Can a Co-Founder Be Prosecuted for Withdrawing Startup Funds?
Introduction
When a co-founder withdraws money from a joint bank account without the other founder’s consent, the conduct may appear to be estafa. However, criminal liability does not arise merely because the withdrawal was unauthorized, the startup failed, or the parties later disagreed about ownership of the funds.
The proper charge depends on the startup’s legal arrangement, the source and ownership of the money, the accused co-founder’s authority over the account, the purpose for which the funds were received, and proof of misappropriation or conversion. A criminal complaint must therefore be supported by evidence showing the elements of estafa beyond a mere business dispute.
When Does an Informal Startup Become a Partnership?
Under the Civil Code, a partnership may exist when two or more persons agree to contribute money, property, or industry to a common fund, with the intention of dividing profits among themselves. Registration with the Securities and Exchange Commission or execution of a public instrument is not always indispensable to establish the existence of a partnership between the parties.
In Angeles, et al. v. Secretary of Justice, et al., G.R. No. 142612, 18 November 2005, the Supreme Court recognized that a partnership may exist even without registration or a public instrument when the parties contributed to a common fund and shared profits. The Court further held that when money is delivered by one partner to another for partnership business, the misuse of that money generally gives rise to civil liability rather than estafa.
This principle is significant in an unregistered startup. A person described as a “co-founder” may be treated legally as a partner if the evidence shows contribution to a common enterprise and an agreement to share profits. The label used by the parties is not conclusive.
What Must Be Proven for Estafa?
The usual charge in this situation is estafa under Article 315(1)(b) of the Revised Penal Code, involving misappropriation or conversion of money or property received in trust, on commission, for administration, or under another obligation requiring delivery or return.
The prosecution must generally establish:
- Receipt of money or personal property by the accused;
- Receipt under a fiduciary or similar obligation requiring delivery or return;
- Misappropriation or conversion of the property, or denial of its receipt;
- Prejudice or damage to another person; and
- Demand, when relevant to proving that the obligation remained unperformed or that the accused’s possession became unlawful.
In Legaspi v. People of the Philippines, et al., G.R. No. 225753, 5 September 2018, the Supreme Court emphasized that receipt of money must be connected with a duty to deliver or return it. Mere receipt of money as payment for shares in a corporation does not automatically create the fiduciary relationship required for estafa.
Why the Joint Bank Account Matters
A joint bank account does not, by itself, determine whether a withdrawal constitutes estafa. The bank mandate may authorize either account holder to withdraw funds, but contractual authority to withdraw is different from the criminal question of whether the money was misappropriated.
The complaint should identify:
- Who deposited the money and in what amounts;
- Whether the money belonged to the startup, the founders personally, investors, or customers;
- Whether the accused had authority to withdraw or transfer the funds;
- Whether the withdrawal was made for a legitimate startup expense;
- Whether the accused was required to account for or return the funds; and
- How the funds were ultimately used.
If the account contained partnership funds and the accused was a partner with authority to manage those funds, the dispute may principally concern accounting, reimbursement, dissolution, or damages. If the accused was merely entrusted with money for a specified purpose and diverted it for personal use, the facts may support estafa.
Distinguishing Estafa from a Civil Business Dispute
| Situation | Likely legal concern |
|---|---|
| Partner withdraws partnership funds and fails to account for them | May primarily involve civil accounting, restitution, or damages; estafa requires proof of a fiduciary obligation and criminal conversion |
| Founder uses startup funds for an expressly authorized business expense | Generally no estafa, although unauthorized or excessive spending may create civil or corporate liability |
| Person receives investor funds for a specific project and secretly transfers them to a personal account | May support estafa if receipt, fiduciary duty, conversion, and damage are sufficiently shown |
| Person induces investors to deposit money through false representations made before payment | May involve estafa by false pretenses under Article 315(2)(a) of the Revised Penal Code |
The decisive issue is not simply whether the withdrawal was made without the complainant’s consent. The prosecution must prove that the accused had no right to treat the money as his or her own and that the funds were converted in violation of a legal or contractual duty.
