Let's Talk Tax

Stockholders’ rights in dissolved corporations

Lea Roque Lea Roque

What happens when a corporation is dissolved but the stockholders failed to liquidate the corporation and distribute the remaining assets of the corporation? May a stockholder who was deprived of his share in the remaining property demand to inspect the books of the corporation?

Under Philippine laws, a corporation which has been dissolved, has three years after dissolution to continue as a body corporate but only for the purpose of liquidating its assets and winding up its affairs.

During this three-year period, the corporate acts shall be limited to liquidation and it is no longer allowed to continue the business for which it was established.

Dissolution of a corporation in the Philippines is quite complicated. In my long years of practice, I have seen corporate dissolution to take years and sometimes, decades. The long process requires convoluted stages of securing clearances from various government agencies. Of course, the most difficult of all the processes is getting the tax clearance which can take as long as the longest-running telenovela you can think of.

Thus, it is not surprising that some stockholders become uninterested in the winding up process of their corporation and leave such task to a trusted business partner or consultant. Considering that most corporate liquidations can go beyond the three-year period, the right of such trustee to oversee the liquidation process until it is finally completed is valid even if it goes beyond the period.

Sometimes, stockholders resort to dissolving a corporation as a solution to the problematic operations of the corporation or to end the disputes among the stockholders. Little do they know that it may actually exacerbate the problems and fan the flames of distrust among them.

In one case (SEC-OGC Opinion No. 16-23 dated Oct. 5, 2016), it was represented that the stockholder has left the Philippines only to find out that their corporation which was supposed to have been dissolved actually continued business operations. Alleging that the assets of the dissolved corporation were never liquidated, the stockholder demanded access to the financial records and books of the corporation. However, the president of the corporation allegedly refused to grant access, noting that since the corporation has already been dissolved, the stockholder no longer has the right of inspection.

The SEC refused to rule on the issues, saying that the case involves an intra-corporate controversy which is within the jurisdiction of the Regional Trial Courts. It, however, laid down related laws and jurisprudence for guidance and information.

In the case of Clemente vs. Court of Appeals (G.R. No. 82407 March 27, 1995), the Supreme Court emphasized that the "(T)he termination of the life of a juridical entity does not by itself cause the extinction or diminution of the rights and liabilities of such entity... nor those of its owners and creditors."

In the case of Gokongwei vs. SEC, (G.R. No. L-45911, April 11, 1979), the Supreme Court explained that the right of inspection of the corporate books and financial records is an incident of the ownership rights of the stockholders over the assets and property of the corporation. It is necessary to afford the stockholder the right of self-protection. Such right exists even if the ownership is beneficial or equitable.

The SEC also emphasized that the right should be exercised to protect the interest of the stockholders as owners such as where the purpose is to find out the actual financial condition of the corporation and how his investment is being used.

As such, we can conclude that the right of the stockholder to inspect the financial records of the corporation is not terminated by the mere fact that the corporation has been dissolved. It should remain up to the time that the remaining assets are finally distributed to the stockholders.

It is clear that in some cases, terminating the operations of a corporation to end the seemingly insurmountable problems often leads to new sets of challenges. The stockholders need to be ready for a long and uphill battle. Like any aspect of running a business, the stockholders should be vigilant in seeing through the stages of dissolution. They need to properly coordinate with the board of directors and/or trustees to ensure that the remaining assets are properly distributed among the stockholders.

However, if all else fails, the stockholders may need to file a case in court to rule on the controversy and decide which party has the right to the remaining assets, if any.

With all the changes being introduced by the new Duterte administration, perhaps it is also time to look at simplifying the dissolution process in the Philippines to better protect the rights of stockholders.

Eleanor Lucas Roque is the head and principal of the Tax Advisory and Compliance Division of Punongbayan & Araullo.

As published in Business World dated 22 November 2016