Azuelo, Josiebeth B.

JD II March 12, 2018

Corporation Law Atty. Jose Riodil Montebon

FACTS:
ABC, Inc. owns a prime parcel of land in Calindagan. DEF approaches it and
proposes a joint venture to develop a planned community of condominiums, malls, and
service centers. Under the terms of the joint venture, ABC’s exposure shall only be
limited to its contribution of the land. DEF, on the other hand, shall finance the
development exclusively from its own resources, without utilizing the land as collateral
for a loan. To pursue the joint venture, the parties organize a new corporation, Montecillo
Arms Development Corporation., with ABC holding 30% and DEF owning 70% of the
equity. Soon after the joint venture company is formed, DEF requires ABC to assign its
land to the joint venture company. ABC is reluctant at first, because it would like DEF to
first put in a substantial portion of capital for the project as a counterpart. However, DEF
is very persuasive, and ABC assigns the property. Because of the assignment, however,
ABC acquires control of the joint venture company pursuant to the tax-free provision in
the Internal Revenue Code which requires that the owner of an asset exchanged for equity
must retain at least majority control of the corporation to which the property has been
transferred. In the meantime, DEF has not put in its capital, although it has succeeded in
interesting a few investors to acquire shares from the joint venture company. The
proceeds of these sales have been deposited in the joint venture company’ bank account.
After more than a year, DEF still has not introduced improvements on the property. ABC
then ousts the DEF representatives in the joint venture Board and takes control of the
company. DEF, however, refuses to surrender the company’s ban account.

ISSUE:

Will rescission of the joint venture agreement prosper? What consequences will it
have on all parties, including DEF’s investors to the joint venture company?

DISCUSSION:

No, rescission is not the proper remedy since this case involves corporate joint
venture. The Supreme Court in Tuason vs. Bolanos stated that, "while a corporation has
no power to enter into a partnership, it can validly enter into a Joint Venture agreement
where the nature of that venture is in line with the business authorised by its charter."
There is no Philippine law that expressly recognizes or governs the formation of joint
ventures however, the existence of which has been recognized by several jurisprudence
already. There are two types- the contractual joint venture and corporate joint venture,
are treated by Philippine tax law as corporate taxpayers for purposes of corporate income
tax.
 Corporate Joint Ventures are undertaken by the formation of a new domestic
corporation that must be licensed by the SEC..The formation therefore is governed by the
Corporation Code. The Securities and Exchange Commission (SEC) licences and
regulates corporate joint ventures and are created like an ordinary domestic corporation.
There exist a corporate joint venture in the case at bar as when ABC, Inc. and DEF
agreed to form one and subsequently formed the Montecillo Arms Development
Corporation pursuant to a joint venture agreement. The provisions in the Corporation
Code apply, hence, the proper remedy would be dissolution and not rescission. The
Supreme Court in the case of Primelink Properties and Development Corporation v.
Lazatin-Magat said that "when the RTC rescinded the JVA on complaint of respondents
based on the evidence on record that petitioners willfully and persistently committed a
breach of the JVA, the court thereby dissolved/cancelled the partnership."
Furthermore, in Sancho v. Lizarraga, the SC ruled that owing to the defendant’s
failure to pay to the partnership the whole amount which he bound himself to pay, he
became indebted to the partnership for the remainder, with interest and any damages
occasioned thereby, but the plaintiff did not thereby acquire the right to demand
rescission of the partnership contract according to article 1124 of the Code. Article 1124
cannot be applied to the case in question, because it refers to the resolution of
obligations in general, whereas articles 1681 and 1682 specifically refer to the contract
of partnership in particular. And it is a well known principle that special provisions
prevail over general provisions.

In a corporate joint venture, dissolution may be effected by the affirmative vote of

the stockholders owning at least two-thirds of the outstanding capital stock. However, it
is noteworthy that in the case at bar, that it is not clear whether there were really investors
engaged in the corporate joint venture because the facts only stated that DEF succeeded
in interesting several investors. Assuming that there were indeed investors and
transactions already ensued, then Section 119 of the Corporation Code must be followed
on the provision of voluntary dissolution where creditors are affected. The provision
states that, “a 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.”
A dissolved corporation continues its corporate existence but may not carry on any
activities except those appropriate to wind up and liquidate its affairs. Granting that there
are investors in this case, and assuming that there were already transactions performed
under the name of the corporation, liabilities to the investors or creditors must be paid
using corporate assets. DEF's refusal to surrender the corporate bank book may be
remedied by petition by mandamus, effectively ordering DEF to surrender the same. The
bank account belongs to the corporation created, not to DEF, nor to ABC. In addition, the
court may also order, by ABC's proper petition in court, that DEF shall pay the its
liability to the corporation. DEF bound itself to finance the development of the joint
venture exclusively from its own resources when the parties organized Montecillo Arms
Development Corporation., with ABC holding 30% and DEF owning 70% of the equity.
With DEF’s failure to comply with its promised obligation, the rule on equity requires
DEF to pay what he owes in the Montecillo Arms Development Corporation, which, in
the first place, was created because of its own inducement. Thus, DEF will have to pay
what he has to pay in order to complete the corporation's asset and pay the creditors.
After the winding up, the Montecillo Arms Development Corporation ceases to exist.

REFERENCE:
-Joint ventures in the Philippines: overview by Perry L. Pe and Andrea Antonette A. Sese-Relucio, Romulo
Mabanta Buenaventura Sayoc & de los Angeles
https://uk.practicallaw.thomsonreuters.com/w-011-6852?
transitionType=Default&contextData=(sc.Default)&firstPage=true&bhcp=1

-Batas Pambansa Blg. 68

-Tuason vs. Bolanos, G.R. No. L-4935, 28 May 1954

-Primelink v. Lazatin-Magat, G.R. No. 167379, June 27, 2006

-Sancho v. Lizarraga, G.R.No. L-33580 February 6, 1931