CORPORATION LAW  Doctrine of Limited Liability (b.

Cases)

G.R. No. 157549               May 30, 2011 ISSUE: Whether or not petitioner Donnina Halley is personally
DONNINA C. HALLEY, Petitioner, vs.PRINTWELL, INC., liable though she submits she had no participation in the
Respondent. transaction between BMPI and Printwell and that BMPI acted
on its own.
FACTS:
BMPI (Business Media Philippines Inc.) is a corporation HELD:
under the control of its stockholders, including Donnina Yes. Although a corporation has a personality separate
Halley. In the course of its business, BMPI commissioned and distinct from those of its stockholders, directors, or
PRINTWELL to print  Philippines, Inc. (a magazine published officers,such separate and distinct personality is merely a
and distributed by BMPI). PRINTWELL extended 30-day credit fiction created by law for the sake of convenience and to
accommodation in favor of BMPI and in a period of 9 mos. promote the ends of justice.The corporate personality may be
BMPI placed several orders amounting to 316,000. disregarded, and the individuals composing the corporation
However, only 25,000 was paid hence a balance of 291,000. will be treated as individuals, if the corporate entity is being
PRINTWELL sued BMPI for collection of the unpaid balance used as a cloak or cover for fraud or illegality; as a justification
and later on impleaded BMPI’s original stockholders and for a wrong; as an alter ego, an adjunct, or a business conduit
incorporators to recover on their unpaid subscriptions. for the sole benefit of the stockholders. As a general rule, a
corporation is looked upon as a legal entity, unless and until
It appears that BMPI has an authorized capital stock of sufficient reason to the contrary appears. Thus,the courts
3M divided into 300,000 always presume good faith, andfor that reason accord prime
shares with P10 par value. Only 75,000 shares worth P750,000 importance to the separate personality of the corporation,
were originally subscribed of which P187,500 were paid up disregarding the corporate personality only after the
capital. Halley subscribed to 35,000 shares worth P350,000 wrongdoing is first clearly and convincingly established.It thus
but only paid P87,500. behooves the courts to be careful in assessing the milieu where
  the piercing of the corporate veil shall be done.
Halley contends that: Although nowhere in Printwell’s amended complaint or
1. They all had already paid their subscriptions in full in the testimonies Printwell offered can it be read or inferred
2. BMPI had a separate and distinct personality from that the petitioner was instrumental in persuading BMPI
3.BOD and SH had resolved to dissolve BMPI to renege on its obligation to pay; or that she induced Printwell
to extend the credit accommodation by misrepresenting the
RTC and CA: solvency of BMPI to Printwell, her personal liability, together
Defendant merely used the corporate fiction as a cloak/cover to with that of her co-defendants, remained because the CA found
create aninjustice (against PRINTWELL). Rejected allegations of her and the other defendant stockholders to be in charge of the
full payment in view of irregularity in the issuance operations of BMPI at the time the unpaid obligation was
of ORsPayment made on a later date was covered by an OR transacted and incurred.
with a lower serialnumber than payment made on an earlier
date). In the case at bench, it is undisputed that BMPI made
several orders on credit from appellee PRINTWELL involving
the printing of business magazines, wrappers and subscription

