Corporation Law: The Revised Corporation Code of the Philippines - Sec 20

 THE REVISED CORPORATION CODE  OF THE PHILIPPINES  

Republic Act No. 11232 

TITLE II -  INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS

Sec. 20. Corporation by Estoppel. -

 All persons who assume to act as a corporation knowing it to be without the authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof: Provided, however, That when any such ostensible corporation is sued on any transaction entered by its as a corporation or on any tort committed by it as such, it shall not be allowed to use on any its lack of corporate personality as a defense. Anyone who assumes an obligation to an ostensible corporation as such cannot resist performance thereof on the ground that there was in fact no corporation.

NOTES 

1. Estoppel.

• One who assumes an obligation to an ostensible corporation as such cannot resist performance thereof on the ground that there was in fact no corporation. 
• os·ten·si·ble ー stated or appearing to be true, but not necessarily so.
• When a third person has entered into a contract with an association which represented itself to be a corporation, the association will be estopped from denying its corporate capacity in a suit against it by such third person.
• It cannot allege lack of capacity to be sued to evade responsibility on a contract it had entered into and by virtue of which it received advantages and benefit.

2. Liability as General Partner. 

• Those who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners. 
• Therefore, they are liable even beyond their investment; in other words, their personal properties may be made to answer for what is purportedly a corporate debt of the non-existent corporation. 
• This also means that those without knowledge of the non-existence of the corporation are liable as if they are regular stockholders of a corporation. 
• They are not liable beyond their investments.
• Even if the ostensible corporate entity is proven to be legally non-existent, a party may be estopped from denying its corporate existence. 
• The reason behind this doctrine is obvious ー  an unincorporated association has no personality and would be incompetent to act and appropriate for itself the power and attributes of a corporation as provided by law; it cannot create agents or confer authority on another to act in its behalf; thus, those who act or purport to act as its representatives or agents do so without authority and at their own risk.
• A person who acts as an agent without authority or without a principal is himself regarded as the principal, possessed of all the rights and subject to all the liabilities of a principal.
• A person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and obligations and comes personally liable for contracts entered into or for other acts performed as such agent.
• In acting on behalf of a corporation which he knew to be unregistered, he assumed the risk of reaping the consequential damages or resultant rights, if any, arising out of such transaction.
• The doctrine of corporation by estoppel may apply to the alleged corporation and to a third party. 
•  Alleged corporation
• In the first instance, an unincorporated association, which represented itself to be a corporation, will be estopped from denying its corporate capacity in a suit against it by a third person who relied in good faith on such representation.
• It cannot allege lack of personality to be sued to evade its responsibility for a contract it entered into and by virtue of which it received advantages and benefits.
• Third party.
• On the other hand, a third party who, knowing an association to be unincorporated, nonetheless treated it as a corporation and received benefits from it, may be barred from denying its corporate existence in a suit brought against the alleged corporation. 
• In such case, all those who benefited from the transaction made by the ostensible corporation, despite knowledge of its legal defects, may be held liable for contracts they impliedly assented to or took advantage of.
• In one case, the Supreme Court ruled that a lessor is bound under Section 21 of the Corporation Code (now Section 20 of the RCCP) by the contract with a corporation (as lessee) even if the contract was entered into before the latter's incorporation.
• The lessor was estopped from claiming that the contract was the personal contract of the officer who represented the corporation since the statements of the parties show that it was really meant for the corporation. 
• However, it seems that the more appropriate doctrine is plain estoppel under the New Civil Code and the rule on corporation by estoppel need not even be cited because the corporation eventually existed and there was no misrepresentation as to the existence of a corporation.
• The Supreme Court explained that the doctrine of corporation by estoppel is founded on principles of equity and is designed to prevent injustice and unfairness. 
• It applies when a non- existent corporation enters into contracts or dealings with third persons. 
• In such case, the person who has contracted or otherwise dealt with the non-existent corporation is estopped to deny the latter's legal existence in any action leading out of or involving such contract or dealing. 
• The doctrine of corporation by estoppel rests on the idea that if the Court were to disregard the existence of an entity which entered into a transaction with a third party, unjust enrichment would result as some form of benefit have already accrued on the part of one of the parties.

Enterprise Liability.

