Obtaining a License: Its Substance to Foreign

Corporations doing Business in the Philippines 1

Patrick Mabbagu2

Prologue

Corporations, both domestic and foreign have been considered partners of the State
in its economic progression and stability. In our jurisdiction, a number of Supreme Court
decisions support the view that business corporations are not organized solely as profit-
making enterprises but also as economic and social institutions corresponding public
responsibility to aid in the betterment of economic and social conditions in the
community in which such corporations are doing business.

Recognizing their economic and social import, the State in the exercise of its police
powers, has enacted legislations which regulate and promote the establishment of
corporate institutions and the means and manner by which these corporations perform,
use or exercise their corporate powers.

With the growing trends of economic globalization and trade liberalization, which
former Chief Justice Artemio V. Panganiban considers “the millennium buzz words 3”, the
existence of foreign corporations doing business here in our archipelago are hence
inevitable.

Definition and Nature of Foreign Corporations

Under the Corporation Code of the Philippines, 4 a foreign corporation is done,

formed, organized or existing under any laws other than those of the Philippines and
whose laws allow Filipino citizens and corporations to do business in its own country or
state. It shall have the right to transact business in the Philippines after it shall have
obtained a license to transact business in this country in accordance with the provisions of
the Corporation Code and a certificate of authority from the appropriate government
agency.

With respect to a particular state, a foreign corporation is a corporation created by or

under the laws of another State or country. This is the traditional definition of the term. In
the incorporating State, it is a domestic corporation. Thus:

“X corporation organized under the laws of the Philippines is a domestic

corporation with respect to the Philippines and a foreign corporation with
reference to any other State; if organized under the laws of Y country, it is
1
Attributed to the discussions of and cases assigned by Judge Dante Vittorio D. Dalman in the subject
Private Corporation
2
Bachelor of Arts in Political Science, Andres Bonifacio College; College Instructor; Freelance
columnist-The Mindanao Observer; Former Governor-Supreme Law Council; Former President-Lex
Deo (Debate and Oratorical) Club; Editor in Chief and Chairman of the Editorial Board-Bonifacio Law
Journal
3
Tañada vs. Angara, G.R. No. 118295, May 2, 1997
4
Section 123, Batas Pambansa Bilang 68; took effect on the date of its approval on May 1, 1980;
supplants Act No. 1459 as amended
 domestic with reference to Y and a foreign corporation under the
Corporation Code.”5

In the 1997 case of Avon Insurance PLC vs. Court of Appeals, 6 the Supreme Court
described a foreign corporation as one which owes its existence to the laws of another
state and generally, has no legal existence within the state in which it is foreign.

As a rule, a foreign corporation can have no legal existence or status beyond the
bounds of the State or sovereignty by which it is created or incorporated and organized. It
exists only in contemplation of law and by force of the law and where the law ceases to
operate, the corporation can have no existence.

Nationality of Foreign Corporations

As cited by de Leon7, there are two rules for determining the corporate nationality of
a corporation. Under the incorporation test, the nationality of a corporation is that of the
state of incorporation regardless of the nationality of its stockholders. Under the control
test, it depends on the nationality of the stockholders who owns the controlling interest.
The application of either test depends however on the particular situation.

During wartime, for reasons of national security, the control test and not the
incorporation test shall determine the nationality of a corporation, that is, a domestic
corporation controlled by enemy aliens shall be deemed a foreign corporation with a
nationality identical with that of its controlling stockholders8.

The Department of Justice in an opinion 9 applying the control test, has laid down the
rule adopted by the Securities and Exchange Commission 10 and now expressly embodied
in the Forein Investments Act11 in the determination of the nationality of corporations
formed or organized under Philippine law with alien equity as follows:

“Shares belonging to corporations or partnerships at least 60% of the

capital of which are owned by Filipino citizens shall be considered as of
Philippine nationality but if the percentage of Filipino ownership in the
corporation or partnership is less than 60%, only the number of shares
corresponding to such percentage shall be counted as of Philippine
nationality. Thus, if 100,000 shares are registered in the name of corporation
or partnership at least 60% of the capital stock or capital, respectively, of
which belong to Filipino citizens, all of said shares shall be recorded as
5
De Leon, H. The Corporation Code of the Philippines Annotated. Ninth Edition. Manila: Rex
Bookstore Inc. 2006.
6
278 SCRA 312
7
De Leon, ibid.
8
Filipinas Cia de Suguros vs. Christern Huenefeld and Company, 89 Phil 53 (1951)
9
Opinion No. 18, January 19, 1989
10
SEC opinion, December 7, 1993
11
Republic Act No. 7042
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Its Substance to Foreign Corporations
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 owned by Filipinos. But if less than 60% or say only 50% of the capital
stock or capital belong to Filipino citizens, only 50,000 shares shall be
counted as owned by Filipinos and the other 50,000 shares shall be recorded
as belonging to aliens.

