Mr. D. C. Cobalida, Jr.

June 10, 1986 Mr. D. C. Cobalida, Jr. 2016 Mola Street, La Paz Makati, Metro Manila Gentlemen: This refers to your letter dated May 2, 1986, requesting for opinion on the queries posed therein. It appears from the facts presented in your letter that X, Inc. has filed its articles of incorporation on May, 1983 and a corresponding certificate of registration was issued by the SEC. Since its registration it has not submitted its by-laws and all reportorial requirements required by the SEC. On March 30, 1984, heirs ABCD executed a deed of sale of several parcels of land in favor of X, Inc. On the same date, X, Inc. executed a deed of sale of the same parcels of land in favor of Y Construction, a single proprietorship. It appeared in the Deed of Sale that X, Inc. was represented by Mr. XY as president and authorized signatory for the Corporation. Allegedly, the only documents available at the SEC are the articles of incorporation and the SEC notice dated May 1985 addressed to X, Inc. giving said corporation 15 days to comply with the reportorial requirements, otherwise, its certificate of registration will be canceled. X, Inc.,however, never complied with the said directive of SEC. Your queries are as follows: 1. Can this corporation be still considered legally existing inspite of its failure to file/adopt its by-laws and non-compliance with SEC reportorial requirements? 2. Can this corporation which never filed its by-laws, pursue its business operation legally and enter into a contract with a natural person and will this contract be binding between them? 3. Can any of the incorporators act on behalf of X, Inc. to enter into a contract without the corporation's by-laws and/or Board Resolution authorizing him to act on behalf of the corporation? 4. Will the certificate of registration of X, Inc. be considered canceled after the lapse of the period given to them to comply with the requirements of SEC? 5. Can this Honorable Commission give its legal opinions or information on any case having similar nature which may have been decided by it? As a matter of policy, the Commission refrains from giving its opinion on any hypothetical case presented before it. Unless the case is an actual one and the facts thereon are fully disclosed, the Commission cannot, as it should not make any pronouncements on the points brought up in the query. However, purely for the purposes of general information and discussion strictly confined to the facts given in your letter, the following observations pertinent to your query may be imparted. LibLex Anent your first and fourth query, quoted hereunder are the pertinent provisions of the Corporation Code: "SECTION 46. Adoption of by-laws . Every corporation formed under this Code, must , within one (1) month after receipt of official notice of the issuance of its certificate of incorporation by the Securities and Exchange Commission, adopt a code of by-laws for its government not inconsistent with this Code. . . . ; and a copy thereof, duly certified to by a majority of the directors or trustees and countersigned by the Secretary of the corporation, shall be filed with the Securities and Exchange Commission ,which shall be attached to the original articles of incorporation." ...(emphasis supplied) "SECTION 26. Report of Elections of Directors, Trustees and Officers . Within thirty (30) days from the election of the directors, trustees and officers of the corporation, the secretary, or any other officer of the corporation, shall submit to the Securities and Exchange Commission ,the names, nationalities and residences of the directors, trustees and officers elected. Should a director, trustee or officer die, resign or in any manner cease to hold office, his heirs in case of his death, the secretary or any officer of the corporation, or the director, trustee or officer himself, shall immediately report such fact to the Securities and Exchange Commission ." (emphasis supplied) "SECTION 141. Annual report of corporations . Every corporation, domestic or foreign, lawfully doing business in the Philippines shall submit to the Securities and Exchange Commission an annual report of its operations, together with a financial statement of its assets and liabilities, certified by an independent certified public accountant in appropriate cases, covering the preceding fiscal year and with other requirements as the Securities and Exchange Commission may require. Such report shall be submitted within such period as may be prescribed by the Securities and Exchange Commission." (emphasis supplied) The foregoing provisions, therefore, make the submission of by-laws and reportorial requirements mandatory. In case of violations thereof, the Corporation Code provides: "SECTION 144. Violations of the C od e . Violations of any of the provisions of the Code or its amendments not otherwise specifically penalized therein shall be punished by a fine of not less than one thousand (P1,000.00) pesos but not more than ten thousand (P10,000.00) pesos or by imprisonment for not less than thirty (30) days but not more than five (5) years, or both, in the discretion of the court. If the violation is