This article sets out the procedure and requirements for dissolving and liquidating a Philippine corporation.
Modes of Voluntary Dissolution of Corporations
Under the Philippine Corporation Code, a corporation may be dissolved either voluntarily or involuntarily.
1. Where no creditors are affected by the dissolution, an administrative application for dissolution may be filed with the Securities and Exchange Commission (“SEC”);
2. Where creditors are affected by the dissolution, a formal petition for dissolution is filed with the SEC; and
3. Shortening of corporate term by the amendment of the articles of incorporation.
Where no creditors are affected in Dissolving a Corporation
In case the dissolution of a corporation does not prejudice the rights of any creditor having a claim against such corporation, the dissolution may be effected by complying with the following procedural requirements:
(i) The board of directors shall hold a meeting to vote on the dissolution of the corporation. At least a majority of the board of directors must vote in favor of the dissolution.
(ii) Notice of a meeting to be held on the call of the directors shall be sent to each stockholder at least thirty (30) days prior to the meeting either by registered mail or by special delivery, stating the time, place and object of the meeting calling for the approval of the dissolution of the corporation.
(iii) Such notice of meeting shall be published once a week for three (3) consecutive weeks in a newspaper published in the place where the principal office of the corporation is located, and if there be none, then in a newspaper of general circulation in the Philippines.
(iv) The stockholders shall then hold the meeting after publication and service of the notice to the stockholders and approve the dissolution of the corporation by an affirmative vote of the stockholders owning at least two-thirds (2/3) of the outstanding capital stock. Such resolution authorizing the dissolution shall be certified by a majority of the board of directors and countersigned by the secretary of the corporation. The SEC shall thereupon issue the certificate of dissolution.
Documents and Processes Required
The following documents should be filed with the SEC:
1. Cover Sheet
2. Resolution dissolving the corporation adopted by the affirmative vote of the stockholders owning at least two-thirds (2/3) of the outstanding capital stock of the corporation at a meeting held on the call of the directors after publication of the notice of the meeting and the transmittal of such notice to each stockholder
3. Directors’ certificate signed by at least a majority of the directors, countersigned by the secretary, certifying to the approval of the resolution dissolving the corporation
4. Certification that no rights of creditor will be affected by the dissolution
5. Affidavit of the directors/stockholders/principal officers that they shall personally assume any outstanding obligations of the corporation
6. Latest audited financial statements which must not be earlier than the date of the meeting of the stockholders approving the dissolution
7. Affidavit of the publisher regarding the publication of the notice of the time, place and object of the stockholders’ meeting approving the dissolution once a week for three (3) consecutive weeks in a newspaper published in the place where the principal office of the corporation is located
8. Bureau of Internal Revenue (“BIR”) tax clearance certificate which requires the submission of the following documents:
a. Application Form (BIR Form No. 1905);
b. Letter-request for cancellation of registration (stating the reasons for dissolution);
c. Original copy of the BIR Registration Certificate;
d. Dissolution papers (resolutions approving the dissolution)
e. Notice of Dissolution;
f. Inventory list of unused official receipts/invoices;
g. Unused official receipts/invoices for cancellation; and
h. Whenever applicable, photocopies of all of the following documents since the date of registration up to the present: 1. VAT Returns; 2. Non-VAT Returns; 3. Withholding Tax Returns; 4. Quarterly Income Tax Returns; 5. Percentage Income Tax Returns; 6. Income Tax Returns for the past three (3) years; 7. Financial Statements for the past three (3) years; 8. Latest Annual Registration Fee Return, and 9. SEC Registration
9. Payment of Filing Fee
Where creditors are affected
Where the dissolution of a corporation may prejudice the rights of any creditor, a petition for dissolution shall be filed with the SEC under the following procedure:
(i) There must be a meeting of the stockholders, with the necessary call and notice. In such a meeting, the dissolution must be agreed upon in a resolution approved by the affirmative vote of the stockholders representing at least 2/3 of the outstanding capital stock.
