d. Pre-incorporation Stage: Promoter’s Contracts i. Sec. 3.

10, Securities Regulation Code (RA

8799)

Section 3.10 of the Securities Regulation Code (RA 8799) is not provided in the text of the cases,
thus no digest can be made for this specific provision.

ii. Case/s:

1. Bayla v. Silang Traffic Co., Inc., G.R. Nos. 48195 and 48196, May 01, 1942

 Brief relevant facts: Sofronio T. Bayla, Josefa Naval, Paz Toledo, and Venancio Toledo
(petitioners) entered into "Agreement for Installment Sale of Shares" with Silang Traffic
Co., Inc. (respondent) in March 1935 , long after the corporation's organization in 1927.
These agreements stipulated installment payments, interest on deferred payments, and
forfeiture of payments and reversion of shares to the seller upon failure to pay any
installment . On August 1, 1937, the board of directors of the respondent corporation
resolved to declare previous share sales ineffective and refund amounts paid, for the
good of the corporation and to terminate a pending civil case .
https://www.google.com/search?q=Petitioners sought to recover sums paid based on
this resolution. The corporation later revoked this resolution on August 22, 1937.

 Arguments of the parties:

o Sofronio T. Bayla et al. cite_start: Insisted on their right to recover the amounts
paid based on the August 1, 1937 resolution, arguing that it validly rescinded the
contracts.

o Silang Traffic Co., Inc. (Respondent): Contended that the petitioners' shares had
automatically reverted to the corporation and payments forfeited due to non-
payment of installments by July 31, 1937, making the August 1, 1937 resolution
inapplicable. They also argued the resolution was revoked by a subsequent board
resolution.

 Ruling of the lower court: The trial court absolved the defendant and declared the
shares forfeited, holding the August 1, 1937 resolution void, citing Velasco v. Poizat that
a corporation cannot release an original subscriber . The Court of Appeals modified,
affirming dismissal but allowing plaintiffs 30 days to pay arrears .

 Issue related to the subject: Whether the agreements were contracts of subscription or
contracts of sale, and whether the resolution allowing refund of payments was valid.

 Ratio decidendi: The agreements were contracts of sale, not subscription. "A
subscription, properly speaking, is the mutual agreement of the subscribers to take and
pay for the stock of a corporation, while a purchase is an independent agreement
between the individual and the corporation to buy shares of stock from it at stipulated
price." The rules governing subscriptions (e.g., calls for unpaid subscriptions, inability to
release subscribers) do not apply to a purchase of stock . The provision for interest on
deferred payments in the contract indicated no automatic forfeiture, and under Article
1100 of the Civil Code, demand is necessary for default unless expressly provided . The
August 1, 1937 resolution was valid as it rescinded a contract of sale, not a subscription,
and was done for the good of the corporation to settle pending litigation . There was no
intimation that the corporation was insolvent or that creditors were prejudiced. The
 subsequent attempted revocation of said rescission by the resolution of August 22,
1937, was invalid, it not having been agreed to by the petitioners.

2. Cagayan Fishing Dev. Co., Inc. v. Teodoro Sandiko, G.R. No. 43350, December 23, 1937

 Brief relevant facts: Manuel Tabora, registered owner of four parcels of land, executed a
public document on May 31, 1930, selling these lands to "Cagayan Fishing Development
Co., Inc.," which was stated to be "under process of incorporation" . The plaintiff
company filed its articles of incorporation on October 22, 1930. Later, on October 28,
1931, the company's board of directors authorized its president to sell these lands to
Teodoro Sandiko, which resulted in a deed of sale, a promissory note, and a mortgage
dated February 15, 1932 . When Sandiko failed to pay the promissory note, the plaintiff
company sued.

 Arguments of the parties:

o Cagayan Fishing Development Co., Inc. (Plaintiff-Appellant): Sought to enforce

the promissory note and recover the amount from Sandiko, implying the validity
of its ownership and sale of the lands.

o Teodoro Sandiko (Defendant-Appellee): Argued that the sale of the lands to him
by the plaintiff company was invalid because of "vice in consent and repugnancy
to law".

 Ruling of the lower court: The Court of First Instance of Manila absolved the defendant
from the complaint, finding the sale invalid.

 Issue related to the subject: Whether a contract of sale entered into by a company that
is still "under process of incorporation" (i.e., not yet legally incorporated) is valid.

