Advance Paper Corporation vs. Arma Traders Corporation

A corporation is bound by loan contracts entered into by its president and treasurer despite the absence of a specific board resolution authorizing such loans, where the corporation knowingly permitted these officers to act as sole managers and hold themselves out as possessing authority to bind the corporation for 14 years, thereby clothing them with apparent authority; furthermore, evidence not objected to on the ground of hearsay during trial becomes admissible and forms part of the records of the case.

The case arose from a 14-year business relationship between Advance Paper Corporation, a manufacturer of paper products, and Arma Traders Corporation, a distributor of school and office supplies. The dispute centered on whether Arma Traders was liable for approximately P15 million in unpaid obligations arising from credit purchases and loans obtained by its President and Treasurer, which the corporation claimed were ultra vires acts and fraudulent rediscounting schemes designed to siphon corporate funds.

• Advance Paper Corporation is a domestic corporation engaged in producing, printing, manufacturing, distributing, and selling paper products, with George Haw as President and his wife as General Manager.
• Arma Traders Corporation is a domestic corporation engaged in wholesale and distribution of school and office supplies, with Antonio Tan as former President and Uy Seng Kee Willy as Treasurer, who represented the company in dealings with Advance Paper for approximately 14 years.
• From September to December 1994, Arma Traders purchased on credit notebooks and other paper products amounting to P7,533,001.49 from Advance Paper.
• Upon representation of Tan and Uy, Arma Traders obtained three loans from Advance Paper in November 1994 totaling P7,788,796.76 (P3,380,171.82, P1,000,000.00, and P3,408,623.94) to settle obligations with other suppliers due to delayed collectibles.
• As payment for both credit purchases and loans, Arma Traders issued 82 postdated checks signed by Tan and Uy as authorized bank signatories, aggregating P15,130,636.87.
• All checks were dishonored by the drawee bank for either "insufficiency of funds" or "account closed."
• Benjamin Ng, Arma Traders' Corporate Secretary, testified that the stockholders and board of directors never conducted meetings from 1984 to 1995, leaving the sole and active management of the company entirely to Tan and Uy.
• The Articles of Incorporation of Arma Traders authorized the corporation to borrow or raise money to meet the financial requirements of its business by issuing bonds, promissory notes, and other evidence of indebtedness.
• Tan and Uy were incorporators of Arma Traders along with Ng, Ting, and Pedro Chao.
• Uy admitted in his Answer that he and Tan were authorized for 13 years to issue checks on behalf of Arma Traders and that the checks were issued to pay contractual obligations with Advance Paper.
• The respondents claimed the transactions were fraudulent and constituted "rediscounting" of checks, and that the loans were personal obligations of Tan and Uy rather than corporate debts.

• Arma Traders is estopped from denying the authority of Tan and Uy to obtain loans under the doctrine of apparent authority, given that the corporation knowingly permitted them to act as sole managers for 14 years without board supervision, holding them out to the public as possessing power to bind the corporation.
• The absence of a board resolution is immaterial because the corporation's own laxity and acquiescence clothed Tan and Uy with apparent authority to borrow.
• The sales invoices are admissible evidence because the respondents failed to object to their admissibility on the ground of hearsay during the trial, and Haw had personal knowledge of the transactions as he supervised the preparation of invoices and deliveries.
• The discrepancies pointed out by respondents (in check amounts, sales invoice photocopies, and SEC reports) are minor, explained, or irrelevant to the existence of the underlying obligations.
• There is no evidence of conspiracy between Haw, Tan, and Uy to defraud Arma Traders.

• The loans were ultra vires because Tan and Uy lacked board resolution authorizing them to contract loans; authority to sign checks is distinct from authority to contract loans.
• The sales invoices are inadmissible hearsay because Haw did not personally prepare them and the secretaries who did were not presented or shown to be dead or unable to testify.
• The transactions were spurious and fraudulent, constituting "rediscounting" of postdated checks to finance the personal business of Tan and Uy, with Haw allegedly conniving with them.
• The petition should be dismissed for failure to comply with A.M. No. 02-8-13-SC (use of Community Tax Certificate in verification) and for filing the motion for reconsideration with the CA out of time.
• The discrepancies in the amounts of checks versus obligations, and the SEC report showing only P219,705.19 in receivables versus the P15 million claimed, constitute badges of fraud proving the transactions were simulated.

• Procedural:
  • Whether the petition for review should be dismissed for failure to comply with A.M. No. 02-8-13-SC regarding the use of Community Tax Certificate as proof of identity in the verification.
  • Whether the petition for review should be dismissed on the ground that the motion for reconsideration with the CA was filed out of time.
• Substantive Issues:
  • Whether Arma Traders is liable for the loans obtained by Tan and Uy applying the doctrine of apparent authority despite the absence of a board resolution.
  • Whether the sales invoices are admissible as evidence despite being hearsay for failure to present the preparers.
  • Whether the petitioners proved Arma Traders' liability for the purchases on credit by preponderance of evidence.