Can a Partner Be Charged with Estafa?
Ordinarily, a partner’s misapplication of partnership property is addressed through civil remedies because partnership property is held for the partnership and the partners have rights and obligations arising from their partnership relation. A criminal case may nevertheless be possible where the evidence shows that the accused received property in a separate fiduciary capacity, exceeded the authority granted, or obtained the funds through deceit.
In Angeles, the Supreme Court found that the existence of a partnership weakened the estafa charge because the money had been delivered for a common business venture. The Court treated the alleged misuse as a matter of civil liability rather than criminal fraud in the absence of sufficient proof of deceit and unlawful conversion.
Accordingly, a complainant should not rely solely on the fact that one founder withdrew money from the account. The complaint must explain why the accused was legally obligated to preserve, deliver, return, or use the money only for a specified purpose.
Possible Estafa Theories
Estafa by Misappropriation or Conversion
This theory applies when the accused received funds under an obligation to deliver or return them, but appropriated or converted them for personal benefit or another unauthorized purpose. Bank records, written agreements, receipts, accounting reports, and proof of personal expenditures may be relevant.
Estafa by False Pretenses
This theory applies when the accused made a false representation before or at the time the money was delivered, and the representation induced the complainant to part with the funds. A later failure to perform a promise is not automatically estafa unless the original promise was accompanied by a fraudulent intent or false representation existing at the time of the transaction.
Estafa Through Falsification
If falsified documents were used to obtain or withdraw the funds, the facts may support a complex crime involving estafa and falsification. The specific document, act of falsification, participation of the accused, and causal connection to the loss must be established.
The applicable provisions on estafa include Article 315 of the Revised Penal Code. P.D. No. 1689 may apply only in the specific circumstances stated in its text, including syndicated swindling involving five or more persons and funds covered by the decree. It does not automatically apply to a dispute between two co-founders of an informal startup.
How to File the Criminal Complaint
A complainant generally begins by filing a sworn complaint-affidavit with the appropriate prosecutor’s office, together with supporting affidavits and documentary evidence. The complaint should state the material facts in chronological order and identify the specific manner by which the accused allegedly committed estafa.
- Secure the bank records. Obtain account statements, deposit slips, withdrawal slips, transfer records, check images, online banking records, and information identifying the recipient accounts.
- Establish the parties’ agreement. Collect incorporation documents, founders’ agreements, partnership documents, chat messages, emails, memoranda, investor agreements, and accounting records.
- Trace the funds. Show the source of each deposit, the authorized purpose, the withdrawal or transfer, and the final use of the money.
- Prove lack of authority or breach of trust. Present board or founder resolutions, account mandates, spending limits, approval requirements, and written demands for an accounting or return.
- File the complaint-affidavit. Attach the documentary evidence and affidavits of persons with personal knowledge of the transactions.
The prosecutor determines during preliminary investigation whether probable cause exists to file an information. Probable cause is not a final determination of guilt, and the accused retains the right to present a counter-affidavit and supporting evidence under the applicable preliminary-investigation rules.
Evidence That May Support the Complaint
The following evidence may help establish the elements of the offense:
- Bank statements showing withdrawals or transfers;
- Account-opening documents and signature cards;
- Written agreements identifying the purpose of the funds;
- Messages in which the accused acknowledges receiving or using the money;
- Invoices, payroll records, and accounting ledgers showing legitimate or unauthorized expenditures;
- Proof that the money was transferred to the accused, relatives, or controlled businesses;
- Demand letters and the accused’s response, if any; and
- Auditor or accountant findings tracing the alleged loss.
Electronic evidence should be preserved in its original form, with relevant metadata and a clear explanation of how it was obtained. Bank certifications and testimony from bank officers may also be necessary to authenticate account records.
