Classification of Corporations

V. CLASSIFICATIONS OF CORPORATIONS

1. In Relation to the State: (a) Public corporations (Sec. 3, Act No. 1459) § Organized for the government of the portion of the state (e.g., barangay, municipality, city and province) § Majority shares by the Government does not make an entity a public corporation. xNational Coal Co., v. Collector of Internal Revenue, 46 Phil. 583 (1924). (b) Quasi-public corporations xMarilao Water Consumers Associates v. IAC, 201 SCRA 437 (1991) Although Boy Scouts of the Philippines does not receive any monetary or financial subsidy from the Government, and that its funds and assets are not considered government in nature and not subject to audit by the COA, the fact that it received a special charter from the government, that its governing board are appointed by the Government, and that its purpose are of public character, for they pertain to the educational, civic and social development of the youth which constitute a very substantial and important part of the nation, it is not a public corporation in the same sense that municipal corporation or local governments are public corporation since its does not govern a portion of the state, but it also does not have proprietary functions in the same sense that the functions or activities of government-owned or controlled corporations such as the National Development Company or the National Steel Corporation, is may still be considered as such, or under the 1987 Administrative Code as an instrumentality of the Government. Therefore, the employees are subject to the Civil Service Law. xBoy Scouts of the Philippines v. NLRC, 196 SCRA 176 (1991). (c) Private Corporation (Sec. 3, Act 1459) A government-owned or -controlled corporation when organized under the Corporation Code is still a private corporation. But being a government-owned or -controlled corporation makes it liable for laws and provisions applicable to the Government or its entities and subject to the control of the Government. xCervantes v. Auditor General, 91 Phil. 359 (1952). A private corporation is created by operation of law under the Corporation while a government corporation is normally created by special law referred to often as a charter. xBliss Dev. Corp. Employees Union v. Calleja, 237 SCRA 271 (1994). The doctrine that employees of government-owned and -controlled corporations, whether created by special law or formed as subsidiaries under the general corporation law are governed by the Civil Service Law and not by the Labor Code, has been supplanted by the 1987 Constitution. The present doctrine in determining whether a government-owned or -controlled corporation is subject to the Civil Service Law is the manner of its creation, such that government corporations created by special charter are subject to the Civil Service Law, while those incorporated under the general corporation law are governed by the Labor Code. xPNOC-Energy Development Corp. v. NLRC, 201 SCRA 487 (1991); xDavao City Water District v. Civil Service Commission, 201 SCRA 593 (1991). The test to determine whether a corporation is government owned or controlled, or private in nature is simple. Is it created by its own charter for the exercise of a public function, or by incorporation under the general corporation law? Those with special charters are government corporations subject to its provisions, and its employees are under the jurisdiction of the Civil Service Commission, and are compulsory members of the Government Service Insurance System. xCamparedondo v. NLRC, 312 SCRA 47 (1999). Section 31 of the Corporation Code (Liability of Directors and Officers) is applicable to corporations which have been organized by special charters since Sec. 4 of the Corporation Code renders the provisions of thereof applicable in a supplementary manner to all corporations, including those with special or individual charters, such as cooperatives organized under Pres. Decree No. 269, so long as those provisions are not inconsistent with such charters. xBenguet Electric Cooperative, Inc. v. NLRC, 209 SCRA 55 (1992).

2. As to Place of Incorporation: (a) Domestic Corporation (b) Foreign Corporation (Sec. 123)

3. As to Purpose of Incorporation: (a) Municipal or Public corporation (b) Religious corporation (Secs. 109 and 116) (c) Educational corporations (Secs. 106, 107 and 108; Sec. 25, B.P. Blg. 232) (d) Charitable, Scientific or Vocational corporations (e) Business corporation

4. As to Number of Members: (a) Aggregate Corporation (b) Corporation Sole (Secs. 110 to 115; xRoman Catholic Apostolic Administrator of Davao, Inc. v. LRC and the Register of Deeds of Davao City, 102 Phil. 596 (1957). xDirector of Land v. IAC, 146 SCRA 509 (1986), which held that a corporation sole has no nationality, overturned the previous doctrine (xRepublic v. Villanueva, 114 SCRA 875 [1982] and Republic v. Iglesia Ni Cristo, 127 SCRA 687 [1984]) that a corporation sole is disqualified to acquire or hold alienable lands of the public domain, because of the constitutional prohibition qualifying only individuals to acquire land of the public domain and the provision under the Public Land Act which applied only to Filipino citizens or natural persons. xRepublic v. Iglesia ni Cristo, 127 SCRA 687 (1984); xRepublic v. IAC, 168 SCRA 165 (1988).