Under existing laws, the basis for the computation is the total outstanding capital
stock or number of shares, irrespective of the amount of the par value of the shares.

Requirements to be Complied before Foreign Corporations Can Transact Business

As provided under Section 123, foreign corporations shall not be permitted to

transact or do business in the Philippines until they have secured a license for the purpose
from the Securities and Exhange Commission and a certificate of authority from the
appropriate government agency. SEC does not have rules and regulations governing the
activities of foreign corporations in the Philippines before they are granted a license, the
reason being that until they have obtained a license, they cannot transact business in the
country.

The objectives of the statutory provisions prescribing conditions under which foreign
corporations are permitted to do business in a State other than that of their creation have
been stated as follows12:

1.) to place them on an equality with domestic corporations;

2.) to subject them to inspection so that their condition may be known; and
3.) to protect the residents of the State doing business with them by
subjecting them to the courts of the state.

The license requirement does not prevent the foreign corporation from performing
single or isolated acts, but instead, it seeks to bar foreign corporations from acquiring
domicile for the purpose of business without taking steps necessary to render it amenable
to suit in the local courts13. In other words, what the law seeks to prevent is a foreign
corporation doing business in the Philippines without a license from gaining access to
Philippine courts14.

The requirement enables our government to exercise jurisdiction over foreign

corporations doing business in the Philippines for the regulation of their activities in the
country. By securing license, a foreign corporation gives assurance that it will abide by
the decisions of our courts even if adverse to it.15

In Avon Insurance PLC case,16 the Supreme Court ratiocinated as follows:

12
De Leon, ibid.
13
De Leon, ibid., citing Marshall-Wells Co. Vs. Elser & Co., 46 Phil 71 (1924)
14
Ibid., citing Hang Lung Bank, Ltd. Vs. Saulog, 201 SCRA 137 (1991
15
Ibid, citing Eriks Pte., Ltd. vs. CA 79 SCAD 70, 267 SCRA 567 (1997)
16
Ibid.
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 “The purpose of the law requiring that foreign corporations doing
business in the country be licensed to do so is to subject the foreign
corporations doing business in the Philippines to the jurisdiction of the
courts, otherwise, a foreign corporation illegally doing business here because
of its refusal or neglect to obtain the required license and authority to do
business may successfully, though unfairly, plead such neglect or illegal act
so as to avoid service and thereby impugn the jurisdiction of the local
courts”.

For licensing purposes, Section 123 also requires reciprocity. Under the Corporation
Code, the existence of a foreign law allowing Filipino citizens and corporations to do
business in the country of the foreign corporation is prescribed as a condition for securing
a license to transact business in the Philippines. It is to be noted however that it is not an
essential element of being a foreign corporation.

Requisites for the Grant of License

Since securing a license is imperative before foreign corporations can engage in

business in the Philippines, we shall now examine what are the requisites for the grant of
such license.

Section 125 of the Corporation Code clearly provides that a foreign corporation
applying for a license to transact business in the Philippines shall submit to the Securities
and Exchange Commission a copy of its articles of incorporation and by-laws, certified in
accordance with law, and their translation to an official language of the Philippines, if
necessary. The application shall be under oath and, unless already stated in its articles of
incorporation, shall specifically set forth the following:

“1. The date and term of incorporation;

2. The address, including the street number, of the principal office of the
corporation in the country or state of incorporation;
3. The name and address of its resident agent authorized to accept summons
and process in all legal proceedings and, pending the establishment of a local
office, all notices affecting the corporation;
4. The place in the Philippines where the corporation intends to operate;
5. The specific purpose or purposes which the corporation intends to pursue
in the transaction of its business in the Philippines: Provided, That said
purpose or purposes are those specifically stated in the certificate of
authority issued by the appropriate government agency;
6. The names and addresses of the present directors and officers of the
corporation;
7. A statement of its authorized capital stock and the aggregate number of
shares which the corporation has authority to issue, itemized by classes, par
value of shares, shares without par value, and series, if any;

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 8. A statement of its outstanding capital stock and the aggregate number of
shares which the corporation has issued, itemized by classes, par value of
shares, shares without par value, and series, if any;
9. A statement of the amount actually paid in; and
10. Such additional information as may be necessary or appropriate in order
to enable the Securities and Exchange Commission to determine whether
such corporation is entitled to a license to transact business in the
Philippines, and to determine and assess the fees payable.”

