Verify Authority: Why Corporate Board Approval is Crucial in Philippine Property Sales
When engaging in property transactions with corporations in the Philippines, always verify that the individual representing the company has proper authorization from the Board of Directors. This case underscores that a corporate treasurer, without explicit board approval, cannot validly sell corporate land, even if they are a major shareholder. Due diligence in confirming corporate authority is paramount to ensure the validity of such transactions and avoid costly legal battles.
G.R. No. 129459, September 29, 1998
INTRODUCTION
Imagine a business eagerly pursuing a prime piece of real estate, believing they’ve secured a deal with a corporation, only to find out later that the signatory lacked the authority to sell. This scenario is not just a hypothetical; it’s a real risk in the Philippines, where corporate transactions must adhere strictly to legal protocols. The Supreme Court case of San Juan Structural and Steel Fabricators, Inc. vs. Court of Appeals serves as a stark reminder of the critical importance of verifying corporate authority, particularly when dealing with high-value assets like land. In this case, a land sale agreement was signed by the treasurer of Motorich Sales Corporation without explicit board authorization. The central legal question was clear: Can a corporate treasurer, acting alone, validly sell corporate property?
LEGAL CONTEXT: CORPORATE POWERS AND AGENCY IN THE PHILIPPINES
Philippine corporate law, as embodied in the Corporation Code of the Philippines (Batas Pambansa Blg. 68), firmly establishes that corporations are distinct legal entities, separate from their stockholders. This principle of corporate personality means that a corporation acts through its authorized agents. Section 23 of the Corporation Code explicitly states, “The corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees…” This provision underscores that the power to manage and dispose of corporate property resides in the Board of Directors.
Officers or agents of a corporation can bind the entity, but only to the extent of the authority granted to them. This authority can be express, conferred intentionally by the board, or implied, arising from the usual course of business or by custom. However, individuals dealing with a corporation have a responsibility to ascertain the extent of an agent’s authority. As the Supreme Court has consistently reiterated, those dealing with an assumed agent are “bound at their peril, if they would hold the principal liable, to ascertain not only the fact of agency but also the nature and extent of authority.” In property sales, Article 1874 of the Civil Code is particularly relevant, mandating that “When a sale of a piece of land or any interest therein is through an agent, the authority of the latter shall be in writing; otherwise, the sale shall be void.” This requirement of a written special power of attorney for real estate sales by agents highlights the law’s stringent approach to protecting property rights and ensuring clear authorization in such significant transactions.
CASE BREAKDOWN: SAN JUAN STRUCTURAL VS. MOTORICH SALES
The narrative of San Juan Structural and Steel Fabricators, Inc. vs. Court of Appeals unfolds with San Juan Structural, represented by its president, Mr. Andres Co, entering into an agreement with Motorich Sales Corporation. The agreement, dated February 14, 1989, was for the sale of a parcel of land owned by Motorich. Crucially, Motorich was represented in this agreement by its treasurer, Ms. Nenita Lee Gruenberg.
San Juan Structural paid a down payment of P100,000 and was prepared to pay the balance. However, when the time came for the formal transfer, Motorich, through Ms. Gruenberg, did not appear. San Juan Structural later discovered that Motorich refused to honor the agreement, asserting that Ms. Gruenberg, as treasurer, lacked the authority to sell corporate land without board approval. Feeling aggrieved, San Juan Structural filed a complaint to compel Motorich to execute the sale and for damages.
The case journeyed through the Philippine court system:
- Regional Trial Court (RTC): The RTC dismissed San Juan Structural’s complaint, finding no evidence that Ms. Gruenberg was authorized by Motorich to sell the property. The RTC emphasized Section 40 of the Corporation Code requiring board and stockholder approval for the sale of substantially all corporate assets.
- Court of Appeals (CA): The CA affirmed the RTC’s decision with modification, ordering Ms. Gruenberg to refund the down payment. The CA echoed the RTC’s finding that Ms. Gruenberg lacked authority and that no ratification by Motorich occurred.
- Supreme Court (SC): San Juan Structural elevated the case to the Supreme Court, arguing that Ms. Gruenberg’s actions should bind Motorich, especially since she and her husband owned a significant portion of Motorich’s shares. They also attempted to invoke the doctrine of piercing the corporate veil.
The Supreme Court, however, was unconvinced. Justice Panganiban, writing for the Court, highlighted the fundamental principle that a corporation acts through its board. The Court stated, “Indubitably, a corporation may act only through its board of directors, or, when authorized either by its bylaws or by its board resolution, through its officers or agents in the normal course of business.” The Supreme Court found no proof of board authorization for Ms. Gruenberg to sell the land. Furthermore, the Court rejected the argument to pierce the corporate veil, stating there was no evidence Motorich was used to perpetrate fraud or illegality. The petition was denied, and the CA decision was affirmed, solidifying the principle that a corporate treasurer, without proper authorization, cannot bind the corporation in a sale of land.
