G.R. No.

176897 December 11, 2013

ADVANCE PAPER CORPORATION and GEORGE HAW, in his capacity as President
of Advance Paper Corporation, Petitioners,
vs.
ARMA TRADERS CORPORATION, MANUEL TING, CHENG GUI and BENJAMIN NG,
Respondents.

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ANTONIO TAN and UY SENG KEE WILLY, Respondents.

FACTS:

Advance Paper is a domestic corporation engaged in the business of producing, printing,
manufacturing, distributing and selling of various paper products where George Haw is
President and his wife, Connie Haw is the General Manager. Arma Traders is also a
domestic corporation engaged in the wholesale and distribution of school and office
supplies, and novelty products where Antonio Tan (Tan) was formerly the President while
respondent Uy Seng Kee Willy (Uy) is the Treasurer of Arma Traders. They represented
Arma Traders when dealing with its supplier, Advance Paper, for about 14 years. Manuel
Ting, Cheng Gui and Benjamin Ng worked for Arma Traders as Vice-President, General
Manager and Corporate Secretary, respectively.

From September to December 1994, Arma traders purchased, on credit, notebooks and
other paper products amounting to 7.5 million from Advance Paper. Because of Arma
Traders good relations with Advanced Paper, Uy and Tan were able to obtain loans from
Advanced Paper amounting to 7.7 million in order to pay their obligation to other suppliers.
Tan and Uy issued 82 postdated checks payable to cash or to Advance Paper with an
aggregate amount of 15. 1 million pesos.

Advance Paper presented the checks to drawee bank but were dishonoured either
because "insufficiency of funds" or "account closed. Arma Traders failed to settle its
account with Advance Paper. On December 29, 1994, the petitioners filed a complaint for
collection of sum of money with application for preliminary attachment against Arma
Traders, Tan, Uy, Ting, Gui, and Ng.

Claims of the Petitioner: The petitioners claimed that the respondents fraudulently issued
the postdated checks as payment for the purchases and loan transactions knowing that
they did not have sufficient funds with the drawee banks. Arma Traders led the petitioners
to believe that Tan and Uy had the authority to obtain loans since the respondents left the
active and sole management of the company to Tan and Uy since 1984. In fact, Ng
testified that Arma Traders stockholders and board of directors never conducted a meeting
from 1984 to 1995. Therefore, if the respondents position will be sustained, they will have
the absurd power to question all the business transactions of Arma Traders. Citing Lipat v.
Pacific Banking Corporation, the petitioners said that if a corporation knowingly permits
one of its officers or any other agent to act within the scope of an apparent authority, it
holds him out to the public as possessing the power to do those acts; thus, the corporation
will, as against anyone who has in good faith dealt with it through such agent, be estopped
from denying the agents authority.

Claims of the Respondent: the loan transactions were ultra vires because the board of
directors of Arma Traders did not issue a board resolution authorising Tan and Uy to obtain
the loans from Advance Paper. They claimed that the borrowing of money must be done
only with the prior approval of the board of directors because without the approval, the
corporate officers are acting in excess of their authority of ultra vires. When the acts of
the corporate officers are ultra vires, the corporation is not liable for whatever acts
that these officers committed in excess of their authority. Further, the respondents
claimed that Advance Paper failed to verify Tan and Uys authority to transact business
with them. Hence, Advance Paper should suffer the consequences.

RTC Ruling: The RTC ruled that the purchases on credit and loans were sufficiently
proven by the petitioners. Hence, the RTC ordered Arma Traders to pay Advance Paper
the sum of P15,321,798.25 with interest, and P1,500,000.00 for attorneys fees, plus the
cost of the suit. RTC dismissed the complaint against Tan, Uy, Ting, Gui and Ng due to the
lack of evidence showing that they bound themselves, either jointly or solidarily, with Arma
Traders for the payment of its account.

CA Ruling: RTC ruling was set aside. The CA held that the petitioners failed to prove by
preponderance of evidence the existence of the purchases on credit and loans based on
the following:

1. Arma Traders was not liable for the loan in the absence of a board resolution
authorizing Tan and Uy to obtain the loan from Advance Paper. The authority to sign
the checks is different from the required authority to contract a loan.
2. The CA also held that the petitioners presented incompetent and inadmissible
evidence to prove the purchases on credit since the sales invoices were hearsay.
identification of the sales invoices was not an exception to the hearsay rule.
3. Petitioners failed to satisfactorily rebut the badges of fraud.

ISSUE:

Whether Arma Traders is liable to pay the loans applying the doctrine of apparent
authority?

RULING:

Arma Traders is liable to pay the loans on the basis of the doctrine of apparent
authority.

The doctrine of apparent authority provides that a corporation will be estopped from
denying the agents 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. The doctrine of apparent authority does not apply if
the principal did not commit any acts or conduct which a third party knew and relied upon
in good faith as a result of the exercise of reasonable prudence. Moreover, the agents
acts or conduct must have produced a change of position to the third partys detriment.

A corporate officer or agent may represent and bind the corporation in transactions with
third persons to the extent that [the] authority to do so has been conferred upon him, and
this includes powers as, in the usual course of the particular business, are incidental to, or
may be implied from, the powers intentionally conferred, powers added by custom and
usage, as usually pertaining to the particular officer or agent, and such apparent powers
as the corporation has caused person dealing with the officer or agent to believe that it has
conferred.

[A]pparent authority is derived not merely from practice. Its existence may be ascertained
through:

(1) the general manner in which the corporation holds out an officer or agent as having the
power to act or, in other words the apparent authority to act in general, with which it
clothes him; or
(2) the acquiescence in his acts of a particular nature, with actual or constructive
knowledge thereof, within or beyond the scope of his ordinary powers. It requires
presentation of evidence of similar act(s) executed either in its favor or in favor of other
parties. 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.

In the present petition, we do not agree with the CAs findings that Arma Traders is not
liable to pay the loans due to the lack of board resolution authorizing Tan and Uy to obtain
the loans. To begin with, Arma Traders Articles of Incorporation provides that the
corporation may borrow or raise money to meet the financial requirements of its business
by the issuance of bonds, promissory notes and other evidence of indebtedness. Likewise,
it states that Tan and Uy are not just ordinary corporate officers and authorised bank
signatories because they are also Arma Traders incorporators along with respondents Ng
and Ting, and Pedro Chao. Furthermore, the respondents, through Ng who is Arma
Traders corporate secretary, incorporator, stockholder and director, testified that the sole
management of Arma Traders was left to Tan and Uy and that he and the other officers
never dealt with the business and management of Arma Traders for 14 years. He also
confirmed that since 1984 up to the filing of the complaint against Arma Traders, its
stockholders and board of directors never had its meeting.

Thus, Arma Traders bestowed upon Tan and Uy broad powers by allowing them to
transact with third persons without the necessary written authority from its non-performing
board of directors. Arma Traders failed to take precautions to prevent its own corporate
officers from abusing their powers. Because of its own laxity in its business dealings, Arma
Traders is now estopped from denying Tan and Uys authority to obtain loan from Advance
Paper.