Corporation Law: The Revised Corporation Code of the Philippines - Sec 19

 THE REVISED CORPORATION CODE  OF THE PHILIPPINES  

Republic Act No. 11232 

TITLE II -  INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS

Sec. 19. De facto Corporations. -

The due incorporation of any corporation claiming in good faith to be a corporation under this Code, and its right to exercise corporate powers, shall not be required into collaterally in any private suit to which such corporation may be a party. Such inquiry may be made by the Solicitor General in a quo warranto proceeding.

NOTES 

1. Defective Corporations.

• Certain basic rules can be used in determining if the corporation is a de jure corporation or one that is defectively formed, viz.:
1. Non-compliance with directory provisions of law or regulations will not affect the de jure existence of a corporation.
2. Non-compliance with mandatory provisions will affect the de jure existence. 
• However, only substantial compliance is required and mere colorable compliance may result in a de facto corporation.
3. Non-compliance with conditions precedent to incorporation may affect the de jure existence of the corporation. 
• For example, issuance of a Certificate of Incorporation is a condition precedent and there can be no de jure corporation without it.
4. Non-compliance with conditions subsequent to incorporation may not affect the existence of a corporation but may be a ground for revocation of the certificate of incorporation.
5. Condition subsequent to carry on the business will not affect the corporation's de jure status but non-compliance may be a ground to revoke the certificate of incorporation.

2. Requisites of De Facto Corporation. 

• To constitute a corporation de facto under Section 20, the weight of authority is that there must be:
1. A valid law under which the corporation is organized; 
2. An attempt in good faith to incorporate; and
3. An assumption of corporate powers.

Valid Law.

• No de facto corporation will result if there is no law under which the corporation is organized even if the components thereof assume corporate powers. 
• This is consistent with the proposition that to be a de facto corporation, it must be possible to be a corporation de jure. 
• The absence of law erases such possibility. 
• There are two views regarding the effect of unconstitutional or invalid laws:
• Orthodox view 
• expressed in Article 7 of the New Civil Code which states that when the courts declare a law to be inconsistent with the Constitution, the former shall be void and the latter shall govern.
• an unconstitutional law is not a law, confers no rights, imposes no duties and affords no protection
• under the orthodox view, if the law under which the corporation is organized is void, there is no resulting de facto corporation
• Operative Fact
• it declares unconstitutional laws as an "operative fact";
• that for a period of time, the law is actually in existence.
• under this view, an unconstitutional law does not bar the existence of a de facto corporation

Good Faith. 

• Attempt in good faith to incorporate means that there must be colorable compliance with the law. 
• The claim that a corporation de facto was created is compatible with the existence of errors and irregularities; but not with a total or substantial disregard of the law. 
• Unless there has been an evident attempt to comply with the law, the claim that a corporation has been constituted under the Corporation Code could not be made in good faith. 

Certificate of Incorporation Indispensable. 

• There can be no claim of attempt in good faith to incorporate if the SEC issues no Certificate of Incorporation. 
• The filing of Articles of Incorporation and the issuance of the Certificate of Incorporation by the SEC are essential for the existence of a de facto corporation.
• All incorporators know or ought to know that the personality of a corporation begins to exist only from the time the certificate is issued.
• Steps must be taken and the attempt made must, to some extent and in some degree, have resulted in the effecting of those things which the law designates as pre-requisites to a corporate existence, however, informal and irregular such proceedings and results may be.
• There must be colorable compliance with the law. 
• Defects that do not preclude the existence of a de facto corporation include the following: 
1. the corporate name resembles that of a pre-existing corporation;
2. ineligibility of one or more incorporators;
3. one of the purposes is not authorized by law.

Assumption of Powers.

• It is also required that there is a user of corporate powers. 
• A corporation must have exercised its franchise to be a corporation by doing business under it. 
• There must be some corporate act or acts in attempted execution of the powers conferred by the Articles of Incorporation or by the special charter granted by the legislature. 
• The acts relied upon as showing user must be corporate acts, as distinguished from acts which might just as well be performed by an unincorporated association or from acts of individuals which would not be corporate acts if there were a charter.
• However, "there is no fixed rule for determining just how much business must be done. But acts done relative to the formation of a corporation before taking any of the statutory steps to that end do not constitute user nor does the mere organization of the corporation by the election of officers.

3. Distinguished from De Jure Corporations.

• De jure corporation
• has a right to corporate existence even against the State. 
• De facto corporation
• it has a right to corporate existence even against the State if the attack is collateral but not if the attack is direct.
• Nevertheless, the State, which alone, has the power to incorporate, may waive irregularities in the organization of the corporation; and, so long as the State remains inactive in the premises, individuals must acquiesce.

4. Policy Considerations

• The de facto corporation doctrine prevents collateral attack on the personality of the corporation. 
• The policy considerations for this purpose are: 
1. The merits of the controversy seldom are affected by corporate existence of a party to the action, where the de facto doctrine is applicable; and 
2. If any rights and franchises have been usurped, they are rights and franchises of the State, and the State alone can object.

5. Nature and Status of De Facto Corporations. 

• The personality of a de facto corporation is subject to attack by the State in a proper proceeding. 
• However, so long as it exists, a de facto corporation is a reality and has substantial, legal existence and independent status recognized by the law as distinct from that of its members or shareholders.
• A de facto corporation enjoys the attributes of a corporation until the State questions its existence.
• The only difference between the powers, rights and liabilities of a de jure and a de facto corporation is that the latter may have its existence inquired into and forfeited by the State.
• Stockholders in a de facto corporation have the same rights possessed by the stockholders in a de jure corporation unless otherwise provided by the Statute, but no greater rights than the latter class. 
• Generally, there is no difference between the liabilities of the stockholders in a de facto corporation and those of stockholders in de jure corporation.
• The result is, therefore, that corporation de facto which, if regularly organized might have been one de jure, may contract, hold property, and sue and be sued in the same manner as if it were a corporation de jure, for no one can act but the government, and that in a direct proceeding. 
• As to all the world except the paramount authority from which it receives it charter it occupies the same position as though in all respects valid.

6. Dissolved Corporation. 

• A group of employees who continued the operations of a dissolved corporation or a corporation whose registration had been revoked cannot acquire the status of a de facto corporation. 
• If the charter of a corporation is forfeited and its legal existence terminated, it is no longer a corporation either de jure or de facto.

7. Effect of Non-Filing of By-Laws. 

• In Sawadjaan v. Court of Appeals, the Supreme Court observed that a corporation may be considered a de facto corporation because of the corporation's failure to submit its by-laws on time. As a de facto corporation, its right to exercise corporate powers may not be inquired into collaterally in any private suit to which such a corporation is a party.
• It is submitted that the observation is erroneous. 
• The nature of a juridical entity as a de facto corporation arises from the very beginning of its existence. 
• The filing of the by-laws with the SEC is not a mandatory provision that affects the existence of the corporation from the very beginning; the filing of the by-laws is a condition subsequent.
• As noted earlier, non-compliance with conditions subsequent to incorporation may not affect the existence of a corporation; it is, however, a ground for revocation of the certificate of incorporation.

Problem:

Q: A corporation was created by a special law. Later, the law creating it was declared invalid. May such corporation claim to be a de facto corporation?

A: No. The corporation is not a de facto corporation. The requisites for its existence are absent because there is no valid law under which it was organized. There would therefore be no continuity of good faith. (1994 Bar)