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cards, in the total amount of P291,342.76 (Record pp. 3-5, Also, under the trust fund doctrine,a corporation has no
Annex "A") which facts were never denied by appellants’ legal capacity to release an original subscriber to its capital
stockholders that they owe(d) appellee the amount of stock from the obligation of paying for his shares, in whole or
P291,342.76. The said goods were delivered to and received by in part, without a valuable consideration, or fraudulently, to
BMPI but it failed to pay its overdue account to appellee as well the prejudice of creditors.The creditor is allowed to maintain an
as the interest thereon, at the rate of 20% per annum until action upon any unpaid subscriptions and thereby steps into
fully paid. It was also during this time that appellants the shoes of the corporation for the satisfaction of its debt.To
stockholders were in charge of the operation of BMPI despite make out a prima facie case in a suit against stockholders of
the fact that they were not able to pay their unpaid an insolvent corporation to compel them to contribute to the
subscriptions to BMPI yet greatly benefited from said payment of its debts by making good unpaid balances upon
transactions. In view of the unpaid subscriptions, BMPI failed their subscriptions, it is only necessary to establish that
to pay appellee of its liability, hence appellee in order to protect thestockholders have not in good faith paid the par value of the
its right can collect from the appellants stockholders regarding stocks of the corporation.
their unpaid subscriptions. To deny appellee from recovering
from appellants would place appellee in a limbo on where to  Doctrine of Piercing the Veil of Corporate Fiction
assert their right to collect from BMPI since the stockholders
who are appellants herein are availing the defense of corporate ISSUE: Whether or not the CA erred in affirming the decision of
fiction to evade payment of its obligations. the RTC which essentially allowed the piercing of the Veil of
Corporate Fiction.
Both the RTC and the CA applied the trust fund
doctrineagainst the defendant stockholders, including the HELD:
petitioner. The trust fund doctrine enunciates a – No. Settled is the rule that when the veil of corporate
xxx rule that the property of a corporation is a trust fund for fiction is used as a means of perpetrating fraud or an illegal act
the payment of creditors, but such property can be called a or as a vehicle for the evasion of an existing obligation, the
trust fund ‘only by way of analogy or metaphor.’ As between circumvention of statutes, the achievements or perfection of
the corporation itself and its creditors it is a simple debtor, and monopoly or generally the perpetration of knavery or crime, the
as between its creditors and stockholders its assets are in veil with which the law covers and isolates the corporation
equity a fund for the payment of its debts. from the members or stockholders who compose it will be lifted
to allow for its consideration merely as an aggregation of
SC clarified that the trust fund doctrineis not limited to individuals (First Philippine International Bank vs. Court of
reaching the stockholder’s unpaid subscriptions. The scope of Appeals, 252 SCRA 259). Moreover, under this doctrine, the
the doctrine when the corporation is insolvent encompasses corporate existence may be disregarded where the entity is
not only the capital stock, but also other property and assets formed or used for non-legitimate purposes, such as to evade a
generally regarded in equity as a trust fund for the payment of just and due obligations or to justify wrong (Claparols vs. CIR,
corporate debts.All assets and property belonging to the 65 SCRA 613).
corporation held in trust for the benefit of creditors thatwere
distributed or in the possession of the stockholders, regardless Although a corporation has a personality separate and
of full paymentof their subscriptions, may be reached by the distinct from those of its stockholders, directors, or
creditor in satisfaction of its claim. officers,such separate and distinct personality is merely a
fiction created by law for the sake of convenience and to

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promote the ends of justice.The corporate personality may be its right can collect from the appellants stockholders regarding
disregarded, and the individuals composing the corporation their unpaid subscriptions. To deny appellee from recovering
will be treated as individuals, if the corporate entity is being from appellants would place appellee in a limbo on where to
used as a cloak or cover for fraud or illegality; as a justification assert their right to collect from BMPI since the stockholders
for a wrong; as an alter ego, an adjunct, or a business conduit who are appellants herein are availing the defense of corporate
for the sole benefit of the stockholders. As a general rule, a fiction to evade payment of its obligations.
corporation is looked upon as a legal entity, unless and until
sufficient reason to the contrary appears. Thus, the courts ACCORDINGLY, we deny the petition for review on
always presume good faith, and for that reason accord prime certiorari;and affirm with modification the decision
importance to the separate personality of the corporation, promulgated on August 14, 2002by ordering the petitionerto
disregarding the corporate personality only after the pay to Printwell, Inc. the sum of P262,500.00, plus interest of
wrongdoing is first clearly and convincingly established.It thus 12% per annum to be computed from February 8, 1990 until
behooves the courts to be careful in assessing the milieu where full payment.
the piercing of the corporate veil shall be done.
Although nowhere in Printwell’s amended complaint or
in the testimonies Printwell offered can it be read or inferred
from that the petitioner was instrumental in persuading BMPI
to renege on its obligation to pay; or that sheinduced Printwell
to extend the credit accommodation by misrepresenting the
solvency of BMPI to Printwell, her personal liability, together
with that of her co-defendants, remained because the CA found
her and the other defendant stockholders to be in charge of the
operations of BMPI at the time the unpaid obligation was
transacted and incurred, to wit:

In the case at bench, it is undisputed that BMPI made

several orders on credit from appellee PRINTWELL involving
the printing of business magazines, wrappers and subscription
cards, in the total amount of P291,342.76 (Record pp. 3-5,
Annex "A") which facts were never denied by appellants’
stockholders that they owe(d) appellee the amount of
P291,342.76. The said goods were delivered to and received by
BMPI but it failed to pay its overdue account to appellee as well
as the interest thereon, at the rate of 20% per annum until
fully paid. It was also during this time that appellants
stockholders were in charge of the operation of BMPI despite
the fact that they were not able to pay their unpaid
subscriptions to BMPI yet greatly benefited from said
transactions. In view of the unpaid subscriptions, BMPI failed
to pay appellee of its liability, hence appellee in order to protect

