Sale of Delinquent Shares

Delinquent Shares as a Capital Collection Device

Sale of delinquent shares is the statutory method by which a corporation enforces payment of an unpaid stock subscription without first filing an ordinary collection case. It protects the corporation's capital because a subscription is not a mere option to buy shares; it is a binding undertaking to contribute to the corporate fund.

The unpaid balance of a subscription is an asset of the corporation and may be reached by corporate creditors through the corporation. Delinquency rules therefore serve both internal corporate order and the trust fund principle that subscribed capital should not be casually withdrawn, forgiven, or left uncollected to the prejudice of creditors.

The sale is not an ordinary sale of corporate property. It is a forced sale of the subscriber's stockholder interest to satisfy the unpaid balance, accrued interest, advertisement costs, and expenses of sale. The corporation receives payment of the unpaid subscription, while ownership of the number of shares sold passes to the winning bidder.

When Shares Become Delinquent

The starting point is the maturity of the unpaid subscription. The subscription contract may itself fix the dates and amounts for payment. If it does not, the board of directors may make a call requiring payment of all or part of the unpaid subscription on a specified date.

When the subscriber fails to pay on the date fixed in the subscription contract or in the board call, the entire balance of the subscription becomes due and payable. Interest also runs on the unpaid balance at the rate agreed upon in the subscription contract or, in the absence of agreement, at the legal rate.

If payment is still not made within thirty days from the due date, all shares covered by the subscription become delinquent, unless the board orders otherwise. Delinquency therefore attaches to the subscription as a whole and not merely to the installment that was not paid.

• There must be an enforceable unpaid subscription. A delinquency sale presupposes a valid subscription and a matured obligation to pay.
• There must be a due date. The due date may arise from the subscription contract or from a proper board call.
• There must be nonpayment after the grace period. Failure to pay on the due date accelerates the balance, but delinquency arises after the statutory thirty-day period unless the board acts otherwise.
• The board retains collection choices. The corporation may proceed to delinquency sale, sue to collect the unpaid subscription, or use lawful remedies provided in the bylaws, subject to the rule against double recovery.

Board Resolution Ordering the Sale

The sale of delinquent shares must be ordered by the board of directors through a resolution. This requirement matters because the sale can divest a stockholder of shares and alter voting control, dividend rights, and the corporation's stock and transfer records.

The resolution must state the amount due on the subscription, the accrued interest, and the costs and expenses chargeable to the delinquent stockholder. It must also fix the date, time, and place of sale. The date of sale must be not less than thirty days and not more than sixty days from the date the shares became delinquent.

The board resolution performs three functions. It confirms that the corporation has chosen the statutory sale remedy, supplies the financial amount that must be paid to avoid sale, and gives the procedural details necessary for notice and public auction.

Notice of Delinquency Sale

Notice is indispensable because the stockholder must be given a final opportunity to preserve the shares by paying the amount due. The notice must include a copy of the board resolution ordering the sale, so the delinquent stockholder can verify the amount claimed and the date, time, and place of auction.

The notice must be sent to every delinquent stockholder personally, by registered mail, or by another mode allowed by the bylaws. It must also be published once a week for two consecutive weeks in a newspaper of general circulation in the province or city where the principal office of the corporation is located.

Publication is required because the sale is public and because potential bidders must be informed that shares will be auctioned. Personal or registered notice protects the delinquent subscriber; publication protects the integrity and competitiveness of the auction.

Before the date fixed for sale, the delinquent stockholder may stop the sale by paying the amount due on the subscription, accrued interest, and the costs of advertisement and sale then chargeable. Full payment removes the delinquency and restores the stockholder to the normal incidents of share ownership.

How the Public Auction Works

The auction is conducted to determine who will pay the corporation's full claim for the smallest number of shares or fraction of a share. The winning bidder is not the one who offers the highest total price for all the delinquent shares; the winning bidder is the one who satisfies the entire amount due while taking the least number of shares from the delinquent subscriber.

This rule preserves as much of the original subscriber's equity as possible. Once the winning bidder pays the full balance, interest, advertisement costs, and sale expenses, the remaining shares covered by the subscription are credited as fully paid in favor of the original stockholder.

For example, if a subscriber has one hundred subscribed shares and the total delinquency claim is satisfied by a bidder who asks for twenty shares, only those twenty shares are sold. The remaining eighty shares are treated as fully paid in favor of the original subscriber because the subscription obligation has been fully discharged by the auction payment.