• Prof. Berle summarized the different situations involving cases when liability is imposed for "De Facto corporations."
• However, the "De Facto corporations" that he was referring to are not the equivalent of De Facto corporations contemplated in this jurisdiction under the RCCP and are more consistent with "Corporations by Estoppel" because he referred to enterprises that "have not secured creation of the entity." 
• The main sequences according to Prof. Berle are these:
1. The enterprise contracts with an outsider, who later brings actions against the enterprise as though it were a corporation;
• a case involving true estoppel 
2. The enterprise contracts with the outsider, and subsequently brings action in corporate form against the outsider;
• courts likewise use the word estoppel in resolving the issue of liability
3. The enterprise contracts with an outsider, and the outsider brings action against the component individuals; and
• it is believed that since there is really no corporation, the outsider or third party can maintain an action against the real parties in interest, the persons who compose the corporation by estoppel subject to the rule that only those who assume to act as a corporation knowing it to be without authority can be made liable as general partners. 
4. "The enterprise contracts with an outsider, and the component individuals seek to hold the outsider liable on his contract.
• may also prosper because there is no separate juridical personality to speak of.
• In this jurisdiction, liability must be resolved on the basis of Section 20 of the RCCP. 
• If there is cause of action on the part of the plaintiff/s in the first and the second situations, actions contemplated therein may be allowed to prosper on the basis of Section 20. 
• It should be noted in this connection that the conclusion is not entirely the same if what is involved is a real De Facto corporation under Section 19 of the RCCP.
• The actions in the first two situations enumerated above can prosper because there is, in fact, a juridical person that can be sued and/or can sue/file an action in the case of a De Facto corporation.
• The actions in the third situation cannot be maintained against the components and the components cannot maintain an action in the fourth situation because the personality of the components is separate and distinct from that of the corporation even if a De Facto corporation.

Tort Liability

• The liability under Section 20 of the RCCP in case there is an ostensible corporation is applicable to tort liability. 
• There is a difference between tort liability and contractual liability with respect to the application of estoppel. 
• There are many types of tort and tort cases when there is no contractual relationship between the parties. 
• Hence, there is ordinarily no reliance by a third person on representations of the components of the ostensible corporation when the cause of action arose. 
• For example, in a case involving negligence based on quasi-delict under Article 2176 of the New Civil Code, the injured party may file an action against an ostensible corporation with whom he or she has no previous dealings.
• It is possible that the mistake - regarding the status of the ostensible corporation - may occur only when the case is already being filed. 

3. When Not Applicable.

• In one case, a contract was sought to be enforced against an officer of an unincorporated association. 
• It was argued however that the officer cannot be made personally liable because the other contracting party is estopped from claiming that the association with whom he contracted is not in fact a corporation. 
• The Supreme Court rejected the argument explaining that the "application of the doctrine applies to a third party only when he tries to escape liability on a contract from which he has benefited on the irrelevant ground of defective incorporation."
• It is not applicable if the party "is not trying to escape liability from the contract but rather is the one claiming from the contract."
• This appears to be the third situation contemplated by Prof. Berle as enumerated earlier.

4. Cannot Override Jurisdictional Requirements.

• The doctrine of corporation by estoppel cannot likewise be advanced to override jurisdictional requirements under the law. 
• Jurisdiction is fixed by law and is not subject to the agreement of the parties.
• It cannot be acquired through or waived, enlarged or diminished by, any act or omission of the parties; neither can it be conferred by the acquiescence of the court. 
• Thus, if a law will be passed granting an administrative tribunal jurisdiction to hear cases involving corporations, the same tribunal cannot assume jurisdiction over a case filed against a non-existent corporation just because one party is allegedly estopped from claiming that the corporation is non-existent. 

5. Rules of Court Provision.

• Section 15 of Rule 3 of the 1997 Rules of Civil Procedure provides that when two or more persons not organized as an entity with juridical personality enter into a transaction, they may be sued under the name by which they are generally or commonly known. 
• In the answer of such defendant, the names and addresses of the persons composing said entity must all be revealed. 
• However, these persons cannot sue under the name by which they are generally or commonly known if they are not organized as a juridical entity.

Problem:

Q: Mamuhunan was invited by his friends to invest in A Corp., a newly organized firm engaged in money market and financing operation. Because of his heavy investments, Mamuhunan became the firm's president and, as such, purchased a big number of computers, typewriters and other equipment from Taktak Corp. on installment basis. A Corp. paid the down payment and Taktak Corp. issued the corresponding receipt. To his chagrin, Mamuhunan discovered that the articles of incorporation had not been filed by his friends on that date so he hurriedly attended to the matter. No sooner had the certificate of incorporation been issued by the, SEC, A Corp. became bankrupt after three months. Upon being sued by Taktak corporation in its personal capacity, Mamuhunan raised among its defenses the doctrines of de facto corporations and corporations by estoppel. Can the two defenses be validly raised? Explain.

A: No, the two defenses cannot be raised because they are not available. It cannot be argued that there was a de facto corporation. The Articles of Incorporation was not filed with the SEC; hence there can be no attempt in good faith to incorporate. The defense that the corporation is a corporation by estoppel is not also a valid defense. Although there was a corporation by estoppel, the same can be invoked only for the purpose of protecting third persons or creditors. It cannot be invoked by persons who represent themselves as stockholders of the corporation by estoppel. However, Mamuhunan can invoke the defense of good faith to limit his liability only up to the extent of his investment. Section 21 of the Corporation Code (now Section 20 of the RCCP) makes liable as general partner only those who assume to act as a corporation knowing it to be without authority. (1986 Bar)