This case clarifies the extent of a corporate president’s authority to bind the corporation in loan agreements. The Supreme Court ruled that if a corporation’s by-laws explicitly grant the president the power to borrow money and execute contracts, a separate board resolution is not required for each transaction. This decision highlights the importance of clearly defined corporate by-laws in determining the scope of an officer’s authority, and emphasizes that corporations are bound by the powers they vest in their officers.

Loan Liability: Can a Corporation Deny Its President’s Financial Deals?

Cebu Mactan Members Center, Inc. (CMMCI) found itself in a legal battle after its President, Mitsumasa Sugimoto, obtained loans totaling P16,500,000 from Masahiro Tsukahara. CMMCI argued that these loans were Sugimoto’s personal debts, not the corporation’s, and that no board resolution authorized Sugimoto to secure these loans. Tsukahara, on the other hand, contended that Sugimoto acted within his authority as president. The central legal question was whether CMMCI was bound by the loan agreements entered into by its president without explicit board approval. The resolution of this issue hinged on the interpretation of CMMCI’s corporate by-laws and the extent of authority granted to its president.

The Supreme Court addressed the fundamental principle that a corporation, as a juridical entity, operates through its board of directors. The board is responsible for exercising corporate powers and establishing business policies. Generally, without explicit authorization from the board, no officer can bind the corporation. Section 23 of the Corporation Code underscores this principle, stating that corporate powers are exercised by the board of directors.

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.

However, this rule is not absolute. A board of directors can delegate its functions to officers or agents. This delegation can be express or implied through habit, custom, or acquiescence. As the Supreme Court has previously stated, a corporate officer can bind the corporation to the extent that such authority has been conferred, whether intentionally or impliedly, through the usual course of business or by custom.

In this specific case, the Court turned its attention to CMMCI’s by-laws. Article III of these by-laws explicitly grants the President the power to borrow money, execute contracts, and issue financial instruments on behalf of the company. This power is detailed in Article III(2)(c)(d)(e). Because these powers were expressly granted within the corporate by-laws, the Court held that Sugimoto did not require a separate board resolution for each loan transaction. The explicit grant of power within the bylaws made the need for resolutions to be unnecessary.

ARTICLE III

Officers

x x x

2. President. The President shall be elected by the Board of Directors from their own number. He shall have the following powers and duties:

x x x

c. Borrow money for the company by any legal means whatsoever, including the arrangement of letters of credit and overdrafts with any and all banking institutions;

d. Execute on behalf of the company all contracts and agreements which the said company may enter into;

e. Sign, indorse, and deliver all checks, drafts, bill of exchange, promissory notes and orders of payment of sum of money in the name and on behalf of the corporation;

The Court emphasized that insisting on a board resolution despite the clear language of the by-laws would defeat the purpose of having by-laws in the first place. By-laws are essentially the self-imposed private laws of a corporation, holding the same force and effect as laws enacted by the corporation. Because the by-laws themselves are considered as fundamental law, a need for another authorization would be uncalled for.

Therefore, CMMCI was estopped from denying Sugimoto’s authority to bind the corporation, and the loans obtained by Sugimoto were deemed valid and binding against CMMCI. This decision affirms the Court of Appeals’ ruling, solidifying the principle that corporations are bound by the express powers granted to their officers in the corporate by-laws. The liability for the loan now rested with CMMCI.

FAQs

What was the key issue in this case?	The key issue was whether CMMCI was liable for loans obtained by its president without a specific board resolution authorizing those loans, given that the corporate by-laws granted the president the power to borrow money and execute contracts.
What did the Court rule?	The Court ruled that CMMCI was liable for the loans. Because the corporate by-laws expressly granted the president the authority to borrow money, no separate board resolution was required.
What is the role of corporate by-laws in determining an officer’s authority?	Corporate by-laws define the powers and duties of the corporation’s officers. If by-laws grant specific powers, officers can act within those powers without further board approval.
What is the significance of Section 23 of the Corporation Code?	Section 23 generally vests corporate powers in the board of directors. However, it allows for delegation of these powers, as reflected in this case.
What does it mean for a corporation to be “estopped” in this context?	It means CMMCI cannot deny its president’s authority because it granted him that authority in the by-laws. The corporation’s bylaws became the grant of authority.
What is the impact of this ruling on corporate governance?	This ruling underscores the importance of clearly defining the powers of corporate officers in the by-laws. It can have implications for the officers to take such powers as their responsibility.
Did the Court consider Sugimoto’s intent when he obtained the loans?	Yes, the court deemed that Sugimoto acted on behalf of CMMCI due to the powers bestowed by his bylaws and his position.
Does this case impact rules of other officers of the corporation?	The by-laws for any roles in the corporation become binding if they can be tied with an officers actions. An ultra vires situation cannot exist where the officers are acting inline with bylaws.

This case offers a valuable lesson in corporate governance and the importance of well-defined by-laws. It serves as a reminder that corporations are bound by the actions of their officers when those actions fall within the scope of authority granted in the corporate by-laws. Because these by-laws are the guiding principles of the company, they must be accurate and well implemented.

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: Cebu Mactan Members Center, Inc. vs. Masahiro Tsukahara, G.R. No. 159624, July 17, 2009