(ii) The petition for dissolution is then filed with the SEC. The petition must (a) be signed by a majority of the corporation’s board of directors or other officers having the management of its affairs, (b) be verified by the president or one of its directors, (c) set forth the claims against it, and (d) state that the dissolution has been approved by the affirmative vote of the stockholders as required by law.
(iii) The SEC will issue an order fixing the date on or before which objections may be filed by any person, which date shall not be less than thirty (30) nor more than sixty (60) days after entry of the order. Before such date, the law requires the order to be published at least once a week for three (3) consecutive weeks in a newspaper of general circulation published in the city or municipality where the principal office of the corporation is located, or if there be none, in a newspaper of general circulation in the Philippines.
(iv) A copy of the order must likewise be posted for three (3) consecutive weeks in three (3) public places in the said city or municipality.
(v) After the date fixed for the filing of objections has expired, the SEC, upon five (5) days’ notice, will then hear the petition and try any issue made by the objections.
(vi) If the petition is found to be proper, the SEC will render judgment dissolving the corporation and directing the disposition of its assets as justice requires, and may appoint a receiver to collect such assets and pay the debts of the corporation.
In dissolution proceedings where creditors are affected, the SEC is not mandated to dissolve the corporation when it would be detrimental to the interests of the creditors, who may wish to rehabilitate the operations of the corporation to ensure that it will pay off all of its debts. (Cesar L. Villanueva, Philippine Corporate Law 673 (2001).
Shortening of corporate term to Dissolve a Corporation
Voluntary dissolution by the shortening of corporate term is effected by the amendment of the articles of incorporation. Therefore, the procedure outlined under the law for the amendment of the articles of incorporation should also be complied with. The procedure for such amendment is as follows:
(i) The board of directors shall hold a meeting to discuss the reason for the dissolution. At least a majority of the directors must approve the shortening of the corporate term. It will then recommend for stockholders’ approval the shortening of the term of corporate existence and the amendment of the articles of incorporation.
(ii) Written notice of the proposed action and of the time and place of the meeting shall be served personally or addressed to each stockholder at his residence and deposited to the addressee in the post office with postage prepaid.
(iii) The stockholders shall then hold a meeting to ratify the dissolution by shortening the term of corporate existence and amendment of the articles of incorporation by a vote of at least 2/3 of the outstanding capital stock.
(iv) Notice of the dissolution of the corporation by shortening of the corporate term shall be published once a week for three (3) consecutive weeks in a newspaper of general circulation published in the municipality or city where the principal office of the corporation is located.
Documents and Processes Required
The following documents should be filed with the SEC:
1. Cover Sheet
2. Company Data Maintenance Form
3. Amended articles of incorporation containing the amendment to the article relating to the corporate term of existence
4. Directors’ certificate signed by at least a majority of the directors, countersigned by the secretary, certifying that the amended articles of incorporation are true and correct as amended through the affirmative vote of the stockholders owning at least two-thirds (2/3) of the outstanding capital stock
5. List of creditors, if any, and their consent to the shortening of the corporate term
6. Affidavit of the directors/stockholders/principal officers that they shall personally answer for any outstanding obligations of the corporation
7. Latest audited financial statements as of the date of approval/dissolution/any date thereafter
8. Affidavit of publisher regarding the publication of the notice of dissolution
9. BIR tax clearance certificate
10. Payment of Filing Fee
Securing a Tax Clearance
A common requirement for these modes of dissolution is a BIR tax clearance. A dissolving corporation shall, prior to the issuance by the SEC of the Certificate of Dissolution, secure a tax clearance from the BIR, which shall be submitted to the SEC. The dissolving corporation will also be required, within thirty (30) days after the adoption of “a resolution or plan for its dissolution”, to file its income tax returns covering the income earned by it from the beginning of the taxable year up to the date of dissolution.
