MERGERS AND CONSOLIDATIONS

As to each corporation, number of shares or members

voting for and against such plan respectively.

DEFINITION AND CONCEPT

Merger a corporation absorbs the other and remains in existence
while the others are dissolved. [Sec.76]

The Articles of Merger or Consolidation:

-

One of the constituent corporations remains as an existing

juridical person, whereas the other corporation shall cease
to exist. Merger is the disappearance of one of the
corporations [generally by amending the articles of
incorporation and shortening its term of existence (Sec.40)]
with the other corporation acquiring all the assets, rights of
action, and assuming all the liabilities of the disappearing
corporation.

Consolidation a new corporation is created, and consolidating

corporations are extinguished [Sec.76]
-

PROCEDURE
-

Approval by majority vote of each of the board of directors

or trustees of the constituent corporations of the plan of
merger or consolidation.

Approval by the stockholders or members of each of such

corporations. The affirmative vote of stockholders
representing at least two-thirds (2/3) of the outstanding
capital stock of each corporation in the case of stock
corporations or at least two-thirds (2/3) of the members in
the case of non-stock corporations shall be necessary for
the approval of such plan.

If there is consolidation, there will be disappearance of all

constituent corporations with the emergence of a new
corporate entity which shall obtain all the assets of the
disappearing corporations, and likewise shall assume all
their liabilities.

CONSTITUENT VS. CONSOLIDATED CORPORATION

Constituent Corporations the parties to a merger or consolidation

Consolidated Corporation The new single corporation created
through consolidation.

Notice of such meetings shall be given to all stockholders

or members of the respective corporations, at least two (2)
weeks prior to the date of the meeting, either personally or
by registered mail. Said notice shall state the purpose of
the meeting and shall include a copy or a summary of the
plan of merger or consolidation.

Any dissenting stockholder in stock corporations may

exercise his appraisal right in accordance with the Code.
Provided, that if after the approval by the stockholders of
such plan, the board of directors decides to abandon the
plan, the appraisal right shall be extinguished.

Amendment to the plan of merger or consolidation may be

made by approval of the majority vote of the respective
boards of directors or trustees of all the constituent
corporations and ratified by the affirmative vote of
stockholders representing at least two-thirds (2/3) of the
outstanding capital stock or of two-thirds (2/3) of the
members of each of the constituent corporations. Such
plan, together with any amendment, shall be considered as
the agreement of merger or consolidation.

Articles of Merger or Articles of Consolidation shall be

executed by each of the constituent corporations.

PLAN OF MERGER OR CONSOLIDATION [SEC. 76]

Each of the constituent corporations must draw up a Plan
of Merger or Consolidation which shall set forth:
o Names of the corporation involved;
o Terms and mode of carrying it;
o Statement of changes, if any, in the present
articles of the surviving corporation to be formed
in the case of merger; and with respect to the
consolidated corporation in case of consolidation

ARTICLES OF MERGER OR CONSOLIDATION

-

Each of the constituent corporation shall execute Articles of

Merger or Consolidation signed by the president/vice-president,
and certified by the secretary/assistant secretary setting forth:
-

Plan of merger or consolidation;

For stock corporation, the number of shares outstanding;
for non-stock, the number of members;

Holders of non-voting shares are entitled to vote

on the plan. [Sec. 6, par. 6(6)]

Surviving Corporation one of the constituent corporations which

remain in existence after the merger

take the place of the Articles of Incorporation of the

consolidated corporation; or
amend the Articles of Incorporation of the surviving
corporation.

Submission of Four (4) copies of the Articles of Merger or

Articles of Consolidation to the SEC for approval.
o Mergers and consolidations of corporations
governed by special laws requires a
recommendation from the appropriate
government agency [Sec. 79 (1)]

If necessary, the SEC shall set a hearing, notifying all

corporations concerned at least two (2) weeks before.

Issuance of certificate of merger or consolidation.

The surviving or the consolidated corporation shall possess

all rights, privileges, immunities and franchises of each
constituent corporation and the properties shall be deemed
transferred to and vested in the surviving or consolidated
corporation without further act or deed.

All liabilities of the constituents shall pertain to the surviving

or the consolidated corporation [assumption of liability is
automatic [De Leon; Campos]].

