Technology Resource Center

April 15, 1987 Technology Resource Center Ministry of Human Settlements TRC Bldg.,Buendia Ave. Ext. Makati, Metro Manila Attention : Mr . Francisco B . Figura Gentlemen: This relates to your letter, dated April 8, 1987, requesting the opinion of this Commission on the following queries: 1. Could a corporation, through a board resolution, validly mortgage a corporate property to secure the loan obligation of another corporation although such act is not covered in the primary and secondary purposes of the corporation and that the same does not benefit, directly or indirectly, the mortgagor-corporation? 2. Would it make any legal difference if the mortgagor corporation is a mother corporation and the corporation being accommodated is a subsidiary, or vice versa? How about of sister companies wherein the stockholders and directors of both corporations are basically the same? llcd 3. Would such act be legal, ultra-vires or illegal per se? If ultra-vires, could the same be ratified? If so, how? As a matter of policy, this Commission refrains from giving its opinion on any hypothetical question presented before it involving any of the statute entrusted to it for administration and enforcement, unless it is fully appraised of all the true and correct facts of a given space. However, for purposes of general information only, the following may be imparted. Section 36 of the Corporation Code of the Philippines provides in part, thus: "Every corporation incorporated under this Code has the powers and capacity: xxx xxx xxx 7. To purchase, take or grant, hold, convey, sell, lease, pledge, mortgage ,and otherwise deal with such real and personal property, including securities and bonds of the corporation, as the transaction of the lawful business of the corporation may reasonably and necessarily required ,subject to the limitations prescribed by law and the Constitution. xxx xxx xxx (emphasis supplied) The exercise of implied powers by the corporation is expressly recognized by law, particularly under the above quoted provision of the Code (Sec. 36, par. 7), and paragraph 11 of the same section. The rule may thus be stated that the management of a corporation, in the absence of express restrictions, has discretionary authority to enter into contracts or transactions which may be deemed reasonably incidental to its business purposes. (Agbayani, Commercial Laws of the Phil., Vol. 3, p. 305, citing Ballantine, 224). Hence, a corporation, through a board resolution, may validly mortgage its corporate assets to further the interests of the corporation in the conduct of its business. Conversely, a corporation cannot, through a mere resolution of the board, execute a mortgage of its assets where the same is not done in the usual and regular course of its business; neither where the proceeds of the mortgage or other disposition of assets are not appropriate in the conduct of the corporations business. Furthermore, please be informed that under Section 40 of the Corporation Code, a corporation, may, by a majority vote of its board of directors or trustees mortgage all or substantially all of its property and assets upon such terms and conditions and for such consideration which may be money, stocks, bonds or other instrument for the payment of money or other property or consideration, as its board of directors or trustees may deem expedient when authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock. Anent your second query, it has been held that a corporation has power to mortgage its property to secure the debt of a subsidiary. (Jesselsohn v. Boorstein, III N.J. Eq. 310, 162 A 254 cited in 7 Fletcher, Cyc. Corp.,1978 Rev. Vol. sec. 3082). In relation to your other queries, please be advised that "If a corporation goes beyond its express or implied powers in the execution of a mortgage, its action is ultra-vires and void in some jurisdictions, and will be recognized only to the extent of the consideration that actually passed to the mortgagor corporation".(Fletcher, Supra.,sec. 3090, pp. 312-313, citing Fidelity-Union Trust Co. v. Union Cemetery Ass'n.,102 NJ Eq. 100, 139 A 706). According to the weight of authorities, unless the public or the creditors are prejudicially affected, an ultra-vires contract may become binding on the corporation by ratification, assent or acquiescence of all the shareholders." (Agbayani, Op. cit.,p. 319, citing Ballantine, 255).That the ratification of an ultra-vires act by all the shareholders validates it is generally "where no creditors, or the creditors are not impaired thereby, and where the rights of the state or the public are not involved, unless the act is not ultra-vires but in addition illegal and void." (Agbayani, p. 320). Please be advised accordingly. Very truly yours, (SGD.) JULIO S. SULIT, JR. Chairman