• Procedural:
  • The defective jurat in the Verification/Certification of Non-Forum Shopping using a Community Tax Certificate is merely a formal, not jurisdictional, requirement that the Court may waive, especially considering the millions of pesos at stake and the need to avoid grave injustice.
  • The CA itself effectively waived the rules on the period to file the motion for reconsideration when it denied the motion on the merits (allegations being a rehash) rather than on timeliness.
• Substantive:
  • Arma Traders is liable for the loans under the doctrine of apparent authority. The corporation knowingly permitted Tan and Uy to act as sole managers for 14 years without board supervision or meetings, clothing them with the power to bind the corporation. The Articles of Incorporation authorized borrowing, and the corporation's laxity estops it from denying the officers' authority.
  • The sales invoices are admissible because the respondents failed to timely object to their admissibility on the ground of hearsay during the trial; failure to object renders evidence admissible and part of the case records.
  • The petitioners proved their claims by preponderance of evidence. Uy's admission that the checks were issued to pay contractual obligations, coupled with the postdated checks themselves and Haw's testimony, established the existence of the obligations. The alleged badges of fraud were either explained or insufficient to overcome the evidence presented.

• Doctrine of Apparent Authority (Ostensible Authority) — A corporation is estopped from denying the authority of its officer or agent to bind the corporation if it knowingly permits the officer to act within the scope of apparent authority and holds him out to the public as possessing such power. Apparent authority is established not by the quantity of similar acts but by the vesting of a corporate officer with the power to bind the corporation through the corporation's conduct or acquiescence.
• Ultra Vires Acts — Acts performed by corporate officers beyond the scope of their authority as defined by the articles of incorporation, bylaws, or board resolutions. Ordinarily, the corporation is not bound by ultra vires acts unless the doctrine of apparent authority applies.
• Hearsay Evidence Rule — Evidence that derives its value not from the personal knowledge of the witness but from the mere repetition of the statement of another. While generally inadmissible, failure to timely object during trial renders such evidence admissible and part of the record, though the court may consider the lack of personal knowledge in assessing probative value.
• Entries in the Course of Business (Business Records Exception) — Under Rule 130, Section 43, entries made at or near the time of transactions by a person deceased or unable to testify, in the ordinary course of business, are admissible as prima facie evidence.

• "The doctrine of apparent authority provides that a corporation will be estopped from denying the agent’s authority if it knowingly permits one of its officers or any other agent to act within the scope of an apparent authority, and it holds him out to the public as possessing the power to do those acts."
• "It is not the quantity of similar acts which establishes apparent authority, but the vesting of a corporate officer with the power to bind the corporation."
• "In the absence of a charter or bylaw provision to the contrary, the president is presumed to have the authority to act within the domain of the general objectives of its business and within the scope of his or her usual duties."
• "The rule is that failure to object to the offered evidence renders it admissible, and the court cannot, on its own, disregard such evidence."

• Lipat v. Pacific Banking Corporation — Cited for the principle that a corporation is estopped from denying an agent's authority if it knowingly permits the agent to act within the scope of apparent authority.
• Inter-Asia Investment Industries v. Court of Appeals — Discussed the derivation of authority from law, bylaws, or board authorization, and explained that apparent authority requires presentation of evidence of similar acts or acquiescence by the corporation.
• People’s Aircargo and Warehousing Co., Inc. v. Court of Appeals — Applied the doctrine of apparent authority where the corporation did not object to or repudiate contracts entered into by its president without board approval, thereby clothing him with power to bind the corporation.
• AF Realty & Development, Inc. v. Dieselman Freight Services, Co. — Cited by the CA for the rule that contracts or acts of a corporation must be made by the board or duly authorized corporate agent.
• Heirs of Policronio M. Ureta, Sr. v. Heirs of Liberato M. Ureta — Discussed that while hearsay evidence cannot be given credence for having no probative value, this principle is relaxed when there is failure to object and other circumstances support the fact in issue.
• Malayan Insurance Co., Inc. v. Alberto — Cited for the rule that failure to object to offered evidence renders it admissible.
• Galicto v. Aquino III — Cited regarding the waiver of formal, non-jurisdictional requirements in pleadings.

• Section 23, Corporation Code (Batas Pambansa Blg. 68) — Provides that the corporate powers are lodged in the board of directors, but may be delegated to officers, committees, or agents.
• Rule 130, Section 43, Rules of Court — Provides for the admissibility of entries in the course of business as an exception to the hearsay rule, requiring that the entrant be deceased or unable to testify.
• A.M. No. 02-8-13-SC — Amended the 2004 Rules on Notarial Practice, deleting the Community Tax Certificate as acceptable proof of identity due to unreliability.