Corporation Law: The Revised Corporation Code of the Philippines - Sec 21

 THE REVISED CORPORATION CODE  OF THE PHILIPPINES  

Republic Act No. 11232 

TITLE II -  INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS


Sec. 21. Effects of Non-Use of Corporate Charter and Continous Inoperation. -
If a corporation does not formally organize and commence its business within five (5) year from the date of its incorporation, its certificate of incorporation shall be deemed revoked as of the day following the end of the five (5)-year period.

However, if a corporation has commence its business but subsequently becomes inoperative for a period of at least five (5) consecutive years, the Commission may, after due notice and hearing, place the corporation under delinquent status.

A delinquent corporation shall have a period of two (2) years to resume operations and comply with all requirements that the Commission shall prescribed. Upon the compliance by the corporation, the Commission shall issue an order lifting the delinquent status. Failure to comply with the requirements and resume operations within the period given by the Commission shall cause the revocation of the corporation's certificate of incorporation.

The Commission shall give reasonable notice to, and coordinate with the appropriate regulatory agency prior to the suspension or revocation of the certificate of incorporation of companies under their special regulatory jurisdiction.

NOTES 

1. Conditions Subsequent. 

  • Section 22 of the Corporation Code, now Section 21 of the RCCP, involves conditions subsequent to incorporation. It involves these three violations of conditions subsequent:
  1. Failure to organize within five years from incorporation;
  2. Failure to commence business within five years from incorporation; and
  3. Becoming continuously inoperative for a period of at least five consecutive years.

2. Period to Organize. 

  • Five-year period to commence business or to organize
    • counted from the date of incorporation
  • Five-year period in case of continuous inoperation
    • may commence thereafter or on a date after the date of incorporation. 
  • Thus, even if the corporation has been operating for 10 years, there is a ground to revoke the franchise if it ceased to operate continuously thereafter for at least five years. 
  • The Supreme Court stressed in one case that substantial compliance with conditions subsequent would suffice to perfect corporate personality. 
  • Organization and commencement of transaction of corporate business are but conditions subsequent and not prerequisites for acquisition of corporate personality. 

3. Effect of Failure to Organize and Commence Business. 

  • The provision of the Corporation Code previously stated that "its [the corporation's] corporate powers [shall] cease and the corporation shall be deemed dissolved" if it fails to organize and commence the transaction of its business within two years from incorporation. 
  • Under the RCCP, the effect of failure to organize and commence business is that "its [the corporation's] certificate of incorporation shall be deemed revoked as of the day following the end of the five (5)-year period." 
  • The language indicates an intent to make the effect of failure to organize and to commence business automatic.
  • Under the Corporation Code, although the wording of the law indicates that the corporation is automatically dissolved, it was also explained that if the corporation failed to organize within two years but exercises corporate powers after such period the corporation is deemed to be exercising its powers illegally.
    • It was observed however that it is the SEC that will determine whether the corporation is already exercising the powers illegally.
    • In effect the dissolution is not automatic. 
    • The SEC also had occasion to opine that the effect of failure to organize and commence business is not automatic. 
    • Citing Section 6(1) of Presidential Decree No. 902-A, the SEC opined that proper proceedings for revocation of the Articles of Incorporation must be initiated. 
  • Under Section 21 of the RCCP however, the effect of failure to organize and commence business appears to be automatic because in case of such non-compliance with the conditions subsequent, the corporation's "certificate of incorporation shall be deemed revoked as of the day following the end of the five (5)-year period." 
  • Nevertheless, it is still necessary for the SEC to determine in an appropriate proceeding if the life of the non-compliant corporation

4. Delinquency for Non-Operation. 

  • Under Section 21 the SEC may place a corporation under delinquent status if it fails to operate for at least five consecutive years.
  • There must be a positive action on the part of the government.
  • Justification for non-operation may be invoked and established by the corporation.

Resumption of Operations.

  • A delinquent corporation shall have a period of two (2) years to resume operations and comply with all requirements that the SEC shall prescribe. 
  • Upon compliance by the corporation, the SEC shall issue an order lifting the delinquent status. 
  • Failure to comply with the requirements and reume operations within the period given by the SEC shall cause the revocation of the corporation's certificate of incorporation.
Failure to Submit Reports
  • A corporation may also be placed under delinquent status if it fails to comply with the reportorial requirements three (3) times, consecutively or intermittently within a period of five (5) years. 

5. Meaning of Organization.
  • Organize or organization as used in reference to corporations has a well-understood meaning, which is the:
    • election of officers
    • providing for the subscription and payment of the capital stock
    • the adoption of by-laws, and 
    • such other similar steps. 
  • It relates to the systematization and orderly arrangement of the internal and managerial affairs and organs of the corporation.
  • Organization means simply the process of forming and arranging into suitable disposition the parties who are to act together in, and defining the objects of, the compound body.
  • Thus, organization under SEC rules include: 
    1. adoption, filing by the corporation and approval by the SEC of the corporate By-laws after incorporation; 
    2. election of Directors or Trustees and of officers; 
    3. establishment of the principal office; and 
    4. providing for the subscription and payment of the capital stock; 
    5. taking such steps as are necessary to endow the legal entity with capacity to transact the legitimate business for which it was created
6. Meaning of Commencement of Business. 
  • On the other hand, the corporation "shall be considered to have commenced the transaction of its business when it has performed preparatory acts geared toward the fulfillment of the purposes for which it was established such as but not limited to the following"
    1. entering into contracts or negotiation for lease or purchase of properties to be used as business or factory site;
    2. making plans for and the construction of the factory; 
    3. taking steps to expedite the construction of the company's working equipment. 
Problem:

Q: In the Articles of Incorporation of 3D Corporation, eleven members were named to constitute the board of directors. These eleven elected from among themselves a secretary-treasurer but did not elect a president. The board used to hold meetings to transact business, which was done through the secretary-treasurer. In a proceeding to forfeit its charter, the question was posed as to whether the corporation may be considered to have formally organized. Resolve the question.

A: Yes, the corporation is considered to have formally organized. Organize or organization as used in reference to corporations has a well-understood meaning, which is the election of officers, providing for the subscription and payment of the capital stock, the adoption of by-laws, and such other similar steps. In the present case, the corporation had a governing board, which directed its affairs, as well as a secretary-treasurer. The corporation actually functioned and engaged in the business for which it has been organized. By those acts, the corporation is deemed to have formally organized. Consequently, the charter of the corporation cannot be forfeited on the ground alone of its failure to elect a president. (1979 Bar)

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