Corporation Law: The Revised Corporation Code of the Philippines - Secs 59 & 60

 THE REVISED CORPORATION CODE  OF THE PHILIPPINES 

Republic Act No. 11232 

TITLE VII - STOCKS AND STOCKHOLDERS

Section 59. Subscription Contract.

Any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed shall be deemed a subscription within the meaning of this Title, notwithstanding the fact that the parties refer to it as a purchase or some other contract. 

1. Acquisition of Share.

• A person may become a stockholder in a corporation by voluntarily acquiring a share. 
• Voluntary onerous acquisition of shares can be:
• by purchase or
• through subscription.
• Purchase may be from the:
• corporation itself or
• other shareholders.

Differences between the two modes of becoming a shareholder: 

1. Time entered into
• Subscription can be made before or after incorporation
• Purchase is made only after incorporation; 
2. If no agreement as to the time of payment
• Subscriber in a subscription agreement need not pay unless there is a call
• Sale is reciprocal and the purchaser under a deed of absolute assignment or sale must fully pay the purchase price at the time the shares are transferred;
3. Obligation to Pay
• Subscriber cannot be released from his obligation to pay the subscription price
• Stockholder who sells his shares can condone the obligation of the purchaser to pay; 
4. The Statute of Frauds 
• It does not apply to subscription contracts 
• It applies to purchase if the price is not less than P500.00. 

• As a rule, only persons whose ownership are registered in the stock and transfer book are considered stockholders of record. 
• The rights of a shareholder accrue only upon entry of his name in the books of the corporation. 
• If a person wants to be recognized as stockholder, he must secure his standing by having his ownership of shares recorded in the corporate books.
• Consequently, a person cannot be recognized as a stockholder by mere presentation of dividend coupons if his ownership is not recorded.
• Mere inclusion in the General Information Sheet (GIS) submitted to the SEC is insufficient. 
• The information in the GIS should be correlated with the corporate records.
• As between the GIS and the corporate records, the latter should prevail.
• With respect to original subscribers, they become shareholders from the time of the issuance of the Certificate of Incorporation by the SEC. 
• Even if the Corporate Secretary failed to reflect such fact in the Stock and Transfer Book, the original subscribers whose names appear in the Articles of Incorporation are already stockholders who are entitled to all the rights as such.
• One can likewise become the owner of shares through the other modes of acquiring ownership under the New Civil Code particularly:
• succession and 
• donation.
• Transfer can also be gratuitous like in the case of transfer by donation. 
• In assignment of shares, the transfer of ownership is through tradition or delivery. 
•  The applicable provisions on assignment are the provisions on assignment of incorporeal right (governed by the law on sales) under the New Civil Code.
• Tradition or delivery is also the mode of acquiring ownership of shares in subscription of shares. 
• However, as will be discussed hereunder, different rules are provided for under the RCCP on subscription contracts, which is the primary law on the matter.

2. Subscription Contract. 

• A subscription contract is defined as a contract by which the subscriber agrees to take a certain number of shares of the capital stock of a corporation, paying the consideration therefor or expressly or impliedly promising to pay for the same. 
• A subscription contract is also defined as any contract for the acquisition of unissued stocks in an existing corporation or a corporation still to be formed.

2.01. Perfection of Subscription Contract.

• A subscription contract is formed by an offer by one of the parties, the corporation or the subscriber, as the case may be, and an acceptance of this offer by the other. 
• There is a binding contract of subscription as soon as the offer to take shares made by a person to a corporation is accepted by the corporation, or as soon as the person to whom the offer is made accepts an offer of shares by a corporation.

