Corporation Law: The Revised Corporation Code of the Philippines - Secs 67, 68, 69 and 70

THE REVISED CORPORATION CODE  OF THE PHILIPPINES 

Republic Act No. 11232 

TITLE VII - STOCKS AND STOCKHOLDERS

Section 67. Delinquency Sale. 

The board of directors may, by resolution, order the sale of delinquent stock and shall specifically state the amount due on each subscription plus all accrued interest, and the date, time and place of the sale which shall not be less than thirty (30) days nor more than sixty (60) days from the date the stock become delinquent.

Notice of the sale, with a copy of the resolution, shall be sent to every delinquent stockholder either personally, by registered mail, or through other means provided in the bylaws. The same shall be published once a week for two (2) consecutive weeks in newspaper of general circulation in the province or city where the principal office of the corporation is located.

Unless the delinquent stockholder pays to the corporation, on or before the date specified for the sale of the delinquent stock, the balance due on the former's subscription, plus accrued interest, costs of advertisement and expenses of sale, or unless the board of directors otherwise orders, said delinquent stock shall be sold at a public auction to such bidder who shall offer to pay the full amount of the balance on the subscription together with accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares or fraction of a share. The stock so purchased shall be transferred to such purchaser in the books of the corporation and a certificate for such stock shall be issued in the purchaser's favor. The remaining shares, if any, shall be credited in favor of the delinquent stockholder who shall likewise be entitled to the issuance of a certificate of stock covering such shares.

Should there be no bidder at the public auction who offers to pay the full amount of the balance on the subscription together with accrued interest, costs of advertisement, and expenses of sale, for the smallest number of shares or fraction of a share, the corporation may, subject to the provisions of this Code, bid for the same, and the total amount due shall be credited as fully paid in the books of the corporation. Title to all the shares of stock covered by the subscription shall be vested in the corporation as treasury shares and may be disposed of by said corporation in accordance with the provisions of this Code.


Section 68. When Sale May be Questioned. 

No action to recover delinquent stock sold can be sustained upon the ground of irregularity or defect in the notice of sale, or in the sale itself of the delinquent stock, unless the party seeking to maintain such action first pays or tenders to the party holding the sum for which the same was sold with interest from the date of sale at the legal rate. No such action shall be maintained unless a complaint is filed within six (6) months from the date of sale.


Section 69. Court Action to Recover Unpaid Subscription.

Nothing in this Code shall prevent the corporation from collecting through court action, the amount due on any unpaid subscription, with accrued interest, costs and expenses.


Own Notes:

Sec. 67. Delinquency Sale.

Resolution of Sale

  • The board of directors may, by resolution, order the sale of delinquent stock.
  • The resolution shall specifically state the:
    1. Amount due on each subscription plus all accrued interest,
    2. Date of the sale, which shall:
      • not be less than thirty (30) days 
      • nor more than sixty (60) days from the date the stock become delinquent
    3. Time of the sale 
    4. Place of the sale 
Notice of Sale

  • Every delinquent stockholder shall be sent:
    1. Notice of the sale
    2. Copy of the resolution,
  • Mode:
    • personally
    • by registered mail, or 
    • through other means provided in the bylaws. 
  • The same shall be published once a week for two (2) consecutive weeks in newspaper of general circulation in the province or city where the principal office of the corporation is located.

Sale, Recovery and Transfer

  • The delinquent stock shall be sold at a public auction to such bidder who shall:
    1. offer to pay:
      1. the full amount of the balance on the subscription 
      2. accrued interest
      3. costs of advertisement 
      4. expenses of sale
    2. for the smallest number of shares or fraction of a share. 
  • Unless:
    • the delinquent stockholder pays to the corporation, on or before the date specified for the sale of the delinquent stock;
      1. the balance due on the former's subscription,
      2. accrued interest
      3. costs of advertisement
      4. expenses of sale, or 
    • the board of directors otherwise orders.
  • The stock so purchased:
    1. shall be transferred to such purchaser in the books of the corporation and
    2. certificate for such stock shall be issued in the purchaser's favor. 
  • The remaining shares shall be credited in favor of the delinquent stockholder who shall likewise be entitled to the issuance of a certificate of stock covering such shares.
No bidders? Corporation buys the shares as Treasury Shares

  • Should there be no bidder at the public auction who:
    1. offers to pay:
      1. the full amount of the balance on the subscription
      2. accrued interest
      3. costs of advertisement
      4. expenses of sale
    2. for the smallest number of shares or fraction of a share
  • The corporation may, subject to the provisions of this Code:
    • bid for the same
    • the total amount due shall be credited as fully paid in the books of the corporation. 
  • Title to all the shares of stock covered by the subscription shall be vested in the corporation as treasury shares and may be disposed of by said corporation in accordance with the provisions of this Code.

