Philippine Trust Company vs. Rivera

A corporation cannot release an original subscriber from the obligation to pay for his shares without valuable consideration, and any reduction of capital stock is ineffective against creditors absent strict compliance with the statutory formalities prescribed by the Corporation Law. An assignee in insolvency may maintain an action upon any unpaid stock subscription to realize assets for the payment of corporate debts.

La Cooperativa Naval Filipina was incorporated in 1918 with an authorized capital stock of P100,000 divided into 1,000 shares of P100 par value. Defendant Marciano Rivera, an incorporator, subscribed for 450 shares (P45,000). The company later became insolvent, and the Philippine Trust Company was appointed as assignee in bankruptcy. A stockholders’ meeting had earlier adopted a resolution reducing the capital by 50% and releasing the subscribers from any obligation to pay the unpaid half of their subscriptions. Fully paid certificates were issued to each shareholder for one-half of their original subscription. The company’s creditors, however, retained an interest in the full amount of the subscriptions, and the assignee brought this action to recover the unpaid balance from Rivera.

• Incorporation and Subscription: In 1918 La Cooperativa Naval Filipina was duly incorporated under Philippine law with a capital of P100,000, divided into 1,000 shares of P100 par value each. Defendant Marciano Rivera, an incorporator, subscribed for 450 shares with a total par value of P45,000. The articles of incorporation were registered with the Bureau of Commerce and Industry on October 30, 1918.
• The Stockholders’ Resolution: Sometime after incorporation, a stockholders’ meeting adopted a resolution reducing the capital stock by 50% and releasing all subscribers from the obligation to pay any unpaid balance exceeding 50% of their respective subscriptions. Pursuant to this resolution, fully paid certificates were issued to each shareholder for one-half of their original subscription.
• Non-Compliance with Statutory Formalities: The formalities prescribed in section 17 of the Corporation Law (Act No. 1459), as amended, for the reduction of capital stock — particularly the requirement that a certificate showing the reduction be filed with the Bureau of Commerce and Industry — were never observed.
• Insolvency and the Assignee’s Demand: The company later became insolvent and was placed under the Philippine Trust Company as assignee in bankruptcy. Rivera admitted that he had never paid the other half of his subscription. The assignee brought this action to recover the unpaid P22,500 balance, asserting that the attempted release was void as against the corporation’s creditors and its assignee.

• Invalid Reduction of Capital: Petitioner (assignee) argued that the stockholders’ resolution releasing subscribers from the unpaid 50% of their subscriptions was ineffective because the mandatory requirements for reducing capital stock under section 17 of Act No. 1459 — including the filing of a certificate with the Bureau of Commerce and Industry — had not been complied with.
• Trust Fund for Creditors: Petitioner maintained that unpaid stock subscriptions constitute a trust fund to which creditors are entitled to look for satisfaction of corporate debts, and that a corporation cannot release an original subscriber without valuable consideration, especially when the formalities prescribed by law are ignored.

• Effect of the Stockholders’ Resolution: Defendant-appellant Rivera contended that the stockholders’ resolution had validly reduced the capital and released him from the obligation to pay more than 50% of his subscription, as fully paid certificates were issued for the reduced shares.

• Validity of Capital Reduction and Release: Whether a stockholders’ resolution that reduces capital stock and releases subscribers from unpaid balances is binding on creditors and the assignee in insolvency when the statutory requirements for reduction of capital stock under Act No. 1459 have not been followed.
• Assignees Right of Action: Whether the assignee in insolvency can maintain an action to recover an unpaid stock subscription from an original subscriber.

• Validity of Capital Reduction and Release: The resolution was ineffectual. A corporation lacks the power to release an original subscriber from the obligation of paying for his shares without a valuable consideration. Against creditors, a reduction of capital stock can take place only in the manner and under the conditions prescribed by statute, the charter, or the articles of incorporation; strict compliance with statutory regulations is indispensable. Because no certificate of reduction was ever filed with the Bureau of Commerce and Industry as required by section 17 of Act No. 1459, the attempted withdrawal of 50% of the capital from the fund upon which creditors were entitled to rely was wholly ineffectual, and Rivera remained liable for the unpaid balance.
• Assignees Right of Action: The assignee in insolvency may indeed sue to recover unpaid stock subscriptions. Subscriptions to the capital of a corporation constitute a fund for the satisfaction of creditors’ claims, and the assignee is empowered to collect those unpaid subscriptions to realize assets for the payment of debts (Velasco vs. Poizat, 37 Phil. 802).

• Trust Fund Doctrine (Subscription as a Fund for Creditors) — Subscriptions to the capital of a corporation form a fund to which creditors have a right to look for the satisfaction of their claims. This fund cannot be withdrawn or released to the prejudice of creditors without strict compliance with statutory requirements. The assignee in insolvency may maintain an action upon any unpaid stock subscription to marshal assets for the payment of corporate debts.
• Strict Compliance Rule for Reduction of Capital Stock — A reduction of capital stock that affects creditors’ rights is valid only when accomplished in the manner and under the conditions prescribed by the corporation statute or the articles of incorporation. The formalities mandated by section 17 of the Corporation Law (Act No. 1459), including the filing of a certificate of reduction with the Bureau of Commerce and Industry, must be strictly observed; otherwise, the reduction is ineffectual against creditors and the assignee in insolvency.
• Prohibition Against Gratuitous Release of Subscribers — A corporation has no power to release an original subscriber to its capital stock from the obligation of paying for his shares without a valuable consideration. Any release that reduces the capital available to creditors, made without compliance with statutory safeguards, is void as against creditors.

• “It is established doctrine that subscription to the capital of a corporation constitute a fund to which creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its debts. (Velasco vs. Poizat, 37 Phil., 802.) A corporation has no power to release an original subscriber to its capital stock from the obligation of paying for his shares, without a valuable consideration for such release; and as against creditors a reduction of the capital stock can take place only in the manner and under the conditions prescribed by the statute or the charter or the articles of incorporation. Moreover, strict compliance with the statutory regulations is necessary.” — This passage articulates the trust fund doctrine and the strict-compliance rule, forming the ratio decidendi of the case.

• Velasco vs. Poizat, 37 Phil. 802 — Cited as controlling authority for the rule that the assignee in insolvency can maintain an action to recover unpaid stock subscriptions as assets for the payment of corporate debts.

• Section 17, Act No. 1459 (Corporation Law), as amended — Prescribes the procedure for reduction of capital stock, requiring the filing of a certificate with the Bureau of Commerce and Industry. The non-observance of this requirement rendered the stockholders’ resolution releasing subscribers ineffective against creditors.

Araullo, C.J., Malcolm, Avanceña, Villamor, Ostrand, Johns, and Romualdez, JJ., concurred.