 Ratio decidendi: No, the contract of sale is not valid. The transfer of property to the
plaintiff company occurred almost five months

before its actual incorporation . "Before a corporation may be said to be lawfully organized,
many things have to be done." A corporation "was not yet incorporated when it entered into a
contract of sale" and "was not even a de facto corporation at the time." Not being in legal
existence, it "did not possess juridical capacity to enter into the contract." "Corporations are
creatures of the law, and can only come into existence in the manner prescribed by law." "A
corporation, until organized, has no being, franchises or faculties." The contract was essentially
between the individual owner and mere promoters of a projected corporation, and these
promoters could not act as agents for a non-existent entity . The Supreme Court declined to
extend the doctrine of ratification in this case as it would "result in the commission of injustice
or fraud to the candid and unwary." Therefore, if the plaintiff corporation did not validly acquire
the lands, it had no right to dispose of them.

3. Rizal Light & Ice Co., Inc. v. Public Service Comm., G.R. No. L-20993, No. L-21221, September
28, 1968

 Brief relevant facts: Morong Electric Co., Inc. (Morong Electric) was granted a municipal
franchise on May 6, 1962, to operate an electric service, but its certificate of
incorporation was issued by the SEC only on October 17, 1962. Rizal Light & Ice Co., Inc.
(petitioner), a prior operator whose certificate was later revoked, opposed Morong
 Electric's application for a certificate of public convenience, arguing that Morong Electric
had no legal personality when the franchise was granted .

 Arguments of the parties:

o Rizal Light & Ice Co., Inc. (Petitioner): Contended that Morong Electric had no
legal personality when the franchise was granted on May 6, 1962, rendering the
franchise invalid, as juridical personality begins only upon SEC incorporation .

o Morong Electric Co., Inc. (Respondent): Argued that it was a de facto

corporation when the franchise was granted and was not incapacitated to enter
into contracts or accept franchises . It asserted that its subsequent incorporation
cured any deficiency.

 Ruling of the lower court: The Public Service Commission (PSC) denied the motion to
dismiss, finding Morong Electric a de facto corporation. It then granted Morong Electric
a certificate of public convenience .

 Issue related to the subject: Whether a franchise granted to a company before it obtains
its certificate of incorporation from the SEC is valid, particularly if the company
subsequently incorporates and accepts the franchise.

 Ratio decidendi: Yes, the franchise is valid. The fact that Morong Electric had no
corporate existence on the day the franchise was granted does not render the franchise
invalid, "because later Morong Electric obtained its certificate of incorporation and then
accepted the franchise in accordance with the terms and conditions thereof." While a
franchise cannot take effect until the grantee corporation is organized, "the franchise
may, nevertheless, be applied for before the company is fully organized." "It is enough
that organization is complete prior to the passage and acceptance of the ordinance." The
subsequent incorporation of Morong Electric on October 17, 1962, and its acceptance of
the franchise by prosecuting the application with the Commission, "not only perfected a
contract between the respondent municipality and Morong Electric but also cured the
deficiency pointed out by the petitioner". This is consistent with the view that contracts
made by promoters on behalf of a corporation may be adopted or ratified by the
corporation when organized.

4. Caram, Jr. v. CA, G.R. No. L-48627, June 30, 1987

 Brief relevant facts: Alberto V. Arellano (private respondent) prepared a project study
and rendered technical services that led to the organization of Filipinas Orient Airways.
These services were requested by Barretto and Garcia, who then presented the project
study to Fermin Z. Caram, Jr. and Rosa O. de Caram (petitioners) to induce them to invest
. The airline was eventually organized on the basis of the project study with the Carams
as major stockholders and, together with Barretto and Garcia, as principal officers.
Arellano sought payment for his services, and the lower court held the Carams jointly
and severally liable with the corporation and other defendants.

 Arguments of the parties:

o Fermin Z. Caram, Jr. and Rosa O. de Caram (https://www.google.com/search?

q=Petitioners): Claimed they had no contract with Arellano for the services and,
as mere subsequent investors, should not be held solidarily liable with the
 Filipinas Orient Airways (a separate juridical entity) or with Barretto and Garcia,
who were the ones who requested the said services .

o Alberto V. Arellano (Private Respondent): Argued that the petitioners, having

benefited from the project study and being involved in the preparatory stages
and becoming officers/stockholders, should be jointly and severally liable for his
services .

 Ruling of the lower court: The lower court ordered the defendants, including the
Carams, to jointly and severally pay Arellano P50,000 for the project study and technical
services.

 Issue related to the subject: Whether individuals who become major stockholders and
officers of a corporation, having been persuaded to invest by a project study prepared by
a promoter at the request of others, are personally liable for the promoter's services
even if they did not directly contract for them.

