State Investment House, Inc. vs. Citibank, N.A.

A foreign corporation licensed to do business and actually doing business in the Philippines through branches or agencies is a resident of the Philippines for purposes of Section 20 of the Insolvency Law, because the residence of a corporation is where it exercises corporate functions, not only its state of incorporation.

The foreign banks—Bank of America NT & SA, Citibank, N.A., and Hongkong & Shanghai Banking Corporation—were licensed to do business in the Philippines and operated through branches or agencies here; Consolidated Mines, Inc. (CMI) was their debtor. State Investment House, Inc. (SIHI) and State Financing Center, Inc. (SFCI) were domestic creditors of CMI. The dispute turned on Section 20 of the Insolvency Law, which permits an involuntary insolvency petition by three or more creditors who are “residents of the Philippine Islands” and whose credits accrued in the Philippines.

The three foreign banks—Bank of America NT & SA, Citibank, N.A., and Hongkong & Shanghai Banking Corporation—had extended loans to Consolidated Mines, Inc. (CMI). As of November/December 1981, CMI’s outstanding obligations were P15,297,367.67 and US$4,175,831.88 to Bank of America; US$4,920,548.85 to Citibank; and US$5,389,434.12 and P6,233,969.24 to Hongkong & Shanghai Bank. In November 1981, State Investment House, Inc. (SIHI) and State Financing Center, Inc. (SFCI) separately sued CMI for collection of sums of money and damages in the Court of First Instance of Rizal, docketed as Civil Cases Nos. 43588 and 43677; on their application, writs of preliminary attachment issued and were executed on the royalty/profit-sharing payments due CMI from Benguet Consolidated Mining, Inc. On December 11, 1981, the three banks jointly filed with the Court of First Instance of Rizal a petition for involuntary insolvency of CMI, which they amended four days later; the case was docketed as Sp. Proc. No. 9263 and assigned to Branch 28. The petition alleged that CMI had committed specific acts of insolvency under Section 20 of the Insolvency Law, namely that it had suffered its property to remain under attachment or legal process for three days for the purpose of hindering, delaying, or defrauding creditors, and that being a merchant or tradesman it had generally defaulted in the payment of its current obligations for thirty days.

SIHI and SFCI opposed the petition. They claimed that the banks had come to court with unclean hands because, although they alleged that CMI was defrauding creditors and sought to have all creditors share in its assets, a few days earlier they had received for CMI’s account substantial payments aggregating P10,800,000.00. They also claimed that the court had no jurisdiction because the alleged acts of insolvency were false—the writs of attachment had remained in force because there were just, valid, and lawful grounds for their issuance, and CMI was not a merchant or tradesman nor had it generally defaulted for thirty days—and because the petitioning banks were not resident creditors of CMI under the Insolvency Law. They further claimed that the court had no power to set aside the attachment issued in their favor. CMI answered that it was not insolvent and later filed a motion to dismiss based on the affirmative defense of the petitioners’ lack of capacity to sue, echoing the theory that the banks were not Philippine residents. The RTC deferred resolution of the motion until after hearing on the merits, the grounds not appearing indubitable. SIHI and SFCI then filed an answer-in-intervention and requests for admission under Rule 26 of the Rules of Court; only Hongkong & Shanghai Bank responded. SIHI and SFCI moved for summary judgment dated May 23, 1983, arguing that based on the pleadings and admissions the trial court had no jurisdiction because the banks were not resident creditors of CMI. Oppositions were filed and a reply was submitted.

The banks had been licensed to do business in the Philippines and had in fact been doing business here for many years through branch offices or agencies, including foreign currency deposit units; Hongkong & Shanghai Bank had been doing business in the Philippines since as early as 1875. The RTC resolved the jurisdictional objection on the basis of the pleadings, motions, and admissions of the parties, treating the banks’ licensed status as the operative fact against their claim of residence.