Any claim, action or proceeding pending by or against any

of the constituent corporations may be prosecuted by or
against the surviving or consolidated corporation; and

The rights of the creditors or lien upon the property of any

of each constituent corporation shall not be impaired by
such merger or consolidation.

EFFECTIVITY
-

Upon issuance of the certificate of merger or consolidation, such

merger or consolidation shall become effective [Sec. 79].

PNB v. Andrada Electric & Engr. Co., Inc. (2002):

-

Merger or consolidation does not become effective by mere

agreement of the constituent corporations. The approval of
the SEC is required.

Notwithstanding Section 79, parties may stipulate a specific

effective date of merger (or consolidation) where no third party
will be prejudiced [SEC Opinion No. 09-13, July 1, 2009].

LIMITATIONS
-

In the case of merger or consolidation of banks or banking

institutions, building and loan associations, trust
companies,
insurance companies, public utilities,
educational institutions and other special corporations
governed by special laws, the favorable recommendation
of the appropriate government agency shall first be
obtained [Sec. 79]

EFFECTS [SEC. 80]

-

The constituent corporations shall become a single

corporation.

The separate existence of the constituents shall cease,

except that of the surviving or the consolidated corporation.

DISSOLUTION AND LIQUIDATION

Dissolution of a corporation is the extinguishment of its franchise
and the termination of its corporate existence or business purpose.
However, for the purpose only of winding up its affairs and liquidating
its assets, its corporate existence continues for a period of 3 years
from such dissolution [Sec. 122].
MODES OF DISSOLUTION
According to some decisions, the method of effecting dissolution as
prescribed by law are exclusive, and a corporation cannot be
dissolved except in the manner prescribed by law. [De Leon]
VOLUNTARY
Note: If no dissolution papers are filed with the SEC by a corporation
claiming dissolution voluntarily, such corporation is still deemed
legally existing, notwithstanding the fact that it has ceased to
operate. [De Leon]
WHERE NO CREDITORS ARE AFFECTED [SEC. 118]

The absorbed or constituent corporations are

ipso facto dissolved by operation of law [SEC
Opinion, July 16, 1981]; there is no liquidation of
the assets of the dissolved corporations
[Campos].

The surviving or the consolidated corporation shall possess

all the rights, privileges, immunities and powers and shall
be subject to all the duties and liabilities of a corporation.

Notice of the meeting should be given to the stockholders or

members by personal delivery or registered mail at least 30 days
prior to the meeting.
The notice of meeting should also be published for 3 consecutive
weeks in a newspaper published in the place where the principal
office of said corporation is located. If no newspaper is published in
such place, then in a newspaper of general circulation in the
Philippines.

The resolution to dissolve must be approved by the majority of the

directors/trustees and approved by the stockholders representing at
least 2/3 of the OCS or 2/3 of members.
-

Non-voting shares are entitled to vote in this matter [Sec. 6.

Par 6(8)]

A copy of the resolution shall be certified by the majority of the

directors or trustees and countersigned by the secretary.
The signed and countersigned copy will be filed with the SEC and the
latter will issue the certificate of dissolution.
Note:
Daguhoy Enterprises v. Ponce (1954): Thus, except for the expiration
of its term, no dissolution can be effective without some act of the
State.
WHERE CREDITORS ARE AFFECTED [SEC. 119]

As long as 2/3 vote is obtained, no member/ stockholder can

prevent such dissolution unless the majority stockholders acted
in bad faith. The latter may be held liable for damages.
(Campos)

BY SHORTENING OF CORPORATE TERM

A voluntary dissolution may be effected by amending the AOI. Upon
approval of the amended AOI or the expiration of the shortened term,
as the case may be, the corporation shall be deemed dissolved
without any further proceedings.
A publication of notice of dissolution is required and cannot be
dispensed with by alleging that it was not required in Section 120 and
that no creditors will be prejudiced by its dissolution. [SEC Opinion,
August 30, 1988]
SEC Opinion No. 06-20, March 13, 2006:
-

A petition shall be signed by a majority of its board of directors

or trustees or other officers having management of its affairs.