 Ratio decidendi: No, the petitioners (Carams) are not personally liable. The services
were requested by Barretto and Garcia, who were the main promoters ("the moving
spirit") . The petitioners were "merely among the financiers whose interest was to be
invited and who were in fact persuaded, on the strength of the project study, to invest in
the proposed airline". There was no showing that Filipinas Orient Airways was a fictitious
corporation that would justify piercing the corporate veil and making the petitioners, as
principal stockholders, responsible for its obligations. "As a bona fide corporation, the
Filipinas Orient Airways should alone be liable for its corporate acts as duly authorized
by its officers and directors." While the petitioners may have benefited from the
services, this is "no justification to hold them personally liable therefor".

e. Subscription Agreements i. Case: Trillana v. Quezon College, G.R. No. L-5003, June 27, 1953

 Brief relevant facts: Damasa Crisostomo sent a letter to Quezon College, Inc. subscribing
to 200 shares. However, instead of an initial payment, she stated: "babayaran kong lahat
pagkatapos na ako ay makapag-pahuli ng isda" (I will pay everything after I have caught
fish) . Crisostomo died without making any payment. Quezon College, Inc. presented a
claim in her testate proceeding for the P20,000 subscription.

 Arguments of the parties:

o Quezon College, Inc. (Claimant-Appellant): Sought to collect the P20,000,

arguing that it was a valid subscription.

o Nazario Trillana (Administrator-Appellee): Opposed the claim, arguing, among

other things, that the subscription was not registered or authorized by the SEC,
and that there was no perfected contract due to the potestative condition for
payment.

 Ruling of the lower court: The Court of First Instance of Bulacan dismissed the claim,
primarily on the ground that the subscription was not registered in or authorized by the
SEC .

 Issue related to the subject: Whether a stock subscription is an enforceable contract

when the subscriber makes payment dependent solely on her will ("after she has caught
fish") and there is no evidence of acceptance of this condition by the corporation.
  Ratio decidendi: No, the stock subscription is not an enforceable contract. The
applicant's (Damasa Crisostomo's) offer to pay "after she has caught fish" was a
"condition obviously dependent upon her sole will and, therefore, facultative in nature,
rendering the obligation void, under article 1115 of the old Civil Code". There was
nothing in the record to show that Quezon College, Inc. accepted this specific term of
payment, or that such acceptance came to Crisostomo's knowledge during her lifetime .
For the relation to ripen into an enforceable contract, acceptance of this counter-offer
by the college was essential. "A condition, facultative as to the debtor, is obnoxious to
the first sentence contained in article 1115 and renders the whole obligation void."

ii. Purchase Agreement 1. Bayla v. Silang Traffic Co., G.R. Nos. 48195 and 48196, May 1, 1942

 Brief relevant facts: Sofronio T. Bayla, Josefa Naval, Paz Toledo, and Venancio Toledo
(petitioners) entered into "Agreement for Installment Sale of Shares" with Silang Traffic
Co., Inc. (respondent) in March 1935 , long after the corporation's organization in 1927.
These agreements stipulated installment payments, interest on deferred payments, and
forfeiture of payments and reversion of shares to the seller upon failure to pay any
installment . On August 1, 1937, the board of directors of the respondent corporation
resolved to declare previous share sales ineffective and refund amounts paid, for the
good of the corporation and to terminate a pending civil case .
https://www.google.com/search?q=Petitioners sought to recover sums paid based on
this resolution. The corporation later revoked this resolution on August 22, 1937.

 Arguments of the parties:

o Sofronio T. Bayla et al. cite_start: Insisted on their right to recover the amounts
paid based on the August 1, 1937 resolution, arguing that it validly rescinded the
contracts.

o Silang Traffic Co., Inc. (Respondent): Contended that the petitioners' shares had
automatically reverted to the corporation and payments forfeited due to non-
payment of installments by July 31, 1937, making the August 1, 1937 resolution
inapplicable. They also argued the resolution was revoked by a subsequent board
resolution.

 Ruling of the lower court: The trial court absolved the defendant and declared the
shares forfeited, holding the August 1, 1937 resolution void, citing Velasco v. Poizat that
a corporation cannot release an original subscriber . The Court of Appeals modified,
affirming dismissal but allowing plaintiffs 30 days to pay arrears .

 Issue related to the subject: Whether the agreements were contracts of subscription or
contracts of sale, and whether the resolution allowing refund of payments was valid.

