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If a corporations purpose, as stated in the Articles of Incorporation, is lawful, then the SEC has no

authority to inquire whether the corporation has purposes other than those stated, and mandamus
will lie to compel it to issue the certificate of incorporation. (Gala v. Ellice Agro-Industrial Corp.)

Section 22. Effects on non-use of corporate charter and continuous inoperation of a


corporation. If a corporation does not formally organize and commence the
transaction of its business or the construction of its works within two (2) years from the
date of its incorporation, its corporate powers cease and the corporation shall be
deemed dissolved. However, if a corporation has commenced the transaction of its
business but subsequently becomes continuously inoperative for a period of at least
five (5) years, the same shall be a ground for the suspension or revocation of its
corporate franchise or certificate of incorporation.
Section 19 of the Corporation Law, part of which is now Section 22 of the Corporation Code, provided
that the powers of the corporation would cease if it did not formally organize and commence the
transaction of its business or the continuation of its works within two years from date of its
incorporation. Section 20, which has been reproduced with some modifications in Section 46 of the
Corporation Code, expressly declared that "every corporation formed under this Act, must within one
month after the filing of the articles of incorporation with the Securities and Exchange Commission,
adopt a code of by-laws." Whether this provision should be given mandatory or only directory effect
remained a controversial question until it became academic with the adoption of PD 902-A. Under this
decree, it is now clear that the failure to file by-laws within the required period is only a ground for
suspension or revocation of the certificate of registration of corporations.
Non-filing of the by-laws will not result in automatic dissolution of the corporation. Under Section 6(i) of
PD 902-A, the SEC is empowered to "suspend or revoked, after proper notice and hearing, the
franchise or certificate of registration of a corporation" on the ground inter alia of "failure to file bylaws within the required period." It is clear from this provision that there must first of all be a hearing
to determine the existence of the ground, and secondly, assuming such finding, the penalty is not
necessarily revocation but may be only suspension of the charter. In fact, under the rules and
regulations of the SEC, failure to file the by-laws on time may be penalized merely with the imposition
of an administrative fine without affecting the corporate existence of the erring firm. 21
It should be stressed in this connection that substantial compliance with conditions subsequent will
suffice to perfect corporate personality. Organization and commencement of transaction of corporate
business are but conditions subsequent and not prerequisites for acquisition of corporate personality.
The adoption and filing of by-laws is also a condition subsequent. Under Section 19 of the Corporation
Code, a corporation commences its corporate existence and juridical personality and is deemed
incorporated from the date the Securities and Exchange Commission issues certificate of incorporation
under its official seal. This may be done even before the filing of the by-laws, which under Section 46
of the Corporation Code, must be adopted "within one month after receipt of official notice of the
issuance of its certificate of incorporation."

When person a partner by estoppel. Persons who are not partners as to each other are not
partners as to third persons. (Art. 1709[1].) No one can be held liable nor claim rights as a partner
unless he has given his consent to become such. An exception to this rule is provided by Article 1825.
Due to the doctrine of estoppel, one may become liable as a partner even though he is not a partner in
fact.
A person not a partner may become a partner by estoppel and thus be held liable to third persons as if
he were a partner, when by words or by conduct he:
existing

(a) Directly represents himself to anyone as a partner in an existing partnership or in a nonpartnership (with one or more persons not actual partners); or

existing

(b) Indirectly represents himself by consenting to another representing him as a partner in an


partnership or in a non-existing partnership.

In other words, the holding out as a partner may be done by the person himself, or by his consent or
with his knowledge. To hold the party liable, the third person must prove such misrepresentation by the
purported partner and that a bona fi de or justifiable reliance by him upon it caused him injury.

De Facto Corporations: Requisites


User of Corporate Powers
What is a de facto corporation?
A de facto corporation is a defectively organized corporation, which has all the
powers and liabilities of a de jure corporation and, except as to the State, has a
juridical personality distinct and separate from its shareholders, provided that the
following requisites are concurrently present:
(1) That there is an apparently valid statute under which the corporation with
its purposes may be formed;
(2) That there has been colorable compliance with the legal requirements in
good faith; and,
(3) That there has been use of corporate powers, i.e., the transaction of
business in some way as if it were a corporation.
Can a corporation transact business as a de facto corporation while application is
still pending with SEC?

No. In the case of Hall v. Piccio (86 Phil. 603; 1950), where the supposed
corporation transacted business as a corporation pending action by the SEC on
its articles of incorporation, the Court held that there was no de facto corporation
on the ground that the corporation cannot claim to be in good faith to be a
corporation when it has not yet obtained its certificate of incorporation.

Formation under apparently valid statute.


MUNICIPALITY OF MALABANG V. BENITO (29 SCRA 533; 1969)
WON a corporation organized under a statute subsequently declared
void acquires status as de facto corporation.
No. A corporation organized under a statute subsequently declared
invalid cannot acquire the status of a de facto corporation unless there is
some other statute under which the supposed corporation may be validly
organized. Hence, in the case at bar, the mere fact that the municipality was
organized before the statute had been invalidated cannot conceivably make
it a de facto corporation since there is no other valid statute to give color of
authority to its creation.