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CASE TITLE DAVID C. LAO AND JOSE LAO VS. Whether the mere inclusion as shareholder in the
DIONISIO C. LAO General Information Sheet of a corporation constitutes as a
CITATION G.R. No. 170585 sufficient proof that one is a shareholder in such corporation.
PROMULGATIO
October 6, 2008 RULING:
N DATE
DIGEST BY Castro, Ernest
TOPIC NO. The mere inclusion as shareholder of petitioners in
Stockholders the General Information Sheet of PFSC is insufficient proof that
COVERED
they are shareholders of the company.
DOCTRINE: The mere inclusion as shareholder of petitioners
in the General Information Sheet of PFSC is insufficient proof A certificate of stock is the evidence of a holder's
that they are shareholders of the company. A certificate of interest and status in a corporation. It is a written
stock is the evidence of a holder’s interest and status in a instrument signed by the proper officer of a corporation stating
corporation—it is prima facie evidence that the holder is a or acknowledging that the person named in the document is
shareholder of a corporation. Corporate books prevail over the the owner of a designated number of shares of its stock. It is
General Information Sheet. prima facie evidence that the holder is a shareholder of a
corporation.
PONENTE:
While it may be true that petitioners were named as
REYES, R.T., J: shareholders in the General Information Sheet submitted to
the SEC, that document alone does not conclusively prove that
FACTS: they are shareholders of PFSC. The information in the
document will still have to be correlated with the corporate
Petitioners David and Jose Lao filed a petition with the books of PFSC. As between the General Information Sheet and
SEC against respondent Dionisio Lao, president of Pacific the corporate books, it is the latter that is controlling.
Foundry Shop Corporation (PFSC). Petitioners prayed for a
declaration as stockholders and directors of PFSC, issuance of
certificates of shares in their name and to be allowed to
examine the corporate books of PFSC. Petitioners claimed that
they are stockholders of PFSC based on the General
Information Sheet (GIS) filed with the SEC, in which they are
named as stockholders and directors of the corporation.
Petitioners claim that the respondent is estopped from
contesting the GIS. Records, however, disclose that petitioners
have no certificates of shares in their name.

ISSUE:

