Our government is continuously instituting reforms aimed at making the entry of investments easier and simplifying the procedures and requirements for starting and doing business. For instance, the establishment of new corporate entities has become relatively easier and faster with the digitalization and streamlining of the procedures, processes, and requirements relating to the registration of companies.
At the same time, the government is implementing counter-measures to prevent abuses of the improved system and to avoid the use of corporate entities that can be utilized as vehicles for committing fraud and other illegal activities. In this respect, the Securities and Exchange Commission (SEC) is taking the lead, being the government agency charged with the supervision and regulation of corporate entities and the protection of the investing public.
Recently, the said agency issued guidelines providing details for the revocation of registration and declaration of delinquent status of corporations that are non-compliant and non-operational. Based on the said guidelines, the SEC may deem as revoked the certificate of incorporation of a company that fails to formally organize and commence its business within five years from the date of its incorporation. A corporation is considered to have formally organized if it has (a) adopted its By-laws; (b) elected the members of its Board of Directors and officers; (c) established its principal office; and (d) taken the necessary steps to prepare the entity to transact the purposes for which it is created. On the other hand, an entity is considered to have commenced its operations when it has performed initiatory acts geared toward the fulfillment of its purposes. Examples of these preparatory acts are: (a) entering into contracts or negotiations for the lease or sale of properties to be used as office, business, or factory sites and making plans for the construction of such; (b) entering into contracts and negotiations for the sale or purchase of goods, services, properties, or equipment; and (c) entering into contracts to pursue the purposes, projects, and activities for which the corporation was organized. By “deemed revocation” means that the SEC can revoke the registration of a company at an instant, without notice and hearing, if after the end of the five-year period, the corporation fails to formally organize and commence its operations.
The SEC may also declare as delinquent a corporation that already commenced its business but subsequently becomes inoperative for a period of at least five consecutive years. In this case, the SEC shall issue first a show cause order to the corporation, directing it to explain why its status should not be declared delinquent. If the corporation fails to submit any valid justification within 30 days from receipt of the show cause order, its status shall become “Delinquent” in the records. A corporation may also be declared delinquent if it fails to file its financial statements and/or General Information Sheets (GIS) three times, consecutively or intermittently, within a period of five years.
Corporations with “Delinquent Status” may not have their transactions (e.g., application for amendment of articles and license) accepted or approved by the SEC. Delinquent corporations shall not also be entitled to the issuance of a Certificate of No Derogatory Information by the Commission. In addition, the corresponding fines and surcharges shall be imposed.
Delinquent corporations may, within a certain period of time, redeem their active status. An entity which has become delinquent by reason of its continuous inoperation for five years may, within a period of two years, resume its operations by submitting any two of the following documents: (a) income tax returns; (b) mayor’s or business permits; (c) contracts; (d) receipts evidencing real property tax payments; (e) certifications/recognitions/annual conventions; and (f) any other similar or related documents. On the other hand, an entity that has become delinquent for failure to comply with the reportorial requirements has a period of six months to submit the financial statements and GIS.
The SEC may only revoke the registration of a delinquent corporation if it fails to redeem its status and submit the required documents within the specified period of time. A corporation with a revoked status may, at any time, file a petition with the SEC to lift the order of revocation.
To avoid disruptions in operations through the revocation of registration or being declared as delinquent—an entity should immediately start operations, avoid long-time interruptions in the conduct of its business, and comply with regular reportorial requirements.
The author is a junior partner of Du-Baladad and Associates Law Offices (BDB Law), a member-firm of WTS Global.
The article is for general information only and is not intended, nor should be construed as a substitute for tax, legal or financial advice on any specific matter. Applicability of this article to any actual or particular tax or legal issue should be supported therefore by a professional study or advice. If you have any comments or questions concerning the article, you may e-mail the author at firstname.lastname@example.org or call 8403-2001 local 160.