Sec. 68. When Sale May be Questioned. 

  • No action to recover delinquent stock sold can be sustained upon the:
    • ground of irregularity or 
    • defect in the:
      • notice of sale, or 
      • in the sale itself of the delinquent stock
  • Unless the party seeking to maintain such action:
    • first pays or tenders to the party holding the sum for which the same was sold
    • with interest from the date of sale at the legal rate. 
  • No such action shall be maintained unless a complaint is filed within six (6) months from the date of sale.


Sec. 69. Court Action to Recover Unpaid Subscription.

  • Nothing in this Code shall prevent the corporation from collecting through court action:
    • the amount due on any unpaid subscription
    • with accrued interest
    • costs and 
    • expenses

Additional Notes:

  • In Art. 67, "for the smallest number of shares or fraction of a share" means that, among all the bids that offer to pay the full amount owed for the delinquent shares, the corporation must choose the one that requires transferring the fewest number of shares to fulfill the debt.
    • Example: 
      • Let's say a shareholder owes money for 100 shares of stock. At the delinquency sale:
        • Bidder A offers to pay the full amount for 75 shares.
        • Bidder B offers to pay the full amount for 50 shares.
      • Bidder B wins the auction. 
      • They pay the full amount owed, but they only receive 50 shares, leaving the remaining 50 shares with the delinquent shareholder. 
      • If no bidder offered to buy as few shares as Bidder C, the corporation itself could have stepped in and bought the entire 100 shares as treasury shares.
  • This rule encourages fair and efficient resolution of delinquent stock. It helps ensure that the delinquent shareholder retains as much ownership as possible while still satisfying the debt they owe. It also prevents bidders from artificially inflating the sale price by offering to buy more shares than necessary.
  • Sec. 68 states that action to recover against the delinquency sale can only be made if the person challenging pays back the sale price with interest.
    • Grounds:
      1. ground of irregularity or 
      2. defect in the:
        • notice of sale, or 
        • in the sale itself of the delinquent stock
    • Prescription: Within six (6) months from the date of sale.
  • Sec. 69 clarifies that even though there is a a delinquency sale process, the corporation can still sue the shareholder in court to collect the unpaid amount.


1. Available Remedies

  1. The first and most special remedy given by the statute if a shareholder is in default in paying the subscription consists of permitting the corporation to put up the unpaid shares for sale and dispose of it in a delinquency sale for the account of the delinquent subscriber
  2. The second remedy is a court action as recognized under Section 69. 
  • It is generally accepted doctrine that the statutory right to sell the subscriber's stock is merely a remedy in addition to that which proceeds by action in court and it has been held that the ordinary legal remedy exists even though no express mention thereof is made in the statute.
  • The offsetting of the debt of a stockholder against his shareholdings is not permissible. 
    • While the corporation may be a creditor to the stockholder, a stockholder's indebtedness to a corporation cannot be compensated with the amount of his shares in the same institution, there being no relation of creditor and debtor with regard to such shares.

