Corporate Authority and Debt: When a Corporation Is Not Liable for Its President’s Loan

When a corporate president signs a loan and mortgages company property, is the corporation bound? The Supreme Court’s 2006 decision in Koji Yasuma v. Heirs of Cecilio S. de Villa (G.R. No. 150350) clarifies when a corporation may—and may not—be held liable for the acts of its officers. The ruling is a practical reminder that corporate officers are agents, and their authority has strict limits.

The Facts of the Case

In 1988, Cecilio S. de Villa, president of East Cordillera Mining Corporation, obtained three loans from Koji Yasuma totaling P1.3 million. De Villa signed the promissory notes in his own name as borrower, without indicating any corporate capacity. To secure the loans, de Villa executed real estate mortgages over a parcel of land titled in the corporation’s name, signing as its president.

When de Villa failed to pay, Yasuma sued both de Villa and the corporation. The trial court initially ruled for Yasuma, but the case was retried after improper service of summons. During the retrial, de Villa died, and his heirs were impleaded. The trial court eventually ordered the corporation to pay P1.3 million plus interest and damages. On appeal, however, the Court of Appeals reversed, holding that the loan was personal to de Villa and that the mortgage was void for lack of corporate authority.

The Issue: Personal or Corporate Debt?

The Supreme Court framed two questions: (1) whether the loans were personal liabilities of de Villa or debts of the corporation, and (2) whether the mortgage on corporate property was void for lack of authority.

Corporate Officers as Agents

Under the Corporation Code of the Philippines, a corporation acts through its board of directors. Officers may bind the corporation only when authorized—expressly by by-laws or board resolutions, or impliedly through general practice or policy. The general principles of agency govern these relationships. When an officer acts without authority, the corporation is not bound.

The power to borrow money, the Court noted, requires a special power of attorney. In this case, no such authority was ever presented. The promissory notes were signed by de Villa as borrower, with no mention of the corporation. On their face, they were personal loans. Even Yasuma’s demand letters were addressed to de Villa personally, not to the corporation. The Court concluded that Yasuma dealt with de Villa purely in his personal capacity.

Ratification: Knowledge Is Essential

Yasuma argued that the corporation ratified de Villa’s act because it admitted receiving the P1.3 million. The Court rejected this. Ratification requires a voluntary choice, knowingly made, to adopt an unauthorized act. The corporation could not ratify an act it had no knowledge of—it believed the money was an investment, not a loan. The corporation accepted the funds in good faith, and Yasuma presented no evidence of bad faith. Since the corporation did not know the true nature of the transaction, there was no valid ratification.

The Mortgage: Void Without Special Authority

Yasuma also argued that the mortgage, as an accessory contract, was ratified along with the loan. The Court disagreed. Under the Civil Code, a special power of attorney is required to create or convey real rights over immovable property, and that special power must appear in a public document. Without such authority, the mortgage executed by de Villa was void from the start—and a void contract cannot be ratified.

The Court added that Yasuma could blame only himself for failing to verify de Villa’s authority to mortgage corporate property.

Practical Takeaways

• Check authority before lending. A corporate officer’s title alone does not confer power to borrow or mortgage company assets. Always require a board resolution or special power of attorney.
• Read the documents. If a promissory note names only the individual, courts will treat the debt as personal, even if the money benefits the corporation.
• Ratification requires knowledge. A corporation that accepts funds without knowing they came from a loan has not ratified the loan. Ratification demands a knowing, voluntary choice.
• Void contracts cannot be ratified. A mortgage executed without the required special power of attorney is void, not merely voidable.
• Know your remedy. If the borrower has died, the creditor’s recourse is a money claim in the estate settlement proceedings under the Rules of Court.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.