The Supreme Court, in this case, ruled that a corporation can be held liable for the unauthorized loans secured by its officers if it had created an appearance that these officers had the authority to act on its behalf. This decision highlights the principle of apparent authority, which dictates that a corporation is bound by the actions of its agents if it leads third parties to reasonably believe that the agent has the power to act for the corporation. This protects third parties who deal in good faith with corporate agents, relying on the corporation’s conduct.

When Trust Becomes a Debt: Can a Corporation Deny Loans Approved by Its Executives?

The case revolves around Advance Paper Corporation (Advance Paper) seeking to collect a substantial sum from Arma Traders Corporation (Arma Traders), representing unpaid purchases and loans. Advance Paper claimed that Arma Traders, through its officers Antonio Tan and Uy Seng Kee Willy, secured loans and made purchases on credit, issuing postdated checks that were later dishonored. Arma Traders, however, argued that Tan and Uy acted without proper authorization, making the loans their personal obligations, and that the purchases were fabricated. The central legal question is whether Arma Traders is bound by the actions of its officers, despite the lack of formal authorization, based on the principle of apparent authority.

The factual backdrop reveals a long-standing business relationship between Advance Paper and Arma Traders, spanning approximately 14 years. During this period, Tan and Uy represented Arma Traders in dealings with Advance Paper. In 1994, Arma Traders acquired goods and loans from Advance Paper, issuing postdated checks amounting to P15,130,636.87. These checks, signed by Tan and Uy, were subsequently dishonored due to insufficient funds or closed accounts. Advance Paper then filed a collection suit against Arma Traders and its officers.

The Regional Trial Court (RTC) initially ruled in favor of Advance Paper, ordering Arma Traders to pay the outstanding amount. However, the Court of Appeals (CA) reversed this decision, arguing that the loans were not authorized by a board resolution and that the evidence for the purchases was inadmissible. The CA emphasized that the authority to sign checks did not equate to the authority to contract loans. Furthermore, the CA questioned the validity of the sales invoices, deeming them hearsay evidence.

The Supreme Court, however, disagreed with the CA’s assessment. The Court highlighted the doctrine of apparent authority, stating that a corporation is estopped from denying an agent’s authority if it knowingly permits the agent to act within an apparent scope of authority. The Supreme Court cited Inter-Asia Investment Industries v. Court of Appeals, explaining the principle of apparent authority:

Under this provision [referring to Sec. 23 of the Corporation Code], the power and responsibility to decide whether the corporation should enter into a contract that will bind the corporation is lodged in the board, subject to the articles of incorporation, bylaws, or relevant provisions of law. However, just as a natural person who may authorize another to do certain acts for and on his behalf, the board of directors may validly delegate some of its functions and powers to officers, committees or agents. The authority of such individuals to bind the corporation is generally derived from law, corporate bylaws or authorization from the board, either expressly or impliedly by habit, custom or acquiescence in the general course of business.

Building on this principle, the Supreme Court noted that Arma Traders’ Articles of Incorporation allowed the corporation to borrow money and issue evidence of indebtedness. Moreover, the Court emphasized that Tan and Uy were not merely officers but also incorporators of Arma Traders. The Court further noted the testimony of respondent Ng, Arma Traders’ corporate secretary, admitting that Tan and Uy were solely managing Arma Traders’ business for 14 years, and that the stockholders and board of directors never conducted a meeting during that period. Because of this, Arma Traders was held to have vested broad powers in Tan and Uy.

Furthermore, the Court addressed the admissibility of the sales invoices, explaining that while Haw’s testimony was considered hearsay, the respondents failed to object to the invoices’ admissibility on those grounds during the trial. As such, the sales invoices formed part of the evidence. The Court stated that,

The rule is that failure to object to the offered evidence renders it admissible, and the court cannot, on its own, disregard such evidence. When a party desires the court to reject the evidence offered, it must so state in the form of a timely objection and it cannot raise the objection to the evidence for the first time on appeal. Because of a party’s failure to timely object, the evidence becomes part of the evidence in the case.

Additionally, the Supreme Court gave weight to the fact that Uy admitted that the checks issued were in payment of the contractual obligations of Arma Traders with Advance Paper. The Court found no proof of conspiracy between Advance Paper and Arma Traders’ officers, thereby undermining the defense’s primary argument. It emphasized that the respondents failed to provide sufficient evidence to prove any such conspiracy.

The Supreme Court’s ruling underscores the importance of corporations carefully managing the authority granted to their officers and agents. Corporations must ensure that third parties are not misled into believing that an officer has the power to act on the corporation’s behalf when such authority has not been formally granted. This can be achieved through clear internal policies, regular board meetings, and transparent communication with external parties. Failure to do so can result in the corporation being bound by unauthorized actions, as illustrated in this case. Ultimately, the Supreme Court sided with Advance Paper, reversing the CA’s decision and reinstating the RTC’s order for Arma Traders to pay the outstanding debt.

FAQs

What was the key issue in this case?	The central issue was whether Arma Traders was liable for loans and purchases made by its officers, Tan and Uy, without formal board approval, based on the doctrine of apparent authority. The Court had to determine if Arma Traders had created the impression that Tan and Uy had the authority to act on its behalf.
What is the doctrine of apparent authority?	The doctrine of apparent authority states that a corporation can be held liable for the actions of its agents if it leads third parties to reasonably believe that the agent has the authority to act for the corporation. This applies even if the agent does not have express authority.
Why did the Court of Appeals initially rule against Advance Paper?	The Court of Appeals ruled that Arma Traders was not liable because there was no board resolution authorizing Tan and Uy to obtain the loans. They also deemed the sales invoices inadmissible as evidence, considering them hearsay.
How did the Supreme Court justify its ruling in favor of Advance Paper?	The Supreme Court emphasized that Arma Traders had allowed Tan and Uy to manage the company without oversight for 14 years, creating an appearance of authority. The Court also noted that the respondents failed to object to the admissibility of the sales invoices on the grounds that they were hearsay during the trial.
What evidence supported Advance Paper’s claim that the purchases were valid?	Uy himself admitted that the checks issued were in payment of the contractual obligations of Arma Traders with Advance Paper. Additionally, the respondents failed to object on the sales invoices’ admissibility on the grounds that they were hearsay during the trial.
Was there evidence of collusion between Advance Paper and the officers of Arma Traders?	The Court found no credible evidence of collusion between Advance Paper and Tan and Uy to defraud Arma Traders. The respondents had intended to call a witness to testify about the conspiracy, but did not.
What is the practical implication of this ruling for corporations?	This ruling underscores the importance of corporations managing the authority of their officers and agents carefully. Corporations should implement clear internal policies and procedures to prevent unauthorized actions.
How does this case relate to Section 23 of the Corporation Code?	Section 23 of the Corporation Code vests the power to enter into contracts with the board of directors. However, the court clarifies that this power can be delegated to corporate officers, explicitly or implicitly, through a pattern of conduct known as apparent authority.

This case serves as a reminder that corporations must be vigilant in overseeing the actions of their officers and agents. The principle of apparent authority can hold corporations liable for unauthorized actions if they create the impression that their agents have the power to act on their behalf. Therefore, companies must implement robust internal controls and communication strategies to protect themselves from potential liability.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Advance Paper Corporation vs. Arma Traders Corporation, G.R. No. 176897, December 11, 2013