Equitable Interest: How Liquidating Dividends Impact Foreign Land Ownership in the Philippines

The Supreme Court's 2021 ruling in Khoo Boo Boon v. Belle Corporation clarifies a critical intersection of corporate law and constitutional property restrictions: whether a foreign corporation's entitlement to liquidating dividends consisting of Philippine land can be levied upon to satisfy a judgment debt. The case provides important guidance on equitable interests, the constitutional ban on foreign land ownership, and the priority of registered levies over unregistered sales.

Facts of the Case

Khoo Boo Boon, a Malaysian national, was the CEO of Legend International Resorts, Ltd. (LIRL), a Hong Kong corporation doing business in the Philippines. After LIRL was placed under liquidation, Boon was terminated and successfully sued for illegal dismissal. The Labor Arbiter awarded him over US$1.2 million and P10 million in damages.

When garnishment proved insufficient, Boon moved to levy a 2,899-square-meter parcel in Parañaque City. Although the property was registered under Manila Bay Landholdings, Inc. (MBLI), documents showed that MBLI had been absorbed by Belle Bay City Corporation (BBCC) through a merger. When BBCC was dissolved in 2005, its distribution plan allocated the property to LIRL as its liquidating dividends.

Belle Corporation, BBCC's parent, filed a third-party claim, asserting it had purchased the property through a contract to sell and deed of absolute sale. However, these instruments were never registered with the Register of Deeds.

The Issue

The central questions were: (1) whether a foreign stockholder's liquidating dividends in a dissolved Filipino corporation may be levied on execution; (2) whether LIRL, as a foreign corporation, could acquire leviable interest over private land without violating the constitutional prohibition on foreign land ownership; and (3) whether a registered notice of levy takes precedence over a prior unregistered sale.

The Ruling

The Supreme Court ruled in favor of Boon, holding that LIRL had equitable interest in the property that could be levied upon.

Equitable Interest Through Implied Trust. The Court explained that under Section 122 of Batas Pambansa Bilang 68 (the Corporation Code), when a corporation dissolves, its assets are distributed to stockholders as liquidating dividends. If no trustee is expressly designated, the board of directors continues as trustee by legal implication. Here, BBCC's directors held the property in trust for LIRL's benefit, creating an "implied trust" where LIRL held equitable title while BBCC held legal title.

The Court clarified that Fernando v. Spouses Lim was misapplied by the Court of Appeals. That case only addressed tax treatment of liquidating dividends—it did not mean stockholders acquire no interest in corporate assets upon liquidation.

Constitutional Prohibition and Foreign Stockholders. The Court acknowledged the constitutional ban on foreign ownership of private lands but reasoned that this cannot mean foreign stockholders automatically forfeit their liquidating dividends when a corporation's remaining assets consist solely of private land. Such a view would constitute forfeiture of property without due process and violate equal protection.

Instead, the Court held that if a dissolving corporation's assets consist only of private land, the foreign stockholder's liquidating dividend is deemed the equivalent of such land in cash, personal property, or non-land realty. The trustee has an equitable obligation to convert the land into property the foreigner may legally own. Until conversion, the foreign stockholder retains an equitable interest—but never a registrable title.

Levy on Equitable Interest. Citing Reyes v. Grey, the Court held that "property" subject to execution comprehends every species of title, inchoate or complete, legal or equitable. Since LIRL's equitable interest could be disposed of for value (indeed, Belle Corporation paid P72,475,000.00 for it), it was leviable.

Registered Levy Prevails. The Court applied the settled doctrine that a registered notice of levy takes precedence over a prior unregistered sale. Registration is the operative act that binds third persons under the Torrens system. Since the contract to sell was never registered, it was not binding on Boon as a judgment creditor.

Practical Takeaways

• Foreign stockholders of dissolved Philippine corporations retain equitable interests in liquidating dividends consisting of private land, though such interests never ripen into registrable title.
• Equitable interests are leviable to satisfy judgment obligations, even when legal title stands in another's name.
• Trustees must convert land into permissible assets for foreign beneficiaries—cash, personal property, or non-land realty—to respect both the constitutional ban and the foreigner's property rights.
• Register conveyances promptly. An unregistered sale loses to a subsequently registered notice of levy, regardless of good faith.
• Corporations in liquidation should plan asset distributions carefully, particularly when foreign stockholders are involved, to avoid constitutional complications.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.