Capacity to sue

Capacity to Sue of Dissolved Corporation

Does a dissolved corporation have the capacity to sue?

Dissolution vs. Liquidation

Dissolution is the termination of corporate existence for business purpose. Once dissolved, a corporation loses its franchise to do business. However, the corporation is given three more years to continue as a body corporate for the sole purpose of liquidation.

Liquidation is the settlement of the affairs of the corporation after it has been dissolved. It involves the process of converting its assets into cash, paying its debts and other obligations, and distributing its remaining assets, if any, among the stockholders or members, as the case may be.

It must be stressed that during this three-year period, the corporation continues to exist only to settle and close its affairs. It is not allowed anymore to conduct its regular business activities.

Capacity to Sue During Liquidation Period

The Corporation Code explicitly provides that the dissolved corporation retains its legal capacity to continue prosecuting and defending pending suits by or against it during the three-year liquidation phase. During this three-year period, the dissolved corporation may also institute new suits to enforce its claims.

Capacity to Sue After the Three-Year Liquidation Period

In the case of ALABANG DEVELOPMENT CORPORATION vs. ALABANG HILLS VILLAGE ASSOCIATION and RAFAEL TINIO (G.R. No. 187456), the dissolved corporation insisted that it could still validly initiate a complaint considering that the case involved the liquidation of its assets.

The Supreme Court disagreed. Citing its previous ruling the Supreme Court held:

“…the time during which the corporation, through its own officers, may conduct the liquidation of its assets and sue and be sued as a corporation is limited to three years from the time the period of dissolution commences…”

Liquidation may Proceed Beyond the Three-Year Period

It is not, however, required that the liquidation be completed during the three-year period. Liquidation may proceed beyond the three-year period, but it must be carried on by the trustees duly constituted under Sec. 122 of the Corporation Code (Sec. 139, Revised Corporation Code).