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JUANITO ANG vs SPOUSES ROBERTO and RACHEL ANG  No such meeting of the Board to increase capital stock
Facts:  Sunrise Marketing (Bacolod), materialized. It was more of an accommodation to buy peace
Inc. (SMBI) is a duly registered corporation owned by the Ang Juanito claimed that payments to Nancy and Theodore (their
family.4 Its current stockholders and their respective creditors) ceased sometime after 2006.
stockholdings are Juanito, Anecita, Jeannevieve, Roberto, and  On 24 November 2008, Nancy and Theodore, through their
Rachel counsel here in the Philippines, sent a demand letter to
 Roberto was elected President of SMBI, while Juanito was "Spouses Juanito L. Ang/Anecita L. Ang and Spouses Roberto
elected as its Vice President. Rachel Lu-Ang (Rachel) and L. Ang/Rachel L. Ang" for payment of the principal amounting
Anecita are SMBI’s Corporate Secretary and Treasurer, to $1,000,000.00 plus interest at ten percent (10%) per
respectively. annum, for a total of $2,585,577.37 within ten days from
 On 31 July 1995, Nancy Ang (Nancy), the sister of Juanito receipt of the letter. 12
and Roberto, and her husband, Theodore Ang (Theodore),  Roberto and Rachel then sent a letter to Nancy and
agreed to extend a loan to settle the obligations of SMBI and Theodore’s counsel on 5 January 2009, saying that they are
other corporations owned by the Ang family, specifically not complying with the demand letter because they have not
Bayshore Aqua Culture Corporation, Oceanside Marine personally contracted a loan from Nancy and Theodore.
Resources and JR Aqua Venture.6  On 8 January 2009, Juanito and Anecita executed a Deed of
 Nancy and Theodore issued a check in the amount of Acknowledgment and Settlement Agreement (Settlement
$1,000,000.00 payable to "JuanitoAng and/or AnecitaAng Agreement) and an Extra-Judicial Real Estate Mortgage
and/or Roberto Ang and/or Rachel Ang." (Mortgage). Under the foregoing instruments, Juanito and
 Nancy was a former stockholder of SMBI, but she no longer Anecita admitted that they, together with Roberto and Rachel,
appears in SMBI’s General Information Sheets as early as obtained a loan from Nancy and Theodore for $1,000,000.00
1996.7 on 31 July 1995 and such loan shall be secured by:
 There was no written loan agreement, in view of the close  Robert and Rachel regused to pay their share of the loan
relationship between the parties. Part of the loan was also used  Thereafter, Juanito filed a "Stockholder Derivative Suit with
to purchase real properties for SMBI, for Juanito, and for prayer for an ex-parte Writ of Attachment/Receivership"
Roberto.8 (Complaint) before the RTC Bacolod on 29 January 2009. He
 On 22 December 2005, SMBI increased its authorized capital alleged that "the intentional and malicious refusal of defendant
stock to ₱10,000,000.00. The Certificate of Increase of Capital Sps. Roberto and Rachel Ang to settle their 50% share x xx of
Stock was signed by Juanito, Anecita, Roberto, and Rachel as the total obligation x xx will definitely affect the financial
directors of SMBI.9 viability of plaintiff SMBI."14
Juanito claimed, however, that the increase of SMBI’s capital Juanito also claimed that he has been "illegally excluded from
stock was done in contravention of the Corporation Code.10 the management and participation in the business of [SMBI
According to Juanito, when he and Anecita left for Canada: through] force, violence and intimidation" and that Rachel and
Sps. Roberto and Rachel Ang took over the active Roberto have seized and carted away SMBI’s records from its
management of [SMBI]. office.15  Rachel also argued that the Complaint failed to
 Through the employment of sugar coated words, they were allege that Juanito "exerted all reasonable efforts to exhaust all
able to successfully manipulate the stocks sharings between intra-corporate remedies available under the articles of
themselves at 50-50 under the condition that the procedures incorporation, by-laws, laws or rules governing the corporation
mandated by the Corporation Code on increase of capital stock to obtain the relief he desires," as required by the Interim
be strictly observed (valid Board Meeting). Rules.
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 During cross-examination, Juanito admitted that there was of the other corporations owned by the Angs as well as the
no prior demand for accounting or liquidation nor any written purchase of real properties for the Ang brothers.
objection to SMBI’s increase of capital stock. ISSUES: I.  SMBI was never a party to the Settlement Agreement or the
Whether based on the allegations of the complaint, the nature Mortgage. It was never named as a co-debtor or guarantor of
of the case is one of a derivative suit or not. RULING: the loan. Both instruments were executed by Juanito and
Complaint is not a derivative suit. Anecita in their personal capacity, and not in their capacity as
 A derivative suit is an action brought by a stockholder on directors or officers of SMBI. Thus, SMBI is under no legal
behalf of the corporation to enforce corporate rights against the obligation to satisfy the obligation.
corporation’s directors, officers or other insiders.29 Under  Since damage to the corporation was not sufficiently proven
Sections 2330 and 3631 of the Corporation Code, the directors by Juanito, the Complaint cannot be considered a bona fide
or officers, as provided under the bylaws,32 have the right to derivative suit. A derivative suit is one that seeks redress for
decide whether or not a corporation should sue. Since these injury to the corporation, and not the stockholder. No such
directors or officers will never be willing to sue themselves, or injury was proven in this case.
impugn their wrongful or fraudulent decisions, stockholders  The Complaint also failed to allege that all available corporate
are permitted by law to bring an action in the name of the remedies under the articles of incorporation, by-laws, laws or
corporation to hold these directors and officers accountable.33 rules governing the corporation were exhausted, as required
In derivative suits, the real party ininterest is the corporation, under the Interim Rules. o x xxNo written demand was ever
while the stockholder is a mere nominal party made for the board of directors to address private respondent
 However, it cannot prosper without first complying with the JuanitoAng’s concerns.1âwphi1
legal requisites for its institution. Section 1, Rule 8 of the  The fact that [SMBI] is a family corporation does not exempt
Interim Rules imposes the following requirements for derivative private respondent JuanitoAng from complying with the
suits: 1. The person filing the suit must be a stockholder or Interim Rules. In the x xx Yu case, the Supreme Court held
member at the time the acts or transactions subject of the that a family corporation is not exempt from complying with
action occurred and the time the action was filed; 2. He must the clear requirements and formalities of the rules for filing a
have exerted all reasonable efforts, and alleges the same with derivative suit. There is nothing in the pertinent laws or rules
particularity in the complaint, to exhaust all remedies available which state that there is a distinction between x xx family
under the articles of incorporation, by-laws, laws or rules corporations x xx and other types of corporations in the
governing the corporation or partnership to obtain the relief he institution by a stockholder of a derivative suit.38
desires; 3. No appraisal rights are available for the act or acts  The CA-Cebu correctly ruled that the Complaint should be
complained of; and 4. The suit is not a nuisance or harassment dismissed since it is a nuisance or harassment suit under
suit. Section 1(b) of the Interim Rules. Section 1(b) thereof provides:
 Applying the foregoing, we find that the Complaint is not a b) Prohibition against nuisance and harassment suits. -
derivative suit. The Complaint failed to show how the acts of Nuisance and harassment suits are prohibited. In determining
Rachel and Roberto resulted in any detriment to SMBI.  The whether a suit is a nuisance or harassment suit, the court
CA-Cebu correctly concluded that the loan was not a corporate shall consider, among others, the following: (1) The extent of
obligation, but a personal debt of the Ang brothers and their the shareholding or interest of the initiating stockholder or
spouses. member; (2) Subject matter of the suit; (3) Legal and factual
 The check was issued to "JuanitoAng and/or AnecitaAng basis of the complaint; (4) Availability of appraisal rights for the
and/or Roberto Ang and/or Rachel Ang" and not SMBI. The act or acts complained of; and (5) Prejudice or damage to the
proceeds of the loan were used for payment of the obligations
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corporation, partnership, or association in relation to the relief Respondent argues that deposit on future subscription is not
sought.
 In case of nuisance or harassment suits, the court may, subject to DST under Section 175 of the Tax Code. Respondent
motuproprio or upon motion, forthwith dismiss the case. contends that by presenting its GIS and financial statements, it
had already sufficiently proved that the amount sought to be
CIR vs FIRST EXPRESS PAWNSHOP taxed is deposit on future subscription, which is not subject to
  DST.[34] Respondent claims that it cannot be required to
 
