ASG Law

Tag: Guarantor Liability

  • Corporate Dissolution: Directors as Trustees and Guarantor Liability After Corporate Revocation

    In a significant ruling, the Supreme Court held that the revocation of a corporation’s Certificate of Registration does not automatically extinguish its legal rights or the liabilities of its debtors. Even after dissolution, the corporation’s directors become trustees by operation of law, empowered to continue legal proceedings. Moreover, the Court affirmed that guarantors remain liable for the debts of a corporation, even after its dissolution, reinforcing the binding nature of guarantees and the principle that corporate dissolution should not unjustly enrich debtors at the expense of creditors. This decision clarifies the scope of corporate liquidation and the enduring responsibilities of guarantors, ensuring the protection of creditors’ rights in the face of corporate dissolution.

    Can a Dissolved Corporation Still Collect Debts? Bancom’s Legal Battle

    This case revolves around a dispute between Bancom Development Corporation and the Reyes Group, who acted as guarantors for loans obtained by Marbella Realty, Inc. from Bancom. Marbella defaulted on its loan obligations, leading Bancom to file a collection suit. Subsequently, Bancom’s Certificate of Registration was revoked by the Securities and Exchange Commission (SEC). The central legal question is whether the revocation of Bancom’s corporate registration abated the legal proceedings against the Reyes Group, and whether the guarantors are still liable for Marbella’s debts.

    The petitioners, Ramon E. Reyes and Clara R. Pastor, argued that the revocation of Bancom’s Certificate of Registration by the SEC should abate the suit, claiming Bancom no longer existed. Furthermore, they contended that the appellate court incorrectly relied upon the Promissory Notes and the Continuing Guaranty, failing to consider earlier agreements that purportedly absolved them of liability for the debt. The Supreme Court addressed these arguments by clarifying the legal implications of corporate dissolution under Section 122 of the Corporation Code.

    The Supreme Court DENIED the Petition, asserting that the revocation of Bancom’s Certificate of Registration did not justify the abatement of the proceedings. The Court cited Section 122 of the Corporation Code, which allows a corporation whose charter is annulled or terminated to continue as a body corporate for three years for specific purposes, including prosecuting and defending suits. However, the Court noted jurisprudence has established exceptions to this rule, allowing an appointed receiver, assignee, or trustee to continue pending actions on behalf of the corporation even after the three-year winding-up period.

    The Court cited Sumera v. Valencia, where it was held that if a corporation liquidates its assets through its officers, its existence terminates after three years. However, if a receiver or assignee is appointed, the legal interest passes to the assignee, who may bring or defend actions for the corporation’s benefit even after the three-year period. Subsequent cases further clarified that a receiver or assignee need not be appointed; a trustee specifically designated for a particular matter, such as a lawyer representing the corporation, may institute or continue suits. Additionally, the board of directors may be considered trustees by legal implication for winding up the corporation’s affairs.

    In this case, the SEC revoked Bancom’s Certificate of Registration on 26 May 2003. Despite this, Bancom did not convey its assets to trustees, stockholders, or creditors, nor did it appoint new counsel after its former law firm withdrew. The Supreme Court clarified that the mere revocation of a corporation’s charter does not automatically abate proceedings. Since Bancom’s directors are considered trustees by legal implication, the absence of a receiver or assignee was inconsequential. Moreover, the dissolution of a creditor-corporation does not extinguish any right or remedy in its favor, as stipulated in Section 145 of the Corporation Code.

    Sec. 145. Amendment or repeal.- No right or remedy in favor of or against any corporation, its stockholders, members, directors, trustees, or officers, nor any liability incurred by any such corporation, stockholders, members, directors, trustees, or officers, shall be removed or impaired either by the subsequent dissolution of said corporation or by any subsequent amendment or repeal of this Code or of any part thereof.

    The Court emphasized that the corresponding liability of the debtors of a dissolved corporation remains subsisting, preventing unjust enrichment at the corporation’s expense. The Supreme Court affirmed the CA’s finding that the petitioners were liable to Bancom as guarantors of Marbella’s loans. The petitioners executed a Continuing Guaranty in favor of Bancom, making them solidarily liable with Marbella for the amounts indicated on the Promissory Notes.

    The Court rejected the petitioners’ defense that the promissory notes were not binding and that the funds released were merely additional financing. The obligations under the Promissory Notes and the Continuing Guaranty were plain and unqualified. Marbella promised to pay Bancom the amounts stated on the maturity dates, and the Reyes Group agreed to be liable if Marbella’s guaranteed obligations were not duly paid.

    Even considering the other agreements cited by the petitioners, the Court found they would still be liable. These agreements established that Fereit was initially responsible for releasing receivables from State Financing, Marbella assumed this obligation after Fereit’s failure, and Bancom provided additional financing to Marbella for this purpose, with Fereit obligated to reimburse Marbella. The Amendment of the Memorandum of Agreement explicitly stated that Marbella was responsible for repaying the additional financing, regardless of the profitability of the Marbella II Condominium Project.

