PROBLEM # 13 MLFI, a foreign corporation, through MLFPh, a local company, sold commodity futures to the public without the

proper license to do business. MLFI filed a case in court against a local investor. The local investor, aware that MLFI had no license, argues that it has no legal standing in Philippine courts. Decide.

ISSUES 1. What is foreign corporation? 2. What are the requirements prescribed by the Code in order for a foreign corporation to be authorized to do business in the Philippines? 3. What are the rights of a foreign corporation under the Philippine laws? 4. Whether or not MLFI being a foreign corporation not registered under Philippine laws has the right to file a suit against the local investor.

APPLICABLE LEGAL BASIS I. Provisions

1. Corporation Code of the Philippines a. Sections 123; b. 124; c. and 125 2. Sec. 4 of R.A. No. 5455 entitled, AN ACT TO REQUIRE THAT THE MAKING OF INVESTMENTS AND THE DOING OF BUSINESS WITHIN THE PHILIPPINES BY FOREIGNERS OR BUSINESS ORGANIZATIONS OWNED IN WHOLE OR IN PART BY FOREIGNERS SHOULD CONTRIBUTE TO THE SOUND AND BALANCED DEVELOPMENT OF THE NATIONAL ECONOMY ON A SELF-SUSTAINING BASIS, AND FOR OTHER PURPOSES.

Section 4. Licenses to do business. No alien, and no firm, association, partnership, corporation or any other form of business organization formed, organized, chartered or existing under any laws other than those of the Philippines, or which is not a

Philippine national, or more than thirty per cent of the outstanding capital of which is owned or controlled by aliens shall do business or engage in any economic activity in the Philippines, or be registered, licensed, or permitted by the Securities and Exchange Commission or by any other bureaus, office, agency, political subdivision or instrumentality of the government, to do business, or engage in any economic activity in the Philippines, without first securing a written certificate from the Board of Investments to the effect; (1) That the operation or activity of such alien, firm, association, partnership, corporation or other form of business organization is not inconsistent with the Investments Priorities Plan; (2) That such business or economic activity will contribute to the sound and balanced development of the national economy on a self-sustaining basis; (3) That such business or economic activity by the applicant would not conflict with the Constitution or laws of the Philippines; (4) That the field of business or economic activity is not one that is being adequately exploited by Philippine nationals; and (5) That the entry of applicant therein will not pose a clear and present danger of promoting monopolies or combinations in restraint of trade. Upon granting said certificate, the Board shall impose the following requirements on the alien or the firm, association, partnership, corporation or other form of business organization that is not organized or existing under the laws of the Philippines (1) To appoint a citizen of the Philippines, of legal age, good moral character and reputation, and sound financial standing, as resident agent, who shall be authorized to accept summons and other legal process in behalf of the applicant; (2) To establish an office in the Philippines and to notify the Securities and Exchange Commission in writing of the applicant's exact address and of every contemplated transfer thereof or of the opening of new offices, at least fifteen days before the same are to be effected; and once effected, not later than ten days afterwards; (3) To bring assets into the Philippines to constitute the capital of the office or offices, of such kind and value as the Board may deem necessary to protect those who may deal with the applicant, and to maintain that capital unimpaired during the period it does business in the Philippines; (4) To present prior proof that citizens of the Philippines and corporations or other business organizations organized or existing under the laws of the

Philippines are allowed to do business in the contrary or individual state within a federal country of which applicant is a citizen or in which it is domiciled: Provided, however, That if the state or country of domicile of the applicant imposes on, or requires of, Philippine nationals other conditions, requirements or restrictions besides those set forth in this Act, the Board of Investments shall impose the said other conditions, requirements or restrictions on the applicant if, in its judgment, the imposition thereof shall foster the sound and balanced development of the national economy on a selfsustaining basis; (5) To submit to the Securities and Exchange Commission certified copies of applicant's charter and by-laws and all amendments thereto, if any, with their translation into an official language within twenty days after their adoption or after the grant of the prescribed certificate by the Board of Investments; and annually, of applicant's financial statements showing all assets, liabilities, and networth and results of operations, setting out separately those pertaining to the branch office; (6) To keep a complete set of accounting records with the resident agent, which shall fully and faithfully reflect all transactions within the Philippines, and to permit inspection thereof by the Securities and Exchange Commission, the Bureau of Internal Revenue, the Board of Investments and, if a corporation, by the officers mentioned in Section fifty-four of the Corporation Law; (7) To give priority to resident creditors as against non-resident creditors and owners or stockholders in the distribution of assets within the Philippines upon insolvency, dissolution or revocation of the license; (8) To give the Securities and Exchange Commission at least six months advance notice in writing of applicants' intention to stop doing business within the Philippines; and to give such public notice thereof as the Securities and Exchange Commission may require for the protection of resident creditors and others dealing with the applicant; and (9) Not to terminate any franchise, licensing or other agreement that applicant may have with a resident of the Philippines, authorizing the latter to assemble, manufacture or sell within the Philippines the products of the applicant, except for violation thereof or other just cause and upon payment of compensation and reimbursement of investment and other expenses incurred by the licensee in developing a market for the said products: Provided, however, That in case of disagreement, the amount of compensation or reimbursement shall be determined by the court where the licensee is domiciled or has its principal office who shall require the applicant to file a bond in such amount as, in its opinion, is sufficient for this purpose.