The petition must be verified by its president, or secretary or one

of its director or trustees.

Approval of the stockholders representing at least 2/3 of the

OCS or 2/3 of members in a meeting called for that purpose.

Filing of a petition with the SEC signed by majority of directors

or trustees or other officers having the management of its affairs
verified by the President or Secretary or Director. Claims and
demands must be stated in the petition.
If the petition is sufficient in form and substance, the SEC shall
issue an order fixing the date on or before which objections to
the petition may be filed. Such date shall not be less than 30
days nor more than 60 days after the entry of the order.
A copy of the order shall be published at least once a week for 3
consecutive weeks in a newspaper of general circulation, or if
there is no newspaper in the city or municipality of the principal
office, posting for 3 consecutive weeks in 3 public places is
sufficient.

After the expiration of the time to file objections, a hearing shall

be conducted upon prior 5 day notice to hear the objections.

Judgment shall be rendered dissolving the corporation and

directing the disposition of assets. The judgment may include
appointment of a receiver.

If the shortened term expires before the SEC approval- the

corporation will be dissolved upon the SEC approval
If the shortened term expires after the SEC approval - the
corporation will be dissolved upon the expiration of the
shortened term
If SEC fails to act within 6 months from filing of the
amended AOI and shortened term expires after the 6month period - the corporation will be dissolved upon the
expiration of the shortened term
If SEC fails to act within 6 months from filing of the
amended AOI and shortened term expires before the 6month period- the corporation will be dissolved at the end
of the 6-month period. [Campos]

INVOLUNTARY
BY EXPIRATION OF CORPORATE TERM
-

Once the period expires, the corporation is automatically

dissolved without any other proceeding and it cannot
thereafter be considered a de facto corporation.

FAILURE TO ORGANIZE AND COMMENCE BUSINESS WITHIN 2

YEARS FROM INCORPORATION
-

Failure to formally organize and commence the transaction

of its business or construction of its works within two years
- its corporate powers shall cease and the corporation shall
be deemed dissolved [Sec. 22].
o Dissolution in this case is automatic. (Campos)
o Contrary view: Since there is a defense available
to the corporation, that is, if its failure to organize
and commence its business is due to causes
beyond the control of the corporation as may be
determined by the SEC, therefore, the dissolution
is not automatic.

Mentholatum v. Mangaliman (1946):

Transacting business implies a continuity of acts or dealings in the
accomplishment of the purpose for which the corporation was
formed.
Formal organization includes not only the adoption of the by-laws but
also the establishment of the body which will administer the affairs of
the corporation and exercise its powers
-

By-laws should be adopted within one month of receipt of

official notice of the issuance of the certificate of
incorporation, otherwise the certificate may be suspended
or revoked [PD 902-A, Sec. 6 (i)(5)]

Failure to operate for at least 5 consecutive years after

commencement of business - ground for suspension or revocation of
its corporate franchise or certificate of incorporation.
Note: Dissolution in this case is not automatic. [Campos]

A corporation may be dissolved by the SEC, upon a verified

complaint and after proper notice and hearing, on the following
grounds [Sec. 6, par. i, PD 902-A]:
1.
2.

Fraud in procuring its certificate of registration

Serious misrepresentation as to what the corporation can or is
doing to the great prejudice of or damage to the general public
Refusal to comply or defiance of any lawful order of the
Commission restraining commission of acts which would
amount to a grave violation of its franchise
Continuous inoperation for a period of at least five years
Failure to file by-laws within the required period
Failure to file required reports in appropriate forms as
determined by the Commission within the prescribed period

3.

4.
5.
6.

OTHER GROUNDS
-

The corporation may show that the failure to commence its business
or to continuously operate is due to causes beyond its control [Sec.
22].
LEGISLATIVE DISSOLUTION

METHODS OF LIQUIDATION
Liquidation is the process by which all the assets of the
corporation are converted into liquid assets (cash) in order
to facilitate the payment of obligations to creditors, and the
remaining balance if any is to be distributed to the
stockholders. It is a proceeding in rem.

