Introduction to Corporate Liability and the Liability of Directors for Corporate Acts

Understanding the liability of directors is crucial in corporate governance in the Philippines. Due to the nature of a corporation, which is a juridical entity vested with a legal personality separate and distinct from those acting for and, in its behalf, and, in general, from the people comprising it. Following this principle, obligations incurred by the corporation, acting through its directors, officers and employees, are its sole liabilities. A director, officer or employee of a corporation is generally not held personally liable for obligations incurred by the corporation. However, if a corporation is used as a means to commit a crime, perpetrate fraud or an illegal act, or as a vehicle for the evasion of an existing obligation, the circumvention of laws and statutes, or to confuse legitimate issues, a director, officer or employee of a corporation who perpetrated such action is liable directly and personally.

On this note, Section 30 of the Revised Corporation Code states:

“SEC. 30. Liability of Directors, Trustees or Officers. – Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons.

A director, trustee, or officer shall not attempt to acquire, or acquire any interest adverse to the corporation in respect of any matter which has been reposed in them in confidence, and upon which, equity imposes a disability upon themselves to deal in their own behalf; otherwise the said director, trustee, or officer shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation.”

Thus, the general rule is that a director of a corporation is not liable for corporate acts or acts which a director performs pursuant to the functions of his or her office.

Legal Framework Governing Directors’ Liability in the Philippines: 7 Insights

The Revised Corporation Code serves as the cornerstone of corporate governance in the Philippines, significantly influencing directors’ liability. Instituted in 2019, the Revised Corporation Code modernizes previous regulations and establishes clearer standards for corporate conduct. Understanding this code is essential for directors to navigate their responsibilities effectively.

Potential Liabilities for Directors

Directors face various liabilities when they fail to comply with the Revised Corporation Code or other Philippine laws requiring a standard of action.

Civil Liability: Directors, trustees and officers of a corporation can be civilly liable for their actions, although in the performance of their functions as part of the corporation. Civil liability includes the payment of monetary remuneration, or indemnity to the corporation, to other officers or directors of the corporation, or to third persons whose rights were violated or who suffered injury. The damages to be awarded may also include profits or earnings which were earned by the erring director or officer.
Criminal Liability: In cases of egregious misconduct, such as willful violations of anti-fraud provisions, violation of the penal provisions of the Revised Corporation Code and other laws, directors may face criminal charges. Note that since a corporation can only act through its board of directors, trustees or officers, if a corporation engages in any criminal activity, the directors, trustees or corporate officers are those subject to the penal provisions of the law violated. The penalties which may be imposed include fines or imprisonment.
Administrative Sanctions: The Securities and Exchange Commission has the authority to impose administrative sanctions on corporations, corporate officers, directors and trustees. The administrative sanctions may be in the form of fines, disqualification from holding office, or the performance of remedial measures to prevent further violative conduct.
Reputational Damage: Beyond legal consequences, non-compliance can severely damage a director’s reputation and credibility in the business community, impacting future opportunities.

Key Provisions of the Revised Corporation Code

Solidary Liability of Directors

The Revised Corporation Code speaks about solidary liability when it comes to certain corporate acts of directors or trustees. Not all actions of a director or trustee can render it solidarily liable. Section 30 of the Revised Corporation Code specifies certain types of actions, which may be a source of direct, and personal liability to directors and trustees of corporations. These acts include:

When directors and trustees or, in appropriate cases, the officers of a corporation: (a) vote for or assent to patently unlawful acts of the corporation; (b) act in bad faith or with gross negligence in directing the corporate affairs; and (c) are guilty of conflict of interest to the prejudice of the corporation, its stockholders or members, and other persons;
When a director or officer has consented to the issuance of watered stocks or who, having knowledge thereof, did not forthwith file with the corporate secretary his written objection thereto;
When a director, trustee or officer has contractually agreed or stipulated to hold himself personally and solidarily liable with the corporation; or
When a director, trustee or officer is made, by specific provision of law, personally liable for his corporate action.

Personal Liability of Directors for Bad Faith or Gross Negligence

Gross Negligence and Bad Faith

Directors can be personally liable for negligence, especially when it crosses the threshold into gross negligence or bad faith. These terms describe situations where a director fails to act with the care that a reasonably prudent person would exercise in similar circumstances.

