Rich v. Paloma

Rich V.
Paloma
Facts:
Sometime in 1997, Dr. Gil Rich (petitioner) lent P1,000,000.00 to his brother,
Estanislao Rich (Estanislao). The agreement was secured by a real estate mortgage
over a 1000-square-meter parcel of land with improvements. By reason of default,
petitioner foreclosed the mortgage in which he was declared as the highest bidder in a
public auction. Without his knowledge however, the same property was subsequently
mortgaged in favor of Maasin Traders Lending Corporation to secure another loan prior
to the foreclosure on the year 2005. By reason of the second mortgage, respondent
was able to acquire a deed of redemption in his favor. This prompted petitioner to file
for the annulment of the deed of redemption alleging that since the corporation on
which respondent Servacio was the president was already dissolved by the SEC on
2003, the corporation has no juridical personality to effect the equitable redemption.
Issue:
WON the corporation may still redeem the property despite having it dissolved?
Ruling:
Once a corporation is dissolved, be it voluntarily or involuntarily, liquidation, which is

the process of settling the affairs of the corporation, will ensue. This consists of (1)
collection of all that is due the corporation, (2) the settlement and adjustment of claims
against it, and (3) the payment of its debts. Yu more particularly described this process
as that which entails the following:
"Winding up the affairs of the corporation means the collection of all assets, the
payment of all its creditors, and the distribution of the remaining assets, if any among
the stockholders thereof in accordance with their contracts, or if there be no special
contract, on the basis of their respective interests. The manner of liquidation or winding
up may be provided for in the corporate by-laws and this would prevail unless it is
inconsistent with law."
These pronouncements draw their basis from Section 122 of the Corporation Code,
which empowers every corporation whose corporate existence has been legally
terminated to continue as a body corporate for three (3) years after the time when it
would have been dissolved. This continued existence would only be for the purposes of
"prosecuting and defending suits by or against it and enabling it to settle and close its
affairs, to dispose of and convey its property and to distribute its assets."
This continuance of its legal existence for the purpose of enabling it to close up its
business is necessary to enable the corporation to collect the demands due it as well as
to allow its creditors to assert the demands against it.
In addition, and as expressly mentioned by the Corporation Code, this extended

authority necessarily excludes the purpose of continuing the business for which it was
established. The reason for this is simple: the dissolution of the corporation carries with
it the termination of the corporation's juridical personality. Any new business in which
the dissolved corporation would engage in, other than those for the purpose of
liquidation, "will be a void transaction because of the non-existence of the corporate
party."
Two things must be said of the foregoing in relation to the facts of this case. First, if
MTLC entered into the real estate mortgage agreement with Estanislao after its
dissolution, then resultantly, such real estate mortgage agreement would be void ab
initio because of the non-existence of MTLC's juridical personality.
Second, if, however, MTLC entered into the real estate mortgage agreement prior to its
dissolution, then MTLC's redemption of the subject property, even if already after its
dissolution (as long as it would not exceed three years thereafter), would still be valid
because of the liquidation/winding up powers accorded by Section 122 of the
Corporation Code to MTLC.
Respondent Corporation that Estanislao executed the Real Estate Mortgage in favor of
the Corporation on 2005, long after it was dissolved by the SEC. From the foregoing, it
is clear that, by the time MTLC executed the real estate mortgage agreement, its
juridical personality has already ceased to exist. The agreement is void as MTLC could
not have been a corporate party to the same.
To be sure, a real estate mortgage is not part of the liquidation powers that could have
been extended to MTLC. It could not have been for the purposes of "prosecuting and
defending suits by or against it and enabling it to settle and close its affairs, to dispose
of and convey its property and to distribute its assets." It is, in fact, a new business in
which MTLC no longer has any business pursuing.

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Rich V.

Once a corporation is dissolved, be it voluntarily or involuntarily, liquidation, which is

In addition, and as expressly mentioned by the Corporation Code, this extended

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