1. AO-AS v.

COURT OF APPEALS
Rev. Luis Ao-As, Rev. Jose Laking, Eusquicio Galang, et. al.,, Petitioner
-versus- Court of Appeals, Thomas Batong, Juanito Basalong, et. al.,,
Respondents

G.R. No. 128464, 20 June 2006, Chico-Nazario, J., (491 SCRA 339)

Non-Stock Corporations – Distribution of Assets Upon Dissolution

FACTS:

The Lutheran Church in the Philippines (LCP) is a religious organization

registered with the Securities and Exchange Commission (SEC) wherein it is
comprised of several districts that its own corresponding representative.
These are namely: North Luzon District (NLD), South Luzon District (SLD),
and Mindanao District (MDD). A resolution was passed dividing the NLD into
two which became Northern Luzon Highland District (NLHD), Northern Luzon
Lowland District (NLSD), and Visayan Islands District (VID). Thus, the total
number of representatives, wherein two (2) is allotted per district became
eleven (11), the one being the President of the LCP which is elected at large
by the whole organization.

Operations of the corporation went were peaceful until such Eclesio Hipe
brought complaints before the court disputing the resolution of the
organization which dismissed his services. The Batong Group

ISSUE:

Whether or not the Court of Appeals committed grave abuse of discretion in

confusing the derivative suit with liquidation of the corporation? (YES)

RULING:

The general is that where a corporation is an injured party, its power to sue
is lodged with its board of directors or trustees. As an exception, a
stockholder is allowed to file a derivative suit on behalf of the corporation
wherein he holds stocks in order to protect or vindicate corporate rights,
whenever the officials refuse to sue, or are the ones to be sued, or control
the corporation accordingly. In other words, a derivative suit is an action by
the shareholder to enforce a corporate cause of action. In this regard,
derivative suits are within the jurisdiction of the Regional Trial Court.

On the other hand, liquidation under the Corporation Code indicates that
when the corporation expires by the lapse of its term, on its own accord, or
whose corporate existence is extinguished by any other manner, it shall
continue for three (3) years after the time when it would have been so
dissolved in order to prosecute and defend suits to enable it to settle affairs
and dispose of their property properly with the caveat that it shall not
continue it business.

Conversely speaking, liquidation is the process of settling the affairs of the

corporation which involves the winding up of affairs that includes collection
of all assets, payments of debt and distribution of assets.

The Court of Appeals is erroneous as it automatically proceeded to discuss

the liquidation proper of the derivative suit being filed by the respondents as
it can be seen that they are distinct from each other. Therefore, before even
discussing the liquidation of the corporation, the propriety of the derivative
suit must first be tackled.

Under, Sec. 1, Rule 8 of the Interim Rules of Procedure Governing Intra-

Corporate Controversies, for a derivative suit to prosper, the stockholder
must comply with the following:

1. The one filing the suit must be a stockholder or member at the time of
the transaction occurred AND at the time the action was filed;
2. The stockholder must have exerted all reasonable efforts AND alleges
with particularity in the complaint that he exhausted all available
remedies under the articles of incorporation, by-laws governing the
corporation;
3. No appraisal rights are available for the acts complained of; and
4. The suit was not meant to harass or vex.

Considering that the derivative suit did not particularly state that the
respondents did not exhaust all reasonable means, it must only fail and their
petition must be denied.