    The Court pointed to the provisions highlighting Bancom’s extension of additional financing to Marbella, conditional upon repayment, and Marbella’s unconditional obligation to repay Bancom the stated amount, reflected in the Promissory Notes. Marbella, in turn, had the right to seek reimbursement from Fereit, a separate entity. While petitioners claimed Bancom controlled Fereit’s assets and activities, they provided insufficient evidence to support this assertion.

    The Continuing Guaranty bound the petitioners to pay Bancom the amounts indicated on the original Promissory Notes and any subsequent instruments issued upon renewal, extension, amendment, or novation. The final set of Promissory Notes reflected a total amount of P3,002,333.84. Consequently, the CA and RTC ordered the payment of P4,300,247.35, representing the principal amount and all interest and penalty charges as of 19 May 1981, the date of demand.

    The Court affirmed this ruling with modifications, specifying the amounts the petitioners were liable to pay Bancom, including the principal sum, interest accruing on the principal amount from 19 May 1981, penalties accrued in relation thereto, and legal interest from the maturity date until fully paid. The Court found the award of P500,000 for attorney’s fees appropriate, pursuant to the stipulation in the Promissory Notes, while modifying the stipulated interest rate to conform to legal interest rates under prevailing jurisprudence.

    FAQs

    What was the key issue in this case? The key issue was whether the revocation of Bancom’s Certificate of Registration by the SEC abated the legal proceedings against the Reyes Group, who were guarantors of Marbella’s loans, and whether the guarantors remained liable for Marbella’s debts.
    Does the dissolution of a corporation extinguish its debts? No, the dissolution of a corporation does not extinguish its debts. Section 145 of the Corporation Code explicitly states that no right or remedy in favor of or against a corporation is removed or impaired by its subsequent dissolution.
    What happens to a corporation’s assets and liabilities upon dissolution? Upon dissolution, a corporation’s directors become trustees by legal implication. These trustees are responsible for winding up the corporation’s affairs, including settling its debts and distributing its remaining assets to stockholders, members, or creditors.
    Are guarantors still liable for a corporation’s debts after its dissolution? Yes, guarantors remain liable for a corporation’s debts even after its dissolution. The Continuing Guaranty executed by the guarantors remains in effect, binding them to pay the amounts indicated on the Promissory Notes.
    What is a Continuing Guaranty? A Continuing Guaranty is an agreement where a guarantor agrees to be liable for the debts of another party, such as a corporation, even if the terms of the debt are modified or renewed. It ensures that the creditor can seek recourse from the guarantor if the debtor defaults.
    What is the legal basis for directors acting as trustees after dissolution? The legal basis for directors acting as trustees after dissolution is found in Section 122 of the Corporation Code and related jurisprudence. This provision allows the corporation to continue as a body corporate for three years after dissolution to wind up its affairs, with directors assuming the role of trustees by legal implication.
    Can a dissolved corporation still pursue legal action to collect debts? Yes, a dissolved corporation can still pursue legal action to collect debts. Even after dissolution, the corporation’s rights and remedies remain intact, allowing it to prosecute and defend suits to settle and close its affairs.
    What was the outcome of the Bancom case? The Supreme Court denied the petition and affirmed the Court of Appeals’ decision, with modifications. The petitioners, Ramon E. Reyes and Clara R. Pastor, were held jointly and severally liable with Marbella Manila Realty, Inc., and other individuals for the amounts due to Bancom.

    In conclusion, the Supreme Court’s decision in this case underscores the principle that corporate dissolution does not automatically absolve debtors of their obligations. It reinforces the enduring responsibilities of guarantors and the continued legal standing of dissolved corporations to pursue and defend suits. This ruling ensures that creditors’ rights are protected and that debtors cannot unjustly benefit from the dissolution of a corporation.

    For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

    Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
    Source: Ramon E. Reyes and Clara R. Pastor vs. Bancom Development Corp., G.R. No. 190286, January 11, 2018

  • Guarantee Obligations: Upholding Reimbursement Rights Despite Waiver of Excussion

    The Supreme Court ruled that a guarantor who pays a debtor’s obligation can demand reimbursement from the debtor, even if the guarantor waived the right to exhaust the debtor’s properties first (benefit of excussion). This decision reinforces the guarantor’s right to indemnification, ensuring that debtors remain responsible for their debts, regardless of the guarantor’s choice to expedite payment.

    Guarantee Agreements: Can Debtors Avoid Reimbursement by Questioning the Guarantor’s Payment?

    This case involves JN Development Corporation (JN), spouses Rodrigo and Leonor Sta. Ana, and Narciso Cruz, who obtained a loan from Traders Royal Bank (TRB) guaranteed by Philippine Export and Foreign Loan Guarantee Corporation (PhilGuarantee). When JN defaulted, PhilGuarantee paid TRB and sought reimbursement from JN and its co-signatories. The central legal question is whether JN and the other petitioners could avoid their obligation to reimburse PhilGuarantee based on arguments related to the guarantee’s expiration, alleged lack of consent to loan extensions, and TRB’s subsequent foreclosure.

