G.R. No. 71837 - Bio vs. Intermediate Appellate Court

Case Summary (G.R. No. 71837)

Relevant Dates and Corporate Acts

Original PBM incorporated January 19, 1952, with charter expiring January 19, 1977.
Deed of assignment of all receivables, properties, obligations and liabilities executed May 14, 1977, by the old PBM board in favor of Chung Siong Pek as treasurer of the purported new PBM.
New PBM issued a certificate of incorporation June 14, 1977.
Petition for liquidation of both old and new PBM filed by petitioners with SEC on May 5, 1981.
New PBM adopted and filed by‑laws on September 6, 1981 (correction of alleged defect).
Related petitions, appeals and consolidation of three cases proceeded to the Intermediate Appellate Court, which issued a decision on February 28, 1985; the appealed Supreme Court decision was rendered by Justice Cruz.

Procedural Posture

Petitioners sought liquidation (not dissolution) of both corporations on the ground that the old PBM had become legally nonexistent when its charter expired and that the new PBM was ipso facto dissolved for non-use (failure to adopt by‑laws/commence business within two years). The SEC initially dismissed but the SEC en banc reinstated and remanded for further proceedings. The intermediate appellate court consolidated related petitions (including a certiorari by director Alfredo Ching challenging SEC actions and a petition for suspension of payments filed by new PBM and Ching) and issued a decision affirming most SEC orders while setting aside an order requiring accounting of assets of the old PBM. The petitioners sought certiorari review before the Supreme Court.

Petitioners’ Principal Contentions

The dissolved corporation’s board lacked authority, without stockholder consent, to convey all assets to a new corporation; stockholders had not consented or transferred their shares.
The new PBM did not substantially comply with the two‑year non‑user requirement (Section 22 of the then Corporation Law) because its stockholders never adopted by‑laws, rendering the new PBM ipso facto dissolved.
A quo warranto proceeding is required to dissolve a corporation that is deemed dissolved under Section 22.
The SEC lacked jurisdiction to entertain a petition for suspension of payments filed by an individual (Alfredo Ching) rather than by a corporation, partnership, or association.

Relevant Statutory Provisions and Administrative Authority

The court relied on pre‑Code Corporation Law provisions then in force and referenced their counterparts in the new Corporation Code: Section 77 (continuance for winding up after charter expiration), Section 28‑12 (authorization for sale or disposition of all or substantially all corporate assets, conditioned on shareholder approval by two‑thirds vote and notice, with a forty‑day right to object and demand payment), and the provisions of Section 19 and Section 20 (by‑laws adoption) as subsequently embodied in the Corporation Code and interpreted in light of PD 902‑A and PD 1758 governing SEC powers to suspend or revoke registrations for noncompliance with by‑laws filing. SEC rules and Memorandum Circular No. 11 (SMD Series of 1987) regarding fines and administrative handling of late by‑laws filing were also noted in the court’s analysis.

Court’s Analysis — Authorization, Presumption of Regularity, and the Deed of Assignment

The Court recognized that a board of a dissolved corporation ordinarily may only wind up affairs and not continue the business, but it is not prohibited for stockholders to transfer their shareholdings to form a new corporation. Section 28‑12 expressly permits disposition of all or substantially all assets when authorized by a two‑thirds shareholder vote at a properly called meeting. Because petitioners alleged the negative (that no stockholders’ meeting was held and no two‑thirds vote obtained), affirmative proof was not strictly necessary; however, the Court applied the presumption of regularity in favor of the private respondents. The deed of assignment contained a unanimous resolution dated March 19, 1977, and the issuance of a certificate of incorporation to the new PBM was likewise entitled to a presumption of regularity. Moreover, the forty‑day statutory right to object and demand payment under Section 28‑12 was not exercised by the petitioners, which reinforced the conclusion that appropriate authorization had been obtained or that petitioners waived their objection.