Gross Negligence is one that is characterized by the lack of the slightest care, acting or failing to act in a situation where there is a duty to act, wilfully and intentionally with a conscious indifference to the consequences insofar as other persons may be affected. (Magaling v. Ong, G.R. No. 173333, August 13, 2008)
Bad Faith entails actions taken with a deliberate or willful disregard for the company’s best interests or engaging in self-serving behavior. For instance, if a director makes management decisions that benefit themselves at the expense of shareholders, this could result in personal liability.

Corporate Liability of Directors

In the case of Francisco v. Mallen, Jr., G.R. No. 173169, September 22, 2010, the Supreme Court enumerated the elements which would indicate an instance when a director, trustee or officer of a corporation can be held to personally answer or be liable for corporate obligations. All of these elements must be present, for such director, trustee or corporate officer to be liable:

The complainant must allege in the complaint that the director or officer assented to patently unlawful acts of the corporation, or that the officer was guilty of gross negligence or bad faith; and
The complainant must clearly and convincingly prove such unlawful acts, negligence or bad faith.

If these elements concur, the director, trustee or corporate officer can be held personally liable for corporate obligations.

Disloyalty of a Director

The Revised Corporation Code specifically punishes disloyal or double-dealing directors.

The Supreme Court, in the case of Strategic Alliance Development Corp. v. Radstock Securities Limited, 622 Phil. 431 (2009), enumerated the duties of a director as an officer and important part of a corporation. In that case, the Supreme Court mentioned these three essential duties as obedience, diligence, and loyalty, specifically. Hence, Directors must therefore:

Manage corporate affairs strictly within the organization’s intended purposes;
Avoid deliberately voting for or consenting to clearly illegal corporate acts, or acting in bad faith or gross negligence when managing corporate affairs; and
Prevent personal or financial interests from conflicting with their directorial obligations.

In the same case of Strategic Alliance Development Corp. v. Radstock Securities Limited, the Supreme Court further explained that the obligation of loyalty specifically bars directors, trustees, and officers of corporations from pursuing or seeking to pursue any personal profit, monetary gain, or other interests that would compete with or oppose their responsibilities as corporate fiduciaries.

The duty of loyalty is etched in law, so much so that Section 33 of the Revised Corporation Code expressly provides for the liability of a disloyal director:

“SEC. 33. Disloyalty of a Director. – Where a director, by virtue of such office, acquires a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, the director must account for and refund to the latter all such profits, unless the act has been ratified by a vote of the stockholders owning or representing at least two-thirds (2/3) of the outstanding capital stock. This provision shall be applicable, notwithstanding the fact that the director risked one’s own funds in the venture.”

The liability of a disloyal director to the corporation is the rule here. Exemption from liability is the legal exception. The disloyal director may only avoid such liability if he or she receives the support of his peers in the corporation’s Board of Directors, and his or her act is ratified by at least two-thirds (2/3) of the outstanding capital stock.

The Doctrine of Corporate Opportunity and the Liability of a Director under the Doctrine

The Supreme Court, in the case of Total Office Products and Services (Topros), Inc., vs. Chang, Jr., et al., G.R. Nos. 200070-71, December 07, 2021, citing the case of Guth vs. Loft, 23 Del. Ch. 255 (1939), the Supreme Court quoted with approval portions of the case discussing the liability of a director in cases of disloyalty, and the consequences for his or her breach of fiduciary duty:

“Corporate officers and directors are not permitted to use their position of trust and confidence to further their private interests. While technically not trustees, they stand in a fiduciary relation to the corporation and its stockholders. A public policy, existing through the years, and derived from a profound knowledge of human characteristics and motives, has established a rule that demands of a corporate officer or director, peremptorily and inexorably, the most scrupulous observance of his duty, not only affirmatively to protect the interests of the corporation committed to his charge, but also to refrain from doing anything that would work injury to the corporation, or to deprive it of profit or advantage which his skill and ability might properly bring to it, or to enable it to make in the reasonable and lawful exercise of its powers. The rule that requires an undivided and unselfish loyalty to the corporation demands that there shall be no conflict between duty and self-interest. The occasions for the determination of honesty, good faith and loyal conduct are many and varied, and no hard and fast rule can be formulated. The standards of loyalty is measured by no fixed scale.

If an officer or director of a corporation, in violation of his duty as such, acquires gain or advantage for himself, the law charges the interest so acquired with a trust for the benefit of the corporation, as its election, while it denies to the betrayer all benefit and profit. The rule, inveterate and uncompromising in its rigidity, does not rest upon the narrow ground of injury or damage to the corporation resulting from a betrayal of confidence, but upon a broader foundation of a wise public policy that, for the purpose of removing all temptation, extinguishes all possibility of profit flowing from a breach of the confidence imposed by the fiduciary relation. Given the relation between the parties, a certain result follows; and a constructive trust is the remedial device through which precedence of self is compelled to give way to the stern demands of loyalty.

