Published — February 18, 2021
The following post does not create a lawyer-client relationship between Alburo Alburo and Associates Law Offices (or any of its lawyers) and the reader. It is still best for you to engage the services of your own lawyer to address your legal concerns, if any.
Also, the matters contained in the following were written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future developments on the subject matter under discussion.
More on subscription aside from its cancellation of receivables: WHAT IS A SUBSCRIPTION CONTRACT?
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Subscription receivables due from shareholders of a corporation cannot be condoned
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The partially-paid subscription of a shareholder cannot be considered as full payment
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Subscription contracts cannot be cancelled without just cause
May a corporation condone subscriptions receivables?
The above query was one of the issues that were tackled in the Opinion No. 19-50 dated October 11, 2019 rendered by the Securities and Exchange Commission (SEC). In responding to the query, the SEC referred to what the law, particularly the Revised Corporation Code, has to say.
The law says:
No corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities except by decrease of capital stock. This is called “Trust Fund Doctrine”.
The “Trust Fund Doctrine” considers the subscribed capital as a trust fund for the payment of the debts of the corporation, to which the creditors may look for satisfaction. Until the liquidation of a corporation, no part of the subscribed capital may be returned or released to the stockholder (except in the redemption of redeemable shares) without violating the principle of Trust Fund Doctrine. Thus, dividends must never impair the subscribed capital; subscription commitments cannot be condoned or remitted; nor can the corporation buy its own shares using the subscribed capital as a consideration.
Also, upon the acceptance of a stock subscription by a corporation, the subscription becomes a binding contract to which the subscriber cannot withdraw. In the same manner, a corporation does not have the power to release an original subscriber from its subscription, and as against the creditors, a reduction of the capital stock can only take place in the manner and under the conditions prescribed by law or the charter of the corporation. Again, to do so would be violative of the Trust Fund Doctrine since it does not fall under any of the allowable instances where a corporation may distribute its assets to its creditors and stockholders. As such, subscription contracts cannot be cancelled by the Board of Directors without justifiable cause. Thus, a corporation may not condone subscription receivables due from shareholders as it violates the Trust Fund Doctrine.
May a corporation issue a certificate of stock for the portion of the subscription that is paid and cancel the portion which remains unpaid?
The law says:
No.
Again, this is similar to the discussion above. A corporation cannot issue a certificate of stock for the portion of the subscription that is paid and cancel the portion which remails unpaid as it violates the doctrine of divisibility. The “Doctrine of Indivisibility” which is enunciated under the Revised Corporation Code provides that no certificate of stock shall be issued to a subscriber until the full amount of the subscription together with interest and expenses (in case of delinquent shares), if any is due, has been paid. The cancellation of the subscription which remains unpaid is in effect a condonation of part of the subscription of a stockholder which is violative of the Trust Fund Doctrine as already explained earlier.
Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/0917-5772207.
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