Corporate Dissolution and Liquidation under Philippine Law

Corporate dissolution and liquidation are governed by Philippine corporate law, particularly the Revised Corporation Code of the Philippines (R.A. No. 11232) and the applicable provisions of taxation laws. This guide delves into the detailed procedures, legal requirements, effects, and tax implications of corporate dissolution and liquidation for business organizations, with a particular focus on corporations.

1. Dissolution of Corporations

Dissolution is the process by which a corporation ceases to exist as a legal entity. In the Philippines, there are various ways a corporation can be dissolved, either voluntarily or involuntarily. The Revised Corporation Code of the Philippines outlines these types:

A. Voluntary Dissolution

Dissolution by Corporate Action without Creditors Involved (Section 134)
- Board Resolution and Stockholders’ Approval: The dissolution must be initiated by a resolution approved by the Board of Directors. Following this, at least two-thirds (2/3) of the stockholders or members’ approval is required in a meeting specifically called for this purpose.
- Filing of Application with the SEC: Once the dissolution resolution is approved, the corporation must file a verified request for dissolution with the Securities and Exchange Commission (SEC).
- SEC Approval: The SEC has the authority to approve the dissolution. No creditors are affected under this mode, so no liquidation process involving creditors is required.
- Public Notice Requirement: Once approved, the SEC publishes a notice of dissolution for the public’s knowledge.
Dissolution by Corporate Action with Creditors Involved (Section 135)
- Board and Stockholder Approval: Similar to the dissolution without creditors, this requires board and stockholder approval.
- Notice to Creditors: Unlike dissolution without creditors, this mode requires the corporation to notify creditors of its intention to dissolve. Creditors are given the opportunity to submit claims.
- Filing with SEC: The corporation must submit an application for dissolution with the SEC, including proof that creditors have been notified.
- Debt Settlement: The corporation must settle outstanding debts to creditors before the SEC grants the dissolution. This is crucial as the SEC will not approve the dissolution unless creditors are satisfied.
- Publication Requirement: As with the former, the SEC also publishes the notice of dissolution.
Shortened Corporate Term (Section 136)
- Amendment of Articles of Incorporation: A corporation can amend its Articles of Incorporation to shorten its corporate term. This change is deemed a voluntary dissolution effective upon the expiration of the shortened term.
- SEC Notification: This amendment should be filed with the SEC for approval.
- No Need for Creditors Notification (if no debts exist): Since this is a planned expiration of term, creditors may not need notification unless the corporation has outstanding obligations.

B. Involuntary Dissolution

Dissolution by SEC Motu Proprio or upon Verified Complaint (Section 138)
- Grounds: The SEC may dissolve a corporation upon finding grounds such as:
  - Serious non-compliance with the Revised Corporation Code;
  - Commission of fraudulent practices;
  - Insolvency;
  - Violations of SEC rules and regulations.
- Due Process: The corporation is entitled to due process, including a notice and hearing, before a final dissolution order is issued.
- Effect on Corporate Obligations: The corporation remains liable for all debts and obligations incurred prior to dissolution.
Dissolution by Court Order
- Forfeiture Proceedings: Courts may dissolve a corporation upon petition by the government (via the Office of the Solicitor General) for public policy reasons, fraud, or repeated legal violations.
- Finality of Judgment: Once the court orders dissolution, it is final and enforceable, subject to liquidation proceedings.

2. Liquidation of Corporations

Upon dissolution, a corporation undergoes liquidation to wind up its affairs. Liquidation is the process of converting corporate assets into cash or other realizable forms to settle obligations and distribute any remaining assets to the stockholders or members. In the Philippines, the liquidation process depends on the manner of dissolution:

A. Methods of Liquidation

Liquidation through Trustees (Section 139)
- Appointment of Liquidators/Trustees: After dissolution, the corporation may designate trustees or liquidators who are responsible for winding up its affairs.
- Trustee Powers and Duties: Trustees are tasked with collecting corporate assets, paying off debts, and distributing any remaining assets to stockholders or members.
- Filing of Liquidation Report with SEC: Upon completion, trustees must submit a liquidation report to the SEC for approval, marking the official end of corporate affairs.
Liquidation by Court-Supervised Process (Insolvent Corporations)
- Court Appointment of Liquidator: If the corporation is insolvent, the court may appoint a receiver or liquidator to handle the liquidation process.
- Creditors’ Claims and Settlements: Creditors are given the opportunity to file their claims, which are then settled from available corporate assets.
- Distribution of Remaining Assets: If assets remain after paying creditors, they are distributed to stockholders according to their respective rights and ownership interests.
SEC-Supervised Liquidation
- In certain cases, the SEC may directly supervise liquidation if it involves public interest, substantial assets, or complicated creditor arrangements.

B. Effect of Liquidation on Corporate Powers

Retention of Legal Personality for Liquidation Purposes (Section 139)
- Despite dissolution, a corporation retains its legal personality but only for purposes related to liquidation.
- No New Business: The corporation cannot engage in new business; activities are limited to liquidation tasks.
- Retention Period: Legal personality continues only until the liquidation process is complete, after which the corporation is fully dissolved.
Final Termination of Legal Personality
- Once liquidation is finalized and all assets are distributed or disposed of, the corporation’s legal personality terminates completely.
- Removal from SEC Registry: The corporation’s name is struck from the SEC’s registry, effectively ending its existence.

3. Tax Implications of Dissolution and Liquidation

Taxation laws impose specific requirements on dissolving and liquidating corporations, ensuring compliance with final tax obligations. The Bureau of Internal Revenue (BIR) closely monitors these processes to secure any outstanding tax liabilities.

A. Final Tax Returns and Clearances

Final Income Tax Return Filing
- A dissolving corporation must file a final income tax return covering the period from the start of its taxable year up to the date of dissolution.
- Payment of Taxes Due: Any tax due must be settled, including income tax, VAT, and withholding tax obligations.
BIR Tax Clearance Requirement
- The BIR requires corporations to secure a tax clearance before full dissolution. This clearance certifies that the corporation has no outstanding tax liabilities.

B. Capital Gains and Documentary Stamp Taxes

Capital Gains Tax on Asset Disposal
- Assets sold during liquidation are subject to capital gains tax or regular corporate tax, depending on the nature of the assets and type of transaction.
Documentary Stamp Tax (DST)
- Transfers of certain properties (such as real property or shares) during liquidation may also be subject to DST, particularly if ownership changes occur.
Withholding Tax Obligations
- Any distributions to stockholders are subject to applicable withholding taxes, and the corporation must remit these to the BIR.

C. Tax on Liquidating Dividends

Taxable Liquidating Dividends
- Liquidating dividends paid to stockholders are subject to tax as “other income” for resident and non-resident stockholders.
Filing Requirements
- The corporation must report these distributions and withhold the appropriate taxes, filing all necessary reports with the BIR.

Conclusion

Corporate dissolution and liquidation in the Philippines require meticulous adherence to legal processes and tax obligations. From the initial decision to dissolve, through settling creditor claims, and final asset distribution, every step must comply with the Revised Corporation Code and BIR regulations. Failure to meet these requirements can delay or complicate the dissolution and liquidation process, leading to potential liabilities and penalties for both the corporation and its stakeholders.