MAP Insights

Section 164 of the Revised Corporation Code (RCC) provides that “those responsible for the formation of a corporation through fraud, or who assisted directly or indirectly therein,” shall be penalized with a fine ranging from P200,000 to P2.0 Million; But that,      when injurious or detrimental to the public, the fine shall range from P400,000 to P5.0 Million. It should be noted that Section 164 does not limit itself to the incorporators who signed the articles of incorporation.

 

For the ground discussed hereunder, we posit that no successful prosecution can be obtained under the language of Section 164 of the RCC.

 

(1)        What Constitutes “Fraud” in the Formation of a Corporation?

 

The offense covered under Section 164 of the RCC, i.e., that of obtaining registration of a corporation through fraud, actually cast a very wide net in violation of due process clause, since usually when “fraud” is used to define a crime, the requisites of what constitutes fraudulent acts are usually defined or enumerated. In addition, criminal fraud when properly defined requires the element of “injury” or “damage” to amount to a criminal offense.

 

The term “responsible for the formation of a corporation through fraud,” could cover a wide range of corporate malpractices from the use of dummies in areas covered by nationalization law, mis-declaration or mis-evaluation of the consideration paid for the subscription of the capital stock, to false certification of the amounts actually paid-in.

 

The term could cover any person responsible for the formation of a corporation, or who assisted directly or indirectly therein, including promoters, passive investors and bank officers who certified to the subscription contributions, the lawyers who handled the formation of the corporation, the appraisers who undertook the valuation of the property contributions, and even the officers of the SEC who approved such registration where fraud was involved.

 

Without defining the requisites of what would constitute “formation of a corporation through fraud”, it would be difficult to convict an accused under Section 164, since the quantum of evidence required in a criminal case is guilt beyond reasonable doubt. Also, the lack of proper definition under Section 164 of what acts constitute the criminal offense would be in violation of the rudiments of due process in criminal proceedings.

 

 

 

(2)        Title II on the Incorporation and Organization of Private Corporations

 

The requirements and procedures for the formation of a corporation are detailed under Title II (Incorporation and Organization of Private Corporations) of the RCC, and it can be expected that the offense of “fraud in the formation of a corporation” under Section 164 of the RCC, must impinge upon any of the requirements and procedures provided therein.

 

Except for the unauthorized use of corporate name which is expressly penalized under Sections 17 in relation to Section 159, no section under Title II of the RCC imposes a criminal penalty for failure to comply with its provision. In fact, when there are lapses in complying with the requirements for the formation of the corporation, Section 16 provides that the proper action of the SEC is to “disapprove” the articles of incorporation and grant the incorporators, directors, trustees or officers a reasonable time to modify the objectionable portions of the articles of incorporation. On the other hand, the corporation has been duly registered with the SEC but there have been serious flaws in the manner of its formation, Section 19, in laying down the doctrine of de facto corporation provides that the proper remedy would be for the SEC works through the Solicitor General to seek a dissolution of the corporation through quo warranto proceedings.

 

Nothing in the structure of Title II of the RCC can support imposition of the criminal offense referred to in Section 164 as “formation of a corporation through fraud.”

 

(3)        Chilling Effect on the Whole Machinery to Promote the Use of the Corporate Vehicle:

 

Since the broad language of Section 164 of the RCC could ensnare a wide-ranging criminal net in the commercial world, it actually induces a “chilling effect” on the various players and institutions in the commercial world that seek to promote the corporate medium as the medium by which to attract investments into our economy. In that sense, the introduction of Section 164 into the RCC is actually against the principle of promoting the ease of doing business in our country through the corporate medium.

 

(4)        SEC’s Restatement of Section 164 Offense

 

SEC Memorandum Circular No. 16-2020, entitled “Guidelines on Authentication of Articles of Incorporation in Applications for Registration of New Domestic Corporations, restates Section 164 of the RCC by providing under Section 6 thereof as follows:

 

SECTION 6. Obtaining Corporate Registration through Fraud or Misrepresentation. — The registration of a corporation, which has procured its Certificate of Registration through fraud or misrepresentation, shall be revoked.

 

Furthermore, those responsible for the formation of a corporation through fraud, or who assisted directly or indirectly therein, shall be punished with a fine ranging from Two hundred thousand pesos (P200,000.00) to Two million pesos (P2,000,000.00). When the violation is injurious or detrimental to the public, the penalty shall be a fine ranging from Four hundred thousand pesos (P400,000.00) to Five million pesos (P5,000,000.00).

 

It cannot be said that the SEC is defining an administrative offense by the foregoing provisions since the fines imposed are beyond the amounts authorized under Section 158 of the RCC, and that both the language and amounts tract the language of Section 164 (Obtaining Corporate Registration Through Fraud; Penalties) of the Code.

 

Consequently, SEC Memorandum Circular No. 16-2020 fails to define an offense that can be the subject of an administrative sanction, nor can it complete the inadequacies of the language of Section 164 of the RCC to comply with rudiments of criminal due process.

 

Fraudulent Conduct of Business

 

Section 165 of the RCC provides that “A corporation that conducts its business through fraud” shall be punished with a fine ranging from P200,000 to P2.0 Million; but that when injurious or detrimental to the public, the fine shall range from P400,000 to P5.0 Million.

 

Section 165 of the RCC provides the legal basis to hold a corporation criminally liable as the respondent in a criminal case. On the other hand, Section 165 provides no legal basis to hold criminally liable the directors, trustees, officers and/or employees who are guilty of conducting the company’s business through fraud. In other words, the criminal liability of the acting officers and employees would be based on the laws that punish the fraudulent acts done in the management of the affairs of the corporation. It would then be Section 171 (see discussions below), in relation to Section 165 by which to hold the culprit directors, trustees, officers and/or employees liable for conducting the corporation’s business through fraud.

 

(This article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines or MAP).

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Atty. Cesar L. Villanueva is Co-Chair for Governance of the MAP ESG Committee,

Chair of Institute of Corporate Directors (ICD), the first Chair

of Governance Commission for GOCCs (GCG),

former Dean of the Ateneo Law School,

and Founding Partner of Villanueva Gabionza & Dy Law Offices.

map@map.org.ph

cvillanueva@vgslaw.com