PROBLEM: 

Q: Q College, Inc. offered 200 shares to Ms. DC for a subscription price of P20,000.00. The offer is stated in a subscription letter form that states that initial payment should be made and the subsequent payment should be in accordance with the terms and conditions of the college. Later, Ms. DC, instead of sending the subscription form, sent a letter to the Board of Trustees of Q College which states: "Please enter my subscription to dalawang daan (200) shares of your capital stock with a par value of P100 each. Enclosed you will find (Babayaran kong lahat pagkatapos na ako ay makapag-pahuli ng isda) pesos as my initial payment and the balance payable in accordance with law and the rules and regulations of the Quezon College. I hereby agree to shoulder the expenses connected with.said shares of stock. I further submit myself to all lawful demands, decisions or directives of the Board of Q College and all its duly constituted officers or authorities (ang nasa itaas ay binasa at ipinaliwanag sa akin sa wikang tagalog na aking nalalaman)." No reply was sent by Q College to Ms. DC. Ms, DC died without having paid any portion of the subscription price. Thereafter, Q College presented a claim in Ms. DC's testate proceeding, for the collection of the sum of P20,000, representing the value of the subscription to the capital stock. Will the claim prosper? 

 A: No, the claim will not prosper. There was no perfected subscription contract. Q College did not accept the term of payment suggested by Ms. DC during her lifetime. As Ms. DC's letter is at variance with the terms evidenced in the form, there was no absolute necessity on the part of the college to express its agreement to DC's offer in order to bind the latter. Conversely, said acceptance was essential, because it would be unfair to immediately obligate the Q College under DC's promise to pay the price of the subscription after she had caused fish to be caught. 

In other words, the relation between DC and Q College had only thus reached the preliminary stage. There was no binding contract in the absence as in the present case of acceptance by the Q College of the counter offer of DC. Indeed, the need for express acceptance on the part of the Q College becomes the more imperative, in view of the fact that the proposal of DC was to pay the value of the subscription after she has harvested fish. There was a condition that was dependent upon DC's sole will and, therefore, potestative in nature, rendering the obligation void under the New Civil Code

2.02. Mode of Acquiring Ownership in Subscription.

• No formality is necessary for the perfection, validity or enforceability of the subscription contract. 
• The subscriber becomes a shareholder when the contract takes effect (or when the corporation's life commences in pre-incorporation subscription agreements). 
• The title in subscription is the subscription contract and the mode is tradition or delivery. 
• Title and mode that are required to transfer ownership are fused into one act of perfecting the contract.
• Tradition or delivery of the right as shareholder in effect occurs when the contract takes effect thereby also making the contract effective and enforceable. 
• It is submitted that the rule under the RCCP and the New Civil Code can be harmonized by considering delivery in subscription contract as one that falls under the concept of "quasi-tradition," which is delivery of an incorporeal right through "the use of the vendee of his rights."
• The subscriber's right, as "vendee" is exercised or "used" the moment the contract takes effect because the right of the subscriber as shareholder accrues or is assumed the moment the subscription contract takes effect or the moment the Certificate of Incorporation is issued.
•  It is also for this reason that the subscription contract cannot be deemed covered by the Statute of Frauds because the contract is always partially executed with the acquisition of ownership. 

3. Stock Options and Warrant. 

• There are hybrid securities that should be distinguished from subscription contracts.
• These include stock options and warrants.

• A stock option is a privilege granted to a party to subscribe to a certain portion of the unissued capital stock of a corporation within a specified period and under the terms and conditions of the grant, exercisable by the grantee at any time within the period granted.

• A warrant is a type of security which entitles the holder to the right to subscribe to the unissued capital stock of a corporation or to purchase issued shares in the future, evidenced by a warrant certificate, whether detachable or not, which may be sold or offered for sale to the public but does not apply to a right granted under an option plan duly approved by the SEC for the benefit of the employees, officers and/or directors of the issuing corporation.
• The period to subscribe is not less than one year but not more than five years. 
• 1 years to 5 years

• The different types of warrants and other related terms are defined in the regulations issued by the SEC: 

