Delinquency

Delinquency | Stockholders and Members | Corporations | BUSINESS ORGANIZATIONS

In the Philippines, the concept of delinquency in relation to stockholders in corporations is governed by the Corporation Code of the Philippines (Republic Act No. 11232), also known as the Revised Corporation Code, as well as principles of mercantile and taxation law. Here’s an in-depth, meticulous examination of delinquency under the legal framework applicable to stockholders.

1. Definition of Delinquency for Stockholders

  • In the context of Philippine corporate law, “delinquency” refers to a stockholder's failure to pay the amount due on subscriptions to shares of stock at the time specified by the corporation. This amount may be unpaid either partially or fully.
  • A stockholder is considered delinquent if they have not fulfilled their obligation to pay the required installments or calls on their subscribed shares as per the corporation’s payment schedule.

2. Obligations of Stockholders on Subscribed Shares

  • Stockholders who subscribe to shares in a corporation enter into an agreement to pay for those shares, either upfront or in installments. This creates a binding financial obligation.
  • The corporation typically issues a call for payment (installment or full payment), notifying the stockholder of the due amount and the due date.
  • Failure to comply with this obligation results in the status of delinquency, which is a serious matter under corporate law, as it affects the stockholder’s rights and can lead to penalties, forfeiture of shares, or other consequences.

3. Procedures and Penalties for Delinquency

  • Under Section 66 of the Revised Corporation Code, corporations may impose penalties and initiate procedures against delinquent stockholders, including:
    • Interest and Penalty Charges: Corporations may impose interest on unpaid subscriptions as specified in the by-laws or agreed upon by the board, provided these are clearly communicated to the stockholders.
    • Publication of Delinquent Stockholders: Corporations are required to provide notice to delinquent stockholders regarding the impending delinquency sale, which includes a notice period and a publication requirement to announce the sale of delinquent shares.
    • Auction or Sale of Delinquent Shares: If the delinquent stockholder fails to pay within the notice period, the corporation has the right to auction or sell the shares. The proceeds from this sale are applied to cover the unpaid balance, and any excess amount is returned to the stockholder.
    • Forfeiture of Shares: If the auction fails to secure a purchaser willing to pay at least the balance of the unpaid subscription, the shares may be forfeited in favor of the corporation as treasury shares.

4. Impact on Stockholder Rights Due to Delinquency

  • Voting Rights: Delinquent stockholders lose their voting rights and other privileges associated with their shares. This suspension remains effective until the delinquency is remedied.
  • Dividends and Distributions: Delinquent stockholders forfeit their rights to dividends or other distributions until they settle their dues. This includes both regular dividends and those declared in arrears.
  • Eligibility for Corporate Governance Roles: Delinquency affects a stockholder’s eligibility to be elected to corporate governance positions, such as directorship, until the delinquent status is resolved.

5. Statutory Notice Requirements and Due Process

  • Notice of Delinquency: The corporation must notify delinquent stockholders in writing, providing them with details on the amount due, interest penalties, and the deadline for payment.
  • Publication of Notice: The corporation is also required to publish the notice of delinquency and the impending sale in a newspaper of general circulation. This publication should occur at least two weeks before the scheduled date of sale.
  • Fair Notice and Opportunity to Cure Delinquency: The corporation must provide the stockholder with reasonable time and opportunity to settle the dues and prevent the sale or forfeiture of shares.

6. Legal Remedies and Protections for Stockholders

  • Curing Delinquency: Stockholders can cure their delinquency by paying the outstanding balance along with any applicable interest and penalties prior to the sale of their shares. This effectively restores their status and rights within the corporation.
  • Right to Challenge the Sale: In cases where the corporation does not follow due process, a delinquent stockholder may challenge the sale or forfeiture of their shares, potentially seeking injunctive relief or other legal remedies.
  • Corporate Duty of Fairness and Transparency: The corporation is required to act fairly and transparently, ensuring that delinquency notices are accurate and that auction processes are conducted in good faith.

7. Accounting and Tax Implications for Delinquent Shares

  • Recording of Delinquent Receivables: Corporations must accurately record the delinquent amounts in their financial statements. These receivables are reflected as unpaid subscriptions or delinquent subscriptions, impacting the corporation’s overall capital and share structure.
  • Tax Consequences on Sale of Delinquent Shares: Any gain realized from the sale of delinquent shares, especially if they are sold above the amount of the unpaid subscription, may be subject to tax obligations for the corporation, and possibly for the delinquent stockholder if there is residual gain.
  • Treatment of Treasury Shares: If the corporation forfeits shares as treasury shares, they must account for these shares according to corporate accounting standards, and these shares are excluded from outstanding shares until reissued.

8. Recent Amendments and Judicial Interpretations

  • The Revised Corporation Code has updated several provisions to protect minority stockholders and ensure transparency in delinquency procedures. Courts in the Philippines have underscored that due process must be meticulously observed in delinquency-related actions, especially in notices and opportunities to cure.
  • Judicial interpretation often favors protecting stockholders’ rights, particularly regarding the adequacy of notice and the fairness of auction procedures. The courts have consistently ruled that corporations must strictly comply with notice and publication requirements.

9. Best Practices for Corporations Handling Delinquency

  • Clear Communication and Timely Notice: Corporations are advised to communicate clearly and early with stockholders regarding subscription deadlines and delinquency penalties to prevent misunderstandings.
  • Transparent Process for Auction or Sale: Corporations should conduct delinquency sales through transparent and fair processes to avoid potential legal challenges from stockholders.
  • By-Law Provisions on Delinquency: Corporations should outline clear policies and procedures regarding delinquency in their by-laws, including specifying interest rates on unpaid balances, penalties, and rights of stockholders in arrears.

In conclusion, delinquency in the context of stockholder subscriptions is a significant aspect of corporate governance and compliance under Philippine corporate law. Both corporations and stockholders have obligations and rights that must be carefully adhered to in cases of unpaid shares, and any process of penalty, forfeiture, or sale of shares must be carried out with strict observance of due process to ensure legal and financial equity for all parties involved.