This case clarifies the extent to which a corporation is bound by the actions of its officers, particularly when those actions are backed by board resolutions. It also examines the liability of individuals who act as sureties for corporate debts. The Supreme Court held that Great Asian Sales Center Corporation was liable for the debts incurred by its treasurer, Arsenio Lim Piat, Jr., because the corporation’s board resolutions authorized him to secure loans and discounting lines. Furthermore, the court affirmed the solidary liability of Tan Chong Lin, the corporation’s president, as a surety for the corporation’s debts. This means creditors can pursue either the corporation or the surety for the full amount of the debt, providing a crucial layer of protection for financial institutions.

Discounting Debts and Double-Dealing: Can a Corporation Deny Its Own Promises?

Great Asian Sales Center Corporation, a household appliance retailer, found itself in financial straits after several postdated checks it had assigned to Bancasia Finance and Investment Corporation were dishonored. To secure credit, Great Asian’s board of directors had issued resolutions authorizing its treasurer, Arsenio Lim Piat, Jr., to obtain loans and discounting lines from Bancasia. Consequently, Arsenio assigned several postdated checks to Bancasia, but when these checks bounced, Bancasia sought to recover the total amount from Great Asian and its president, Tan Chong Lin, who had signed surety agreements guaranteeing the corporation’s debts. Great Asian then argued that Arsenio acted without proper authority and that Tan Chong Lin’s surety was compromised by the terms of the assignment. At the heart of the legal battle was the question: could Great Asian now disavow the actions it had authorized, leaving Bancasia with unpaid debts?

The Supreme Court firmly rejected Great Asian’s attempts to evade its obligations. Building on established corporate law, the Court underscored that a corporation acts through its board of directors. As articulated in Section 23 of the Corporation Code of the Philippines:

SEC. 23.  The Board of Directors or Trustees.  Unless 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 x x x.”

Since Great Asian’s board had explicitly authorized Arsenio to secure loans and discounting lines, his actions in assigning the postdated checks were binding on the corporation. The Court found that the two board resolutions were unequivocal in their intent and scope. The first resolution authorized Arsenio to apply for a “loan accommodation or credit line,” while the second allowed the corporation to obtain a “discounting line”. Both resolutions clearly designated Arsenio as the authorized signatory for all necessary documents.

The Court elucidated the nature of a “discounting line” within the finance industry. A **discounting line** serves as a credit facility that allows a business to sell its accounts receivable at a discount, providing immediate cash flow. This practice is legally recognized and defined in Section 3(a) of the Financing Company Act of 1998:

“Financing companies” are corporations x x x primarily organized for the purpose of *extending credit* facilities to consumers and to industrial, commercial or agricultural enterprises *by discounting* or factoring commercial papers or *accounts receivable, or by buying and selling* contracts, leases, chattel mortgages, or other *evidences of indebtedness*, or by financial leasing of movable as well as immovable property.”

Given this context, the Court determined that Arsenio’s actions aligned perfectly with the authority granted to him. Furthermore, Great Asian was found to have breached its contractual obligations under the Deeds of Assignment. These agreements stipulated that if the drawers of the checks failed to pay, Great Asian would be unconditionally liable to Bancasia for the full amount.

The Court emphasized the binding nature of contracts. Article 1159 of the Civil Code dictates that “Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith.” The Deeds of Assignment explicitly included a “with recourse” provision, making Great Asian responsible for the dishonored checks. This contractual stipulation was independent of the warranties of an endorser under the Negotiable Instruments Law, and the parties were free to establish such terms under Article 1306 of the Civil Code.

The Court also dismissed Great Asian’s argument of lacking consideration for the Deeds of Assignment. Article 1354 of the Civil Code presumes that consideration exists even if not explicitly stated in the contract, unless proven otherwise. The Court noted that Bancasia had indeed paid Great Asian a discounted rate for the postdated checks. Moreover, Great Asian had admitted its debt to Bancasia in its petition for voluntary insolvency, providing further evidence of consideration.

Turning to the liability of Tan Chong Lin, the Court affirmed his solidary obligation as a surety. The Surety Agreements he signed explicitly bound him to pay Bancasia if Great Asian defaulted. Despite Tan Chong Lin’s argument that the warranties in the Deeds of Assignment increased his risk, the Court found that these warranties were standard practice in discounting arrangements. The Surety Agreements themselves were broadly worded, encompassing “all the notes, drafts, bills of exchange, overdraft and other obligations of every kind which the PRINCIPAL may now or may hereafter owe the Creditor”.

The Court further explained that Article 1207 of the Civil Code establishes solidary liability when the obligation expressly states it, or when the law or nature of the obligation requires it. The Surety Agreements unequivocally mandated Tan Chong Lin’s solidary liability with Great Asian, meaning he was responsible for the full debt alongside the corporation.

Ultimately, the Supreme Court upheld the Court of Appeals’ decision, solidifying the responsibility of Great Asian and Tan Chong Lin to Bancasia. The ruling underscores the importance of clear corporate governance and the binding nature of contractual obligations. By affirming the solidary liability of the surety, the court provided added security to creditors and upheld the integrity of commercial transactions.

FAQs

What was the key issue in this case?	The central issue was whether Great Asian Sales Center Corporation and its president, Tan Chong Lin, were liable to Bancasia for the dishonored checks that Great Asian had assigned to Bancasia under a discounting line agreement.
Did Arsenio Lim Piat, Jr., have the authority to execute the Deeds of Assignment?	Yes, the Supreme Court found that Arsenio Lim Piat, Jr., as the treasurer of Great Asian, had the authority to execute the Deeds of Assignment because the corporation’s board resolutions expressly authorized him to secure loans and discounting lines.
What is a discounting line?	A discounting line is a credit facility that allows a business to sell its accounts receivable (like postdated checks) at a discount to a financial institution, providing the business with immediate cash flow. The financial institution profits from the difference between the face value and the discounted price.
What does “with recourse” mean in this case?	The “with recourse” stipulation in the Deeds of Assignment meant that if the drawers of the checks failed to pay, Great Asian was unconditionally obligated to pay Bancasia the full value of the dishonored checks, regardless of the Negotiable Instruments Law.
Was there a valid consideration for the Deeds of Assignment?	Yes, the Supreme Court found that there was a valid consideration because Bancasia paid Great Asian a discounted rate for the postdated checks. Additionally, Great Asian admitted its debt to Bancasia in its petition for voluntary insolvency.
What is solidary liability?	Solidary liability means that each debtor is liable for the entire debt. In this case, Tan Chong Lin, as a surety, was solidarily liable with Great Asian, meaning Bancasia could pursue either of them for the full amount owed.
Did the warranties in the Deeds of Assignment increase Tan Chong Lin’s risk as a surety?	No, the Supreme Court held that the warranties in the Deeds of Assignment were standard practice in discounting arrangements and did not materially alter Tan Chong Lin’s obligations under the Surety Agreements.
What interest rate was applied to the debt?	The Supreme Court awarded legal interest at 12% per annum from the filing of the complaint until the debt is fully paid, as the Deeds of Assignment did not specify an interest rate.

In conclusion, this case illustrates the importance of corporate adherence to board resolutions and the far-reaching implications of surety agreements. It reinforces the principle that corporations are bound by the authorized actions of their officers and that sureties bear significant responsibility for the debts they guarantee.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Great Asian Sales Center Corporation vs. Court of Appeals, G.R. No. 105774, April 25, 2002