1. Subscription warrants
• it entitles the holder to the right to subscribe to a pre-determined number of shares out of the unissued capital stock of the issuer; 
2. Covered warrant
• it entitles the holder to the right to purchase from the Issuer a pre-determined number of shares that are already issued; 
3. Warrant Certificate
• means the certificate representing the right to a Warrant, which may be detachable or not, duly issued by the Issuer to the Warrant holder;
4. Warrant Instrument
• means the written document or deed containing the terms and conditions of the issue and exercise of a Warrant, which terms and conditions shall include: 
1. the maximum underlying shares that can be purchased upon exercise;
2. the exercise period;
3. such other terms and conditions as the SEC may require;
5. Detachable Warrant
• means a Warrant that may be sold, transferred or assigned to any person by the Warrant holder separate from, and independent of, the corresponding Beneficiary Securities;
6. Non-detachable Warrant
• means a Warrant that may not be sold, transferred or assigned to any person by the Warrant holder separate from, and independent of, the Beneficiary Securities;
7. Beneficiary Securities
• means the shares of stock and other securities of the Issuer which form the basis of the entitlement in a Warrant;
8. Underlying Shares
• means the unissued shares of a corporation that may be purchased by the Warrant holder upon the exercise of the right granted under the Warrant

4. Parties. 

• The parties in a subscription contract are:
• the subscriber and 
• the corporation itself. 
• A subscription contract necessarily involves the corporation as one of the contracting parties because the corporation owns the subject matter of the transaction - its shares of stock. 
• It is not a mere contract between the subscribers even if the other subscribers entered into an agreement prior to incorporation. 
• Consequently, the subscribers are not real parties-in-interest in a case for rescission of the subscription contract of another subscriber because they are not parties thereto.
• However, in a sense, the subscription contract is also a contract among subscribers. 
• Consequently, an original subscriber cannot withdraw from the pre-incorporation subscription agreement without the consent of all shareholders.
• The subscription contract should be distinguished from agreements between individuals as such.
• Thus, an agreement to form a corporation embodied in a Joint Venture Agreement may be an agreement only between the parties in the Joint Venture Agreement. 
• While the terms and conditions may involve the corporation (i.e., the number of shares each party may own, the officers each can nominate, etc.), the corporation is not a party thereto.

4.01. Trustees and Nominees. 

• The shares may be issued in trust for another person. 
• The shares may be registered in the name of one person but the beneficial ownership may belong to another. 
• The trustee may even be a nominee who holds the shares for another to qualify said nominee as director. 
• A nominee is a person in whose name a stock certificate is registered but who is not the actual owner thereof.
• Nominees are recognized under the Foreign Investment Act of the Philippines.

5. Number of Shares Covered. 

• A subscription agreement may cover one or more shares. 
• But even if it covers two or more shares, the subscription agreement is considered an indivisible contract. 
• A subscriber need not enter into only one subscription agreement if he will take two or more shares. 
• He may subscribe to the capital stock under several subscription contracts.

6. Form. 

• There is no law or rule in this jurisdiction requiring a form of subscription to capital stock as a requisite for its validity; hence, the same need not be in writing. 
• A subscription, therefore, may arise out of mutual dealings between an individual and the corporation. 
• If a person accepts a certificate of stock in his name or if he exercises the rights of shareholders, he is liable for the unpaid subscription even if there was no express contract.

7. Kinds.

• A subscription contract may be a:
• pre-incorporation subscription contract or
• post-incorporation subscription contract. 
• A pre-incorporation contract is one entered into before incorporation.
• A post-incorporation subscription contract is one entered into after the issuance of the certificate of incorporation. 
• A subscription contract may pertain to shares that are:
• part of the original Authorized Capital Stock appearing in the Articles of Incorporation or 
• those that involve shares in the increase of capital stock. 
• Subscription contracts may be:
• conditional or 
• unconditional. 
• A subscription upon a condition precedent or a conditional subscription is a subscription that does not take effect so as to make the subscriber a stockholder, or confer rights until the condition is satisfied.