The inherent power of Congress to make laws carries with it the

power to amend or repeal them. Involuntary corporate dissolution
may be effected through the amendment or repeal of the Corporation
Code. [implied from Section 145, De Leon]
The limitations on the power to dissolve corporations by legislative
enactment are as follows:
(1) Under the Constitution, the amendment, alteration, or repeal of
the corporate franchise of a public utility shall be made only when
the common good so requires;
(2) Under Section 145 of the Code, it is provided that: No right or
remedy in favor of or against any corporation, its stockholders,
members, directors, trustees, or officers, nor any liability incurred by
any such corporation, stockholders, members, directors, trustees, or
officers, shall be removed or impaired either by the subsequent
dissolution of said corporation or by any subsequent amendment or
repeal of this Code or of any part thereof;
(3) While Congress may provide for the dissolution of a corporation, it
cannot impair the obligation of existing contracts between the
corporation and third persons, or take away the vested rights of its
creditors. [De Leon]
DISSOLUTION BY THE SEC ON GROUNDS UNDER EXISTING
LAWS

Violation by the corporation of any provision of the

Corporation Code [Sec. 144 BP 68]
In case of a deadlock in a close corporation, and the SEC
deems it proper to order the dissolution of the corporation
as the only practical solution to the dispute [Sec. 104 BP
68]

BY THE CORPORATION ITSELF

-

Under Section 122 of the Corporation Code, a corporation

whose corporate existence is terminated in any manner
continues to be a body corporate for three (3) years after
its dissolution for purposes of prosecuting and defending
suits by and against it and to enable it to settle and close
its affairs, culminating in the disposition and distribution of
its remaining assets. It may, during the three-year term,
appoint a trustee or a receiver who may act beyond that
period.

Pepsi-Cola Products Philippines, Inc. v. CA (2004):

The termination of the life of a corporate entity does not by itself
cause the extinction or diminution of the rights and liabilities of
such entity. If the three-year extended life has expired without a
trustee or receiver having been expressly designated by the
corporation, within that period, the board of directors (or
trustees) itself, may be permitted to so continue as "trustees" by
legal implication to complete the corporate liquidation.
Alhambra Cigar and Cigarette Mfg. v. SEC (1968):

A corporation under liquidation may not amend its articles

of incorporation to extend its lifespan. When a corporation
is liquidating pursuant to the statutory period of three years
to liquidate, it is only allowed to continue for the purpose of
final closure of its business and no other purposes. In fact,
within that period, the corporation is enjoined from
continuing the business for which it was established.
CONVEYANCE TO A TRUSTEE WITHIN A 3-YEAR PERIOD
From and after any such conveyance by the corporation of
its property in trust for the benefit of its
SH/members/creditors and others in interest, all interest
which the corporation had in the property terminates, the
legal interest vests in the trustees, and the beneficial
interest in the stockholders, members, creditors or other
persons in interest.
Reburiano v. CA (1999):
The trustee (of a dissolved corporation) may commence a
suit which can proceed to final judgment even beyond the
three-year period (of liquidation) . . . , no reason can be
conceived why a suit already commenced by the
corporation itself during its existence, not by a mere trustee
who, by fiction, merely continues the legal personality of
the dissolved corporation, should not be accorded similar
treatment to proceed to final judgment and execution
thereof.

justice requires, and may appoint a receiver to collect such

assets and pay the debts of the corporation [Sec. 119]
LIQUIDATION AFTER THREE YEARS
Phil. Veterans Bank v. Employees Union (2001):
Q: What is the difference between Liquidation and Rehabilitation?
A: Liquidation is the winding up of a corporation so that assets are
distributed to those entitled to receive them. It is the process of
reducing assets to cash, discharging liabilities and dividing surplus or
loss. On the other hand, rehabilitation contemplates a continuance of
corporate life and activities in an effort to restore and reinstate the
corporation to its former position of successful operation and
solvency. Both cannot be undertaken at the same time.
Reburiano v CA (1999):
If full liquidation can only be effected after the 3-year period and
there is no trustee, the directors may be permitted to complete the
liquidation by continuing as trustees by legal implication.
Aguirre vs. FQB+, Inc. (2013):
A corporations board of directors is not rendered functus officio by its
dissolution. Since Section 122 allows a corporation to continue its
existence for a limited purpose, necessarily there must be a board
that will continue acting for and on behalf of the dissolved corporation
for that purpose.