Corporate Bid When There Is No Buyer

If no bidder offers to pay the full amount due for any number of shares or fraction of a share, the corporation may bid for the delinquent shares. The amount due is then credited as fully paid in the corporate books, and the shares acquired by the corporation become treasury shares.

This corporate bid prevents the unpaid subscription from remaining indefinitely unresolved. It also prevents a delinquent stockholder from retaining voting or ownership incidents despite failure to pay the capital contribution required by the subscription.

Treasury shares held by the corporation do not vote and do not receive dividends while in the treasury. They may later be sold or otherwise disposed of by the corporation in accordance with corporate law and the corporation's internal approvals.

Effects of Delinquency Before Sale

Before sale, the delinquent stockholder remains liable for the unpaid subscription, interest, and lawful charges. Delinquency does not cancel the subscription, extinguish the debt, or return the parties to their pre-subscription positions.

Delinquent shares cannot be voted, cannot be used for representation at stockholders' meetings, and cannot support the delinquent stockholder's election or participation rights. The holder is generally deprived of stockholder rights while delinquency subsists, except the right to dividends as governed by corporate law.

Cash dividends due on delinquent shares are applied to the unpaid balance, interest, and costs. Stock dividends are withheld until the unpaid subscription is fully paid. These rules prevent a stockholder from enjoying economic benefits while withholding the promised capital contribution.

A corporation also need not register a transfer of shares against which it has an unpaid claim. This restriction prevents a delinquent subscriber from shifting the shares to another person while the corporation's capital claim remains unsettled.

Effects After a Valid Sale

After a valid delinquency sale, the purchaser becomes entitled to the shares sold, subject to the corporation's stock and transfer procedures. The delinquent stockholder loses the shares transferred to the purchaser but retains any remaining shares credited as fully paid.

The sale satisfies the unpaid subscription to the extent required by the statutory auction rule. The corporation records the payment or credit, recognizes the purchaser or treasury status of the sold shares, and adjusts the status of the original subscriber's remaining shares.

If the corporation itself acquires the shares for lack of an outside bidder, the shares become treasury shares. If an outside bidder acquires them, the bidder steps into the rights corresponding to those shares, including dividend and voting rights once properly recorded and not otherwise restricted by law or the articles, bylaws, or lawful agreements.

Questioning a Delinquency Sale

A delinquency sale may be questioned for irregularity or defect in the notice or in the conduct of the sale, but the challenge is strictly limited. An action to recover shares sold for delinquency must be brought within six months from the date of sale.

The challenger must also first pay or tender to the party holding the shares the amount for which the shares were sold, with legal interest from the date of sale. This tender requirement reflects the principle that a party seeking to recover the shares should restore the amount that satisfied the corporate claim.

The action cannot prosper on general dissatisfaction with the sale. The complaining party must allege and prove the specific irregularity or defect relied upon, such as a material failure in notice, an improper sale date, or a departure from the statutory auction method.

These limitations stabilize corporate ownership records. Shares are voting and economic interests in a continuing juridical entity; prolonged uncertainty over ownership can disturb elections, dividends, transfers, and corporate control.

Relation to Other Collection Remedies

The delinquency sale remedy does not eliminate the corporation's ordinary right to collect unpaid subscriptions by court action. The corporation may choose the remedy that best protects its capital, but it may not collect more than what is due.

A court action seeks a money judgment against the subscriber. A delinquency sale enforces the same obligation through the subscriber's shares. A lawful bylaw remedy may supplement these methods if it is consistent with corporate law, due process, and the rights of stockholders.

The remedies are unified by one principle: a stock subscription is a binding capital commitment. The subscriber cannot defeat corporate creditors, other stockholders, or the corporation by refusing to pay while retaining the benefits of share ownership.

Essential Distinctions

Delinquency sale should also be distinguished from a voluntary transfer of shares. In a voluntary transfer, the stockholder chooses the transferee and the consideration, subject to lawful restrictions. In a delinquency sale, the law supplies the procedure, the corporation enforces a matured capital claim, and the auction determines the buyer under the smallest-number-of-shares rule.

It should likewise be distinguished from forfeiture. The statutory sale does not automatically confiscate all shares for nonpayment. It sells only the number of shares necessary to satisfy the corporate claim, and any remaining shares are credited as fully paid to the original subscriber.