 Ratio decidendi: The agreements were contracts of sale, not subscription. "A
subscription, properly speaking, is the mutual agreement of the subscribers to take and
pay for the stock of a corporation, while a purchase is an independent agreement
between the individual and the corporation to buy shares of stock from it at stipulated
price." The rules governing subscriptions (e.g., calls for unpaid subscriptions, inability to
release subscribers) do not apply to a purchase of stock . The provision for interest on
deferred payments in the contract indicated no automatic forfeiture, and under Article
1100 of the Civil Code, demand is necessary for default unless expressly provided . The
 August 1, 1937 resolution was valid as it rescinded a contract of sale, not a subscription,
and was done for the good of the corporation to settle pending litigation . There was no
intimation that the corporation was insolvent or that creditors were prejudiced. The
subsequent attempted revocation of said rescission by the resolution of August 22,
1937, was invalid, it not having been agreed to by the petitioners.

iii. Consideration for Shares

1. Lincoln Phil. Life v. CA, G.R. No. L-44625, July 30, 1979

 Brief relevant facts: Lincoln Philippine Life Insurance Company, Inc. (now Jardine-CMG
Life Insurance Co. Inc.) issued 50,000 shares as stock dividends in 1984, with a par value
of P100 each, totaling P5 million . Petitioner paid documentary stamp taxes on each
certificate on the basis of its par value. The Commissioner of Internal Revenue (CIR)
assessed a deficiency, arguing that the tax should be based on the

book value of the shares (P19,307,500.00), not the par value, citing Section 224 (now 175) of
the National Internal Revenue Code (NIRC) .

 Arguments of the parties:

o Lincoln Philippine Life Insurance Company, Inc. (Petitioner): Argued that the tax
should be based on the par value, as it is a tax on the certificate of stock, not the
value of the shares themselves.

o Commissioner of Internal Revenue (Respondent): Contended that stock

dividends are a distinct class and the tax should be based on their "actual value,"
which is the book value, even if they have a par value .

 Ruling of the lower court: The Court of Tax Appeals (CTA) ruled that the tax should be
based on the par value . The Court of Appeals reversed the CTA, holding that the tax
should be based on the actual value represented by the shares .

 Issue related to the subject: Whether the documentary stamp tax on original issues of
stock dividends with par value should be based on their par value or their book value
(actual value).

 Ratio decidendi: The documentary stamp tax on stock dividends with par value should
be based on their par value, not their book value. The then Section 224 of the NIRC
levied the tax on the "privilege of issuing certificates of stock," not on the shares
themselves or the transaction's actual value . A stock certificate is merely evidence of a
share of stock. The law distinguished between certificates of stock with par value and
without par value . The proviso "in the case of stock dividends on the actual value
represented by each share" was intended to cover stock dividends

without par value to ensure they are taxed, as no consideration is received by the corporation
for them . For stock dividends with par value, the general rule of basing the tax on par value
applies. Tax laws must be construed strictly against the State and liberally in favor of the
taxpayer. The Court noted that the present law (Sec. 175, R.A. No. 8424) explicitly changed this
to tax "shares of stock" based on their par value, but for stock dividends, "on the actual value
represented by each share," clarifying the legislative intent .

2. CIR v. First Express Pawnshop Co., G.R. Nos. 172045-46, June 16, 2009
  Brief relevant facts: The Commissioner of Internal Revenue (CIR) assessed First Express
Pawnshop Company, Inc. (respondent) for deficiency documentary stamp tax (DST) on
"deposit on subscription". The respondent's Balance Sheet showed "Deposit on
Subscription" of P800,000, while its General Information Sheet (GIS) showed
"Subscribed Capital Stock" of P500,000 and "Paid-up Capital Stock" of P250,000 . The
respondent argued that the deposit on subscription was merely an advance by
stockholders for

future subscription and that no corresponding shares or certificates of stock had been issued,
therefore, it was not subject to DST under Section 175 of the Tax Code .

 Arguments of the parties:

o Commissioner of Internal Revenue (Petitioner): Contended that the assessment

was valid and final because the respondent allegedly failed to submit relevant
supporting documents within 60 days of filing its protest, as required by Section
228 of the Tax Code . It argued the "deposit on subscription" indicated a taxable
transaction.

o First Express Pawnshop Co., Inc. (Respondent): Maintained that the "deposit on
subscription" was an advance for future subscription, not a present subscription
or issuance of shares, and thus not subject to DST under Section 175 of the Tax
Code . It also argued that it submitted sufficient documents with its protest and
that the assessment was not final .

