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Corporation by Estoppel

Salvatierra vs. Judge Garlitos and Segundino Refuerzo (May 1958)

Facts:

Salvatierra (S) was an owner of vast track of agricultural lands in Leyte while Refuerzo (R) was the
President of Philippine Fibers Producers Co Inc. (PFBC). PFBC was not registered in Security and
Exchange Commission. S and R entered into a lease contract and agreed that among others, S would be
entitled to 30% of the net income accruing from the harvest of any, crop without being responsible for
the cost of production thereof; and that after every harvest, R was bound to declare at the earliest
possible time the income derived therefrom and to deliver the corresponding share due to S.

However, the contract did not materialize because as what S averred, R did not comply with his
obligations in the contract. S alleged that sometime in April, 1954, R planted kenaf on 3 hectares of the
leased property which crop was already harvested, processed and sold by R. That R refused to render an
accounting of the income derived therefrom and to deliver S’s share. S then filed an action for rescission
of contracts and damages against PFBC and R. The defendants failed to file an answer to the complaint
and the RTC eventually declared them in default. Subsequently, a judgment was rendered in favor of S.

The RTC ordered the attachment of several properties belonged to R himself. But R claimed that the said
judgment was null and void because nothing in the allegations in the complaint that points him as
personally liable. His defense was as a President of PFBC, he was just acted on such capacity and could
not be held liable.

The RTC found R’s claim was valid. It ordered the release of all attached property belonged to R. S
appealed to SC arguing that among others, S was made to believe that at the time of the contract, PFBC
was registered in the SEC and R could be personally liable.

Issue:

WON the RTC was correct in ruling that R is not personally liable to the contracts of PFBC.

Ruling:

No. RTC was not correct.

While the general rule says that a person who has contracted or dealt with an association in such a
way as to recognize its existence as a corporate body is estopped from denying the same in an action
arising out of such transaction or dealing, this doctrine may not be held to be applicable where fraud
takes a part in the said transaction.

In the instant case, on plaintiff's charge that she was unaware of the fact that the PFBC had no
juridical personality, defendant R gave no confirmation or denial and the circumstances surrounding
the execution of the contract lead to the inescapable conclusion that plaintiff S was really made to
believe that such corporation was duly organized in accordance with law.
Moreover, a corporation which is registered in SEC has a juridical personality separate and distinct from
its component members or stockholders and officers such that a corporation cannot be held liable for
the personal indebtedness of a stockholder even if he should be its president. Conversely, a stockholder
or member cannot be held personally liable for any financial obligation of the corporation.

But this rule is understood to refer merely to registered corporations and cannot be made applicable to
the liability of members of an unincorporated association. It is an elementary principle of law that a
person who acts as an agent without authority or without a principal is himself regarded as the principal,
possessed of all the rights and subject to all the liabilities of a principal, a person acting or purporting to
act on behalf of a corporation which has no valid existence assumes such privileges and obligations and
comes personally liable for contracts entered into or for other acts performed as such, agent.

Considering that R, as president of the unregistered corporation PFBC, was the moving spirit behind
the consummation of the lease agreement by acting as its representative, his liability cannot be
limited or restricted that imposed upon corporate shareholders. In acting on behalf of a corporation
which he knew to be unregistered, he assumed the risk of reaping the consequential damages or
resultant rights.

Disposition: RTC’s order to release the attached properties of R is reversed and set aside. R is personally
liable to S.