Can a Corporate Treasurer Be Liable for Illegal Dividends?

Introduction

Corporate dividends are not ordinary shareholder payouts. They may be distributed only when authorized by law and supported by the corporation’s available earnings. When a corporation has zero unrestricted retained earnings, a payout to shareholders may unlawfully impair corporate capital and prejudice creditors.

The corporate treasurer may face personal liability when the treasurer knowingly approves, facilitates, or participates in an unlawful distribution. The precise consequence depends on the treasurer’s conduct, knowledge, authority, and participation in the transaction. The present authorities establish substantial civil and corporate liability principles, but they do not, by themselves, create a general criminal offense applicable to every illegal dividend payment.

What Is an Illegal Dividend?

Under Section 42 of the Revised Corporation Code of the Philippines, or R.A. No. 11232, a stock corporation may declare dividends only out of its unrestricted retained earnings. Dividends may be paid in cash, property, or stock, subject to the statutory requirements governing each form.

A dividend is generally illegal when it is distributed despite the absence of unrestricted retained earnings, when it is sourced from capital rather than profits, or when the distribution violates the rights of creditors or other legal restrictions. A corporation cannot lawfully use its capital as though it were distributable profit.

The Supreme Court has emphasized that the board’s power to declare dividends depends on the availability of unrestricted retained earnings. In “Commissioner of Internal Revenue v. Goodyear Philippines, Inc.,” G.R. No. 216130, November 9, 2016, the Court held that absent unrestricted retained earnings, the board has no power to issue dividends. [Commissioner of Internal Revenue v. Goodyear Philippines, Inc. (2016)]

Why Zero Unrestricted Retained Earnings Matter

Unrestricted retained earnings represent profits legally available for distribution after considering applicable accounting adjustments and restrictions. If the corporation’s financial statements show no unrestricted retained earnings, there is no ordinary statutory basis for declaring dividends under Section 42 of R.A. No. 11232.

The absence of unrestricted retained earnings is not cured by the corporation’s gross assets, cash balance, or apparent profitability in an earlier year. Cash on hand may represent capital, borrowed funds, restricted funds, or assets needed to satisfy existing obligations. It does not automatically constitute distributable profit.

In “Ongkingco, et al. v. Sugiyama, et al.,” G.R. No. 217787, February 13, 2019, the Court stated that dividends cannot be fixed and predetermined in advance because their declaration depends on the corporation’s unrestricted retained earnings. [Ongkingco, et al. v. Sugiyama, et al. (2019)]

What Is the Corporate Treasurer’s Role?

The treasurer ordinarily handles or supervises the corporation’s funds, disbursements, cash controls, and financial records. The treasurer’s position does not automatically make the officer personally liable for every dividend declared by the board.

Personal liability may arise, however, when the treasurer knowingly participates in an unlawful distribution. Relevant conduct may include signing or approving checks, authorizing transfers, certifying the availability of distributable earnings despite contrary financial records, or releasing funds after receiving notice that the dividend declaration was unlawful.

The decisive inquiry is not the officer’s title alone. It is whether the treasurer acted in bad faith, with gross negligence, with a conflicting personal interest, or in knowing assent to a patently unlawful corporate act.

Statutory Basis for Personal Liability

Section 30 of R.A. No. 11232 provides that directors, trustees, and officers may be held jointly and severally liable for damages resulting from their participation in patently unlawful corporate acts, bad faith, gross negligence, or conflicts of interest.

The same provision also prohibits a director, trustee, or officer from acquiring an interest adverse to the corporation in matters entrusted to that person in confidence. The officer may be required to account for profits obtained through the breach of that duty. [Revised Corporation Code of the Philippines (2019)]

Although Section 30 does not impose automatic liability on every treasurer, it may apply when the treasurer is an officer who substantially participated in the illegal distribution and the required factual circumstances are proven.

When Can the Treasurer Be Held Personally Liable?

Based on Section 30 of R.A. No. 11232 and the jurisprudential standards summarized in “Malate Construction Development Corporation, et al. v. Extraordinary Realty Agents & Brokers Cooperative,” G.R. No. 243765, March 15, 2022, personal liability may attach in circumstances such as the following:

• Knowing assent to a patently unlawful act: the treasurer knew that the corporation had no unrestricted retained earnings but nevertheless approved or released the dividend.
• Bad faith: the treasurer acted dishonestly, concealed the corporation’s financial condition, or intentionally disregarded the legal prohibition.
• Gross negligence: the treasurer failed to perform basic financial verification despite access to records showing that no dividend was legally available.
• Conflict of interest: the treasurer benefited personally or favored related shareholders through the distribution.
• Substantial participation: the treasurer’s approval, signature, certification, or release of funds was a necessary step in completing the payout.

In “Malate Construction Development Corporation, et al. v. Extraordinary Realty Agents & Brokers Cooperative,” G.R. No. 243765, March 15, 2022, the Court reiterated that corporate officers are not personally liable for corporate obligations merely because of their positions. Liability requires proof of bad faith, gross negligence, or another recognized ground under the Corporation Code. [Malate Construction Development Corporation, et al. v. Extraordinary Realty Agents & Brokers Cooperative (2022)]

Is the Treasurer Automatically Criminally Liable?

No. The mere approval or release of a dividend does not automatically establish criminal liability. Criminal liability requires a specific penal provision, proof of all its elements, and proof beyond reasonable doubt of the accused’s participation and required criminal intent or negligence.

The authorities cited here principally establish civil liability, fiduciary accountability, corporate-law restrictions, and administrative consequences. Section 30 of R.A. No. 11232 is not, by itself, a general penal provision making every unlawful dividend distribution a crime.