Court’s Analysis — Laches, Delay, and Prejudice

The Court found laches to bar the petitioners’ belated challenge: petitioners waited nearly four years (May 14, 1977 to May 5, 1981) after the deed of assignment and the public operations of the new PBM before seeking relief. The Court applied the traditional four‑part test for laches (defendant conduct giving rise to complaint; delay after knowledge and opportunity to sue; lack of notice to defendant of plaintiff’s intention to assert the right; and prejudice to defendant). All elements were present: the deed of assignment and acceptance by the new PBM created the operative conduct; petitioners had knowledge and opportunity yet delayed; the new PBM and its officers had no indication petitioners would sue (one of the petitioners, Chung Siong Pek, had acted in the transaction); and prejudice to third parties and the new PBM would result if transactions and credits made in good faith were undone. The Court emphasized public policy discouraging stale claims and characterized the petitioners’ inaction as negligence warranting denial of equitable relief.

Court’s Analysis — Non‑User, By‑laws, and Corporate Existence

The Court rejected the petitioners’ contention that the new PBM was ipso facto dissolved for non‑user or for failure to adopt by‑laws within statutory time. It distinguished conditions precedent to incorporation from conditions subsequent required for organization and commencement of business. The failure to adopt or file by‑laws was characterized as a ground for administrative sanction (suspension or revocation after hearing) under PD 902‑A and related SEC rules, not an automatic dissolu

Case Syllabus (G.R. No. 71837)

Facts of the Case

The Philippine Blooming Mills Company, Inc. ("old PBM") was incorporated on January 19, 1952 for a 25-year term that expired on January 19, 1977.
On May 14, 1977, members of the old PBM board of directors executed a deed of assignment transferring all accounts receivable, properties, obligations and liabilities of the old PBM to Chung Siong Pek acting as treasurer of a new Philippine Blooming Mills Company, Inc. then in the process of reincorporation.
The new PBM was issued a certificate of incorporation by the Securities and Exchange Commission (SEC) on June 14, 1977.
On May 5, 1981, petitioners (Chung Ka Bio, Wellington Chung, Chung Siong Pek, Victoriano Chung, and Manuel Chung Tong Oh), stockholders of the old PBM, filed with the SEC a petition for liquidation (not for dissolution) of both the old PBM and the new PBM, alleging that the old PBM was legally non-existent for failure to extend its corporate life and that the new PBM was ipso facto dissolved for non-use of the charter and continuous failure to operate within two years from incorporation.
The SEC initially dismissed the petition (AC No. 055) for lack of a cause of action; on appeal the SEC en banc reinstated the case and remanded it to a new panel for further proceedings, including proper accounting of the old PBM’s assets and liabilities.
The SEC en banc order and remand were appealed to the Intermediate Appellate Court (IAC) in a petition for partial review docketed AC GR SP No. 00843, questioning SEC authority to adjudicate matters not raised on appeal or resolved by the appealed order.
Alfredo Ching, a former director of the old PBM and signatory to the deed of assignment, filed a separate petition for certiorari with the IAC (AC GR No. 01099) challenging the same SEC order and decision in AC No. 055, alleging that the SEC should have dismissed the petition for liquidation because the action amounted to quo warranto, which only the state could institute through the Solicitor General.
On April 1, 1982 the new PBM and Alfredo Ching filed with the SEC a petition for suspension of payment (SEC Case No. 2250); this petition was opposed by Chung Ka Bio and others on the ground that the SEC lacked jurisdiction over a petition for suspension of payments filed by an individual. The opposition was rejected and the case set for hearing.
Chung Ka Bio filed a certiorari with the SEC en banc, docketed SEC EB No. 018, seeking annulment of the proceedings and injunctive relief; on May 10, 1983 the SEC en banc remanded that case to the hearing officers.
The matter was referred by the Supreme Court to the IAC where the three related cases—PBM Co., Inc. v. SEC (AC GR SP 00843); Chung Ka Bio, et al. v. SEC (AC GR SP No. 01007); and Alfredo Ching, et al. v. SEC (AC GR SP No. 01099)—were consolidated. The IAC issued the decision being reviewed on February 28, 1985.
The IAC decision affirmed the SEC orders in the consolidated cases except that it set aside the requirement for the accounting of the assets of the old PBM.