The above requirement shall be in addition to those set forth in the Corporation Law, as amended, for licensing foreign corporations and a violation of any of these requirements shall be sufficient cause to cancel a license or permit issued pursuant to this Act: Provided, however, That this section shall not apply to aliens or foreign firms, associations partnerships, corporations or other forms of business organization not organized or existing under the laws of the Philippines who may lawfully have been licensed to do business in the Philippines prior to the effectivity of this Act; Provided, further, That where the issuance of said license has been irregular or contrary to law, any person adversely affected thereby may file an action with the Court of First Instance where said alien or foreign business organizations resides or has its principal office to cancel the said license. In such cases, no injunction shall issue without notice and hearing; and appeals and other proceedings for review shall be filed directly with the Supreme Court.

II.

Principles a. Public Policy- which the law encourages for the promotion of the public good. b. Estoppel- the principle that precludes a person from asserting something contrary to what is implied by a previous action or statement of that person or by a previous pertinent judicial determination.

III.

Applicable Jurisprudence

1. Communication Materials and Design, Inc. v. CA, 260 SCRA 673 (1996.) 2. Corporation Code of the Philippines Annotated. Miriam Defensor Santiago (2000.) 3. National Sugar Trading Corporation v. CA, 246 SCRA 465 (1995.) 4. Columbia Pictures, Inc. v. CA, 261 SCRA 144 (1996.) 5. Marubeni Nederland B.V. v. Tensuan. 190 SCRA 105 (1990).

References: Corporation Code Annotated by Miriam Defensor Santiago. Corporation Code of the Philippines by Hector De Leon Corporation Code of the Philippines: Comments and cases by Justice Vitug

DISCUSSION 1. What is foreign corporation? Section 123 of the Corporation Code of the Philippines provides that a foreign corporation is one formed, organized or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or state. 2. What are the requirements prescribed by the Code in order for a foreign corporation to be authorized to do business in the Philippines? Under Section 124 of the Corporation Code of the Philippines every foreign corporation which on the date of the effectivity of this Code is authorized to do business in the Philippines under a license therefore issued to it, shall continue to have such authority under the terms and condition of its license, subject to the provisions of this Code and other special laws. Further, the law requires that a foreign corporation applying for a license to transact business in the Philippines shall submit to the Securities and Exchange Commission a copy of its articles of incorporation and by-laws, certified in accordance with law, and their translation to an official language of the Philippines, if necessary. The application shall be under oath and, unless already stated in its articles of incorporation, shall specifically set forth the following: 1. The date and term of incorporation; 2. The address, including the street number, of the principal office of the corporation in the country or state of incorporation; 3. The name and address of its resident agent authorized to accept summons and process in all legal proceedings and, pending the establishment of a local office, all notices affecting the corporation; 4. The place in the Philippines where the corporation intends to operate; 5. The specific purpose or purposes which the corporation intends to pursue in the transaction of its business in the Philippines: Provided, That said purpose or purposes are those specifically stated in the certificate of authority issued by the appropriate government agency; 6. The names and addresses of the present directors and officers of the corporation; 7. A statement of its authorized capital stock and the aggregate number of shares which the corporation has authority to issue, itemized by classes, par value of shares, shares without par value, and series, if any;

8. A statement of its outstanding capital stock and the aggregate number of shares which the corporation has issued, itemized by classes, par value of shares, shares without par value, and series, if any; 9. A statement of the amount actually paid in; and 10. Such additional information as may be necessary or appropriate in order to enable the Securities and Exchange Commission to determine whether such corporation is entitled to a license to transact business in the Philippines, and to determine and assess the fees payable. Attached to the application for license shall be a duly executed certificate under oath by the authorized official or officials of the jurisdiction of its incorporation, attesting to the fact that the laws of the country or state of the applicant allow Filipino citizens and corporations to do business therein, and that the applicant is an existing corporation in good standing. If such certificate is in a foreign language, a translation thereof in English under oath of the translator shall be attached thereto. The application for a license to transact business in the Philippines shall likewise be accompanied by a statement under oath of the president or any other person authorized by the corporation, showing to the satisfaction of the Securities and Exchange Commission and other governmental agency in the proper cases that the applicant is solvent and in sound financial condition, and setting forth the assets and liabilities of the corporation as of the date not exceeding one (1) year immediately prior to the filing of the application. Foreign banking, financial and insurance corporations shall, in addition to the above requirements, comply with the provisions of existing laws applicable to them. In the case of all other foreign corporations, no application for license to transact business in the Philippines shall be accepted by the Securities and Exchange Commission without previous authority from the appropriate government agency, whenever required by law.