Section 52(C) of the National Internal Revenue Code states that:
“Every corporation shall, within thirty (30) days after the adoption by the corporation of a resolution or plan for its dissolution; or for the liquidation of the whole or any part of its capital stock, including a corporation which has been notified of possible involuntary dissolution by the Securities and Exchange Commission; or for its reorganization, render a correct return to the Commissioner, verified under oath, setting forth the terms of such resolution or plan and such other information as the Secretary of Finance, upon recommendation of the Commissioner, shall, by rules and regulations, prescribe.
The dissolving or reorganizing corporation shall, prior to the issuance by the Securities and Exchange Commission of the Certificate of Dissolution or Reorganization, as may be defined by rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, secure a certificate of tax clearance from the Bureau of Internal Revenue which certificate shall be submitted to the Securities and Exchange Commission.”
The requirement of the tax clearance ensures that the dissolving corporation has settled all its liabilities with the BIR before it dissolves.
Estimated Period of Completion when Dissolving a Corporation
Assuming all documentary requirements are filed with the SEC, an application for dissolution where no creditors are affected or by shortening of corporate term, can take around one to two (1-2) months. However, before the Company can file an application with the SEC, it must comply with the once-a-week for three consecutive weeks publication requirement, and it must submit a tax clearance which can take as long as one year. All in all, the entire process can be completed from six (6) months to two (2) years. This excludes the time needed to prepare the SEC and BIR documentary requirements (e.g., financial statements prepared by an accountant, resolutions passed by stockholders and directors approving the dissolution, directors’ certificate, and amended articles of incorporation, among others).
Tax Clearance for Dissolution of a Corporation
Documents Required to Secure a Tax Clearance after Corporate Dissolution
In all modes of dissolution of a corporation discussed above, the dissolving corporation must, within thirty days (30) after the adoption of a resolution or plan for the dissolution of the corporation, file its income tax return covering the income earned by it from the beginning of the taxable year up to the date of its dissolution (Section 52, Tax Code, Section 2(a), BIR-SEC Regulations). In addition thereto, the dissolving corporation must submit to the BIR within the same period the following documents which must be verified under oath:
1. Income Tax Return of the corporation covering the period from the start of the taxable year to the date of its dissolution;
2. A copy of the Articles of Incorporation and By-Laws of the corporation;
3. A copy of the resolution of the directors and stockholders authorizing the dissolution of the corporation; and
4. The balance sheet of the dissolving corporation as of the date of dissolution and a profit and loss statement covering the period from the beginning of the taxable year to the date of its dissolution (Section 2(a), BIR-SEC Regulations)
Procedure to Secure a Tax Clearance After Corporate Dissolution
Within thirty days (30) from receipt of the foregoing documents, the Commissioner of the Internal Revenue or his duly authorized representative shall issue the corresponding tax clearance certificate (BIR Form No. 17.61) to the dissolving corporation (Section 3(a), BIR-SEC Regulations). The SEC shall issue the final order of dissolution only after a certificate of tax clearance issued by the BIR has been submitted by the dissolving corporation (Section 3(b), BIR-SEC Regulations).
Failure to render the necessary tax return and secure the certificate of tax clearance as mentioned above shall subject the officers of the corporation required by law to file said return to a fine of not less than Five Thousand Pesos (P5,000.00) or imprisonment of not less than two (2) years, and shall make them liable for all outstanding or unpaid tax liabilities of the corporation (Section 4, BIR-SEC Regulations).
Cancellation of VAT/Non-VAT Registration after Dissolving a Corporation
In addition, upon dissolution of the corporation, it is required to file an application for the cancellation of its Value-Added Tax (“VAT”) or Non-VAT Registration. This will be filed with the Revenue District Office (“RDO”) where the Certificate of Registration of the applicant-corporation was issued.
Documents Required for Submission
The previous Revenue Regulations require the submission of the following documents to the RDO:
1. Three copies of a letter containing the notice of closure/cessation of business;
2. Four accomplished copies of the Application for cancellation of Registration Forms
3. Photocopy of the Certificate of VAT/Non-VAT Registration; and
4. A copy of the resolution of the directors and stockholders authorizing the dissolution of the Corporation.
In cases of cancellation due to cessation/closure of the business, the Revenue Officer will also immediately conduct an investigation on the applicant-corporation’s internal revenue tax liabilities Revenue Regulation No. 16-2005).