 Ruling of the lower court: The CTA First Division cancelled the DST assessment on
deposit on subscription. The CTA En Banc affirmed this, finding that the deposit on
subscription was not subject to DST .

 Issue related to the subject: Whether a "deposit on subscription," representing money

received by a corporation for potential future issuance of capital stock, is subject to
Documentary Stamp Tax (DST) on original issue of shares of stock under Section 175 of
the Tax Code.

 Ratio decidendi: No, a "deposit on subscription" is not subject to DST on original issue of
shares of stock. DST is imposed on the

original issue of shares of stock, which implies the privilege of issuing shares and accrues when
the shares are issued and the stockholder acquires attributes of ownership . A "subscription
contract" is a "contract for the acquisition of unissued stocks". In this case, the "deposit on stock
subscription" refers to an amount of money received by the corporation as a deposit with the

possibility of applying the same as payment for the future issuance of capital stock, an event
which "may or may not happen". No shares were issued . The person making such a deposit
does not have the standing of a stockholder and is not entitled to dividends, voting rights, or
other stockholder prerogatives. Therefore, there is "no subscription that creates rights and
obligations between the subscriber and the corporation" yet.

iv. Payment of Balance of Subscription

1. Lingayen Gulf Electric Power Co. v. Baltazar, G.R. No. L-4824, June 30, 1953
  Brief relevant facts: Irineo Baltazar subscribed for 600 shares in Lingayen Gulf Electric
Power Company and paid P15,000, leaving a balance of P18,500 unpaid . A stockholders'
resolution in July 1946 called for payment of unpaid subscriptions in two installments,
with interest, and provided for reversion of unpaid stocks to the corporation after grace
periods . This call was not published in a newspaper of general circulation as required by
Section 40 of the Corporation Law. The corporation sued Baltazar for the unpaid
balance.

 Arguments of the parties:

o Lingayen Gulf Electric Power Company, Inc. (Plaintiff-Appellant): Sought to

collect the unpaid balance, arguing the Board's call was valid.

o Irineo Baltazar (Defendant-Appellee/Appellant): Disclaimed liability, arguing

that the call was invalid due to lack of publication, and that he was released from
the obligation by the earlier stockholders' resolutions .

 Ruling of the lower court: The lower court found the call for payment embodied in the
1946 resolution null and void for lack of publication, dismissing the complaint as
premature . It also held that the resolution releasing Baltazar from liability was null and
void because it was not approved by all stockholders.

 Issue related to the subject: Whether a call for unpaid subscriptions is valid if it is not
published in a newspaper of general circulation, as required by law.

 Ratio decidendi: No, the call for unpaid subscriptions is not valid if not published. "The
law requires that notice of any call for the payment of unpaid subscription should be
made not only personally but also by publication." Section 40 of the Corporation Law "is
mandatory as regards publication, using the word 'must'." The reason for this mandatory
provision is "not only to assure notice to all subscribers, but also to assure equality and
uniformity in the assessment on stockholders." "Compliance with the conditions [of
publication] must be strictly and literally complied with." The Court also ruled that
"release from such payment must be made by all the stockholders".

2. Apodaca v. NLRC, G.R. No. 80039, April 18, 1989

 Brief relevant facts: Ernesto M. Apodaca subscribed to 1,500 shares of Intrans Phils., Inc.
at P100 per share, making an initial payment of P37,500. He later resigned as president
and general manager. Apodaca filed a complaint with the NLRC for unpaid wages, cost of
living allowance, expenses, and bonus. The private respondents (Intrans Phils., Inc. and
Jose M. Mirasol) admitted owing Apodaca P17,060.07 but applied this amount to the
unpaid balance of his subscription, P95,439.93. Apodaca questioned the set-off, arguing
no call for payment had been made for the unpaid subscription.

 Arguments of the parties:

o Ernesto M. Apodaca (Petitioner): Contended that the set-off was invalid because
no call or notice for the payment of the unpaid subscription had been made, thus
the obligation was not yet enforceable. He also argued the NLRC lacked
jurisdiction over intra-corporate disputes.
 o Intrans Phils., Inc. and Jose M. Mirasol (Private Respondents): Maintained that a
stockholder with unpaid subscription becomes a debtor of the corporation and
that the set-off against wages is not contrary to law.

 Ruling of the lower court: The labor arbiter sustained Apodaca's claim for P17,060.07.
The NLRC reversed, upholding the set-off .

 Issue related to the subject: Whether an employer can unilaterally set off an employee's
wages against his unpaid stock subscription without a formal call for payment.