• Residency Allegation: Petitioners argued that the banks’ failure to allege under oath in their petition for involuntary insolvency that they are Philippine residents, wishing only to be considered Philippine residents, is fatal to their cause.
• Reciprocity: Petitioners argued that the banks’ failure to prove, much less allege, that under their domiciliary laws a Philippine corporation is allowed the reciprocal right to petition for a debtor’s involuntary insolvency is fatal.
• Corporate Domicile and Residence: Petitioners argued that corporations have domicile and residence only in the state of their incorporation or in the place designated by law, although other states may consider them residents for limited and exclusive purposes, and that juridical persons may not have residence separate from their domicile.
• Non-Resident Status Under Other Laws: Petitioners argued that the banks’ non-resident status within the context of the Insolvency Law is confirmed by other laws.
• License Not Residence: Petitioners argued that the license granted to the banks to do business in the Philippines does not make them residents.
• No Substantive Law Granting Power: Petitioners argued that no substantive law explicitly grants foreign banks the power to petition for the adjudication of a Philippine corporation as a bankrupt.
• Monetary Board Powers: Petitioners argued that the Monetary Board cannot appoint a conservator or receiver for a foreign bank or order its liquidation, having only the power to revoke its license subject to such proceedings as the Solicitor General may thereafter deem proper to protect its creditors.
• No Denial of Collection: Petitioners argued that the foreign banks are not denied the right to collect their credits against Philippine debtors, only the right to petition for the harsh remedy of involuntary insolvency, which is not conceded to them.
• Unclean Hands: Petitioners argued that the banks came to court with unclean hands because their filing of the petition for involuntary insolvency was an attempt to defeat validly acquired rights of domestic corporations.
• Section 68 General Banking Act: Petitioners argued that the banks’ failure to incorporate their Philippine branches into new banks under Section 68 of the General Banking Act connotes an intention to continue as residents of their respective states of incorporation and not to be regarded as residents of the Philippines.
• Preferential Payments: Petitioners alleged that three days before the banks filed their petition, they received from CMI substantial payments on account in the aggregate amount of P6,010,800.00, with the result that they were preferred in the distribution of CMI’s assets and thereby defrauded other creditors.

• Resident Creditors Under Section 20: Whether foreign banks licensed to do business in the Philippines and actually operating through branches are “residents of the Philippine Islands” under Section 20 of the Insolvency Law, so as to qualify as petitioning creditors for involuntary insolvency.
• Failure to Allege Residency: Whether the banks’ failure to allege under oath in their petition that they are Philippine residents is fatal to their cause.
• Reciprocal Rights: Whether the banks’ failure to prove or allege that their domiciliary laws grant Philippine corporations the reciprocal right to petition for involuntary insolvency is fatal.
• Corporate Domicile vs. Residence: Whether juridical persons may have residence separate from domicile, and whether foreign corporations may be considered residents of the Philippines for purposes of the Insolvency Law.
• License and Doing Business: Whether a license to do business in the Philippines, without more, makes a foreign bank a resident, and whether actual licensed operation does.
• Statutory Authority to Petition: Whether there must be a substantive law explicitly granting foreign banks the power to petition for a Philippine corporation’s involuntary insolvency.
• Monetary Board Powers: Whether the Monetary Board’s inability to appoint a conservator or receiver or liquidate a foreign bank affects the bank’s capacity to petition for a debtor’s involuntary insolvency.
• Unclean Hands: Whether the banks’ filing of the insolvency petition, allegedly to defeat validly acquired rights of domestic corporations, bars the petition.
• Section 68 General Banking Act: Whether failure to incorporate Philippine branches into new banks under Section 68 of the General Banking Act indicates non-residence.
• Preferential Payments: Whether the banks’ receipt of substantial payments from CMI shortly before filing, allegedly making them preferred creditors, is a ground to dismiss the insolvency petition.

