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August 24, 2022

WHAT ARE THE REMEDIES OF CORPORATIONS TO ENFORCE PAYMENT OF STOCKS?

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Published — August 24, 2022

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.

 

After reading “What are the remedies of corporations to enforce payment of stocks?”, read also “What are the ways of increasing and decreasing capital stocks?”

Under the Revised Corporation Code of the Philippines (RCCP), a corporation may exercise the following remedies to enforce payment of stocks:

  • Judicial Action;

  • Extrajudicial delinquency sale at a public auction;

  • Collection from cash dividends.

Judicial Action

If there is a written subscription contract, the right to enforce payment by judicial action prescribes after ten (10) years from the time the right of action accrues.

If there is no written subscription contract, or if based on a verbal subscription contract, the prescriptive period is six (6) years.

 

The law says:

Section 69. Court Action to Recover Unpaid Subscription. – Nothing in this Code shall prevent the corporation from collecting through court action, the amount due on any unpaid subscription, with accrued interest, costs and expenses.

Jurisprudence says:

In the case of Atilano v. Asaali (G.R. No. 174982, September 10, 2012), the Supreme Court ruled that the shareholder who has not fully paid the subscription price may be subject to garnishment or may be sued for the recovery of indebtedness of the corporation under Rule 39 of the Rules of Court.

Furthermore, it was likewise ruled that “stock subscriptions are considered a debt of the stockholder to the corporation.” (Atilano v. Asaali, G.R. No. 174982, September 10, 2012.)

 

Extrajudicial Delinquency Sale

Forfeiture of delinquent stock, without the corporation paying for it under Section 67, is not authorized under the RCCP. It cannot forfeit in its favor delinquent shares to be taken up in the corporation’s treasury shares. (De Leon & De Leon, Jr. The Corporation Code of the Philippines Annotated, 2013, p. 601.)

The delinquency sale is an extrajudicial procedure where the corporation puts up the unpaid shares for sale and dispose it in a public sale for the account of the delinquent stockholder.

This remedy is available upon failure of the stockholder to pay the unpaid subscription or balance thereof within the grace period of thirty (30) days specified in the contract of subscription.

The law says:

Section 67. Delinquency Sale. – The board of directors may, by resolution, order the sale of delinquent stock and shall specifically state the amount due on each subscription plus all accrued interest, and the date, time and place of the sale which shall not be less than thirty (30) days nor more than sixty (60) days from the date the stock become delinquent.

Notice of the sale, with a copy of the resolution, shall be sent to every delinquent stockholder either personally, by registered mail, or through other means provided in the bylaws. The same shall be published once a week for two (2) consecutive weeks in newspaper of general circulation in the province or city where the principal office of the corporation is located.

Unless the delinquent stockholder pays to the corporation, o or before the date specified for the sale of the delinquent stock, the balance due on the former’s subscription, plus accrued interest, costs of advertisement and expenses of sale, or unless the board of directors otherwise orders, said delinquent stock shall be sold at a public auction to such bidder who shall offer to pay the full amount of the balance on the subscription together with accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares or fraction of a share. The stock so purchased shall be transferred to such purchaser in the books of the corporation and a certificate for such stock shall be issued in the purchaser’s favor. The remaining shares, if any, shall be credited in favor of the delinquent stockholder who shall likewise be entitled to the issuance of a certificate of stock covering such shares.

Should there be no bidder at the public auction who offers to pay the full amount of the balance on the subscription together with accrued interest, costs of advertisement, and expenses of sale, for the smallest number of shares or fraction of a share, the corporation may, subject to the provisions of this Code, bid for the same, and the total amount due shall be credited as fully paid in the books of the corporation. Title to all the shares of stock covered by the subscription shall be vested in the corporation as treasury shares and may be disposed of by said corporation in accordance with the provisions of this Code. (Section 67, RCCP)

What is an unpaid claim for the purpose of declaring the shareholder delinquent?

Jurisprudence says:

In the case of China Banking Corp. v. Court of Appeals (G.R. No. 117604, March 26, 1997), the Supreme Court defined the term “unpaid claim” as “any unpaid claim arising from unpaid subscription, and not to any indebtedness which a subscriber or stockholder may owe the corporation arising from any other transaction.”

 

Collection from cash dividends

Should there be cash dividends, the amount therefor can be applied to the unpaid balance of the subscription.

Section 42. Power to Declare Dividends. – The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, property, or in stock to all stockholders on the basis of outstanding stock held by them: Provided, That any cash dividends due on delinquent stock shall be first be applied to the unpaid balance on the subscription plus costs and expenses, while stock holders until their unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of stockholders representing at least two-thirds (2/3)of the outstanding capital stock at a regular or special meeting duly called for the purpose.

Stock corporations are prohibited from restraining surplus profits in excess of one hundred percent (100%} of their paid-in capital stock, except: (a) when justified by the definite corporate expansion projects or programs approved by the board of directors; or (b) when the corporation is prohibited under any loan agreement with financial institutions or creditors, whether local or foreign, from declaring dividends without their consent, and such consent has not yet been secured; or (c) when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies.


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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