Validity of corporate loan without board approval

Generally, all corporate powers are exercised by the board of directors.  Section 23 of the Corporation Code provides that “[u]nless otherwise provided in this Code, 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. . . ”

Jurisprudence has recognized that:

“. . . under Section 23, the power and the responsibility to decide whether the corporation should enter into a contract that will bind the corporation are lodged in the board of directors, subject to the articles of incorporation, by-laws, or relevant provisions of law. However, just as a natural person 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 by-laws or authorization from the board, either expressly or impliedly by habit, custom or acquiescence in the general course of business. (see People’s Aircargo and Warehousing Co., Inc. v. Court of Appeals, 357 Phil. 850, 862 [1998]).

In Cebu Mactan Members Center, Inc. vs. Masahiro Tsukahara, G.R. No. 159624, July 17, 2009, Cebu Mactan Members Center, Inc. (CMMCI) denied the borrowing obtain by its President and Chairman of the Board (Mitsumasa Sugimoto) from Masahiro Tsukahara. CMMCI claimed that the loans obtained by the CMMCI President were his personal loans. CMMCI also contended that if the loans were those of CMMCI, the same should have been supported by resolutions issued by CMMCI’s board of directors.

It appears that on February 1994, the CMMCI President, purportedly on behalf of CMMCI, obtained a loan amounting to P6,500,000 from Tsukahara. As payment for the loan, CMMCI issued seven postdated checks of CMMCI payable to Tsukahara. On 13 April 1994, Sugimoto, again purportedly on behalf of CMCI, obtained another loan amounting to P10,000,000 from Tsukahara. Sugimoto executed and signed a promissory note in his capacity as CMMCI President and Chairman, as well as in his personal capacity.

Upon maturity, the seven checks were presented for payment by Tsukahara, but the same were dishonored by PNB, the drawee bank. After several failed attempts to collect the loan amount totaling P16,500,000, Tsukahara filed a case for collection of sum of money against CMMCI and Sugimoto with the Regional Trial Court.

Tsukahara alleged that the amount of P16,500,000 was used by CMMCI for the improvement of its beach resort, which included the construction of a wave fence, the purchase of airconditioners and curtains, and the provision of salaries of resort employees. He also asserted that Sugimoto, as the President of CMMCI, “has the power to borrow money for said corporation by any legal means whatsoever and to sign, endorse and deliver all checks and promissory notes on behalf of the corporation.”

The Regional Trial Court ruled in favor of Tsukahara. The Court of Appeals affirmed. The Supreme Court agreed.

The Supreme Court ruled that the CMMCI President is given the power under CMMCI’s by-laws to borrow money, execute contracts, and sign and indorse checks and promissory notes, in the name and on behalf of CMMCI.

ARTICLE III

Officers

2.     President. The President shall be elected by the Board of Directors from their own number. He shall have the following powers and duties . . .

c.      Borrow money for the company by any legal means  whatsoever, including the arrangement of letters of credit and   overdrafts with any and all banking institutions;

d.     Execute on behalf of the company all contracts and agreements which the said company may enter into;

e.    Sign, indorse, and deliver all checks, drafts, bill of exchange, promissory notes and orders of payment of sum of money in the   name and on behalf of the corporation

With such powers expressly conferred under the corporate by-laws, the Supreme Court ruled that the CMMCI president, in exercising such powers, need not secure a resolution from the company’s board of directors:

“Thus, given the president’s express powers under the CMMCI’s by-laws, Sugimoto, as the president of CMMCI, was more than equipped to enter into loan transactions on CMMCI’s behalf.  Accordingly, the loans obtained by Sugimoto from Tsukahara on behalf of CMMCI are valid and binding against the latter, and CMMCI may be held liable to pay such loans.”

Advertisements