Board of Liquidators v Kalaw (1967):

CORPORATE REHABILITATION

Unless the trusteeship is limited in its duration by the deed

of trust, there is no time limit within which the trustee must
finish liquidation.

Governing

BY MANAGEMENT COMMITTEE OR REHABILITATION

RECEIVER
Leyte Asphalt & Mineral Oil Co. Ltd., v. Block Johnston
& Breenbrawn (1928):
However, the mere appointment of a receiver, without
anything more does not result in the dissolution of the
corporation nor bar it from the exercise of its corporate
rights.Upon five (5) days notice, given after the date on
which the right to file objections as fixed in the order has
expired, the Commission shall proceed to hear the petition
and try any issue made by the objections filed; and if no
such objection is sufficient, and the material allegations of
the petition are true, it shall render judgment dissolving the
corporation and directing such disposition of its assets as

laws/Jurisdiction.

Jurisdiction

over

petitions for

corporate rehabilitation WAS vested in the Securities and Exchange

Commission (SEC) under Presidential Decree (P.D.) No. 902-A, as
amended by P.D. 1758 and P.D. 1799. While Republic Act No. 8799
transferred this jurisdiction to regular courts, P.D. 902-A remains to
be the governing law on corporate rehabilitations. The Rules of
Procedure on Corporate Rehabilitation (2008) superseded theInterim
Rules of Procedure on Corporate Rehabilitation as the governing
rule, with the Rules of Court applying suppletorily. The relevant
differences between the old and new rules are discussed here.
Issuance of Stay Order. If the court is convinced that the petition
is sufficient in form and substance, it will issue a Stay Order, which
shall include, among other things, the appointment of a Receiver and

the suspension of ALL pending claims against the corporation under

wholly different from insolvency, because it allows the corporation to

recover and be able to continue its business as a going concern.

rehabilitation.

Presidential Decree 902-A, however, lacked rules that would provide

Thrust of rehabilation. Rehabilitation contemplates a continuance of

corporate life and activities in an effort to restore and reinstate the
corporation to its former position of successful operation and
solvency.

for an effective corporate recovery system.

Few financially distressed corporations in the Philippines availed of
proceedings under the laws then in force. For one, the filing of
proceedings under the Insolvency Act went against the Oriental value
of maintaining social face2. On the other hand, the automatic stay

Insolvency And Corporate Rehabilitation In The Philippines

was effective only against unsecured creditors, leaving the important

assets of the debtor, often covered by mortgages, susceptible to

Insolvency refers to the inability to pay ones debts as they fall due.

foreclosure anyway. As such, corporate reorganization practice

Rehabilitation, on the other hand, pertains to the process of recovery

evolved slowly in the Philippine commercial landscape. The

and reorganization, and is especially applicable to a juridical entity,

Philippine Supreme Court, acting on cases elevated to it on appeal or

such as a corporation. In the Philippine setting, these are the two

certiorari from the SEC, took the task of interpreting and applying the

main possible scenarios of financial distress that may befall a

provisions of the Decree and formulating a body of policy, principles,

corporation.

and rules on corporate rehabilitation 3.

APPLICABLE PHILIPPINE LAWS

In November 1999, the SEC finally promulgated its Rules on

The Insolvency Law (Act No. 1956), which was passed in 1909,
remains to this date the principal special legislation on the matter. Act
1956 deals with three situations: (1)suspension of payments, for a
debtor who possesses sufficient property to cover all his debts but
foresees the impossibility of meeting them when they respectively fall

Corporate Recovery. Shortly thereafter, in July 2000, the Philippine

Congress promulgated the Securities Regulation Code (Republic
Act No. 8799) which transferred SECs jurisdiction over corporate
rehabilitation proceedings, among other cases, back to the regular
courts.

due; (2)voluntary insolvency, for a debtor applying to be discharged

Having been granted rulemaking power in the 1987 Constitution,

from his debts and liabilities (amounting to the then sizeable amount

the Supreme Court did not waste time nor opportunity and pushed

of 1000 pesos); and (3)involuntary insolvency, or an adjudication of

forward

insolvency made on petition of three or more creditors of an insolvent

rehabilitation. Seen as an act of judicial activism 4, the Court

debtor. Under this Act, the judicial courts had jurisdiction over such

promulgated the Interim Rules of Procedure on Corporate

proceedings.

