Written by Leonard Vinz O. Ignacio, 5 July 2007
Corporations finance their operations either by way of equity or borrowings. Equity comes from the investments made by stockholders. The subscription agreement evidences such investment and supports the relationship between the stockholder and the corporation.
Section 72 of the Corporation Code (Code) expressly provides that holders of partially paid subscribed shares which are not delinquent shall have all the rights of a stockholder.
It is the subscription to shares of stock that creates the legal relationship between the stockholder and the corporation. It is the subscription, and not the payment of such subscription, that grants to the stockholder the statutory and common rights granted to stockholders.
Can holders of subscribed shares not fully paid effect their transfer, sale and assignment?
Yes.
Section 63 of the Code provides that shares of stock so issued with covering certificate of stock are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner of his attorney-in-fact or other person legally authorized to make the transfer.
However, the same section provides that no transfer shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation showing the names of the parties to the transaction, the date of transfer, the number of the certificate or certificates and the number of shares transferred.
In fact, the Securities and Exchange Commission (SEC) has opined that it is only upon full payment of the whole subscription that a stockholder can transfer the same to several transferees.
However, the entire subscription, although not yet fully paid, may be transferred to a single transferee, who as a result of the transfer must assume the unpaid balance.
It is necessary, however, to secure the consent of the corporation since the transfer of subscription rights and obligations contemplates a novation of contract which under Article 1293 of the Civil Code of the Philippines, cannot be made without the consent of the creditor. (SEC Opinion, October 9, 1995)
What are then the remedies of the corporation for shares that are not yet fully paid?
In the case of unpaid subscriptions, stock subscribers shall pay to the corporation, interest on all unpaid subscriptions from the date of subscription, if so required by, and at the rate of interest fixed in the by-laws. (Sec. 66, Code).
If no rate of interest is fixed in the by-laws, such rate shall be deemed to be the legal rate. Likewise, the Code also provides that subject to the provisions of the subscription agreement, the Board of Directors of any stock corporation may at any time declare due and payable to the corporation unpaid subscription to the capital stock and may collect the entirety or percentage thereof, in either case with accrued interest, if any, as it sees fit.
Payment of any unpaid subscription or any percentage thereof, together with the interest accrued, if any, shall be made on the date specified in the subscription contract or on the date stated in the call made by the Board.
Failure to pay on such date shall render the entire balance due and payable and shall make the stockholder liable for interest at the legal rate on such balance, unless a different rate of interest is provided in the by-laws, computed from such date until full payment. If within 30 days from the said date no payment is made, all stocks covered by said description shall become delinquent and be subject to sale, unless the Board of Directors orders otherwise. Likewise, the corporation can also collect by court action the amount due on any unpaid subscription, with accrued interest, costs and expenses.
An interesting example is the case of De Silva vs. Aboitiz (44 Phil. 755). De Silva subscribed for 650 shares of stock. He has paid only 200 shares. Subsequently, the Board of said corporation declared, by resolution, the unpaid subscription to be due and demandable; and non-payment of which on the date fixed would amount to a sale of said shares.
De Silva questioned said authority of the Board, as the corporation’s by-laws provided that the Board may deduct an amount from the net profit to be applied to unpaid subscriptions. He contended that the Board cannot prescribe another manner of collecting unpaid subscriptions when one has already been provided in the by-laws.
The Supreme Court ruled that the Board of Directors has absolute discretion to choose which remedy it deems proper in order to collect on the unpaid subscriptions. If it does not make use of the authority given to it in the by-laws, it still has two other remedies, i.e.,put up the unpaid stock for sale as provided in the Code or by action in court.
Thus, it is prudent move on the part of stockholders to leave no remaining subscribed shares of stock unpaid.