8. Trust Fund Doctrine.

• Under the Trust Fund Doctrine, the subscribed capital stock of the corporation is a trust fund for the payment of debts of the corporation which the creditors have the right to look up to satisfy their credits. 
• The corporation may not dissipate this and the creditors may sue stockholders directly for their unpaid subscription.
• However, the Trust Fund Doctrine is not limited to the unpaid portion of the subscribed capital if the corporation is insolvent or if it cannot otherwise pay its obligation. 
• The capital stock, property and other assets of the corporation are regarded as equity in trust for the payment of the corporate creditors. 
• As the Supreme Court explained in one case:
• "We clarify that the Trust Fund Doctrine is not limited to reaching the stockholder's unpaid subscriptions. The scope of the doctrine when the corporation is insolvent encompasses not only the capital stock, but also other property and assets generally regarded in equity as a trust fund for the payment of corporate debts. All assets and property belonging to the corporation held in trust for the benefit of creditors that were distributed or in the possession of the stockholders, regardless of full payment of their subscriptions, may be reached by the creditor in satisfaction of its claim." 
• Money received for subscription of increase of authorized capital is not covered by the Trust Fund Doctrine prior to the approval of such increase by the SEC. 
• However, Additional Paid-In Capital (APIC) is part of the trust fund under the doctrine. 
• APIC involves the infusion of cash or property by a stockholder whenever no additional shares are issued in consideration thereof.
• APIC shall neither be declared as dividend nor shall it be reclassified to absorb deficiency except through an organizational restructuring duly approved by the SEC.
• APIC falls within the purview of the Trust Fund Doctrine because it forms part of the equity emanating from the original subscription agreement; it is considered an additional paid-in capital or premium that forms part of the capital of the corporation. 
• The Trust Fund Doctrine is violated in the following instances:
1. When the corporation releases or condones payment of the unpaid subscription and the stockholder has no right to demand the refund of his investment;
2. When there is payment of dividends without unrestricted retained earnings;
3. When properties are transferred in fraud of creditors; 
4. When properties are disposed or undue preference is given to some creditors even if the corporation is insolvent; and
5. When the capital stock is decreased which has the effect of relieving the stockholders of the obligation to pay their respective subscription.
• Consistently, under the Trust Fund Doctrine, "a 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, without a valuable consideration, or fraudulently, to the prejudice of creditors."
• However, a release that is given pursuant to a bona fide compromise, or to set off a debt due from the corporation, a release, supported by consideration, will be effectual as against dissenting stockholders and subsequent and existing creditors."
• Release of subscription is also possible if there is unanimous consent of stockholders and creditors.
• The Trust Fund Doctrine provides that subscriptions to the capital stock of a corporation constitute a fund to which the creditors have a right to look for the satisfaction of their claims. This doctrine is the underlying principle and/or is articulated in the following:
1. Procedure for the distribution of capital assets, embodied in the RCCP, which allows the distribution of corporate capital only in three instances:
1. amendment of the Articles of Incorporation to reduce the authorized capital stock,
2. purchase of redeemable shares by the corporation, regardless of the existence of unrestricted/retained earnings, and
3. dissolution and eventual liquidation of the corporation; 
2. Section 40 of the RCCP on the power of a corporation to acquire its own shares; and 
3. Section 139 of the RCCP on the prohibition against the distribution of corporate assets and property unless the stringent requirements therefor are complied with. 
• The distribution of corporate assets and property cannot be made to depend on the whims and caprices of the stockholders, officers or directors of the corporation, or even, for that matter, on the earnest desire of the court a quo "to prevent further squabbles and future litigations" unless the indispensable conditions and procedures for the protection of corporate creditors are followed. 
• Otherwise, the "corporate peace" laudably hoped for by the court will remain nothing but a dream because this time, it will be the creditors' turn to engage in "squabbles and litigations" should the court order an unlawful distribution in blatant disregard of the Trust Fund Doctrine.
• Consistent with the doctrine, a stockholder has no right to demand for the return of his investment. 
• His investment is "locked-in" until the liquidation of the corporation. 
• A stockholder cannot, without violating the Trust Fund Doctrine, compel the corporation to return his investments without the consent of all the stockholders.
• Neither does he have the right to withdraw even when all stockholders assent thereto if there is prejudice to creditors. 
• The underlying reason for the restriction springs from the necessity of imposing safeguards against the depletion by a corporation of its assets and the impairment of its capital needed for the protection of its creditors.
• It should be noted in this connection that there are those who question the continued force of the Trust Fund Doctrine. For instance, in Hospes v. Northwestern Manufacturing & Car Company, the Supreme Court of Minnesota made this scathing commentary on the doctrine: 
• "The 'trust fund' doctrine, commonly called the 'American doctrine,' has given too much confusion of ideas as to its meaning, and much conflict of decision in its application. To such an extent has this been the case that many have questioned the accuracy of the phrase, as well as doubted the necessity or expediency of inventing such doctrine. While a convenient phrase to express a certain general idea, it is not sufficiently precise or accurate to constitute a safe foundation upon which to build a system of legal rules. The doctrine was invented by Justice Story in Wood v. Dummer, 3 Mason, 308, which call for such invention, the fact in that case being that a bank divided up two-thirds of its capital among its stockholders without providing funds to pay its outstanding billholders. Upon familiar principles this was a fraud of creditors. Evidently all that the eminent jurist meant by the doctrine was that corporate property must be first appropriated to the payment of the debts of the company before there can be any distribution of it among stockholders, - a proposition that is sound upon the plainest principles of common honesty. x x x The phrase that 'the capital of a corporation constitutes a trust fund for the benefit of creditors' is misleading. Corporate property is not held in trust, in any proper sense of the term. A trust implies two estates or interests, - one equitable and one legal; one person as trustee, holding the legal title while another, as the cestui que trust, has the beneficial interest. Absolute control and power of disposition are inconsistent with the idea of a trust. The capital of a corporation is its property. It has the whole beneficial interest in it, as well as the legal title. It may use the income and profits of it, and sell and dispose of it, the same as a natural person. It is a trustee for its creditors in the same sense and to the same extent as a natural person, but no further."
• In lieu of the Trust Fund Doctrine, Hospes v. Northwestern Manufacturing & Car Company offered an alternative theory that is based on fraud referred to as the "Fraud Theory." Under this theory, if shares are issued to shareholders who have not yet paid the subscription price, the corporate creditors have the right to go after the shareholders in case of insolvency. 
• The same conclusion can be reached if the Trust Fund Doctrine is applied.
• However, if the "Fraud Theory" is applied, the liability or' the shareholders is explained by submitting to the proposition that there is deemed to be representation to the creditor to the effect that the shares were paid before their issuance.