PRACTICAL IMPLICATIONS: DUE DILIGENCE IN CORPORATE TRANSACTIONS
This Supreme Court decision carries significant practical implications for anyone transacting with corporations in the Philippines, especially in property dealings. It underscores the critical need for due diligence to verify the authority of the corporate representative. Relying solely on an officer’s title, like “Treasurer” or even “President,” is insufficient. Here’s what businesses and individuals should do:
- Demand Proof of Authority: Always request a copy of the Board Resolution explicitly authorizing the corporate officer to enter into the specific transaction, especially for property sales, mortgages, or other significant agreements.
- Check the Articles of Incorporation and By-laws: While a Board Resolution is key, reviewing the corporation’s Articles of Incorporation and By-laws can provide further context on officer powers and limitations.
- Conduct Independent Verification: Don’t hesitate to contact the corporation directly to verify the officer’s authority, especially for substantial transactions.
- Seek Legal Counsel: Engage a lawyer to review transaction documents and conduct due diligence on corporate authority, especially in complex or high-value deals.
Key Lessons from San Juan Structural vs. Motorich Sales:
- Corporate Officers Need Authorization: A corporate officer’s title alone does not equate to authority to sell corporate assets. Board approval is generally required.
- Due Diligence is Essential: Parties dealing with corporations must proactively verify the authority of the corporate representative, especially in property transactions.
- Written Authority for Land Sales: Philippine law requires written authorization (Special Power of Attorney) for agents selling real estate on behalf of principals, including corporations.
- Piercing Corporate Veil is Not Automatic: The corporate veil is not easily pierced. It requires proof of fraud, illegality, or misuse of the corporate form. Majority ownership alone is insufficient.
FREQUENTLY ASKED QUESTIONS (FAQs)
Q: Can a corporation’s President automatically sell corporate property?
A: Not necessarily automatically. While the President often has broad authority, it’s still best practice to have a Board Resolution explicitly authorizing property sales, especially for significant assets. Always verify the specific corporation’s by-laws and practices.
Q: What is a Board Resolution, and why is it important?
A: A Board Resolution is a formal document evidencing a decision made by the corporation’s Board of Directors. It’s crucial because it demonstrates that the corporation’s governing body has authorized a specific action, like a property sale.
Q: What happens if I buy property from a corporate officer without Board approval?
A: The sale could be considered invalid and unenforceable against the corporation, as demonstrated in this case. You may face legal challenges and potentially lose the property and your investment. However, you may have recourse to recover payments made, as was the case with the refund of the down payment ordered by the court here.
Q: Is it enough to rely on the company seal and the officer’s signature?
A: No. While a company seal and officer’s signature add a semblance of formality, they do not substitute for actual proof of authority, such as a Board Resolution.
Q: Does the size of the corporation matter in terms of authorization requirements?
A: No. The authorization requirements under the Corporation Code apply to all corporations, regardless of size. Whether it’s a large conglomerate or a small family corporation, the need for proper board authorization remains.
Q: What does ‘piercing the corporate veil’ mean?
A: Piercing the corporate veil is a legal doctrine where courts disregard the separate legal personality of a corporation and hold its owners or stockholders personally liable for corporate acts. This is done in exceptional cases, such as fraud or misuse of the corporate entity, and was argued, but not applied, in this case.
Q: Where can I verify if a corporation is duly registered and existing?
A: You can verify a corporation’s registration and good standing with the Securities and Exchange Commission (SEC) in the Philippines.
Q: What if the corporate officer verbally assures me they have authority?
A: Verbal assurances are insufficient and risky. Always demand written proof of authority, like a Board Resolution and, for land sales, a Special Power of Attorney.
Q: Is a Treasurer authorized to sell corporate assets just because they handle finances?
A: No. A Treasurer’s primary role is managing corporate funds, not disposing of major assets like land. Selling property is beyond the typical scope of a Treasurer’s authority unless specifically authorized by the board.
Q: What should I do before entering into a property transaction with a corporation?
A: Conduct thorough due diligence: request and review the Board Resolution authorizing the sale, check the Articles of Incorporation, and consult with a lawyer to ensure the transaction is legally sound and the corporate representative has proper authority.
ASG Law specializes in Corporate Law and Real Estate Transactions in the Philippines. Contact us or email hello@asglawpartners.com to schedule a consultation.