 Ratio decidendi: No, an employer cannot unilaterally set off an employee's wages
against his unpaid stock subscription without a formal call for payment. The NLRC has no
jurisdiction over disputes concerning unpaid stock subscriptions, as this is an intra-
corporate dispute within the exclusive jurisdiction of the Securities and Exchange
Commission (SEC) . Even assuming the NLRC had jurisdiction, unpaid subscriptions are
not due and payable until a call is made by the corporation for payment. No resolution
by the board of directors calling for payment or notice of such call to the petitioner was
presented . Therefore, the set-off was "without lawful basis, if not premature".
Furthermore, Article 113 of the Labor Code strictly limits deductions from wages to
specific instances, and unpaid stock subscriptions are not among them .

v. Liability for Unpaid Subscription

1. Keller v. COB Group, G.R. No. L-68097, January 16, 1986

 Brief relevant facts: Edward A. Keller & Co., Ltd. (Keller) appointed COB Group
Marketing, Inc. as an exclusive distributor. COB Group Marketing incurred significant
credit purchases from Keller. Its president, Jose E. Bax, admitted the firm owed Keller
about P179,000. Keller sued COB Group Marketing, its stockholders, and mortgagors for
the debt. COB Group Marketing was declared in default for not filing an answer. The
lower court dismissed Keller's complaint and ordered Keller to pay COB Group Marketing
for alleged overpayment, despite COB Group Marketing being in default and not filing a
counterclaim .

 Arguments of the parties:

o Edward A. Keller & Co., Ltd. (Petitioner-Appellant): Sought to hold COB Group
Marketing liable for its debt, arguing that the admissions of its president, Bax,
proved the liability. It also sought to hold the stockholders personally liable to the
extent of their unpaid subscriptions.

o COB Group Marketing, Inc. et al. (Respondents-Appellees): Bax later claimed

overpayment, despite earlier admissions. They relied on the lower court's ruling
which effectively nullified the admitted liability.

 Ruling of the lower court: The trial court dismissed the complaint, ordered Keller to pay
COB Group Marketing for alleged overpayment, and declared the mortgages void . The
Appellate Court affirmed this judgment, but eliminated the moral damages.

 Issue related to the subject: Whether stockholders can be held personally liable for a
corporation's obligations to the extent of their unpaid subscriptions.
  Ratio decidendi: Yes, a stockholder is personally liable for the financial obligations of a
corporation to the extent of his unpaid subscription. "A stockholder is personally liable
for the financial obligations of a corporation to the extent of his unpaid subscription".
The Supreme Court reversed the lower courts' decisions, finding that they erred in
nullifying Bax's admissions of liability and in crediting the alleged overpayment. The
Court found that COB Group Marketing owed Keller P182,994.60. The stockholders were
held "solidarily liable with COB Group Marketing up to the amounts of their unpaid
subscription to be applied to the company's liability herein" .

vi. Delinquency on Subscription

1. Miranda v. Tarlac Rice Mill Co., G.R. No. 35961, December 2, 1932

 Brief relevant facts: Alberto Miranda subscribed for 100 shares of stock in Tarlac Rice
Mill Company, Inc. on June 8, 1926, obligating himself to pay P10,000 in installments on
specified dates . On July 10, 1926, Miranda assigned and mortgaged a parcel of land to
the corporation as security for his subscription and granted a power of attorney to
certain officers of the corporation to secure a loan not exceeding P10,000 against the
property to increase the corporation's capital . A P10,000 loan was obtained, retained by
the corporation, and later paid by Miranda . The corporation ceased doing business from
1928, and other stockholders had not paid for their shares as per their subscription
agreements, with no action taken by the corporation to compel them. Romana Miranda,
as judicial administratrix of Alberto Miranda's estate, sought to recover the P10,000 paid
to the corporation.

 Arguments of the parties:

o Romana Miranda (Plaintiff-Appellant): Argued that the officers violated the

terms of the power of attorney by mortgaging the land for P10,000 when only
P3,000 was due at the time. She also contended that Miranda was no longer
obligated to pay the remaining installments because the corporation had ceased
to do business and did not compel other stockholders to pay.

o Tarlac Rice Mill Co., Inc. (Defendant-Appellee): Implicitly contended that the
power of attorney authorized the P10,000 loan for the corporation's capital.

 Ruling of the lower court: The Court of First Instance of Tarlac dismissed the case .

