De facto corporations

Published November 26, 2020, 7:00 AM

by Atty. Jun De Zuñiga

There are two types of defective corporations: corporations by estoppel (please refer to my column dated 29 October 2020) and de facto corporations.  The first type is easier to determine as corporations by estoppel are without any color of title to show valid incorporation. It is simply a sham entity. It is the second type which presents perplexing issues to me.

For one, the Revised Corporation Code does not define what a de facto corporation is but merely provides that the due incorporation of any corporation shall not be inquired into collaterally in any private suit and that such inquiry may be made only by the Solicitor General in a quo warranto  proceeding (Section 19).  This principle is grounded on public policy.  It would produce endless confusion and hardship if the legality of the existence of a corporation could be questioned in every suit to which it is a party.  On the other hand, if the State, which alone grants the authority to incorporate, remains silent, an individual would not be permitted to raise the inquiry. Theoretically, it is the State’s right and authority which are invaded and usurped (De Leon, The Corporation Code, p. 196).

From legal references, a de facto corporation is defined as one that is organized with colorable compliance with the requirements of incorporation and allowed to exist and exercise the powers of a corporation until its existence is assailed by the State.  Such a corporation is practically as good as a de jure corporation.  It can sue and be sued, acquire properties and enter into obligations and contracts.

What is then meant by “colorable compliance”?  Authorities agree that it means, at the very least, obtaining a certificate of incorporation from the Securities and Exchange Commission notwithstanding certain defects in its incorporation.  Examples of such defects are: (1) falsity in the treasurer’s affidavit as to the amount of subscription received; and (2) non-compliance with the nationality requirement for nationalized entities.  The SEC may have issued the certificate of incorporation relying on the face value of the documents presented before it.

Should distinctions be drawn on whether the failure to comply was deliberate, or merely the result of negligence? In the examples given, the defects are clearly premeditated and even criminal in nature.  And there now lies the danger of such a corporation foisting its powers on the public.  The certificate of incorporation is conclusive evidence that all conditions precedent required to be performed by the incorporators have been complied with. And such conclusive incidence can now be utilized as an undue advantage by the de facto corporation. If such a corporation is a bank, for example, that means that it can now get deposits from the public notwithstanding its lack of capital or the presence of unwarranted alien ownership therein.

In such instance, there should be an immediate remedy to forbid the corporation from doing business.  While the Solicitor General may assail its existence, the nature of a quo warranto proceeding takes time to resolve. In the meantime, the de facto corporation cannot be precluded from doing business. Fortunately, in the banking system, there is a primary regulator, the Bangko Sentral, which can summarily close a bank, based on its powers, if its continuance would cause prejudice to its depositors and creditors. Other regulatory agencies should be able to do the same for enterprises under their jurisdiction.

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          The above comments are the personal views of the writer. His email address is [email protected]