Demand and Accounting
A written demand is often important, although demand is not invariably an element of every form of estafa. The demand should identify the amount involved, the transaction, the required accounting or return, and a reasonable period for compliance.
For an informal partnership, a demand for accounting may be especially important because it clarifies whether the dispute concerns missing funds, legitimate business expenses, distribution of profits, or an unsettled contribution. A demand may also prevent the complainant from relying on assumptions about the accused’s use of the money.
Prejudicial Questions and Related Civil Cases
A pending civil or intra-corporate case does not automatically prevent a criminal complaint. However, a prejudicial question may exist when the resolution of the civil case is a logical antecedent to the criminal case and will determine whether the accused may be held criminally liable.
In People of the Philippines v. Arambulo, et al., G.R. No. 186597, 15 September 2015, the Supreme Court explained that a prejudicial question may arise where a civil case must first resolve an issue essential to the criminal case. In that case, the authority of the person making a demand for a corporation was material to the estafa charge.
For a startup dispute, the existence of a partnership, ownership of the account funds, or authority to demand payment may become relevant. The complainant should therefore disclose related civil, corporate, or partnership proceedings rather than presenting the criminal case as an isolated transaction.
Malicious Prosecution Risks
A complainant who files an estafa case without probable cause and with malice may face a claim for damages based on malicious prosecution. In Metropolitan Bank and Trust Company, et al. v. Court of Appeals, et al., G.R. No. 154685, 23 June 2006, the Supreme Court held that a prior finding of probable cause by a prosecutor does not prevent a court from independently determining, in a civil action for damages, whether probable cause and malice existed.
This does not mean that a complainant must prove the entire criminal case before filing. It means that the complaint should be based on objectively reasonable evidence, not merely on a failed business relationship, personal disagreement, or desire to pressure the other founder into a settlement.
Typical Scenarios
Scenario one: Personal diversion of investor funds. Investors deposit money for software development. The co-founder secretly transfers the funds to a personal account and refuses to account for them. The facts may support estafa if the purpose of the funds and the accused’s obligation to use them for the project are documented.
Scenario two: Withdrawal by an authorized partner. Both founders agreed that either founder could withdraw funds for startup expenses. One founder withdraws money, but the business later fails and the other founder demands repayment. Without proof of conversion or a specific duty to return the money, the dispute may be civil rather than criminal.
Scenario three: False representation before funding. A co-founder represents that the startup has a government contract or secured technology when that representation is false, inducing the complainant to deposit money. If the false statement existed when the funds were delivered and caused the transfer, estafa by false pretenses may be considered.
Recommended Steps for the Complainant
- Determine first whether the parties created a partnership, corporation, agency, loan, or project-based arrangement.
- Identify the precise legal obligation attached to the funds.
- Separate unauthorized withdrawals from legitimate but disputed business expenses.
- Prepare a transaction-by-transaction schedule tracing the funds.
- Send a focused demand for accounting, supporting documents, and return of any balance.
- Preserve digital communications and obtain certified bank records.
- Consider civil remedies for accounting, restitution, damages, dissolution, or injunction alongside any criminal remedy.
- Have the complaint reviewed by counsel before filing to reduce the risk of an unfounded or poorly framed criminal case.
Conclusion
A co-founder who withdraws money from a joint startup account without consent may be prosecuted for estafa only when the evidence establishes the statutory elements of the offense. The central inquiry is whether the accused received the funds under a duty to deliver, return, or use them for a defined purpose and then deliberately misappropriated or converted them to the prejudice of another.
Where the parties were informal partners and the funds formed part of the partnership business, the dispute may instead require accounting, restitution, or dissolution proceedings. A strong complaint should therefore prove the parties’ agreement, the ownership and purpose of the money, the limits of the accused’s authority, the actual fund trail, and the accused’s unlawful conversion—not merely an unauthorized withdrawal or failed venture.
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