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Also, the matters contained in the following were written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future developments on the subject matter under discussion.
AT A GLANCE:
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 it 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.” (Section 20, Revised Corporation Code)
What is a corporation by estoppel?
There is corporation by estoppel when a group of persons assumes to act as a corporation knowing it to be without authority to do so. It enters into a transaction with a third person on the strength of such appearance. However, it cannot be permitted to deny its existence in an action with respect to such transaction.
Jurisprudence says:
“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 which 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. While the doctrine is generally applied to protect the sanctity of dealings with the public, nothing prevents its application in the reverse, in fact the very wording of the law which sets forth the doctrine of corporation by estoppel permits such interpretation. Such that a person who has assumed an obligation in favor of a non-existent corporation, having transacted with the latter as if it was duly incorporated, is prevented from denying the existence of the latter to avoid the enforcement of the contract.” (The Missionary Sisters of Our Lady of Fatima v. Amando Alzona, G.R. No. 224307, August 06, 2018)
What is the liability of a corporation by estoppel?
When any such ostensible corporation is sued in relation to any transaction entered by it as a corporation or in relation to any tort committed by it, such corporation by estoppel shall not be allowed to use its lack of corporate personality as a defense. As a consequence, any person who assumes an obligation to an ostensible corporation as such cannot resist performance thereof on the ground that there was in fact no corporation existing.
The law says:
“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 it 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.” (Section 20, Revised Corporation Code)
Who may exercise the defense of estoppel?
The defense of estoppel is only available to third persons. Otherwise, there is no corporation by estoppel as the conflict arises only among those people assuming the corporation.
Jurisprudence says:
“Corporation by estoppel is founded on principles of equity and is designed to prevent injustice and unfairness. It applies when persons assume to form a corporation and exercise corporate functions and enter into business relations with third person. Where there is no third person involved and the conflict arises only among those assuming the form of a corporation, who therefore know that it has not been registered, there is no corporation by estoppel.” (Reynaldo Lozano v. Eliezer de los Santos, G.R. No. 125221, June 19, 1997)
Related article: WHAT IS A PROFESSIONAL CORPORATION?
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