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Corporate Securities Info
Corporate liquidation blues

By Raul J. Palabrica
Philippine Daily Inquirer
First Posted 21:14:00 09/03/2009

Filed Under: Economy and Business and Finance

IT?S BEEN A YEAR since several iconic Wall Street financial institutions imploded and caused the still lingering global economic crunch.

Some financial analysts believe the worst is over for the United States and the other countries whose economies are tied to the American market.

The cynics, however, are not impressed by the so-called ?green shoots? that indicate a revival of consumer confidence and investment optimism. They think the small leaves may just be the outcrop of wild grass.

The exact number of local companies that closed shop as a result of the once-in-a-century economic meltdown will never be known. The covering data on this matter will be difficult to validate.

Unless unable to amicably settle with their creditors, local businessmen who call it quits often do so with the least fanfare. They simply liquidate their stocks, pay off their employees and padlock their offices.

Those who treat the closure as a temporary setback from which they hope to recover in the future go through the motions of formal dissolution and cessation of business.

These businessmen know that disappearing from the scene without any bye or leave from their creditors or the regulatory authorities would have adverse effects on their ability to quickly reopen their business when economic conditions later improve.

Termination

The things that a dissolved corporation or whose certificate of registration has been revoked can do were the subject of query to the Securities and Exchange Commission.

A corporation sought guidance on certain activities it planned to undertake as it went through the process of terminating its corporate existence.

For starters, the SEC pointed out that a dissolved corporation ceases to exist, is without any corporate powers and has none of the attributes of a legal corporation.

But the corporation concerned has, under the law, the right to operate as such for three years from the time of its dissolution or loss of registration.

During that period, the corporation can prosecute and defend suits by or against it, settle and close its affairs, and dispose of or liquidate whatever assets it still has.

Since the time allowance given is for winding up purposes only, the corporation is prohibited from doing any act whose objective is to continue the business for which it was earlier organized.

The task of bringing the corporation?s affairs to an orderly close is given to its board of directors. To accomplish this objective, the directors undergo a change of personality?they become ?trustees? of the corporation?s assets for the benefit of the creditors and stockholders.

Authorized acts

The SEC went through the list of the corporation?s planned activities during the liquidation period and gave its comments on them.

Can the corporation issue shares of stocks?

No, it cannot because such issuance ?which necessarily implies the infusion of further investment or new capital into the corporation, is obviously inconsistent with the winding up of corporate affairs.?

May it sell its assets or purchase properties?

Selling its assets for liquidation purposes is okay. Purchasing properties is allowed if that would be consistent with liquidation. But, the SEC stressed, ?it is rare for a liquidating entity to further acquire more non-liquid assets.?

May the corporation sue another person or entity to recover its properties?

Yes, it may. The liquidation period is not a bar to the enforcement of its rights as a corporation. Adverting to a Supreme Court decision, the SEC said ?the trustee may commence a suit which can proceed to final judgment even beyond the three-year period.?

Court filings

A corollary issue was raised with regard to filing a case in court on behalf of the corporation while it is going through the liquidation process.

By way of background, when a corporation sues under its name, it is essential that its board authorize that action by way of a resolution, otherwise the court will throw out the case.

On this point, the SEC explained that the liquidation process was not a hindrance to the issuance of that resolution because ?the board of directors, acting as trustees of the corporation, may authorize an officer to sue or initiate a complaint in Philippine courts.?

The rub lies, however, on how the corporation shall describe itself in making the court filings.

The Rules of Court provide that when a suit is initiated in court by a corporation, it should state that it is duly organized and existing under our laws. This requirement rests on the principle that only natural or juridical persons (a status that registered corporations enjoy) may file actions in courts.

The SEC said that description cannot be used by a corporation whose existence has already been terminated.

Although left unsaid in the opinion, that prohibition, however, does not bar the board of directors, acting as trustees, from filing an action in court on behalf of the corporation.

When the three-year period ends, or later if certain events require its extension, and the corporation?s assets have been properly disposed of, the corporation becomes history.

No further action has to be taken by the corporation, nor is the SEC obliged to issue a certificate for that purpose.

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



Copyright 2014 Philippine Daily Inquirer. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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