Recovery of 2000, which contained not only procedural rules but key

Largely patterned after the Insolvency Act of California of 1895, Act

No. 1956 was created by the Philippine Legislature with the Spanish
Civil Code of 1889, then still in force. The suspension of payments

the

development of the whole body of corporate

provisions that bordered on substantive laws. In January 2009,

the SC Rules of Procedure on Corporate Rehabilitation (SC A.M.
No. 00-8-10-SC) took effect.

aspect was taken from the Spanish Code of Commerce, while the

Finally, it is to be noted that these special laws and rules of

part relating to insolvency is essentially akin to the bankruptcy laws

procedure are applied by the Court together with provisions of New

of American origin because it discharges the honest

debtor 1.

Despite debate in interpreting and applying the provisions of Act No.

1956, it remained largely untouched for nearly sixty years. In
1976,Presidential

Decree

902-A, was issued by President

Ferdinand E. Marcos using his dictatorial powers. With the intention

of creating a more inviting climate for investment, both domestic and

Civil Code of the Philippines and the Labor Code of the

Philippines. Moreover, certain concepts borrowed from foreign
jurisprudence are applied as well.
HOW CORPORATE REHABILITATION WORKS
Generally

foreign, the Decree introduced several changes to the rules

Under the New Rules, there are three types of rehabilitation

governing insolvency.

proceedings: (1)debtor-initiated, (2)creditor-initiated, and (3)pre-

Foremost, Presidential Decree 902-A expressly established the

concept of rehabilitation, which applies only to corporations, and is

negotiated rehabilitation. The Regional Trial Court which has

jurisdiction over the principal office of the debtor, as specified in the
articles of incorporation, is where rehabilitation proceedings are to be

had. If a group of companies is concerned, venue lies in the RTC

which has jurisdiction over the parent company. At present, there are
65 trial courts specially designated by the Supreme Court as
commercial courts and hear such petitions. Proceedings are to be
summary and non-adversarial, thus certain pleadings are prohibited.
The Rehabilitation Receiver and the Management Committee
Aside from the debtor, its creditor/s, and the rehabilitation Court,

Recognition of Foreign Proceedings

Where assistance is sought by a foreign court or a foreign
representative in connection with a foreign proceeding; where
assistance is sought in a foreign State in connection with a domestic
proceeding governed by (Philippine law); or where a foreign
proceeding and a domestic proceeding are concurrently taking place,
a petition may be filed in the rehabilitation court for this purpose.

there are other parties involved in the proceeding.

The Rehabilitation Plan

The Rehabilitation Receiver is a person appointed by the Court to

A rehabilitation plan shall be drawn up and shall include the desired

closely oversee and monitor the operations of the debtor, ensure that

business targets or goals and the duration and coverage of the

the value of the debtors property is reasonably maintained during the

rehabilitation, the terms and conditions of such rehabilitation, and the

pendency of the proceedings, and to implement the rehabilitation

means for the execution of the rehabilitation plan, i.e., debt to equity

plan once approved.

conversion, restructuring of the debts, dacion en pago, or sale

The receiver, however, shall not take over the management and
control of the debtor. Instead, he may recommend the appointment of

exchange or any disposition of assets or of the interest of the

shareholders.

aManagement Committee when there is (1) imminent danger of

Once approved, the rehabilitation plan shall be binding upon the

waste or dissipation, loss, wastage, or destruction of assets or (2)

debtor and all persons who may be affected thereby, including the

paralyzation of business operations (of the debtor) which may be

creditors, whether or not such persons have participated in the

prejudicial to the interest of minority stockholders, parties-litigants, or

proceedings or opposed the plan or whether or not their claims have

the general public.

been scheduled. However, the plan may be revoked, upon motion,

on the ground that it was secured through fraud.