submit proof of DST payment on subscription because such
Facts
payment is non-existent. Thus, the burden of proving that
  there was an agreement to subscribe and that certificates of
In 2001, petitioner issued assessment notices against First stock were issued for the deposit on subscription rests on
Express Pawnshop Company, Inc.for deficiency income tax, for petitioner and his examiners.
deficiency value-added tax (VAT)
for deficiency documentary stamp tax (DST) on deposit  
on subscription and Petitioner alleged that the assessment was valid and
for deficiency DST of P62,128.87 on pawn tickets. correct and the taxpayer had the burden of proof to impugn its
validity or correctness. Petitioner maintained that respondent
Respondent contended that : is subject to 10% VAT based on its gross receipts pursuant to
1. petitioner did not consider the supporting documents Republic Act No. 7716, or the Expanded Value-Added Tax Law
on the interest expenses and donations which resulted in the (EVAT). Petitioner also cited BIR Ruling No. 221-91 which
deficiency income tax. provides that pawnshop tickets are subject to DST. [15]
2. pawnshops are not lending investors whose services  
are subject to VAT, hence it was not liable for deficiency VAT   CTA En Banc affirmed respondents liability to pay the
3. no deficiency DST was due because Section 180 of the VAT and ordering it to pay DST on its pawnshop tickets.
National Internal Revenue Code (Tax Code) does not cover any However, the CTA En Banc found that respondents deposit on
document or transaction which relates to respondent. subscription was not subject to DST.[19]
4. the issuance of a pawn ticket did not constitute a  
pledge under Section 195 of the Tax Code  
Issue:

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Whether respondent is liable to pay DST on deposit on privilege of issuing shares of stock, and, therefore, the taxes
subscription of capital stock. accrue at the time the shares are issued. RMC 47-97 also
  defines issuance as the point in which the stockholder acquires
and may exercise attributes of ownership over the stocks.
 