NOTE: The purpose of the law in requiring a foreign corporations doing business in the Philippines be licensed to do so and that they appoint an agent for service of process is to subject the foreign corporation doing business in the Philippines to the jurisdiction of its courts. The object is not to prevent the foreign corporation from performing single act, but to prevent the foreign corporation from performing single acts but to prevent it from acquiring a domicile for the purpose of business without taking steps necessary to render it amenable to suit in the local courts.

3. What are the rights of a foreign corporation under the Philippine laws?

Generally, a foreign corporation has no legal existence within the state in which it is foreign. These proceeds from the fact the principle that the juridical existence of a corporation is confined within the territory of the state under whose laws it was incorporated and organized, and it has no legal status beyond such territory. Such foreign corporation may be excluded by any other state from doing business within its limits, or conditions maybe imposed on the exercise of such privilege.1 It shall have the right to transact business in the Philippines after it shall have obtained a license to transact business in this country in accordance with this Code and a certificate of authority from the appropriate government agency. 2 4. Whether or not MLFI has the right to file a suit against the local investor. No. While it true that Section 125 of the Corporation code of the Philippines is not a condition precedent in the maintenance of any kind of action in the Philippine courts by a foreign corporation, under the provision, no foreign corporation shall be permitted to transact business here, it shall not be permitted to maintain any suit in local courts. Shortly, it has no legal capacity to sue. The court ruled that The doctrine of lack of capacity to sue is based on the failure to acquire local license is based in the consideration of sound public policy. The license requirement was imposed to subject the foreign corporations doing business in the Philippines to the jurisdiction of its courts. It was never intended to favor domestic corporations who enter into solitary transactions with unwary foreign firms and then repudiate their obligations simply because the latter are not licensed to do business in this country.3 It must be emphasized that a foreign corporation doing business in the Philippines with or without license is subject to process and jurisdiction of the local courts. If such corporation is properly licensed then well and good. But it shall not be allowed, under any circumstances, to invoke its lack of license to impugn jurisdiction of the courts.4

Supplemental Reading: Any foreign Corporation not doing business in the Philippines may maintain an action in our courts upon any cause of action, provided that the subject matter and the defendant are within the jurisdiction of the court. It is not the absence of the prescribed licensed but doing business in the Philippines without such license which debars the foreign corporation from access to the courts. In other words, although a foreign corporation is without license to transact business in the Philippines, it does not follow that it has no capacity to bring an action. Such license is not necessary if it is not engaged in business in the Philippines.5

1 2

Communication Materials and Design, Inc. v. CA, 260 SCRA 673 (1996.) Corporation Code of the Philippines Annotated. Miriam Defensor Satiago (2000.) 3 National Sugar Trading Corporation v. CA, 246 SCRA 465 (1995.) 4 Marubeni Nederland B.V. v. Tensuan. 190 SCRA 105 (1990). 5 Columbia Pictures, Inc. v. CA, 261 SCRA 144 (1996.)

FACTS MLFI, a foreign corporation, through MLFPh, a local company, sold commodity futures to the public without the proper license to do business. MLFI filed a case in court against a local investor. The local investor, aware that MLFI had no license, argues that it has no legal standing in Philippine courts. Decide.

ISSUES 1. Whether or not a foreign corporation doing business in the Philippines may sue MLFPh, a local investor.

2. Whether or not the doctrine of estoppel is applicable to the case at bar.

DISCUSSION 1. Whether or not a foreign corporation doing business in the Philippines may sue MLFPh, a local investor. Yes. A foreign corporation doing business in the Philippines may sue in Philippine Courts although not authorized to do business here against a Philippine citizen or entity who had contracted with and benefited by said corporation. 2. Whether or not the doctrine of estoppel is applicable to the case at bar. Yes. The local investor is estopped. A party is estopped to challenge the personality of a corporation after having acknowledged the same by entering into a contract with it. And the doctrine of estoppel to deny the corporate existence applies to a foreign as well as to domestic corporations. One who has dealt with a corporation of foreign origin as a corporate entity is estopped to deny its corporate existence and capacity: This principle is applied to prevent a person contracting with a foreign corporation from later taking advantage of its noncompliance with the statuses chiefly in cases where such person has received the benefits of the contract.

CORPORATION CODE OF THE PHILIPPINES

A Legal Problem for Business Organization II College of Law Silliman University

Submitted to: Atty. Jose Riodil D. Montebom Adviser

Sumitted by: Mr. Reynil C. Arcide JD II student