The Stay Order

If the Court finds the petition to be sufficient in form and substance, it

Termination of Proceedings

shall, not later than five (5) working days from its filing, issue a Stay

The court shall, upon motion or upon recommendation of the

Order, whose effects include:

rehabilitation receiver, terminate the proceeding when, among other

instances, the petition is dismissed, the debtor fails to submit a

1.

staying enforcement of all claims,

o

whether for money or otherwise

whether such enforcement is by court action or

otherwise, against the debtor, its guarantors and
persons not solidarily liable with the debtor,

2.
3.

rehabilitation plan or the same is disapproved, or after the successful

implementation of an approved rehabilitation plan.
CURRENT EFFORTS
Presently, there is continuing effortthis time, on the part of the

prohibiting the debtor from selling or disposing its

Legislatureto create a more systematic framework for insolvency

properties except in the ordinary course of business

proceedings. It is well-recognized in the Philippines that the solutions

prohibiting the debtor from making any payment of its

to be afforded by laws should be adequate to meet complex modern

liabilities except

issues and over-all, provide a good investment climate.

For supply of goods and services in the ordinary

course of business

For administrative expenses incurred after the

issuance of the stay order

For payment of new loans or other forms of credit

accommodations obtained for the rehabilitation
with prior court approval

Rules on Intra-corporation Dispute

An intra-corporate controversy is one which "pertains to any of the
following relationships: (1) between the corporation, partnership or
association and the public; (2) between the corporation, partnership
or association and the State in so far as its franchise, permit or
license to operate is concerned; (3) between the corporation,
partnership or association and its stockholders, partners, members or

officers; and (4) among the stockholders, partners or associates

themselves."
What are the tests to determine whether a dispute constitutes an
intra-corporate controversy and dispute?
How would jurisdiction be determined?
1. Relationship Test; and
2. Nature of the Controversy Test.
Jurisdiction should be determined by considering not only the status
or relationship of the parties, but also of the nature of the question
under controversy. This two-tier test was adopted in the case of
Speed Distribution, Inc. vs. Court of Appeals: To determine whether
a case involves an intra-corporate controversy, and is to be heard
and decided by the branches of the RTC specifically designated by
the Court to try and decide such cases, two elements must concur:
1. the status or relationship of the parties (relationship test); and
2. the nature of the question that is subject of the controversy (nature
of the controversy test).
The first element requires that the controversy must arise out of intracorporate partnership relations between any or all of the parties and
the corporation, partnership, or association of which they are
stockholders, members, or associates, respectively; and between
such corporation, partnership, or association and the State insofar as
it concerns their individual franchises.
The Second element requires that the dispute among the parties be
intrinsically connected with the regulation of the corporation. If the
nature of the controversy involves matters that are purely civil in
character, necessarily, the case does not involve an intra-corporate
controversy. (Reyes vs. Zenith Insurance Corp., G.R. No. 165744,
August 11, 2008, [Brion, J.])
What is meant by the Relationship Test?
Initially, the main consideration in determining whether a dispute
constitutes an intra-corporate controversy was limited to a
consideration of the intra-corporate relationship (also known as the
Relationship Test) existing between or among parties. The types of
relationships embraced under Section 5(b), as declared in the case
of Union Glass & Container Corp. vs. SEC, were as follows:
1. Between the corporation, partnership, or association and the
public;
2. Between the corporation, partnership, or association and its
stockholders, partners, members or officers;
3. Between the corporation, partnership, or association and the State
as far as its franchise, permit or license to operate is concerned; and

4. Among the stockholder, partners, or associates themselves.

(Reyes vs. Zenith Insurance Corp., G.R. No. 165744, August 11,
2008, [Brion, J.])
What is meant by the Nature of the Controversy Test?
Under the nature of the controversy test, the incidents of that
relationship must also be considered for the purpose of ascertaining
whether the controversy itself is intra-corporate. The controversy
must not only be rooted in the existence of an intra-corporate
relationship, but must pertain to the enforcement of the parties
correlative rights and obligations under the Corporation Code and the
internal and intra-corporate regulatory rules of the corporation. If the
relationship and its incidents are merely incidental to the controversy
or if there will still be conflict even if the relationship does not exist,
then no intra- corporate controversy exists. (Reyes vs. Zenith
Insurance Corp., G.R. No. 165744, August 11, 2008, [Brion, J.])