• Resident Creditors Under Section 20: Yes. Foreign banks licensed and actually doing business in the Philippines through branches are residents under Section 20; the license legitimizes the business, but actual locality of existence makes them residents.
• Failure to Allege Residency: No. Alleging that the banks are foreign banking corporations licensed to do business and actually doing business through branches effectively states that they are resident foreign corporations.
• Reciprocal Rights: No. Section 123 of the Corporation Code only requires that foreign laws allow Filipino citizens and corporations to do business, not that they grant a reciprocal right to petition for involuntary insolvency; the Insolvency Law has no reciprocity requirement.
• Corporate Domicile vs. Residence: Yes. Corporations may have domicile in the state of incorporation and residence where they exercise corporate functions; residence and domicile are not synonymous.
• License and Doing Business: No, the license alone does not make a foreign corporation a resident; actual licensed doing business in the Philippines does.
• Statutory Authority to Petition: No. No express grant is needed; the law grants a juridical person, foreign or domestic, the power to petition if it is a resident corporation and joins at least two other residents.
• Monetary Board Powers: No. The Monetary Board’s powers have no logical connection to the bank’s capacity to petition for a debtor’s involuntary insolvency; the law is not lacking in sanctions.
• Unclean Hands: No. The effects of bankruptcy proceedings on creditors are spelled out by law and will be observed regardless of the petitioner’s motives.
• Section 68 General Banking Act: No. Section 68 gave three options, not only incorporation; petitioners quoted it incompletely.
• Preferential Payments: No. The argument is a non sequitur; the bankruptcy court may consider the payment in distribution, but it is not a ground to dismiss the petition; the payment was only 4.42% of total indebtedness.

• Resident Creditors Under Section 20: Section 20 of the Insolvency Law allows an adjudication of insolvency on the petition of three or more creditors “residents of the Philippine Islands” whose credits accrued in the Philippines and aggregate at least P1,000. The Insolvency Law does not define “resident.” The SC derived the meaning from later statutes: the National Internal Revenue Code distinguishes a “resident foreign corporation” engaged in trade or business in the Philippines from a “non-resident foreign corporation” not so engaged; the Offshore Banking Law provides that branches, subsidiaries, affiliates, extension offices, or other units of foreign corporations operating in the Philippines shall be considered residents of the Philippines; and the General Banking Act treats branches and agencies of foreign banks as banking institutions and binds them to laws applicable to domestic banking corporations, except specified matters. The SC also relied on Claude Neon Lights vs. Philippine Advertising Corporation, where a foreign corporation licitly doing business in the Philippines was held not a non-resident for attachment purposes, and on the policy of assimilating foreign corporations duly licensed to do business to the status of domestic corporations. Under American law, a corporation’s residence is where it exercises corporate functions, where its business is done, where its franchises are exercised, and where it is present in the prosecution of its corporate enterprise; locality of existence is the necessary element. The banks were therefore residents under Section 20.

• Failure to Allege Residency: The SC rejected the argument that the omission of an explicit and categorical statement that the banks are “residents of the Philippine Islands” is fatal. In light of the concept of resident foreign corporations, when the banks alleged that they were foreign banking corporations licensed to do business in the Philippines and actually doing business here through branch offices or agencies, they were in effect stating that they are resident foreign corporations in the Philippines.

• Reciprocal Rights: Section 123 of the Corporation Code does not require that the laws under which foreign corporations are formed give Philippine nationals reciprocal rights. It requires that those laws allow Filipino citizens and corporations to do business in the foreign country or state. The SC found no serious debate that the laws of Hongkong and the United States allow Filipino citizens and corporations to do business in their territory and jurisdiction. The Insolvency Law contains no requirement that the foreign corporation’s state grant reciprocal rights to apply for involuntary insolvency of a resident or citizen.

• Corporate Domicile vs. Residence: The SC rejected the theory that corporations may not have a residence separate from their domicile and that other states may consider them residents only for limited and exclusive purposes. A corporation may be domiciled in one state and resident in another; its legal domicile in the state of creation does not prevent its residence in a real and practical sense in the state of its business activities. The dictionary concept of residence as applied to juridical persons comprehends permanent as well as temporary residence.

• License and Doing Business: The SC agreed that the grant of a license to a foreign corporation to do business in the country does not by itself make it a resident; the license merely gives legitimacy to its doing business here. What effectively makes the foreign corporation a resident corporation in the Philippines is its actually being in the Philippines and licitly doing business here, “locality of existence” being the necessary element in the signification of the term resident corporation. The banks had been licensed and actually doing business for many years through branches or agencies, including foreign currency deposit units; Hongkong & Shanghai Bank had been doing business in the Philippines since 1875.