A criminal case may nevertheless arise if the facts separately constitute an offense under another applicable law, such as fraud, falsification, theft, or another offense supported by the evidence. The particular offense cannot be determined without examining the dividend resolution, accounting records, payment documents, representations made to shareholders, and the officer’s actual participation.

The Trust Fund Doctrine and Creditor Protection

The Trust Fund Doctrine treats the corporation’s capital as a fund to which creditors may look for satisfaction of their claims. Corporate assets cannot ordinarily be distributed to shareholders when the distribution would improperly diminish the fund available to creditors.

In SEC En Banc Case No. 01-18-437, 2018, the Securities and Exchange Commission applied the doctrine in rejecting a proposed buy-back sourced from capital where the corporation lacked sufficient unrestricted retained earnings. The ruling explained that corporate capital may be distributed only in legally recognized circumstances and subject to statutory safeguards. [SEC En Banc Case No. 01-18-437 (2018)]

This principle is relevant to a treasurer because the treasurer may be responsible for preventing the actual release of funds when the proposed payment would unlawfully impair corporate assets. A treasurer who ignores an obvious capital impairment risk may face a claim for damages, especially where creditors suffer loss.

Dividend Declaration and Dividend Payment Are Different Acts

The board generally declares the dividend. The treasurer commonly implements the declaration by arranging payment. These are separate acts, and the treasurer’s implementation does not necessarily make the treasurer liable for an unlawful board resolution.

The distinction does not protect a treasurer who knows that the declaration is unlawful and nevertheless proceeds with payment. Conversely, a treasurer who reasonably relies on complete and accurate corporate records, raises a documented objection, and refrains from releasing funds may have a stronger defense.

In “Ongkingco, et al. v. Sugiyama, et al.,” G.R. No. 217787, February 13, 2019, the Court treated the declaration of dividends as a power belonging to the board and recognized that dividends may be declared only from unrestricted retained earnings. The decision also illustrates that an officer may incur personal responsibility when personally undertaking unauthorized corporate obligations. [Ongkingco, et al. v. Sugiyama, et al. (2019)]

Typical Scenarios

Scenario one: Mere payment clerk. The board adopts a dividend resolution, the treasurer receives complete financial statements showing sufficient unrestricted retained earnings, and the treasurer releases payment in the ordinary course. Personal liability is not automatic merely because the treasurer signed the checks.

Scenario two: Payment despite clear financial records. The treasurer knows that the corporation has a deficit, receives written advice that no unrestricted retained earnings exist, and nevertheless authorizes the payout. These facts may support a finding of bad faith or gross negligence under Section 30 of R.A. No. 11232.

Scenario three: False certification. The treasurer signs a certification falsely stating that dividends are legally available, knowing that the corporation has no unrestricted retained earnings. The certification may support civil liability and may also be relevant to a separate criminal complaint if the statutory elements of a particular offense are established.

Scenario four: Objection and refusal. The treasurer documents the lack of unrestricted retained earnings, objects in writing to the payment, requests legal and accounting review, and refuses to release funds until the matter is resolved. These actions may help demonstrate good faith and due care.

Recommended Compliance Procedure

Before releasing any dividend, the treasurer should require a complete corporate record showing that the distribution is legally and financially supported. The following documents should ordinarily be reviewed and retained:

• the board resolution declaring the dividend;
• the corporation’s latest audited and interim financial statements;
• a computation of unrestricted retained earnings;
• the reconciliation required by applicable Securities and Exchange Commission rules;
• the list of stockholders entitled to the declared dividend; and
• evidence that the distribution will not improperly impair capital or prejudice creditors.

The treasurer should also verify whether any loan agreement, financing covenant, court order, regulatory directive, or other restriction limits the declaration or payment of dividends. Section 42 of R.A. No. 11232 recognizes that certain loan restrictions and special circumstances may justify retention of surplus profits; those circumstances do not, however, authorize payment when no unrestricted retained earnings exist.

Administrative and Corporate Consequences

An unlawful dividend may expose the corporation to regulatory scrutiny, demands for restitution, shareholder disputes, and claims by creditors. Responsible officers may also face corporate remedies, including damages, accounting, removal, or other measures authorized by law and applicable corporate rules.

The Securities and Exchange Commission has issued guidelines on the determination of retained earnings available for dividend declaration. The current issuance identified in the supplied authorities is SEC MC No. 16, series of 2023, which revised the retained-earnings reconciliation process and requires adjustments consistent with updated Philippine Financial Reporting Standards. [SEC MC No. 16, series of 2023 (2023)]

Only the current requirements should be used in preparing the computation. Earlier guidance should not be relied upon where it has been replaced by the 2023 revised guidelines.

Who Is Entitled to Receive Dividends?

A person’s status as a shareholder does not, by itself, create an immediate right to receive a dividend. There must first be a valid declaration by the board, supported by unrestricted retained earnings and compliance with applicable requirements.

SEC-OGC Opinion No. 11-45, 2011, explains that stockholders of record—those reflected in the corporation’s Stock and Transfer Book—are generally the persons entitled to exercise stockholder rights, subject to the validity of the dividend declaration and other governing circumstances. [Opinion No. 11-45 (2011)]

Final Observations

A corporate treasurer is not automatically criminally or civilly liable simply because the treasurer processed a dividend payment. Liability becomes more likely when the treasurer knowingly approves a payout despite zero unrestricted retained earnings, acts with bad faith or gross negligence, falsifies financial information, benefits from the distribution, or disregards a clear legal objection.

To reduce exposure, the treasurer should verify the current unrestricted-retained-earnings computation, insist on a valid board resolution, document all objections, obtain written accounting and legal support when necessary, and refuse to release funds when the proposed distribution would use capital or prejudice creditors.

About Nicolas and De Vega Law Offices

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