Colorable compliance with the legal requirements in good faith.


BERGERON V. HOBBS (71 N.W. 1056, 65 Am. St. Rep. 85)
The constitutive documents of the proposed corporation were
deposited with the Register of Deeds but not on file in said office. One of the
requirements for valid incorporation is the filing of constitutive documents in
the Register of Deeds.
Was there colorable compliance enough to give the supposed
corporation at least the status of a de facto corporation?
No. The filing of the constitutive documents in the Register of Deeds is
a condition precedent to the right to act as a corporate body. As long as an
act, required as a condition precedent, remains undone, no immunity from
individual liability is secured.
HARRIL V. DAVIS (168 F. 187; 1909)
The constitutive documents were filed with the clerk of the Court of
Appeals but not with the clerk of court in the judicial district where the
business was located. Arkansas law requires filing in both offices.
Was there colorable compliance enough to give the supposed
corporation at least the status of a de facto corporation?
No. Neither the hope, the belief, nor the statement by parties that they
are incorporated, nor the signing of the articles of incorporation which are
not filed, where filing is requisite to create the corporation, nor the use of the
pretended franchise of the nonexistent corporation, will constitute such a
corporation de facto as will exempt those who actively and knowingly use s
name to incur legal obligations from their individual liability to pay them.
There could be no incorporation or color of it under the law until the articles
were filed (requisites for valid incorporation).
HALL v. PICCIO (29 SCRA 533; 1969)
In the case of Hall v. Piccio, where the supposed corporation transacted
business as a corporation pending action by the SEC on its articles of
incorporation, the Court held that there was no de facto corporation on the
ground that the corporation cannot claim to be in good faith to be a
corporation when it has not yet obtained its certificate of incorporation.
NOTE: The validity of incorporation cannot be inquired into collaterally in any
private suit
to which such corporation may be a party. Such inquiry must be through
a quo warranto proceeding made by the Solicitor General. (Sec. 20)

CORPORATION BY ESTOPPEL (Sec. 21)


Distinguish a de facto corporation from a corporation by estoppel.
The de facto doctrine differs from the estoppel doctrine in that where all the
requisites of a de facto corporation are present, then the defectively organized
corporation will have the status of a de jure corporation in all cases brought by and
against it, except only as to the State in a direct proceeding. On the other hand, if any of
the requisites are absent, then the estoppel doctrine can apply only if under the
circumstances of the particular case then before the court, either the defendant
association is estopped from defending on the ground of lack of capacity to be sued, or
the defendant third party had dealt with the plaintiff as a corporation and is deemed to
have admitted its existence.

(De facto has status of de jure corpo, except separate personality against State, provided all requisites
are present)

What are the effects of a Corporation by Estoppel in suits brought:


(1) against the Corporation?

Considered a corporation in suits brought against it


if

it held itself out as such and denies capacity to be sued;


(2) against third party?

Third party cannot deny existence of corporation if it


dealt with it as such.

EMPIRE vs. STUART (46 Mich. 482, 9 N.W. 527; 1881)


Company was sued on a promissory note. Its defense was that at the
time of its issuance, it was defectively organized and therefore could not be
sued as such.
The Corporation cannot repudiate the transaction or evade
responsibility when sued thereon by setting up its own mistake affecting the
original organization.
LOWELL-WOODWARD vs. WOODS (104 Kan. 729; 1919)
Corporation sued a partnership on a promissory note.
defense alleged that the plaintiff was not a corporation.

The latter as

One who enters into a contract with a party described therein as a


corporation is precluded, in an action brought thereon by such party under
the same designation, from denying its corporate existence.

ASIA BANKING VS STANDARD PRODUCTS (46 Phil. 145; 1924)


The corporation sued another corporation a promissory note. The
defense was that the plaintiff was not able to prove the corporate existence
of both parties.
The defendant is estopped from denying its own corporate existence.
It is also estopped from denying the others corporate existence. The
general rule is that in the absence of fraud, a person who has contracted or
otherwise dealt with an association is such a way as to recognize and in
effect admit its legal existence as a corporate body is thereby estopped from
denying its corporate existence.
CRANSON VS IBM (234 MD. 477, 200 A. 2D 33 ; 1964)
IBM sued Cranson in his personal capacity regarding a typewriter
bought by him as President of a defectively organized company whose
Articles were not yet filed when the obligation was contracted.
IBM, having dealt with the defectively organized company as if it were
properly organized and having relied on its credit instead of Cransons, is
estopped from asserting that it was not incorporated. It cannot sue Cranson
personally.
SALVATIERRA VS GARLITOS (103 Phil. 757; 1958)
Salvatierra leased his land to the corporation. He filed a suit for
accounting, rescission and damages against the corporation and its president
for his share of the produce. Judgment against both was obtained. President
complains for being held personally liable.
He is liable. An agent who acts for a non-existent principal is himself
the principal. In acting on behalf of a corporation which he knew to be
unregistered, he assumed the risk arising from the transaction.
ALBERT VS UNIVERSITY PUBLISHING CO., INC. (Jan. 30, 1965)
Mariano Albert entered into a contract with University Publishing Co.,
Inc. through Jose M. Aruego, its President, whereby University would pay
plaintiff for the exclusive right to publish his revised Commentaries on the
Revised Penal Code.
The contract stipulated that failure to pay one
installment would render the rest of the payments due. When University
failed to pay the second installment, Albert sued for collection and won.
However, upon execution, it was found that University was not registered
with the SEC. Albert petitioned for a writ of execution against Jose M. Aruego
as the real defendant. University opposed, on the ground that Aruego was
not a party to the case.

