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Case Digest on FINANCING V TEODORO 93 PHIL 404 (1953)

November 11, 2010


93 PHIL 404 (1953)

The minority stockholders of the Financing Corporation are suing the corporation and its president and general manager for gross mismanagement and fraudulent conduct of corporate affairs and are asking for the dissolution of the corporation.

SC Held:  The general rule is that minority stockholders of a corporation cannot sue and demand its dissolution but such action should be brought by the Government through its legal officer in a quo warranto.

However, there are instances when minority stockmembers  who are unable to obtain redress and protection of their rights within the corporation may petition for dissolution without intervention of the State.  When such action is brought by the minority stockholders, the trial court has jurisdiction, and may appoint a receiver as part of its power.

The grounds of the prayer for receivership are:

1)         imminent danger of insolvency

2)         fraud and mismanagement

5.         Failure to organize and commence business; cessation of business for 5 years

§ 22.  Effects of non-use of corporate charter and continuous inoperation of a corporation.   If a corporation does not formally organize and commence the transaction of its business within 2 years from the date of its incorporation, its corporate powers cease and the corporation shall be deemed dissolved.  However, if a corporation has commenced the transaction of its business but subsequently becomes continuously inoperative for a period of at least 5 years the same shall be a ground for the suspension or revocation of its corporate franchise or certificate of incorporation.

This provision shall not apply if the failure to organize, commence the transaction of its business or the construction of its works, or to continuously operate is due to causes beyond the control of the corporation as may be determined by the SEC.

A corporation is formally organized by the:

1.         adoption of its by-laws;

2.         election of its directors and

3.         election of its officers

Failure to do any of these steps within 2 years will cause the dissolution of the corporation.

Failure to adopt by-laws will result in the suspension or revocation of the by-laws.

Failure to elect directors is a ground for dissolution, but if the incorporating directors whose names appear in the AOI continue to act as such and begin transacting corporate business, then stockholders are deemed to have acquiesced to their acts as directors as if they had been duly elected, but only for the purpose of determining whether the corporation “failed to organize.”

Transacting business implies a continuity of acts or dealings in the accomplishment of the purpose for which the corporation was formed.  However, even a single act would be sufficient if it is intended to be the beginning of a series of acts in pursuance of the corporate business.

Code of Commerce. Art. 3.  The legal presumption of habitually engaging in commerce shall exist from the moment the person who intends to engage therein announces through circulars, newspapers, handbills, posters exhibited to the public, or in any other manner whatsoever, an establishment which has for its object some commercial operation.

Any advertisement in the media would thus be sufficient to raise the rebuttable presumption that the corporation has commenced business; thus one can present evidence to show that the business in face never commenced.

SEC may suspend or revoke the certificate of incorporation of a corporation which had been formally organized and had commenced its business within the 2-year period but discontinues its operations for at least 5 continuous years, unless it can prove that the cessation of its business was due to causes beyond its control.  In this case, there is no automatic dissolution and a proceeding before the SEC is necessary.  The corporation must be given due process:  notice and the opportunity to be heard.

Campos: now asks the ? of what happens if the corporation is able to prove that the discontinuation of the corporation’s business was due to causes beyond its control?  Is the corporation revived, or will there be no dissolution until it is given the change to prove that its failure is beyond its control.

6.         Involuntary dissolution

a.         Revocation of Certificate of Registration by SEC

§121.  Involuntary dissolution.  A corporation may be dissolved by the SEC upon filing of a verified complaint and after proper notice and hearing on grounds provided by existing laws, rules and regulations.

PD 902-A, §6.  In order to effectively exercise such jurisdiction, the Commission shall possess the ff. powers: x x x x

e.         To suspend, or revoke, after proper ntocie and hearing, the franchise or certificate of registration of corporations, partnerships or associations, upon any of the grounds provided by law, including the ff:

1.         Fraud in procuring its certificate of registration;

2.         Serious misrepresentation as to what the corporation can do or is doing to the great prejudice of our damage to the general public;

3.         Refusal to comply or defiance of any lawful order of the Commission restraining commission of acts which would amount to a grave violation of its franchise;

4.         Continuous inoperation for a period of at least 5 years;

5.         Failure to file by-laws within the required period;

6.         Failure to file required reports in appropriate forms as determined by the Commission within the prescribed period.

Required reports are the annual report of its operations and a financial statement of its assets and liabilities.

The reference to any of the grounds provided by law, including the ff., implies that aside from the enumerated grounds, there are other grounds for suspending or revoking the certificate.  Some of these are:

1.         Violation of the corporation of any provision of the Corpo Code (§144)

2.         In case of deadlocks in close corporations and the SEC deems it proper to order the dissolution of the corporation as the only practical solution to the dispute.

3.         grounds for a quo warranto proceeding to dissolve the corporation which may be initiated by the Sol Gen or the fiscal on grounds which may also be used as a basis for SEC revocation of registration.

ROC Rule 66 § 2.  Like actions against corporations.  A like action may be brought against a corporation:

a)         when it has offended against a provision of an Act for its creation or renewal;

b)         when it has forfeited its privileges and franchises by non-use;

c)         when it has committed or omitted an act which amounts to a surrender of its corporate rights, privileges, or franchises;

d)         when it as misused a right, privilege, or franchise conferred upon it by law, or when it has exercised a right, privilege, or franchise in contravention of law.

4.         25 % minimum requirement for subscription and/or payment has not been complied with after incorporation, contrary to its AOI.  This amounts to a fraud in procuring the corporation’s registration.

Where the offense of the corporation is not serious enough to cause great prejudice to the public, such a severe penalty as revocation, or even should be suspension, should be avoided as it would affect the goodwill of the corporation.  The SEC can instead enjoin the corporation from further committing the act or acts complained of, and has the power to issue prohibitory or mandatory injunctions in all cases under its jurisdiction.

b.  Quo warranto proceeding

PD 902-A grants exclusive jurisdiction to the SEC over any controversy between the corporation and the State in so far as it concerns its individual franchise or right to exist as such entity.

Consider as repealed by PD902-A the ROC provision re:  quo warranto proceedings should be filed before the RTC.

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