Ruling As pointed out by the CTA, Sections 175 and 176 of the Tax
  Code contemplate a subscription agreement in order for a
In Section 175 of the Tax Code, DST is imposed on the original taxpayer to be liable to pay the DST. A subscription contract is
issue of shares of stock. The DST, as an excise tax, is levied defined as any contract for the acquisition of unissued stocks
upon the privilege, the opportunity and the facility of issuing in an existing corporation or a corporation still to be formed.
[43]
shares of stock  A stock subscription is a contract by which the subscriber
agrees to take a certain number of shares of the capital stock
In Section 176 of the Tax Code, DST is imposed on the sales, of a corporation, paying for the same or expressly or impliedly
agreements to sell, memoranda of sales, deliveries or transfer promising to pay for the same.[44]
of shares or certificates of stock in any association, company,  
or corporation, or transfer of such securities by assignment in  

blank, or by delivery, or by any paper or agreement, or Based on Rosarios testimony and respondents financial

memorandum or other evidences of transfer or sale whether statements as of 1998, there was no agreement to subscribe to

entitling the holder in any manner to the benefit of such the unissued shares. Here, the deposit on stock subscription

certificates of stock, or to secure the future payment of money, refers to an amount of money received by the corporation as a

or for the future transfer of certificates of stock. deposit with the possibility of applying the same as payment for

In CompagnieFinanciereSucresetDenrees v. Commissioner of the future issuance of capital stock.

Internal Revenue, this Court held that under Section 176 of the  

Tax Code, sales to secure the future transfer of due-bills,  Clearly, the deposit on stock subscription as reflected in

certificates of obligation or certificates of stock are subject to respondents Balance Sheet as of 1998 is not a subscription

documentary stamp tax.[42] agreement subject to the payment of DST. There is

  no P800,000 worth of subscribed capital stock that is reflected

RMO 08-98, reiterating Revenue Memorandum Circular No. in respondents GIS. The deposit on stock subscription is

47-97 (RMC 47-97), also states that what is being taxed is the merely an amount of money received by a corporation with a

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view of applying the same as payment for additional issuance 1.         An attempted withdrawal of so much capital from the
fund which the company’s creditors were entitled ultimately to
of shares in the future, an event which may or may not rely, and
happen. The person making a deposit on stock subscription 2.         For having been effected without compliance with the
statutory requirements of § 17 of the Corporation Law
does not have the standing of a stockholder and he is not regarding reduction of capital stock, and
entitled to dividends, voting rights or other prerogatives 3.         For failure to file a certificate with the Bureau of
and attributes of a stockholder. Hence, respondent is not liable Commerce and Industry, showing such reduction.

for the payment of DST on its deposit on subscription for the Thus, stockholder is still liable for the unpaid balance of his
reason that there is yet no subscription that creates rights and subscription.
obligations between the subscriber and the corporation.
Ratio:  Subscriptions to the capital of a corporation constitute
  a fund to which creditors have a right to look for satisfaction of
their claims and that the assignee in insolvency can maintain
# 101 an action upon any unpaid stock subscription in order to
PHILIPPINE TRUST COMPANY, vs .MARCIANO RIVERA realize assets for the payment of its debts.  A corporation has
G.R. No. L-19761             January 29, 1923 no power to release an original subscriber to its capital
stock from the obligation of paying for his shares, w/o a
Facts: Cooperativa Naval Filipina was duly incorporated with a valuable consideration for such release; and as against
capital of P100,000, divided into 100 shares at a par value of creditors a reduction of the capital stock can take place
P100 each. Among its incorporators was Marciano Rivera, who only in the manner and under the conditions prescribed by the
subscribed for 450 shares, representing a value of P45,000. statute or the charter or the AOI.  Moreover, strict compliance
The company however became insolvent. Philippine Trust with statutory regulations is necessary.
became its assignee in bankruptcy. PhilTrust sought to recover
½ of the stock subscription of Rivera, which admittedly, has Note: that for reasons 2 and 3, Campos says that § 17 has
never been paid. Rivera contends that he never paid because been replaced by § 38, and now, even if all the requirements
the stockholders of Naval issued a resolution shortly after the are complied with, if creditors are prejudiced by such
company’s incorporation, stating that the capital shall be reduction, it is most unlikely that the SEC will approve it.
reduced by 50%. As a result, Rivera contends that the
subscribers were released from the obligation to pay any
unpaid balance of their subscription in excess of 50% of their
subscriptions. Rivera further contends that the subscriptions
of the subscribers were 50% cancelled, and certificates of
shares of stock were issued for the said remaining 50% of the
subscriptions.

Issue: Whether such reduction of the capital stock is valid.

Held: No. SC held that the said resolution is without effect for
being:
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