• Statutory Authority to Petition: The SC held that the absence of a substantive law explicitly granting foreign banks the power to petition for the adjudication of a Philippine corporation as bankrupt is inconsequential. No legal provision expressly gives domestic banks the same power, although their capacity to petition for insolvency is scarcely disputed. The law plainly grants to a juridical person, whether a bank or not and whether foreign or domestic, as to natural persons, the power to petition for the adjudication of bankruptcy of any person, natural or juridical, provided that it is a resident corporation and joins at least two other residents in presenting the petition to the bankruptcy court.

• Monetary Board Powers: The SC held that the Monetary Board’s inability to appoint a conservator or receiver for a foreign bank or order its liquidation, having only the power to revoke its license subject to proceedings by the Solicitor General, is of no moment. It has no logical connection to whether the foreign bank may properly ask for a judicial declaration of the involuntary insolvency of a domestic corporation. The law is not lacking in sanctions against foreign banks or powerless to protect their creditors.

• Unclean Hands: The SC held that the effects of the institution of bankruptcy proceedings on all creditors are clearly spelled out by law and will be observed by the insolvency court regardless of whatever motives the party instituting the proceedings might have, apart from the desire to share in the assets of the insolvent in satisfying its credits.

• Section 68 General Banking Act: The SC held that the argument rested on an incomplete and inaccurate quotation of Section 68. That provision required a foreign bank presently having branches and agencies in the Philippines, within one year from the effectivity of the General Banking Act, to comply with any of three options: (1) incorporate its branch or branches into a new bank in accordance with Philippine laws; or (2) assign capital permanently to the local branch with the concurrent maintenance of a “net due to” head office account including all net amounts due to other branches outside the Philippines, in an amount which when added to the assigned capital shall at all times be not less than the minimum amount of capital accounts required for domestic commercial banks under Section 22; or (3) maintain a “net due to” head office account including all net amounts due to other branches outside the Philippines in an amount not less than the minimum amount of capital accounts required for domestic commercial banks under Section 22. Failure to incorporate alone did not indicate non-residence.

• Preferential Payments: The SC held that the argument is a non sequitur. The payment may be taken into consideration by the bankruptcy court in determining the manner and proportion by which the assets of the insolvent company shall be distributed among creditors, but it should not be a ground for giving the petition for insolvency short shrift. The total liabilities of CMI to the three banks as of December 1981 were P21,531,336.91 and US$14,485,814.85; converted at P7.899 to the dollar, the dollar account was P114,423,451.50, making the aggregate P135,954,788.41. The payment of P6,010,800.00 was only some 4.42% of the total indebtedness.

• Resident foreign corporation — A foreign corporation engaged in trade or business in the Philippines is a resident foreign corporation; for insolvency purposes, a foreign bank licensed to do business and actually operating through branches or agencies is a resident of the Philippines under Section 20. The SC applied this to the three banks.
• Residence of a corporation — A corporation’s residence is where it exercises corporate functions, where its business is done, where its franchises are exercised, and where it is present in the prosecution of its corporate enterprise; locality of existence is the necessary element. Applied to hold the banks residents.
• Domicile and residence distinguished — A corporation may be domiciled in the state of its incorporation and resident in another state where it actually does business; legal domicile in the state of creation does not prevent residence in the state of business activities. Applied to reject the banks’ supposed non-residence.
• Assimilation of licensed foreign corporations — Philippine laws and jurisprudence indicate a purpose to assimilate foreign corporations duly licensed to do business to the status of domestic corporations. The SC used this to support the banks’ residence.
• No express statutory grant needed for insolvency petition — The Insolvency Law itself grants a juridical person, foreign or domestic, the power to petition for adjudication of bankruptcy of any person, provided it is a resident corporation and joins at least two other residents; no separate substantive law expressly granting foreign banks that power is required. Applied.
• Reciprocity under Section 123, Corporation Code — The requirement is that the foreign corporation’s laws allow Filipino citizens and corporations to do business in that country or state, not that they grant reciprocal rights to petition for involuntary insolvency. Applied to reject the reciprocity argument.
• Section 68, General Banking Act options — A foreign bank with Philippine branches could comply with any of three options, not only incorporation; failure to incorporate does not by itself prove non-residence. Applied.
• Motive and preferential payments in insolvency — The motives of the petitioning creditor do not bar an insolvency petition; payments received before filing may be considered in the distribution of assets but are not a ground to dismiss the petition. Applied.

