Bar Q and A #31

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1.) Because of disagreement with the BOD and a threat by the BOD to expel her for misconduct and inefficiency, Carissa offered in writing to resign as President and member of the BOD, and to sell to the company all her shares therein for P300,000.00 Her offer to resign was effective as soon as my shares are fully paid. At its meeting, the BOD accepted Carissa‘s resignation, approved her offer to sell back her shares of stock to the company, and promised to buy the stocks on a staggered basis. Carissa was informed of the BOD Resolution in a letter-agreement to which she affixed her consent. The Company‘s new President signed the promissory note. After payment P100,000 the company defaulted in paying the balance of P200,000. Carissa wants to sue the Company to collect the balance. If you were retained by Carissa as her lawyer, where will you file the suit? A) Labor Arbiter; b) RTC; or c) SEC?

RTC has jurisdiction. Under Section 5.2 of the SRC, the commission’s jurisdiction over all cases enumerated under Section 5 of PD 902-A is hereby transferred to the Courts of general jurisdiction or the appropriate Regional Trial Court: Provided, That the Supreme Court in the exercise of its authority may designate the Regional Trial Court branches that shall exercise jurisdiction over these cases. The Commission shall retain jurisdiction over pending cases involving intra- corporate disputes submitted for final resolution which should be resolved within 1 year from the enactment of this Code. The commission shall retain jurisdiction over pending suspension of payments/rehabilitation cases filed as of 30 June 2000 until finally disposed.

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2.) What tools are available to the stockholders to replenish capital?

In the face of the refusal of the creditor- banks to grant more loans, the following are tools available to the stockholders to replenish capital, to wit: (1) additional subscription to shares of stock of the corporation by stockholders or by investors; (2) advances by the stockholders to the corporation; (3) payment of unpaid subscription by the stockholders.

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3.) A, B and C are shareholders of XYZ Company. A has an unpaid subscription of P100,000, B’s shares are fully paid up, while C owns only nominal but fully paid up shares and is a director and officer. XYZ Company becomes insolvent, and it is established that the insolvency is the result of fraudulent practices within the company. If you were counsel for a creditor of XYZ Company, would you advice legal action against A, B and C?

a. An action can be brought against A for P100,000 which is the amount of his unpaid subscription. Since the corporation is insolvent, the limit of a stockholder’s liability to the creditor is only up to the extent of his unpaid subscription.

b. There is no cause of action against B because he has already fully paid for his subscription. As stated earlier, the limit of the stockholder’s liability to the creditor of the corporation, when the latter becomes insolvent, is the extent of his subscription.

c. An action can be filed against C, not as a stockholder because he has already paid up the shares, but in his capacity as director and officer because of the corporation’s insolvency being the result of fraudulent practices within the company. Directors are liable jointly and severally for damages sustained by the corporation, stockholders or other persons resulting from gross negligence or bad faith in directing the affairs of the corporation.

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4.) The Board of Directors of a corporation, by a vote of ten in favor and one against, declared due and payable all unpaid subscription to the capital stock. The lone dissenting director failed to pay on due date, i.e., September 19, 1997, his unpaid subscription. Other than the shares wherein he was unable to complete payment, he did not own any share in the corporation. On September 23, 1997, he was informed by the Board of Directors that, unless due payment is meanwhile received, he: a. Could no longer serve as a director of the corporation forthwith; b. Would not be entitled to the cash and stock dividends which were declared and payable on September 24, 1997; and c. Could not vote in the stockholders meeting scheduled to take place on September 26, 1997. Was the action of the Board of Directors on each of the foregoing matters valid?

a. NO. The period 30 days within which the stockholder can pay the unpaid subscription had not yet expired.

b. NO. The delinquency did not deprive the stockholder of his right to receive dividends declared. However, the cash dividend declared may be applied by the corporation to the unpaid subscription.

c. NO. The period of 30 days within which the stockholder can pay the unpaid subscription had not yet expired.

