Dissolution and Liquidation

Dissolution of a corporation is the extinguishment of its franchise and the termination of its
corporate existence or business purpose. However, for the purpose only of winding up its
affairs and liquidating its assets, its corporate existence continues for a period of 3 years from
such dissolution (Section 122, Corporation Code of the Philippines).
Upon dissolution, the corporation ceases to be a juridical person and consequently can no
longer continue transacting its business
MODES OF DISSOLUTION

Based on jurisprudence, the methods of effecting dissolution as prescribed by law are

exclusive, and a corporation cannot be dissolved except in the manner prescribed by law.
VOLUNTARY WHERE NO CREDITORS ARE AFFECTED
Under Sec. 118 of the Corporation Code, if the dissolution of a corporation does not
prejudice the rights of any creditor having a claim against it, the dissolution may be effected
by:
(1) Notice of the meeting should be given to the stockholders or members by personal
delivery or registered mail at least 30 days prior to the meeting;
(2) The notice of meeting should also be published for 3 consecutive weeks in a
newspaper published in the place where the principal office of said corporation is located. If
no newspaper is published in such place, then in a newspaper of general circulation in the
Philippines;
(3) The resolution to dissolve must be approved by the majority of the BOD/BOT and
approved by the stockholders representing at least 2/3 of the Outstanding Capital Stock or
2/3 of members;
(4) A copy of the resolution shall be certified by the majority of the BOD/BOT and
countersigned by the secretary;

(5) The signed and countersigned copy will be filed with the SEC and the latter will
issue the certificate of dissolution.

This is one of the instances where Non-voting shares are entitled to vote (Sec. 6. Par 6(8),
Corporation Code of the Philippines.
VOLUNTARY WHERE CREDITORS ARE AFFECTED
Where the dissolution of a corporation may prejudice the rights of any creditor, the petition for
dissolution shall be filed with the Securities and Exchange Commission.
The petition shall be signed by a majority of its board of directors or trustees or other officers
having the management of its affairs, verified by its president or secretary or one of its
directors or trustees, and shall set forth all claims and demands against it, and that its
dissolution was resolved upon by the affirmative vote of the stockholders representing at least
two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the members
at a meeting of its stockholders or members called for that purpose.
If the petition is sufficient in form and substance, the Commission shall, by an order reciting
the purpose of the petition, fix a date on or before which objections thereto may be filed by
any person, which date shall not be less than thirty (30) days nor more than sixty (60) days
after the entry of the order. Before such date, a copy of the order shall be published at least
once a week for three (3) consecutive weeks in a newspaper of general circulation published
in the municipality or city where the principal office of the corporation is situated, or if there
be no such newspaper, then in a newspaper of general circulation in the Philippines, and a
similar copy shall be posted for three (3) consecutive weeks in three (3) public places in such
municipality or city. Upon five (5) day's notice, given after the date on which the right to file
objections as fixed in the order has expired, the Commission shall proceed to hear the petition
and try any issue made by the objections filed; and if no such objection is sufficient, and the
material allegations of the petition are true, it shall render judgment dissolving the corporation
and directing such disposition of its assets as justice requires, and may appoint a receiver to
collect such assets and pay the debts of the corporation (Section 119, Corporation Code).
BY SHORTENING OF CORPORATE TERM
A voluntary dissolution may be effected by amending the articles of incorporation to shorten
the corporate term (Sec. 120, Corporation Code).
To do this, a copy of the amended articles of incorporation shall be submitted to the Securities
and Exchange Commission in accordance with this Code.
Upon approval of the amended articles of incorporation of the expiration of the shortened
term, as the case may be, the corporation shall be deemed dissolved without any further
proceedings, subject to the provisions of this Code on liquidation (Sec. 120, Corporation
Code).
If the shortened term expires before the SEC approval, the corporation will be dissolved upon
the SEC approval. If the shortened term expires after the SEC approval, the corporation will
be dissolved upon the expiration of the shortened term (SEC Opinion No. 06 -20, Mar. 13,
2006).

INVOLUNTARY

1.) BY EXPIRATION OF CORPORATE TERM

Once the period expires, the corporation is automatically dissolved without any other
proceeding and it cannot thereafter be considered a de facto corporation.
2.) FAILURE TO ORGANIZE AND COMMENCE BUSINESS WITHIN 2 YEARS FROM
INCORPORATION
The failure of the incorporated corporation to formally organize and commence the transaction of
its business or construction of its works within 2 years would make its corporate powers to cease
and the corporation shall be deemed dissolved [Sec. 22]. In this case, the dissolution is automatic.