• “What effectively makes such a foreign corporation a resident corporation in the Philippines is its actually being in the Philippines and licitly doing business here, "locality of existence" being, to repeat, the "necessary element in . . . (the) signification" of the term, resident corporation.” — The SC’s core test for corporate residence: not the license alone, but actual licensed business presence in the Philippines.
• “The law plainly grants to a juridical person, whether it be a bank or not or it be a foreign or domestic corporation, as to natural persons as well, such a power to petition for the adjudication of bankruptcy of any person, natural or juridical, provided that it is a resident corporation and joins at least two other residents in presenting the petition to the Bankruptcy Court.” — The SC rejects the need for a separate express statutory grant to foreign banks.
• “What it does say is that the laws of the country or state under which a foreign corporation is "formed, organized or existing . . . allow Filipino citizens and corporations to do business in its own country or state," which is not quite the same thing.” — The SC construes Section 123 of the Corporation Code and rejects the reciprocity argument.
• “It is in any case a circumstance that the Bankruptcy Court may well take into consideration in determining the manner and proportion by which the assets of the insolvent company shall be distributed among its creditors; but it should not be considered a ground for giving the petition for insolvency short shrift.” — The SC treats pre-filing payments as a distribution issue, not a jurisdictional or dismissal ground.

• Claude Neon Lights, Fed. Inc. vs. Philippine Advertising Corporation, 57 Phil. 607 — Controlling precedent relied on for the rule that a foreign corporation licitly doing business in the Philippines may not be considered a non-resident for attachment purposes; the SC used it to support assimilation to domestic corporations and residence.
• Marshall Wells Co. vs. Henry W. Elser & Co., 46 Phil. 70, 76 — Cited in the jurisprudence quoted by the SC as part of the policy to assimilate foreign corporations duly licensed to do business to the status of domestic corporations.
• International Mill Co. vs. Columbia Transp. Co., 292 U.S. 511, 78 Led. 1396, 54 S. Ct. 797 — Cited by the SC for the proposition that a corporation may be domiciled in one state and resident in another; its legal domicile in the state of creation does not prevent residence in the state of its business activities.

• Section 20, Insolvency Law (Act No. 1956, as amended) — Requires three or more creditors who are “residents of the Philippine Islands,” whose credits accrued in the Philippines and aggregate at least P1,000, to petition for involuntary insolvency; applied to hold that the licensed and actually operating foreign banks qualified as resident creditors.
• Section 123, Corporation Code — Defines a foreign corporation and requires that the laws under which it is formed allow Filipino citizens and corporations to do business in that country or state; applied to reject the argument that reciprocal insolvency rights must be shown.
• Sections 20(h) and (i), National Internal Revenue Code — Distinguish a “resident foreign corporation” engaged in trade or business in the Philippines from a “non-resident foreign corporation” not so engaged; used by the SC to derive the concept of resident foreign corporation.
• Section 1(e), Offshore Banking Law (PD No. 1034) — Provides that branches, subsidiaries, affiliates, extension offices, or other units of foreign corporations operating in the Philippines shall be considered residents of the Philippines; used to support the banks’ residence.
• Sections 2, 18, and 68, General Banking Act (RA No. 337) — Treat branches and agencies of foreign banks as banking institutions and bind them to laws applicable to domestic banking corporations; Section 68 gave foreign banks with Philippine branches three compliance options, not only incorporation; applied to reject the non-residence and Section 68 arguments.