9. Treasury Shares. 

• Treasury shares are not subject to subscription contracts because Section 59 of the RCCP covers only acquisition of unissued shares. 
• However, when treasury shares are re-issued, the shareholders are entitled to exercise their preemptive right. 

10. Escrow Shares. 

• The corporation may impose the condition that the shares to be issued shall be held in escrow until actual payment is received by the corporation. 
• Title does not pass to the subscriber until the performance of the condition. 
• A holder of escrow shares does not become entitled to the rights pertaining to a stockholder until the conditions for the release of such shares are fully met. 
• The subscriber is not yet the owner of the said shares and consequently he cannot be accorded the rights belonging to a regular shareholder. 

11. Sources of Capital. 

• Capital includes all properties and assets of the corporation that are used for its business or operation. 
• Authorized Capital Stock which is the amount fixed in the Articles of Incorporation to be subscribed and paid by the stockholders of the corporation. 
• Subscribed Capital is that portion of the authorized capital stock that is covered by subscription agreements whether fully paid or not.
• Paid-Up Capital is that portion of the authorized capital stock that has been subscribed and actually paid. 
• The capital of the corporation at its birth is in theory limited to the initial "Paid-up Capital." 
• If the authorized capital and the subscribed capital remain constant, the paid-up capital may be increased by making the subscriber make additional payments or fully pay their subscription. 
• Of course, payment of the subscription price may be made voluntarily without need of call.
• The corporation can increase its Subscribed Capital:
1. by issuing the remaining balance of the Authorized Capital Stock, or
2. by increasing the Authorized Capital Stock that necessarily involves additional subscription. 
• In both cases, additional capital in the form of shareholder's investments is likewise infused to the corporation through post-incorporation subscription. 
• When shares are issued at a premium or for more than their par value, the additional amount that is paid is treated as additional paid-in capital (APIC).
• The issuance of shares out of the unsubscribed shares of the authorized capital stock does not need stockholder's approval. 
•  What is necessary is only a resolution of the Board of Directors approving the same.