Liquidation is the process by which all the assets of the corporation are converted into liquid
assets (cash) in order to facilitate the payment of obligations to creditors, and the remaining
balance if any is to be distributed to the stockholders. It is a proceeding in rem.
METHODS OF LIQUIDATION
1.) BY THE CORPORATION ITSELF
Under Sec. 122 of the Corporation Code of the Philippines, a corporation whose corporate
existence is terminated in any manner continues to be a body corporate for 3 years after its
dissolution for purposes of prosecuting and defending suits by and against it and to enable it
to settle and close its affairs, culminating in the disposition and distribution of its remaining
assets. It may, during the 3-year term, appoint a trustee or a receiver who may act beyond
that period.
The termination of the life of a corporate entity does not by itself cause the extinction or
diminution of the rights and liabilities of such entity. If the 3-year extended life has expired
without a trustee or receiver having been expressly designated by the corporation, within
that period, the BOD (or trustees) itself, may be permitted to so continue as "trustees" by
legal implication to complete the corporate liquidation. [Pepsi-Cola Products Philippines, Inc.
v. CA (2004)]
A corporation under liquidation may not amend its articles of incorporation to extend its
lifespan. When a corporation is liquidating pursuant to the statutory period of 3 years to
liquidate, it is only allowed to continue for the purpose of final closure of its business and no
other purposes. In fact, within that period, the corporation is enjoined from “continuing the
business for which it was established.” [Alhambra Cigar and Cigarette Mfg. v. SEC (1968)]
2.) CONVEYANCE TO A TRUSTEE WITHIN A 3-YEAR PERIOD
In this method, the 3-year limitation does not apply, provided that the designation of the
trustees is made within the period.
As a general rule, there is no time limit within which the trustee must finish the liquidation,
and he may sue and be sued as such even beyond the 3-year period. However, the
trusteeship is limited in its duration by the deed of trust.
Trustees to whom the corporate assets have been conveyed pursuant to liquidation may sue
and be sued as such in all matters connected with the liquidation. [National Abaca v. Pore
(1961)]
The trustee of a dissolved corporation may commence a suit which can proceed to final
judgment even beyond the 3-year period of liquidation. No reason can be conceived why
a suit already commenced by the corporation itself during its existence, not by a mere
trustee who, by fiction, merely continues the legal personality of the dissolved
corporation, should not be accorded similar treatment — to proceed to final judgment
and execution thereof. [Reburiano v. CA (1999)]
Unless the trusteeship is limited in its duration by the deed of trust, there is no time limit
within which the trustee must finish liquidation. [Board of Liquidators v Kalaw (1967)]
3.) BY MANAGEMENT COMMITTEE OR REHABILITATION RECEIVER
In SEC’s judgment dissolving the corporation and directing disposition of its assets as
justice requires, it may appoint a receiver to collect such assets and pay the debts of
the corporation [Sec. 119].
The mere appointment of a receiver, without anything more, does not result in the
dissolution of the corporation nor bar it from the exercise of its corporate rights. [Leyte
Asphalt and Mineral Oil Co. Ltd., v. Block Johnston and Breenbrawn (1928)]
What is the difference between Liquidation and Rehabilitation? Liquidation is the winding
up of a corporation so that assets are distributed to those entitled to receive them. It is the
process of reducing assets to cash, discharging liabilities and dividing surplus or loss. On
the other hand, rehabilitation contemplates a continuance of corporate life and activities in
an effort to restore and reinstate the corporation to its former position of successful operation
and solvency. Both cannot be undertaken at the same time. [Phil. Veterans Bank v.
Employees Union (2001)]

If full liquidation can only be effected after the 3-year period and there is no trustee, the
directors may be permitted to complete the liquidation by continuing as trustees by legal
implication. [Reburiano v CA (1999)]
A corporation’s BOD is not rendered functus officio by its dissolution. Since Sec. 122 allows a
corporation to continue its existence for a limited purpose, necessarily there must be a board
that will continue acting for and on behalf of the dissolved corporation for that purpose. [Aguirre
vs. FQB+, Inc. (2013)]
The trustee of a corporation may continue to prosecute a case commenced by the corporation
within 3 years from its dissolution until rendition of the final judgment, even if such judgment
is rendered beyond the 3-year period allowed by Sec. 122 of the Corporation Code. However,
an already defunct corporation is barred from initiating a suit after the lapse of the said 3-year
period. If a petition is filed after the corporate existence, the effect is that petitioner lacks the
capacity to sue as a corporation. To allow such petition to prosper, on the ground that it is for
the sole purpose of liquidating the corporation’s assets, would be to circumvent the provisions
of Sec. 122 of the Corporation Code. [Alabang Development Corporation v. Alabang Hills
Village Association and Rafael Tinio (2014)]