    The heart of the matter revolves around the nature of a guarantee agreement. Under Article 2047 of the Civil Code, a guarantor binds themselves to the creditor to fulfill the obligation of the principal debtor if the latter fails to do so. In this case, PhilGuarantee acted as the guarantor for JN’s loan. This means that if JN failed to pay, PhilGuarantee would step in to cover the debt. Because PhilGuarantee fulfilled JN’s financial responsibilities by paying TRB, the law mandates that JN must indemnify PhilGuarantee for the payment made. This right to indemnification is clearly established in Article 2066 of the Civil Code.

    The guarantor who pays for a debtor must be indemnified by the latter.

    A key point of contention was the benefit of excussion, as provided in Article 2058 of the Civil Code, which states that a guarantor cannot be compelled to pay unless the creditor has exhausted all the property of the debtor and has resorted to all legal remedies against the debtor. However, the Supreme Court clarified that while a guarantor can invoke this right, they are not obligated to do so. They can choose to waive this benefit and pay the obligation directly. In this situation, PhilGuarantee’s choice to pay TRB without exhausting JN’s assets did not negate its right to reimbursement.

    Petitioners argued that PhilGuarantee’s guarantee had expired and that PhilGuarantee failed to give its express consent to the alleged extensions granted by TRB to JN, but the Court held that these arguments were without merit. Default and demand on PhilGuarantee occurred while the guarantee was still in effect. Further, the Court determined that the consent requirement in Art. 2079 is also waivable. PhilGuarantee’s payment to TRB constituted a waiver of any need for consent to loan extensions and confirmed its obligation under the guarantee.

    Addressing the foreclosure argument raised by JN, the Court determined that the argument was raised for the first time in the motion for reconsideration with the CA, which could not be countenanced. The evidence relating to the foreclosure, having been available during trial but not presented, could not be later presented. Furthermore, it did not constitute proof that JN actually paid its obligations with PhilGuarantee, with the Court noting that PhilGuarantee’s complaint was based on its payment to TRB as a guarantor and should be reimbursed, and that any issues concerning double payment between TRB and JN should be addressed by the parties.

    Narciso Cruz’s claim of forgery regarding his signature on the Deed of Undertaking was also rejected by the Court. The Court reiterated that forgery must be proven by clear, positive, and convincing evidence, which Cruz failed to provide. The notarized document carried a presumption of regularity, and Cruz’s mere denial was insufficient to overcome this presumption.

    The Court ultimately affirmed the Court of Appeals’ decision, emphasizing the guarantor’s right to reimbursement under Article 2066 of the Civil Code, which cannot be defeated by arguments challenging the guarantor’s payment choices. By upholding the CA’s decision, the Supreme Court provided clear guidance on the responsibilities of debtors and the rights of guarantors within financial agreements. Debtors are still responsible for their debts even if the guarantor chooses to expedite payment.

    FAQs

    What was the key issue in this case? The central issue was whether JN Development Corporation and its co-signatories were obligated to reimburse PhilGuarantee for payments made on their behalf, despite arguments about the guarantee’s validity and the guarantor’s actions.
    What is a contract of guarantee? A contract of guarantee is an agreement where one party (the guarantor) promises to fulfill the obligations of another party (the debtor) if the debtor fails to do so. This is outlined in Article 2047 of the Civil Code.
    What is the benefit of excussion? The benefit of excussion is the right of a guarantor to demand that the creditor exhaust all the debtor’s properties before seeking payment from the guarantor. Article 2058 of the Civil Code outlines this benefit.
    Can a guarantor waive the benefit of excussion? Yes, a guarantor can waive the benefit of excussion and choose to pay the creditor directly without requiring the creditor to exhaust the debtor’s assets first. This waiver does not negate the guarantor’s right to reimbursement.
    What happens if a guarantor pays the debt? Under Article 2066 of the Civil Code, the debtor must indemnify the guarantor for the total amount of the debt, legal interests, and expenses incurred by the guarantor after notifying the debtor.
    What if the debtor claims the guarantee had expired? The guarantor’s liability is determined by the default date, not the payment date, so the expiration of the guarantee after the default does not extinguish the guarantor’s liability.
    Is consent from the guarantor required for loan extensions? While consent is usually required under Article 2079, the guarantor can waive this requirement, especially if they choose to honor the guarantee despite the extensions.
    What is required to prove forgery of a signature? Forgery must be proven by clear, positive, and convincing evidence. Mere denial is insufficient, especially when the document is notarized, as notarized documents carry a presumption of regularity.
    Can a principal debtor invoke defenses available only to the guarantor? No. A principal debtor cannot invoke defenses such as the benefit of excussion or the need for consent to extensions, as these rights belong solely to the guarantor and serve to protect the guarantor against unwarranted enforcement of the guarantee.

    This ruling clarifies the rights and obligations of guarantors and debtors, reinforcing the principle that debtors remain primarily responsible for their debts, even when a guarantor expedites payment. It emphasizes that waiving the benefit of excussion does not absolve the debtor of their responsibility to indemnify the guarantor.

    For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

    Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
    Source: JN Development Corporation v. Philippine Export and Foreign Loan Guarantee Corporation, G.R. No. 151060, August 31, 2005