2. Delinquency Sale.
  • Section 67 prescribes a mandatory procedure for the delinquency sale
  • The steps that must be strictly complied with in a delinquency sale may be outlined in this wise: 
  1. Resolution.
    • The Board of Directors shall issue a resolution ordering the sale of delinquent stock; 
  2. Notice.
    • Notice of said sale, with a copy of the resolution, shall be sent to every delinquent stockholder either personally or by registered mail or through other means provided in the By-Laws;
  3. Publication.
    • The notice shall furthermore be published once a week for two consecutive weeks in a newspaper of general circulation in the province or city where the principal office of the corporation is located;
  4. Sale.
    • The delinquent stock shall be sold at public auction to be held not less than 30 days nor more than 60 days from the date the stocks become delinquent;
  5. Transfer.
    • The stock so purchased shall be transferred to the purchaser in the books of the corporation and a certificate for such stock shall be issued in his favor; and
  6. Credit of Remainder. 
    • The remaining shares, if any, shall be credited in favor of the delinquent stockholder who shall likewise be entitled to the issuance of a certificate of stock covering the same. 
2.01. Contents of Resolution.
  • It is required that the Board resolution shall state the following:
  1. the amount due on each subscription
  2. all accrued interest, and
  3. the date, time, and place of the sale. 
  • The delinquent shareholder is entitled to a copy of this resolution.
2.02. Winning Bidder.
  • The winning bidder is such bidder who shall: 
  1. offer to pay the full amount of the balance on the subscription together with accrued interest, costs of advertisement, and expenses of sale, 
  2. for the smallest number of shares or fraction of a share. 
  • The winning bidder would then be entitled to the issuance of stock certificates corresponding to the shares that is covered by his or her bid. 
2.03. Cancellation of Sale. 
  • The delinquent shareholder may actually stop the delinquent sale if he pays to the corporation, on or before the date specified for the sale of the delinquent stock, the balance due on his subscription, plus accrued interest, costs of advertisement, and expenses of sale. 
  • Payment made by the delinquent shareholder automatically stops the sale. 
  • However, the sale may also be stayed upon the order of the Board of Directors. 
3. Action to Recover. 
  • After the delinquency sale, the delinquent shareholder may file an action to recover the delinquent stocks that were sold if the following requirements are complied with: 
  1. The action is filed on the ground of irregularity or defect in the notice of sale, or in the sale itself of the delinquent stock; 
  2. The party seeking to maintain such action first pays or tenders to the party holding the stock the sum for which the same was sold, with interest from the date of sale at the legal rate; and 
  3.  The complaint is filed within six months from the date of sale.


Section 70. Effect of Delinquency.

No delinquent stock shall be voted for, be entitled to vote, or be represented at any stockholder's meeting, nor shall the holder thereof be entitled to any of the rights of a stockholder except the right to dividends in accordance with the provisions of this Code, until and unless payment is made by the holder of such delinquent stock for the amount due on the distribution with accrued interest, and the costs and expenses of advertisement, if any.

Own Notes:
Effect of Delinquency. 
  • No delinquent stock shall:
    • be voted for,
    • be entitled to vote, or 
    • be represented at any stockholder's meeting, 
    • nor shall the holder thereof be entitled to any of the rights of a stockholder 
      • except the right to dividends in accordance with the provisions of this Code
  • Until and unless payment is made by the holder of such delinquent stock for the:
    • amount due on the distribution 
    • with accrued interest, and 
    • the costs and expenses of advertisement, if any.
1. Unavailable Rights of Delinquents.
  • The delinquent stockholder is not entitled to any right of a stockholder. 
    • Thus, Section 70 provides that he cannot vote and he is not entitled to representation during meetings. 
    • The delinquent shareholder cannot be elected as a director and he cannot continue serving as such. 
    • It is only upon full payment that the stockholder will be restored to his full rights.
  • The only exception is the right to dividends.
    • A delinquent shareholder is still entitled to dividends. 
    • However, if cash dividends are declared, the dividends shall be applied to the subscription price that is due to the corporation. 
    • On the other hand, as to stock dividends, the same shall be withheld from the delinquent shareholder until his unpaid subscription is fully paid.
2. Not Included in Quorum. 
  • Delinquent stockholders shall not be included in determining the existence of the required quorum. 
  • With respect to election of directors, it is clear from Section 23 that the required quorum is the majority of those entitled to vote. 
  • Thus, stockholders who are not entitled to vote because of delinquency should not be included in the determination of the quorum.
3. Assignment of Rights Not Allowed. 
  • Delinquent stockholders (and delinquent members) are not entitled to vote.
  • Hence, voting rights cannot be delegated. 
  • Assignment of voting rights is therefore not permitted.

Problem:
Q: The Board of Directors of a corporation, by a vote of ten in favor and one against, declared due and payable all unpaid subscription to the capital stock. The lone dissenting director failed to pay on due date, i.e., 19 September 1997, his unpaid subscription. Other than the shares wherein he was unable to complete payment, he did not own any share in the corporation. On September 23, 1997, he was informed by the Board of Directors that, unless due payment is meanwhile received, he could no longer serve as a director of the corporation forthwith; would not be entitled to the cash and stock dividends which were declared and payable on September 24, 1997; and could not vote in the stockholders' meeting scheduled to take place on September 26, 1997. Was the action of the Board of Directors on each of the foregoing matters valid? 

A: No. The period of 30 days (reckoned from the date fixed by the Board or specified in the subscription agreement for payment of the unpaid subscription - 19 September 1997 in this case) within which the stockholder can pay the unpaid subscription had not yet expired. With respect to dividends, the delinquent shareholder is not deprived under the law of his right to receive dividends declared. However, the cash dividend declared may be applied by the corporation to the unpaid subscription. (1997 Bar)

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