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Corporate Securities Info

Dissolution of corporations

Last week, the impeachment trial of Chief Justice Renato Corona touched on, among others, the issue of whether a corporation whose registration has been revoked by the Securities and Exchange Commission can still lend money to third parties.

At the center of the issue is Basa Guidote Enterprises Inc., a company owned by the family of Corona’s wife, which Corona claims to have lent him P11 million in 2004 to fund the purchase of certain properties.

The prosecution presented an SEC official who testified that the company’s license was revoked by the SEC in 2003 for failure to file the required reports from 1991 to 1997.

Although his testimony was allowed, the presiding officer of the trial, Senate President Juan Ponce Enrile, stated that the SEC had no authority to dissolve a corporation.

He said that a corporation could only be dissolved by an act of the stockholders or by quo warranto initiated by the government. He remarked “You are misinterpreting the Corporation Law. I’m sorry to tell you but I am teaching you Corporation Law.”

By way of background, quo warranto is an action in court brought in the name of the Republic of the Philippines by the Solicitor General against, among others, “an association which acts as a corporation within the Philippines without being legally incorporated or without lawful authority so to act.

Revocation

Enrile’s comments about dissolution of corporations is correct up to March 11, 1976, or before the promulgation of Presidential Decree No. 902-A.

Until that date, the law in force was the Corporation Law, or Act No. 1459, which was enacted on March 1, 1906 when our country was under American colonial rule.

The legislature that enacted the law consisted of the Philippine Commission, which was composed of Americans appointed by the United States president, and the Philippine Assembly whose members were Filipinos elected by local constituencies.

The law assigned the registration of corporations to the “Chief of the Division of Archives, Patents, Copyrights and Trademarks of the Executive Bureau.”

The power to dissolve corporations was given to the Court of First Instance of the province where the corporation has its principal office upon the application of the members or stockholders representing at least two-thirds of all shares of stocks issued or subscribed.

Some 30 years later, in the aftermath of the Great Depression that hit the US in the preceding year, the succeeding legislature created the SEC to supervise the registration and operation of domestic corporations.

Reports

What was previously the exclusive prerogative of the regular courts to dissolve corporations, either upon the request of the stockholders or through quo warranto proceedings, was expanded by P.D. 902-A to include the SEC.

The decree, issued during the martial law years when Enrile was the Minister of National Defense (in case you’ve forgotten), gave the SEC the power “to suspend, or revoke, after proper notice and hearing, the franchise or certificate of registration of corporations, partnerships or associations upon any of the grounds provided by law.”

Among those grounds is “failure to file required reports in appropriate forms as determined by the Commission within the prescribed period.”

These reports are essential because it is through these documents that the public who may want to do business with registered corporations can determine, among others, the identity of the people behind it, its capitalization and financial condition.

On the part of the government, it is an effective means of checking a corporation’s compliance with existing laws, particularly in relation to its payment of taxes.

If a corporation refuses to comply with its reportorial obligations, it is only fair that its registration be cancelled and its privilege to engage in business as a juridical person revoked.

After all, the government has the right to withdraw a concession it has granted to a group of people if the conditions under which it was given are violated.

Sanctions

The supervisory powers granted to the SEC by P.D. 902-A was reiterated—and even reinforced—by Congress with the enactment of the Securities Regulation Code, or Rep. Act. No. 8799, on July 19, 2000. (Incidentally, at the time of the law’s enactment, Enrile was serving his second term in the Senate.)

At the outset, the law emphasized that the SEC shall “have jurisdiction and supervision over all corporations, partnerships or associations who are the grantees of primary franchises and/or a license or permit issued by the government.”

Corollary to that authority, the SEC was given the power to “suspend, or revoke, after proper notice and hearing, the franchise or certificate of registration of corporations, partnerships or associations upon any of the grounds provided by law.”

To underscore the significance of such supervisory power, the law further provides that the SEC can impose sanctions for the violation of laws and the rules, regulations and orders issued pursuant to those laws.

Bottom line, contrary to Enrile’s statement, the SEC has the power to dissolve a corporation for failure to submit the required reports within the prescribed period.

(For feedback, please write to rpalabrica@inquirer.com.ph.)


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