5. As to Legal Status: (a) De Jure Corporation (b) De Facto Corporation (Sec. 20) (c) Corporation by Estoppel (Sec. 21)

6. As to Existence of Shares (Secs. 3 and 5) (a) Stock Corporation (b) Non-Stock Corporation

VI. CORPORATE CONTRACT LAW

(a) Who Are Promoters? “Promoter” is a person who, acting alone or with others, takes initiative in founding and organizing the business or enterprise of the issuer and receives consideration therefor. (Sec. 3.10, Securities Regulation Code [R.A. 8799]) (b) Nature of Pre-incorporation Agreements (Secs. 60 and 61; Bayla v. Silang Traffic Co., Inc., 73 Phil. 557 [1942]) (c) Theories on Liabilities for Promoter's Contracts (Cagayan Fishing Development Co., Inc. v. Teodoro Sandiko, 65 Phil. 223 [1937]; Rizal Light & Ice Co., Inc. v. Public Service Commission, 25 SCRA 285 [1968]; Caram, Jr. v. CA, 151 SCRA 372 [1987]).

De Facto Corporation (Sec. 20)

(a) Elements for Existence of De Facto Corporation:

(1) Valid law under which incorporated;
(2) Attempt in good faith to incorporate; “colorable compliance;”
(3) Assumption of corporate powers; and
(4) Issuance of certificate of incorporation. Arnold Hall v. Piccio, 86 Phil. 634 (1950).

Corporation by Estoppel Doctrine (Sec. 21; Salvatierra v. Garlitos, 103 Phil. 757 [1958]; Albert v. University Publishing Co., 13 SCRA 84 [1965]; International Express Travel & Tour Services, Inc. v. Court of Appeals, 343 SCRA 674 (2000); xAsia Banking Corporation v. Standard Products, 46 Phil. 145 [1924]; xMadrigal Shipping Co., Inc. v. Ogilvie, Supreme Court Advanced Decision, 55 O.G. No. 35, p. 7331). An individual should be held personally liable for the unpaid obligations of the unincorporated association in whose behalf he entered into such transactions, under the principle that “any person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and becomes personally liable for contract entered into or for other acts performed as such agent.” International Express Travel & Tour Services, Inc. v. Court of Appeals, 343 SCRA 674 (2000).

(a) Nature of Doctrine

Corporation by estoppel doctrine is founded on principles of equity and is designed to prevent injustice and unfairness. It applies when persons assume to form a corporation and exercise corporate functions and enter into business relations with third persons. Where there is no third person involved and the conflict arises only among those assuming the form of a corporation, who therefore know that it has not been registered, there is no corporation by estoppel. Lozano v. De Los Santos, 274 SCRA 452 (1997) A party cannot challenge the personality of the plaintiff as a duly organized corporation after having acknowledged same when entering into the contract with the plaintiff as such corporation for the transportation of its merchandise. (xOhta Dev. Co. v. Steamship Pompey, 49 Phil. 117 [1926]); the same principle applied in xCompania Agricole de Ultramar v. Reyes, 4 Phil. 1 [1911] but that case pertained to a commercial partnership which required registration in the registry under the terms of the Code of Commerce.
(b) Two Levels: (i) With "fraud" and (ii) Without "fraud" When incorporating individuals represent themselves to be officers of the corporation never duly registered with SEC, and engages in the name of purported corporation in illegal recruitment, they are estopped from claiming that they are not liable as corporate officers, since Section 25 of Corporation Code provides that all persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all the debts, liabilities and damages incurred or arising as a result thereof. xPeople v. Garcia, 271 SCRA 621 (1997). An individual cannot avoid his liabilities to the public as an incorporator of a corporation whose incorporation was not consummated, when he held himself out as officer of the corporation and received money from applicants who availed of their services. Such individual is estopped from claiming that they are not liable as corporate officers for illegal recruitment under the corporation by estoppel doctrine under Sec. 25 of the Corporation Code which provides that all persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all the debts, liabilities and damages incurred or arising as a result thereof. xPeople v. Pineda, G.R. No. 117010, 18 April 1997 (Unpublished).

Trust Fund Doctrine

Under the trust fund doctrine, the capital stock, property and other assets of the corporation are regarded as equity in trust for the payment of the corporate creditors. xCommissioner of Internal Revenue v. Court of Appeals, 301 SCRA 152 (1999). The requirement of unrestricted retained earnings to cover the shares is based on the trust fund doctrine which means that the capital stock, property and other assets of a corporation are regarded as equtiy in trust for the payment of corporate creditors. The reason is that creditors of a corporation are preferred over the stockholders in the distribution of corporate assets. There can be no distribution of assets among the stockholders without first paying corporate creditors. Hence, any disposition of corporate funds to the prejudice of creditors is null and void. xBoman Environmental Dev. Corp. v. CA, 167 SCRA 540 (1988). The “Trust Fund” doctrine considers the subscribed capital as a trust fund for the payment of the debts of the corporation, to which the creditors may look for satisfaction. Until the liquidation of the corporation, no part of the subscribed capital stock may be turned over or released to the stockholder (except in the redemption of the redeemable shares) without violating this principle. Thus dividends must never impair the subscribed capital stock; subscription commitments cannot be condoned or remitted; nor can the corporation buy its own shares using the subscribed capital as the consideration therefore. NTC v. Court of Appeals, 311 SCRA 508, 514-515 (1999).

Corporation Purchasing Own Shares (Secs. 8, 41, 43 and 122, last paragraph; Phil. Trust Co. v. Rivera, 44 Phil. 469 [1923]; Steinberg v. Velasco, 52 Phil. 953 [1929])