Procedural History

Old PBM incorporated January 19, 1952; corporate term expired January 19, 1977.
Deed of assignment executed May 14, 1977; new PBM certificate issued June 14, 1977.
Petition for liquidation filed May 5, 1981 (AC No. 055) — dismissed by SEC hearing officer, reinstated by SEC en banc and remanded.
Appeal from SEC en banc order to IAC: AC GR SP No. 00843.
Separate certiorari by Alfredo Ching to IAC: AC GR No. 01099.
Petition for suspension of payment filed April 1, 1982 by new PBM and Alfredo Ching (SEC Case No. 2250); opposition by petitioners rejected; SEC en banc remanded on May 10, 1983 (SEC EB No. 018).
Case referred to IAC as GR SP No. 01007; consolidation of three cases before the IAC.
IAC decision dated February 28, 1985 — affirmed SEC orders except accounting requirement.
Petitioners elevated the matter to the Supreme Court via certiorari, resulting in the present decision (G.R. No. 71837, July 26, 1988).

Issues Presented by the Petitioners

Whether the board of directors of an already dissolved corporation had the inherent power, without express consent of the stockholders, to convey all its assets to a new corporation.
Whether the new corporation is accountable to stockholders of the dissolved corporation who did not consent to the conveyance of assets.
Whether the new corporation substantially complied with the two-year non-user requirement of Section 22 of the new Corporation Code given that its stockholders never adopted a set of by-laws within the required time.
Whether a quo warranto proceeding is necessary to dissolve a corporation already deemed dissolved under Section 22 of the new Corporation Code.
Whether the Securities and Exchange Commission had jurisdiction over a petition for suspension of payments filed by an individual (Alfredo Ching) together with the new PBM.

Relevant Statutory and Regulatory Provisions Quoted or Discussed

Corporation Law, SEC. 77:
- Corporations whose charters expire remain as bodies corporate for three years after dissolution for the purpose of prosecuting and defending suits, winding up affairs, disposing of property, and dividing capital stock, but not for continuing the original business.
Corporation Law, SEC. 28-12:
- Board may sell, lease, exchange or otherwise dispose of all or substantially all property upon authorization by affirmative vote of shareholders holding at least two-thirds of voting power at a shareholders’ meeting called for that purpose; notice requirements; right of a dissenting stockholder to object and demand payment within forty days; appraisal mechanism; consequences of demand; limitation tied to corporate solvency after payment; clarification that board may dispose of property without shareholder authorization if corporate business is not substantially limited.
- These provisions correspond to Sections 122 and 40, respectively, of the Corporation Code (with modifications).
Corporation Law, Section 19 and Section 20:
- Section 19 (now Section 22 of the Corporation Code in part): corporate powers cease if it does not organize and commence business within two years of incorporation.
- Section 20 (now Section 46 of the Corporation Code in part): requirement to adopt by-laws within one month after filing articles of incorporation.
Presidential Decree No. 902-A (PD 902-A), Section 6(i):
- SEC empowered to suspend or revoke, after notice and hearing, a corporation’s franchise or certificate of registration for failure to file by-laws within required period, among other grounds.
PD 902-A as amended by PD 1758, Section 5(d):
- Jurisdiction to hear petitions to be declared in a state of suspension of payments is limited to petitions of corporations, partnerships or associations in specified circumstances; does not include mere individuals.
Memorandum Circular No. 11, SMD Series of 1987 (guidelines implementing Section 46 of the Corporation Code):
- Penalties for failure to file by-laws within one month; fines stipulated for stock and non-stock corporations; requirement to file General Information Sheet for active corporations without by-laws; scale of fines for late filing.

Court’s Analysis: Corporate Transfer of Assets and Authority of Board

The petitioners asserted they never consented to the creation of the new PBM or the transfer of their shares in the old PBM to the new PBM, and that the old board’s authority upon dissolution was limited to winding up and not to continuing the busines