Under the previous procedure, the following additional documents are usually required in the course of the examination to be conducted by the RDO:
1. Inventory of used and unused official receipts, invoices, etc.;
2. Surrender of unused official receipts, invoices, etc.;
3. Photocopy of Annual Registration Fee Return (BIR Form No. 0605) for the last three (3) years;
4. Photocopy of Annual and Quarterly Income Tax Returns for the last three (3) years;
5. Photocopy of Annual and Quarterly Withholding Tax Returns for the last three (3) years;
6. Photocopy of Annual and Quarterly VAT and/or Non-VAT Returns for the last three (3) years;
7. Original copy of the Certificate of VAT/Non-VAT Registration (BIR Form 1556).
Thereupon, the corporation shall file a return and pay the tax due thereon within twenty-five (25) days from the date of cancellation of the VAT registration (Section 114, Tax Code).
The corporation may also, within two (2) years from the date of cancellation of its VAT registration, apply for the issuance of a tax credit certificate for any unused input tax which it may use in payment of its other internal taxes (Section 112, Tax Code).
Liquidation of Assets after Dissolving a Corporation
Nature and Legal Basis for Liquidation of Corporate Assets
After dissolution of the corporation, all its assets should be converted into liquid assets to facilitate the payment of obligations to corporate creditors, and the remaining balance, if any, is to be distributed to the stockholders. This process is known as liquidation.
It must be noted that a corporation must first be lawfully dissolved before proceeding with liquidation. This is in accordance with the Revised Corporation Code which states that except by decrease of capital stock and as otherwise allowed, no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities.
Under the provisions of the Revised Corporation Code, a corporation whose charter expires by its own limitation or is annulled by forfeiture or otherwise, or whose corporate existence is terminated in any other manner, shall nevertheless continue as a body corporate for three (3) years after the time when it would have been so dissolved for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the business for which it was established.
Procedure for Liquidation of Corporate Assets
Liquidation may be done by the corporation itself through the board of directors. Also, an agreement among the stockholders as to how the assets of the corporation shall be distributed among themselves upon dissolution is valid. There is nothing under the provisions of the Revised Corporation Code which requires SEC approval of the distribution or liquidation of the assets of a dissolved corporation. It is a matter of internal concern of the corporation and falls within the power of the directors and stockholders or the duly appointed liquidation trustee. Liquidation of assets, however, is subject to the payment of debts of the corporation. (SEC Opinion, 23 July 1993)
Modes of Liquidation of Corporate Assets
Philippine law does not require a specific procedure or method for liquidation due to closure of the business. However, there are three (3) recognized methods of liquidation of corporate affairs:
1. Liquidation by the corporation itself through its board of directors
The board of directors as a body may conduct the liquidation process by paying the corporate creditors and conveying the remaining assets of the corporation to its stockholders within the 3-year liquidation period.
2. Liquidation through a trustee
The Revised Corporation Code provides that at any time during the 3-year liquidation period, a corporation may convey all of its properties to a trustee(s) who shall conduct the liquidation, for the benefit of stockholders, creditors and other persons in interest. From and after such conveyance, all interest which the corporation had in the property terminates. In other words, the legal interest in the properties now vests in the trustee(s) while the beneficial interest vests in the stockholders, creditors or other persons in interest.
In this event, the 3-year limitation will not apply provided the designation of the trustee is made within the same period. He may sue or even be sued beyond the 3-year period. Unless the trusteeship is limited in its duration by a deed of trust, there is no time limit within which the trustee must finish the liquidation. (Villanueva at 690).
3. Liquidation through a receiver
Finally, liquidation may also be accomplished by a receiver appointed by the SEC in a petition for dissolution (where creditors are affected) upon its decreeing the dissolution of the corporation. Again, the 3-year period will not apply because the corporation will be substituted by the receiver who may sue or be sued in behalf of the corporation. (Villanueva at 693).
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