committed by the corporation, the case may, after notice and hearing , be dissolved in appropriate proceedings before the Securities and Exchange Commission; Provided, that such dissolution shall not preclude the institution of appropriate action against the director, trustee or officer of the corporation responsible for said violation:" . . . (emphasis supplied) cdll Corollary thereto, PD 902-A, as amended, provides: "SECTION 6. In order to effectively exercise such jurisdiction, the Commission shall posses the following powers: xxx xxx xxx (1) To suspend, or revoke, after proper notice and hearing ,the franchise or certificate of registration of corporations, partnerships or associations, upon any of the grounds provided by law, including the following: xxx xxx xxx 5. Failure to file by-laws within the required period : 6. Failure to file required reports in appropriate forms as determined by the Commission within the prescribed period." (emphasis supplied) From the foregoing provisions, it is clear that revocation or cancellation of the certificate of registration of a corporation for failure to comply with the submission of by-laws and SEC reportorial requirements can only be effected by the Securities and Exchange Commission after proper due notice and hearing. Thus, the corporation continues to exist notwithstanding its failure to submit the required by-laws and SEC reportorial requirements, until its revocation has been lawfully ordered by the Commission. On the subject of by-laws, please be informed that "by-laws signifies the rules and regulations or private laws enacted by the corporation to regulate, govern and control its own actions, affairs and concerns and its stockholders or members and directors and officers with relation thereto and among themselves in their relation to it." (9 Fletcher Cyc. Corp. 1963 Rev. Vol.,Sec. 4166.) "In other words, by-laws are the relatively permanent and continuing rules of action adopted by the corporation for its own government and that of the individuals composing it and having the direction, management and control of its affairs, in whole or in part, in the management and control of its affairs and activities." (Fletcher, Supra.) Provisions will be found in the general corporation statutes prescribing either generally or specifically the time for adoption of by-laws. (8 Fletcher. Cyc. Corp.,sec. 4170).The mere fact, however, of the existence of power in the corporation to adopt by-laws does not ordinarily and of necessity make the exercise of such power essential to its corporate life, or to the validity of any of its acts .(Ibid, citing Powell Bros. v. Mc' Mullan Lumber Co.,153 N. C. 52, 68 S. E. 926; Steger v. Davis, 8 tex. Civ. App. 23, 27 S.W. 1068)."By-Laws are for the benefit of the stockholders to regulate the manner of conducting the internal affairs of the corporation, and in the absence of some inquiry to the rights of the public arising therefrom, it is not absolutely essential to the continued exercise of the corporate franchise that by-laws be enacted. (Voorhies v. walker, 227 Mich. 291. 198 N. W. 994, cited in Fletcher, supra.) Strangers are not bound to know by-laws which are merely provisions for the government of the corporation, and notice of them will not be presumed. (13 Am. tur., sec. 162, citing First Nat. Bank v. Briggs, 69 Vt. 12, 37 A. 231, 37 L.R.A. 845, 60 am. st. Rep. 922). Said by-laws merely operates as internal rules among the stockholders. They cannot affect or prejudice those persons who deal with the corporation, unless they have knowledge of the same. (Campus, Campos, the Corporation C od e, Comments, Notes and selected Cases, p. 78). Your second query is therefore answered in the affirmative, subject to the applicable provisions of the Civil Code on the essential requisites of Contracts." Anent your third query, please be informed that the articles of incorporation name the initial members of the board who are to act until the first set of regular directors are duly elected and qualified. The initial board may thus perform the functions of a regular board until the election of directors as may be fixed in the by-laws. (Campus, Supra.,pp. 86-87). Considering that the corporate powers of a corporation are exercised, all business conducted and all property of such corporations controlled and held by the board of directors, in the absence of a by-law provision, the Board, through a resolution duly adopted has the power to appoint an officer or agent who may execute contracts on behalf of the corporation. Thus, an incorporator may act on behalf of X, Inc. to enter into a contract, notwithstanding the absence of a duly approved by-laws, if said incorporator has been duly authorized by the Board of Directors in a resolution approved by the majority of them. In this connection, "persons dealing with the officers or agents of a corporation, acting within their apparent authority, are not bound to ascertain whether such apparent authority is restricted by the by-laws." (Agbayani, Commercial Laws of the Philippines, Vol. 3, p. 410, citing Ballantine 262). Please be advised accordingly. cdlex Very truly yours, (SGD.) JULIO A. SULIT, JR. Chairman