunct Anoos and Soriano Agro Industrial Corporation (ASAIC, for brevity) still owns shares of stock of UCPB Rural Bank Inc. by reason that ASAIC was part of the original incorporators of the former Rural Bank of Lamitan, Basilan (now, UCPB Rural Bank-Lamitan, Basilan Branch).ASAIC's shareholdings in UCPB Rural Bank Inc. amount to 43,949 shares or .027% of the bank's issued shares. To date, you stated that there is a total outstanding dividends payable in the amount of P179,082.20 due to ASAIC covering the dividends declared from the years 1994-2003. However, ASAIC is already dissolved as far back as 1987 by reason that its corporate term had expired. Hence, you would like to know how to deal with a dissolved corporation in order to pay out the dividends due to it. Please be advised that the Commission does not, as a matter of settled policy, render opinions on matters, which will in effect make the Commission function or resemble as legal counsel of private firms. 1 However, for purposes of information and guidance only, the following may be imparted. Dissolution is "that condition of law and fact which ends the capacity of the body corporate to act as such and necessitates a liquidation and extinguishment of all legal relations existing in respect of the corporate enterprise. 2 It is the dissolution of a corporation that sets off its liquidation proceedings. 2006seccd Liquidation [on the other hand] is the winding up of the affairs of the corporation by reducing its assets in money, settling with creditors and debtors, and apportioning the amount of profit and loss. 3 As held by the Supreme Court in China Banking Corporation vs. M. Michelin and Cie : 4 Liquidation is the settlement of the affairs of a corporation [which] consists of adjusting the debts and claims, that is, of collecting all that is due the corporation ,the settlement and adjustment of claims against it and the payment of its just debts." [Emphasis supplied] acHCSD Unfortunately, you did not mention in your letter as to how ASAIC was liquidated, following its dissolution in 1987. Nevertheless, for information and guidance, the Corporation Code provides three (3) methods by which a dissolved corporation undergoes liquidation: 1. Liquidation by the corporation itself or its board of directors. 5 2. Liquidation by trustees to whom the board of directors had conveyed the corporate assets. 6 3. Liquidation by a duly appointed receiver. 7 In the first method (by the corporation or its board of directors), the members of the last board of directors become trustees for the creditors and stockholders. 8 As such trustees, they are charged to complete the liquidation of the corporation. Likewise, the stockholders can agree among themselves as to how the assets of the corporation shall be distributed. 9 In the second method (by trustee),the duly designated trustee shall complete the corporation's liquidation according to the terms of the Liquidation Plan, Deed of Trust or by some document embodying the trust agreement. 2006seccd With regard to the third method (by a receiver),the duly appointed receiver shall be the one tasked to administer the remaining corporate assets, which would subsequently be distributed to the stockholders after the settlement of corporate debts. The pertinent provision of the Corporation Code on liquidation provides the following: 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 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 and other persons in interest. Upon the winding up of the corporate affairs, any asset distributable to any creditor or stockholder or member who is unknown or cannot be found shall be escheated to the city or municipality where such assets are located. While Section 122 of the Corporation Code gives a dissolved corporation three (3) years to continue as a body corporate for purposes of liquidation, the disposition of the remaining undistributed assets must necessarily continue even after such period following the SEC En Banc decision in the case of Northern Luzon Transportation Inc. Isabela Cultural Corporation, petitioner, 10 quoted in part hereunder: "SECTION 122 simply means that after the expiration of the three-year winding-up period pending actions by or against the dissolved corporation are abated. Section 122 should not, however, be construed to prevent a corporation from pursuing, activities which would complete the final liquidation of a dissolved corporation. In this case, Northern Luzon Corporation Inc. which term has long expired was unable to dispose of its remaining assets even during the three-year period granted it by Section 122. Accordingly, it should be allowed to continue liquidating its remaining assets in order to complete the process of dissolving the corporation. [emphasis supplied] ... Any assets inadvertently or otherwise omitted from the winding up continue in the dissolved corporation for the benefit of the persons entitled thereto upon dissolution of the corporation and on realization shall be distributed accordingly. 11 It is clear from the above discussion that ASAIC's liquidation can be considered to extend up to this day, taking into account the sizeable assets (shares of stock of UCPB Rural Bank Inc. and the corresponding dividends) that it has left undistributed to its stockholders. Accordingly, the subject assets of ASAIC (dividends and shares of stock of UCPB Rural Bank Inc.) should be placed in the hands of the person(s) tasked to complete the liquidation of ASAIC after its dissolution in 1987. HEacAS Please be guided accordingly. Very truly yours, (SGD.) VERNETTE G. UMALI-PACO General Counsel Footnotes 1. Section 5.10, SEC Memorandum Circular 15, series of 2003. 2. 16 Fletcher Cyc. Corp. p. 655. 3. Ibid ,p. 658. 4. 58 Phil. 261 (1933). 5. Section 122, par. 1. 6. Section 122, par. 2. 7. Section 119, last par. 8. Lopez, The Corporation C od e, 1994 Ed. Vol. 2 p. 1074. 9. 16 A Fletcher Cyc. Corp.,Sec. 8225 "[A]n agreement among the stockholders as to how the assets shall be distributed among themselves on dissolution is valid." 10. SEC AC No. 347 October 7, 1991. 11. Sec. 2010 (c), California Corporations C od e, 1996 Edition.