The Supreme Court found that Aruego represented a non-existent


entity and induced not only Albert but the court to believe in such
representation.
Aruego, acting as representative of such non-existent
principal, was the real party to the contract sued upon, and thus assumed
such privileges and obligations and became personally liable for the contract
entered into or for other acts performed as such agent.
The Supreme Court likewise held that the doctrine of corporation by
estoppel cannot be set up against Albert since it was Aruego who had
induced him to act upon his (Aruego's) willful representation that University
had been duly organized and was existing under the law.

BY-LAWS (Sec. 46 & 47)


When adopted:
(a) No later than one (1) month after receipt from SEC of official
notice of issuance of Cert. of incorporation.
Requirement: Affirmative vote of stockholders representing at least
majority of outstanding capital stock (Stock Corp.) or
members (Non-Stock)
Must be signed by stockholders or members voting for
them

(b)

Prior to incorporation
Requirement: Approval of all incorporators; must be signed by all of
them

Where kept:

(1) In the principal office of the corporation ; and


(2) Securities and Exchange Commission

When effective:

Only upon the SECs issuance of a certification that the by-laws


are not inconsistent with the Corporation Code.

Special corporations:

By-laws and/or amendments thereto must be accompanied


by

a certificate of the appropriate government agency to the


effect that such by-laws / amendments are in accordance with
law.

banks or banking institutions

building and loan associations

trust companies

insurance companies

public utilities

educational institutions

other special corporations governed by special laws

Contents of By-laws - Subject to the provisions of the Constitution, this Code, other
special laws, and the articles of incorporation, a private
corporation may provide in its by-laws for:
1) the time, place and manner of calling and conducting regular or special meetings
of the directors or trustees;
1) the time and manner of calling and conducting regular and special meetings of
the stockholders or members;
1) the required quorum in meetings of stockholders or members and the manner of
voting herein;
1) the form for proxies of stockholders and members and the manner of voting
them;
1) the qualifications, duties and compensation of directors or trustees, officers and
employees;
1) the time for holding the annual election of directors or trustees and the mode or
manner of giving notice thereof;
1) the manner of election or appointment and the term of office of all officers other
than directors or trustees;
1) the penalties for violation of the by-laws;
1) in the case of stock corporations, the manner of issuing certificates; and
1) such other matters as may be necessary for the proper or convenient transaction
of its corporate business and affairs.

FLEISCHER V. BOTICA NOLASCO CO. (47 Phil. 583; 1925)


As a general rule, the by-laws of a corporation are valid if they are
reasonable and calculated to carry into effect the objective of the corporation
and are not contradictory to the general policy of the laws of the land. Under
a statute authorizing by-laws for the transfer of stock, a corp. can do no more
than prescribe a general mode of transfer on the corp. books and cannot
justify an restriction upon the right of sale.
GOVT. OF P.I. V. EL HOGAR

Is a provision in the by-laws allowing the BOD, by vote of absolute majority,


to cancel shares valid?
No. It is a patent nullity, being in direct conflict with Sec. 187 of the
Corp. Law which prohibits forced surrender of unmatured stocks except in
case of dissolution.
Is a provision in the by-laws fixing the salary of directors valid?
Yes.
Since the Corporation Law does not prescribe the rate of
compensation, the power to fix compensation lies with the corporation.
Is a provision requiring persons elected to the Board of Directors to own at
least P 5,000 shares valid?
Yes. The Corporation Law gives the corporation the power to provide
qualifications of its directors.
CITIBANK, N.A. v. CHUA (220 SCRA 75)

Where the SEC grants a license to a foreign corporation, it is


deemed to have approved its

foreign-enacted by-laws. Sec. 46 of the Corporation Code which states


that by-laws are not valid without SEC approval applies only to
domestic corporations.

A board resolution appointing an attorney-in-fact to represent the


corporation during pre-trial is not necessary where the by-laws
authorize an officer of the corporation to make such appointment.

LOYOLA GRAND VILLAS v. CA (276 SCRA 681)


ISSUE: Whether the failure of a corporation to file its by-laws within one (1)
month from the date
of its incorporation, as mandated by Art. 46 of the Corporation Code,
results in the corporation's automatic dissolution.
RULING:
No. Failure to file by-laws does not result in the automatic
dissolution of the corporation. It only constitutes a ground for such
dissolution. (Cf. Chung Ka Bio v. IAC, 163 SCRA 534) Incorporators
must be given the chance to explain their neglect or omission and
remedy the same.

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