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5.) Janice rendered some consultancy work for XYZ Corporation. Her compensation included shares of stock therein. Can XYZ Corporation issue shares of stock to pay for the service of Janice as its consultant? Discuss your answer.

The corporation can issue shares of stock to pay for actually performed services to the corporation, but not for future services or services yet to be performed.

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6.) Victor was employed in MAIA Corporation. He subscribed to P1,500 shares of the corporation at P100 per share or a total of P150,000. He made an initial down payment of P37,500. He was appointed President and General Manager. Because of his disagreement with the Board of Directors, he resigned and demanded payment of his unpaid salaries, his cost of living allowance, his bonus, and reimbursement of his gasoline and representation expenses. MAIA Corporation admits that it owed Victor P40,000 but told him that this will be applied to the unpaid balance of his subscription in the amount of P100,000. There was no call or notice for the payment of the unpaid subscription. Victor questioned the set-off. a. May MAIA set-off unpaid subscription with Victor’s claim for salaries? b. Would your answer be the same if indeed there had been a call for the unpaid subscription?

a. NO. MAIA cannot set-off the unpaid subscription with Victor’s claim for salaries. The unpaid subscription is not yet due as there is no call.

b. YES. The reason is that Victor is entitled to the payment of his salaries which MAIA has no right to withhold in payment of unpaid subscription. To do so would violate Labor Laws.

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7.) What is “watered stock” and what is the legal consequence of the issuance of such stock?

Watered stocks are stocks issued for a consideration less than its par or issued value or for a consideration in any form other than cash, valued in excess of its fair value. Any director or officer of a corporation consenting to the issuance of watered stocks or who, having knowledge thereof, does not forthwith express his objection in writing and file the same with the corporate secretary shall be solidarily liable with the stockholder concerned to the corporation and its creditors for the difference between the fair value received at the time of issuance of the stock and the par or issued value of the same. (Section 65 of the Corporation Code)

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8.) A group of stockholders of Sesame Corporation filed a court suit against the members of the Board of Directors to make good to the shareholders, in proportion to their shareholdings, the losses incurred by the corporation because the of defendant Board of Directors’ management. Will the action prosper?

The action will not prosper because the right belongs to the Corporation. Until the corporation is dissolved and liquidation of assets shall have been made, the shareholders have no right over any specific asset of the corporation (Sec. 122, Corporation Code). The suit should have been filed instead by the and in the name of the corporation. (Evangelista v. Santos, 64 Phil. 697; see also Gamboa v. Victoriano, 90 SCRA 40)

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9.) The corporation, once dissolved, thereafter continues to be a body corporate for 3 years for purposes of prosecuting and defending suits by and against it and of enabling it to settle and close its affairs, culminating in the final disposition and distribution of its remaining assets. If the 3- year extended life expires without a trustee or receiver being designated by the corporation within that period and by that time (expiry of the 3-year extended term), the corporate liquidation is not yet over, how, if at all, can a final settlement of the corporate affairs be made?

The liquidation can continue with the winding up. The members of the Board of Directors can continue with the winding of the corporate affairs until final liquidation. They can act as trustees or receivers for this purpose.

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10.) The SEC approved the amendment of the Articles of Incorporation of GHQ Corp shortening its corporate life to only 25 years in accordance with Sec 120 of the Corp Code. As shortened, the corporation continued its business operations until May 30, 1997, the last day of its corporate existence. Prior to said date, there were a number of pending civil actions, of varying nature but mostly money claims filed by creditors, none of which was expected to be completed or resolved within five years from May 30, 1997. If the creditors had sought your professional help at that time about whether or not their cases could be pursued beyond May 30, 1997, what would have been your advice?

The cases can be pursued even beyond May 30, 1997, the last day of the corporate existence of GHQ Corp. The Corporation is not actually dissolved upon the expiration of its corporate term. There is still the period for liquidation or winding up.

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