11.01. Debt as Source of Capital. 

• Subscription is not the only source of corporate funds after incorporation. 
• As an ongoing concern, the corporation may get funds not only from shareholders but also from creditors in the form of debts. 
• Additionally, funds may also come from the income of the corporation as a result of its operation. 
• It is up to the corporation to decide what best serves its interest in choosing the source of funds. 
• In making such decision, the corporation will consider the advantages and disadvantages of raising money through debts, like the issuance of bonds, rather than stocks. 
• The advantages of debts include:
1. The current shareholders (who cannot exercise their pre-emptive right) do not have to dilute or surrender their control of the corporation when funds are obtained by borrowing rather than issuing more shares of stocks; 
2. Depending on the current tax law, it may be less expensive to issue debt rather than additional stock if the interest payments made to bondholders are tax-deductible while dividends are not; and
3. The issue of bonds may increase the earning of the corporation through favorable financial leverage; a corporation has favorable financial leverage when the borrowed funds are used to increase the earnings per share of common stock.
• The disadvantages of obtaining funds by borrowing include the following:
1. The borrower has a fixed interest payment that must be met each period to avoid default; 
2. The use of debt may reduce a company's ability to withstand a major loss (compared to a situation where there is more equity to meet the losses);
3. It also causes the company to experience unfavorable financial leverage when income from operations falls below a certain level; unfavorable financial leverage results when the cost of borrowing funds exceeds the revenue they generate; and
4. Loan agreements usually require maintenance of a certain amount of working capital and place limitations on dividends and additional borrowings. 

12. Balancing of Interests. 

• It cannot be overemphasized however that subscription or investment of shareholders is not the only source of corporate capital. A large part of the funds of a corporation may come from the creditors of the company. 
• The Trust Fund Doctrine and other rules relating to the legal capital of the corporation are, in fact, directly concerned with the balancing of the interest of the shareholders and the creditors of the company. Dean Bayless Manning explained in his important work on Legal Capital that provisions of corporation laws on the legal capital are addressed to resolving, or at least accommodating the combination of the creditor's perspective and the shareholder's perspective, namely:
1. The creditors of the company desire that the enterprise have large quantities of assets against which only other claimants are those who rank junior to him, i.e., the shareholders. The shareholders, by contrast, would like to have as little as possible of their own assets tied up in the enterprise and exposed to the jeopardy of creditor's claim.
2. The creditor does not ordinarily welcome the creation of additional creditor's claim against the limited assets of the enterprise. The shareholder investor will often (not always) be willing for the incorporated enterprise to incur further debt in order to benefit from leverage, especially when his own equity investment position is small.
3. The creditor would prefer that the junior investment claimant, the shareholder, receive nothing as a return on his investment for so long a time as the creditor's claim has not been paid. The shareholder, on the other hand, would prefer a concurrent return paid out to him as the enterprise earns profits.
4. The creditor wants protection against all manner of asset distributions to shareholders - particularly since he sees the board of directors as a creature of the shareholders. The shareholder wants maximum freedom to receive such distributions.
5. Each shareholder wants assurance that each other shareholder has contributed to the corporate pot a proprietorship investment proportionate to his shareholdings.

13. Creditors. 

• With respect to corporate creditors who supply additional funds to the corporation, they fall under two categories, namely:
1. commercial creditors and 
2. investment creditors.
• Commercial creditors are normally short-term creditors including banks and other institutional lenders who extend revolving lines of short-term credit.
• Investment creditors are those who acquire bonds or debentures issued by the corporation.
• The considerations for bonds are also limited to the considerations that the RCCP allows for subscription agreements.
• Section 61 provides that: "The same considerations provided for in this section, insofar as they may be applicable, may be used for the issuance of bonds by the corporation." 

