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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:
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.
Corporation by estoppel is a legal doctrine used to address situations where a business entity operates as if it were a legally recognized corporation, despite failing to meet certain formalities required for official incorporation.
Section 21 of the Corporation Code gives the definition of Corporation by estoppel, viz.:
Sec. 21. Corporation by estoppel. – All persons who assume to act as a corporation knowing it to be without 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 as a defense its lack of corporate personality.
One who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there was in fact no corporation.
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.
Jurisprudence dictates that the doctrine of corporation by estoppel applies for as long as there is no fraud and when the existence of the association is attacked for causes attendant at the time the contract or dealing sought to be enforced was entered into, and not thereafter.
The doctrine of corporation by estoppel rests on the idea that if the Court were to disregard the existence of an entity which entered into a transaction with a third party, unjust enrichment would result as some form of benefit have already accrued on the part of one of the parties. Thus, in that instance, the Court affords upon the unorganized entity corporate fiction and juridical personality for the sole purpose of upholding the contract or transaction. (The Missionary Sisters Of Our Lady Of Fatima V. Amando V. Alzona, G.R. No. 224307, August 6, 2018)
Corporation by estoppel serves as a crucial doctrine in corporate law, addressing the need for fairness and consistency in business operations. By treating entities that function as corporations, despite failing to complete formal incorporation, as corporations for legal purposes, the doctrine protects the rights of third parties and ensures that businesses cannot evade their obligations through technicalities. As businesses navigate the complexities of incorporation and legal recognition, understanding and adhering to the principles of corporation by estoppel can help mitigate risks and ensure equitable treatment in commercial transactions.
Related Article/s:
Can a non-stock corporation be converted into a stock corporation?
Corporations: De Facto and De Jure
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Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries regarding legal services, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/ 0917-5772207/ 09778050020.
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