The rule, referred to briefly as the rule of corporate opportunity, is merely one of the manifestations of the general rule that demands of an officer or director the utmost good faith in his relation to the corporation which he represents.”

The Supreme Court further holds that in determining the existence of a corporate opportunity misappropriated by a director or officer, all pertinent elements must be considered, including:

The corporation’s active pursuit of the opportunity;
The corporation’s ability to exploit the opportunity;
The opportunity’s alignment with the corporation’s business or related ventures;
The manner in which the director or officer became aware of the opportunity;
Other directors’ awareness of their colleague’s pursuit of the opportunity; and
The extent to which other directors provided informed approval for their colleague’s pursuit of the opportunity.

Elements to Determine Breach of Fiduciary Duty by a Director

The Supreme Court outlined certain criteria for a claim for damages against a disloyal director to be valid in the case of Total Office Products and Services (Topros), Inc. vs. Chang, to wit:

(a) The corporation is financially able to exploit the opportunity;

(b) The opportunity is within the corporation’s line of business;

(d) By taking the opportunity for his own, the corporate fiduciary (i.e., corporate director, trustee or officer) will thereby be placed in a position inimicable to his duties to the corporation.

The High Court further stressed that merely attributing basic acts or dealings where the plaintiff subjectively sees a breach in the duty of loyalty is insufficient. One must present adequate proof demonstrating that the damage claim truly stems from a specific business opportunity within the aforementioned criteria. Only upon such showing can actual damages for the lost opportunity be granted.

Finally, the Supreme Court, in the same case, ruled that “the doctrine of corporate opportunity governs the legal responsibility of directors, officers and controlling shareholders in a corporation, under the duty of loyalty, not to take such opportunities for themselves, without first disclosing the opportunity to the board of directors of the corporation and giving the board the option to decline the opportunity on behalf of the corporation. If the procedure is violated and a corporate fiduciary takes the corporate opportunity anyway, the fiduciary violates its duty of loyalty and the corporation will be entitled to a constructive trust of all profits obtained from the wrongful transaction.”

This means that all profits and earnings which the director obtained in his or her venture would be forfeited, as these, according the Supreme Court, are profits belonging to the corporation whose fiduciary trust was violated by the director, and by virtue of such disloyalty, is by law entitled to such profits and earnings.

Criminal Liability of Directors under the Revised Corporation Code of the Philippines

If a corporation is used as a vehicle for fraud or crime, the directors, trustees or officers, who sanctioned the actions are liable criminally under the law.

Thus, a director of a corporation may be held criminally liable for the violation of any Philippine laws if it is proven that the he or she sanctioned the corporate act. The Revised Corporation Code mentions specific penal provisions for which a director or trustee of a corporation may be held criminally liable. However, it must be remembered that the source of liability for directors is not limited to the provisions of the Revised Corporation Code of the Philippines. Rather, it is the entire gamut of Philippine laws which may be a source of penal liability if knowingly breached by the corporations, through their directors or officers. These provisions include:

Section 159. Unauthorized Use of Corporate Name; Penalties. – The unauthorized use of corporate name shall be punished with a fine ranging from Ten thousand pesos (₱10,000.00) to Two hundred thousand pesos (₱200,000.00).
Section 160. Violation of Disqualification Provision; Penalties. – When, despite the knwoledge of the existence of a ground for disqualification as provided in Section 26 of this Code, a director, trustee or officer willfully holds office, or willfully conceals such disqualification, such director, trustee or officer shall be punished with a fine ranging from Ten thousand pesos (₱10,000.00) to Two hundred thousand pesos (₱200,000.00) at the discretion of the court, and shall be permanently disqualified from being a director, trustee or officer of any corporation. When the violation of this provision is injurious or detrimental to the public, the penalty shall be a fine ranging from Twenty thousand pesos (₱20,000.00) to Four hundred thousand pesos (₱400,000.00).
Section 161. Violation of Duty to Maintain Records, to Allow their Inspection or Reproduction; Penalties. – The unjustified failure or refusal by the corporation, or by those responsible for keeping and maintaining corporate records, to comply with Section s 45, 73, 92, 128, 177 and other pertinent rules and provisions of this Code on inspection and reproduction of records shall be punished with a fine ranging from Ten thousand pesos (₱10,000.00) to Two hundred thousand pesos (₱200,000.00), at the discretion of the court, taking into consideration the seriousness of the violation and its implications. When the violation of this provision is injurious or detrimental to the public, the penalty is a fine ranging from Twenty thousand pesos (₱20,000.00) to Four hundred thousand pesos (₱400,000.00).
Section 164. Obtaining Corporate Registration Through Fraud; Penalties. – Those responsible for the formation of a corporation through fraud, or who assisted directly or indirectly therein, shall be punished with a fine ranging from Two hundred thousand pesos (₱200,000.00) to Two million pesos (₱2,000,000.00). When the violation of this provision is injurious or detrimental to the public, the penalty is a fine ranging from Four hundred thousand pesos (₱400,000.00) to Five million pesos, (₱5,000,000.00).
Section 165. Fraudulent Conduct of Business; Penalties. – A corporation that conduct its business through fraud shall be punished with a fine ranging from Two hundred thousand pesos (₱200,000.00) to Two million pesos (₱2,000,000.00). When the violation of this provision is injurious or detrimental to the public, the penalty is a fine ranging from Four hundred thousand pesos (₱400,000.00) to Five million pesos (₱5,000,000.00).
Section 166. Acting as Intermediaries for Graft and Corrupt Practices; Penalties. – A corporation used for fraud, or for committing or concealing graft and corrupt practices as defined under pertinent statutes, shall be liable for a fine ranging from One hundred thousand pesos (₱100,000.00) to Five million pesos (₱5,000,000.00). When there is a finding that any of its directors, officers, employees, agents, or representatives are engaged in graft and corrupt practices, the corporation’s failure to install:(a) safeguards for the transparent and lawful delivery of services; and (b) policies, code of ethics, and procedures against graft and corruption shall be prima facie evidence of corporate liability under this section.
Section 167. Engaging Intermediaries for Graft and Corrupt Practices; Penalties. – A corruption that appoints an intermediary who engages in graft and corrupt practices for the corporation’s benefit or interest shall be punished with a fine ranging from One hundred thousand pesos (₱100,000.00) to One million pesos (₱1,000,000.00).
Section 168. Tolerating Graft and Corrupt Practices; Penalties. – A director, trustee, or officer who knowingly fails to sanction, report, or file the appropriate action with proper agencies, allows or tolerates the graft and corrupt practices or fraudulent acts committed by a corporation’s directors, trustees, officers, or employees shall be punished with a fine ranging from Five hundred thousand pesos (₱500,000.00) to One million pesos (₱1,000,000.00).
Section 169. Retaliation Against Whistleblowers. – A whistleblower refers to any person who provides truthful information relating to the commission or possible commission of any offense or violation under this Code. Any person who, knowingly and with intent to retaliate, commits acts detrimental to a whistleblower such as interfering with the lawful employment or livelihood of the whistleblower, shall, at the discretion of the court, be punished with a fine ranging from One hundred thousand (₱100,000.00) to One million (₱1,000,000.00).
Section 170. Other Violations of the Code; Separate Liability. – Violation of any of the other provisions of this Code or its amendments not otherwise specifically penalized therein shall be punished by a fine of not less than Ten thousand pesos (₱10,000.00) but not more than One million pesos (₱1,000,000.00). If the violation is committed by a corporation, the same may, after notice and hearing, be dissolved in appropriate proceedings before the Commission; Provided, That such dissolution shall not preclude the institution of appropriate action against the director, trustee, or officer of the corporation responsible for said violation: Provided, further, That nothing in this section shall be construed to repeal the other causes for dissolution of corporation provided in this Code. Liability for any of the foregoing offenses shall be separate from any other administrative, civil, or criminal liability under this Code and other laws.
Section 171. Liability of Directors, Trustees, Officers, or Other Employees. – If the offender is a corporation, the penalty may, at the discretion of the court, be imposed upon such corporation and/or upon its directors, trustees, stockholders. members, officers, or employees responsible for the violation or indispensable to its commission.
Section 172. Liability of Aiders and Abettors and Other Secondarr Liability. – Anyone who shall aid, abet, counsel, command, induce, or cause any violation of this Code, or any rule regulation or order of the Commission shall be punished with a fine not exceeding that imposed on the principal offenders, at the discretion of the court, after taking into account their participation in the offense.

About Nicolas and De Vega Law Offices

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Liability for Directors: 7 Important Insights into Philippine Corporate Governance

Introduction to Corporate Liability and the Liability of Directors for Corporate Acts