 Issue related to the subject: Whether the administratrix of a stockholder's estate can
recover amounts paid on a stock subscription, even if the corporation has ceased
operations and other stockholders have not paid their subscriptions, and no formal call
has been issued.

 Ratio decidendi: No, the administratrix cannot recover the amount paid. A "stock
subscription is a contract between the corporation and the subscriber, and courts will
enforce it for or against either; that a corporation has no legal capacity to release a
subscriber to its capital stock from the obligation to pay for his shares, and that any
agreement to this effect is invalid" . The fact that the corporation has ceased to do
business or that the other stockholders have not been required to pay for their shares in
accordance with their subscription agreement does not justify ordering the corporation
to return to the plaintiff the amount paid by the stockholder. The power of the directors
 to declare unpaid subscriptions due and payable is generally absolute. "No call is
necessary when a subscription is payable, not upon call or demand by the directors or
stockholders, but immediately, or on a specified day, or on or before a specified day, or
when it is payable in installments at specified times."

2. Garcia v. Suarez, G.R. No. 45493, April 21, 1939

 Brief relevant facts: Angel Suarez subscribed to sixteen shares of the capital stock of the
Compañia Hispano-Filipina, Inc. in October 1924, but only paid P400 for four shares . On
June 5, 1931, Gerardo Garcia was appointed receiver of the corporation to collect its
credits. On June 18, 1931, Garcia demanded payment of the balance of the subscription
from Suarez, who refused . Garcia filed a complaint in October 1935 to recover the
balance.

 Arguments of the parties:

o Angel Suarez (Defendant-Appellant): Contended that the action had prescribed

because the obligation was demandable from the date of subscription (October
4, 1924), and more than ten years had elapsed. He also claimed to have been
released from the obligation by a letter from the acting president of the
corporation .

o Gerardo Garcia (Plaintiff-Appellee): Argued that the prescriptive period only

began when he, as receiver, demanded payment, as the board had not previously
declared the subscription due and payable.

 Ruling of the lower court: The trial court ordered Suarez to pay P1,200 with legal
interest.

 Issue related to the subject: Whether the prescriptive period for collecting unpaid stock
subscriptions begins from the date of subscription or from the date the board of
directors (or a receiver exercising their power) makes a call or demand for payment.

 Ratio decidendi: The prescriptive period for collecting unpaid stock subscriptions begins
from the date the board of directors (or a receiver exercising their power) makes a call or
demand for payment, not from the date of subscription itself. While "the obligation to
pay arises from the date of the subscription, but the coming into being of an obligation
should not be confused with the time when it becomes demandable". Section 38 of the
Corporation Law provides that the board of directors "may at any time declare due and
payable to the corporation unpaid subscriptions to the capital stock". Since the board
had not declared the subscription due and payable, the demand by the receiver on June
18, 1931, was the starting point for prescription. The claim of release by the acting
president's letter was invalid because "it has not been established that the stockholders
of the Compañia Hispano-Filipina, Inc., have in any wise consented to release the
appellant from his obligation, or that the acting president, R. Pando, was expressly
authorized by the stockholders, or was authorized by the by-laws of the corporation, to
release the appellant from his obligation". "A corporation has no legal capacity to
release a subscriber to its capital stock from the obligation to pay for his shares; and any
agreement to this effect is invalid."

vii. Release from Subscription Obligation

1. Velasco v. Poizat, G.R. No. 11528, March 15, 1918

 Brief relevant facts: Miguel Velasco, as assignee in insolvency of "The Philippine

Chemical Product Company" (Ltd.), sought to recover P1,500 from Jean M. Poizat, the
unpaid balance on his stock subscription. Poizat had subscribed for 20 shares and paid
P500 (value of 5 shares). The company became insolvent, and a prior board resolution
attempted to release another shareholder, Infante, from his subscription . Poizat claimed
a similar understanding for his release . Poizat contended that the call made by the
board was not in accordance with Corporation Law requirements and that the action
was instituted prematurely.

 Arguments of the parties:

o Miguel Velasco (Plaintiff-Appellant): Argued that Poizat was liable for the unpaid
subscription, asserting that insolvency makes all unpaid subscriptions due on
demand without prior call, and that the board had no power to release a
subscriber.

o Jean M. Poizat (Defendant-Appellee): Contended that the call was invalid due to
non-compliance with statutory requirements and that the action was premature.
He also claimed he was to be released on the same terms as another shareholder
.

 Ruling of the lower court: The Court of First Instance dismissed the complaint.