PROBLEMS: 

Q: X Corporation was organized by five individual incorporators who subscribed to the whole authorized capital stock of Pl,000,000.00 and who paid P500,000.00. The incorporators, all members of the Board of Directors, agreed among themselves that the unpaid balance of their subscription will be paid out of expected cash dividends. However, no dividends were ever declared. The Board of Directors decided to condone and cancel the unpaid subscriptions. This action of the Board was ratified by the stockholders by unanimous vote of the stockholders at a proper meeting. The creditors of the corporation sued the subscribers for their unpaid subscriptions. Can the creditors recover? 

A: Yes, the creditors can recover from the subscribers the latter's unpaid subscriptions. Condonation of the obligation to pay the subscription price violates the Trust Fund Doctrine because it reduces the amount that is supposed to be held in trust for them. The same is prejudicial to the rights and interests of the creditors of the corporation. (1971 Bar)

Q: Ms. Z subscribed to 100 shares of stock of 3D Corporation with par value of Pl00.00 each, paying P2,500.00 on her subscription. Subsequently, Ms. Z asked Mr. Y, the President of the corporation, to release her from her subscription. Mr. Y consented provided that Ms. X forfeits to the company what she had already paid. Ms. Z agreed and Mr. Y gave her a Certificate of Release. Not long afterwards, 3D Corporation went into insolvency and an assignee was appointed. The assignee now seeks to collect from Ms. Z the unpaid balance of her subscription. Decide the dispute with reasons.

A: Ms. Z is liable. The unpaid subscription becomes due the moment the corporation is declared insolvent. Hence, the assignee of the insolvent corporation is well within his right to collect from Ms. Z the unpaid balance of her subscription. The release made by the President is invalid, because under the Trust Fund Doctrine, the capital stock of the corporation constitutes a fund to which the creditors have a right to look up to for the satisfaction of their claims. Hence, the unpaid subscription is part of the amount that can be used to pay the obligations of the insolvent corporation. (1979 Bar) 

Section 60. Pre-incorporation Subscription.

A subscription of shares in a corporation till to be formed shall be irrevocable for a period of at least six (6) months from the date of subscription, unless all of the other subscribers consent to the revocation, or the corporation fails to incorporate wuthin the same period or within a longer period stipulated in the contract of subscription. No pre-incorporation is submitted to the Commission.

1. Nature.

• The concept of a pre-incorporation subscription is a departure from basic civil law precept on obligations and contracts. 
• The indispensable elements of a valid contract under the New Civil Code are consent, object and consideration. 
• Thus, it is required that there is meeting of minds on the part of the parties with respect to the object and cause or consideration of the contract. 
• The presence of at least two contracting parties is presupposed. 
• In a pre-incorporation subscription, not all the parties can give their consent because one of the parties — the corporation — is still non-existent.

2. Binding Effect.

• Despite the non-existence of the corporation, the subscription contract before incorporation is valid and binding. 
• Section 60 of the RCCP provides that it is valid, binding and irrevocable for a period of six months. 
• In addition, even if the six-month period has already expired, the pre-incorporation subscription contract is also irrevocable after the filing of the Articles of Incorporation with the SEC.
• The pre-incorporation subscription is irrevocable for a limited period prior to submission of the Articles of Incorporation with the SEC to prevent injustice that may be inflicted on subscribers who already exerted efforts to organize the corporation and who already committed financial resources therefor.
• The irrevocable nature of the subscription after the filing of the Articles of Incorporation with the SEC is also similarly justified. 
• In addition, the subscription agreement can no longer be revoked the moment the Certificate of Incorporation has already been issued by the SEC. 
• Subscription agreements are already covered by the Trust Fund Doctrine after incorporation. 

3. Revocation. 

• The pre-incorporation subscription agreement can be revoked only in the following cases: 

1. if all the other subscribers consent to the revocation before the expiration of the six-month period; and 
2. upon the expiration of the six-month period (but before the filing of the Articles with the SEC) even without the consent of the other subscribers or within a longer period as may be stipulated in the subscription agreement.