 Issue related to the subject: Whether a formal call or assessment is necessary for a
receiver or assignee of an insolvent corporation to collect unpaid stock subscriptions,
and whether a board of directors can validly release a subscriber from their obligation.

 Ratio decidendi: No, a formal call or assessment is not necessary. "When insolvency
supervenes upon a corporation and the court assumes jurisdiction to wind up, all unpaid
stock subscriptions become payable on demand, and are at once recoverable in an
action instituted by the assignee or receiver appointed by the court." The statutory right
to sell the subscriber's stock is merely an additional remedy to an action in court . It is
generally accepted that "the corporation has no legal capacity to release an original
subscriber to its capital stock from the obligation of paying for his shares, in whole or in
part,...". The attempt to release another shareholder (Infante) was beyond the board's
powers.

2. PNB v. Bitulok Sawmill, Inc., G.R. No. L-24177–85, June 29, 1968

 Brief relevant facts: The Philippine Lumber Distributing Agency, Inc. was organized in
1947, initiated by President Manuel Roxas, to ensure a steady supply of lumber. Lumber
producers (defendants-appellees) subscribed to its capital stock based on a promise by
President Roxas that the Government would invest P9.00 for every peso subscribed .
This government counterpart was never appropriated or invested . The Philippine
National Bank (PNB) extended an overdraft loan to the agency, which was not paid. PNB,
as a creditor, sued the lumber producers to recover the unpaid balance of their stock
subscriptions .

 Arguments of the parties:

 o Philippine National Bank (Plaintiff-Appellee): Sought to collect the unpaid
subscriptions, arguing that subscriptions constitute a trust fund for creditors and
cannot be released without statutory compliance .

o Bitulok Sawmill, Inc. et al. cite_start: Argued that they should not be compelled
to pay the balance of their subscriptions because the government's promise to
invest a counterpart fund, which induced their subscriptions, was not fulfilled.
They contended that it was "grossly unfair and unjust" to compel payment under
the circumstances.

 Ruling of the lower court: The lower court, influenced by "equity," dismissed the cases,
finding it "grossly unfair and unjust" for PNB to compel payment given the unfulfilled
government commitment .

 Issue related to the subject: Whether subscribers to corporate stock can be released
from their obligation to pay unpaid subscriptions when their subscription was induced
by an unfulfilled promise from the government, particularly when a corporate creditor is
seeking to collect these subscriptions.

 Ratio decidendi: No, subscribers cannot be released from their obligation. "It is
established doctrine that subscriptions to the capital of a corporation constitute a fund
to which creditors have a right to look for satisfaction of their claims...". "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..." . Even if the
President had made such a promise and it was unfulfilled, the President is "devoid of the
prerogative of suspending the operation of any statute or any of its terms". The plain
and specific wording of the law, as interpreted by the Supreme Court, must be
controlling.

viii. Watered Stocks

1. Philippine Trust Corp. v. Rivera, G.R. No. 19761, January 29, 1923

 Brief relevant facts: Marciano Rivera subscribed for 450 shares in La Cooperativa Naval
Filipina, with a par value of P100 each, totaling P45,000 . The company became
insolvent, and Philippine Trust Company was appointed assignee in bankruptcy. This
action was instituted to recover one-half of Rivera's stock subscription, amounting to
P22,500, which remained unpaid. Rivera's reason for non-payment was a stockholders'
resolution adopted after incorporation to reduce the capital by 50% and release
subscribers from unpaid balances beyond 50%. The formalities for reducing capital stock
under Section 17 of the Corporation Law were not observed.

 Arguments of the parties:

o Philippine Trust Company (Plaintiff-Appellee): Argued that Rivera was liable for
the unpaid balance, as the resolution to reduce capital was ineffective due to
non-compliance with statutory formalities.
 o Marciano Rivera (Defendant-Appellant): Contended that the stockholders'
resolution had released him from 50% of his subscription.

 Ruling of the lower court: The trial judge held that the resolution was without effect and
Rivera was still liable for the unpaid balance .

 Issue related to the subject: Whether a stockholders' resolution to reduce capital stock
and release subscribers from unpaid balances is valid and effective against creditors if
the statutory formalities for capital reduction are not observed.

 Ratio decidendi: No, such a resolution is not valid or effective 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." "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 an under the conditions prescribed
by the statute or the charter or the articles of incorporation. Moreover, strict compliance
with the statutory regulations is necessary" . The resolution was an "attempted
withdrawal of so much capital from the fund upon which the company's creditors were
entitled ultimately to rely and, having been effected without compliance with the
statutory requirements, was wholly ineffectual".