Attached to the application for license shall be a duly executed certificate under oath
by the authorized official or officials of the jurisdiction of its incorporation, attesting to
the fact that the laws of the country or state of the applicant allow Filipino citizens and
corporations to do business therein, and that the applicant is an existing corporation in
good standing. If such certificate is in a foreign language, a translation thereof in English
under oath of the translator shall be attached thereto.

The application for a license to transact business in the Philippines shall likewise be
accompanied by a statement under oath of the president or any other person authorized by
the corporation, showing to the satisfaction of the Securities and Exchange Commission
and other governmental agency in the proper cases that the applicant is solvent and in
sound financial condition, and setting forth the assets and liabilities of the corporation as
of the date not exceeding one (1) year immediately prior to the filing of the application.

Foreign banking, financial and insurance corporations shall, in addition to the above
requirements, comply with the provisions of existing laws applicable to them. In the case
of all other foreign corporations, no application for license to transact business in the
Philippines shall be accepted by the Securities and Exchange Commission without
previous authority from the appropriate government agency, whenever required by law.

In summary, Cesar Villanueva17 enumerated the following conditions which must be

met before SEC will issue a license to the foreign corporation to do business in the
Philippines:

“a.) appointment of a resident agent:

i. either a Filipino or domestic corporation;
ii. power of attorney for SEC to receive process
b.) must prove that the foreign corporation’s country grants reciprocal
rights to Filipinos and Philippine corporation;
c.) must establish an office in the Philippines;
d.) must bring in its assets;
e.) in the event of insolvency, an undertaking that Filipino creditors will be
preferred;
17
Dean, Ateneo de Manila School of Law; Chairman-Commercial Law Department, Philippine
Judicial Academy; Member-MCLE Governing Board; BSC-Holy Angel University; LlB-Ateneo de
Manila; LlM-Harvard University; DJS-San Beda Graduate School of Law; Author: Commercial Law
Reviewer
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 f.) notice in six months should there be a desire to terminate operations;
g.) franchise and patents must remain belonging to the Philippines if this is
possible;
h.) must file a bond of Php 100,000.00, which may be in the following
form:
i. surety bond;
ii. government securities;
iii. securities of political subdivisions;
iv. shares of stock of registered enterprises with SEC;
v. shares of stock of any corporation being sold at the stock exchange.

That within six months after each fiscal year, SEC shall require the
deposit of additional securities equivalent to 2% of the amount in excess of
Php 5,000,000.00 of the gross.”18

Necessity of a Resident Agent

It is also important to note that a resident agent is also required by the Corporation
Code19 before license could be issued.
A resident agent could be an individual, who must be of good moral character and of
sound financial standing, residing in the Philippines or a domestic corporation lawfully

18
Villanueva, Commercial Law Review, 2009 Edition, p. 766
19
Section 128. Resident agent; service of process. - The Securities and Exchange Commission shall
require as a condition precedent to the issuance of the license to transact business in the Philippines by
any foreign corporation that such corporation file with the Securities and Exchange Commission a
written power of attorney designating some person who must be a resident of the Philippines, on whom
any summons and other legal processes may be served in all actions or other legal proceedings against
such corporation, and consenting that service upon such resident agent shall be admitted and held as
valid as if served upon the duly authorized officers of the foreign corporation at its home office. Any
such foreign corporation shall likewise execute and file with the Securities and Exchange Commission
an agreement or stipulation, executed by the proper authorities of said corporation, in form and
substance as follows:
“The (name of foreign corporation) does hereby stipulate and agree, in consideration of its being
granted by the Securities and Exchange Commission a license to transact business in the Philippines,
that if at any time said corporation shall cease to transact business in the Philippines, or shall be without
any resident agent in the Philippines on whom any summons or other legal processes may be served,
then in any action or proceeding arising out of any business or transaction which occurred in the
Philippines, service of any summons or other legal process may be made upon the Securities and
Exchange Commission and that such service shall have the same force and effect as if made upon the
duly-authorized officers of the corporation at its home office.”
Whenever such service of summons or other process shall be made upon the Securities and Exchange
Commission, the Commission shall, within ten (10) days thereafter, transmit by mail a copy of such
summons or other legal process to the corporation at its home or principal office. The sending of such
copy by the Commission shall be necessary part of and shall complete such service. All expenses
incurred by the Commission for such service shall be paid in advance by the party at whose instance the
service is made.
In case of a change of address of the resident agent, it shall be his or its duty to immediately notify in
writing the Securities and Exchange Commission of the new address.
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transacting business in the Philippines, designated in a written power of attorney by a
foreign corporation authorized to do business in the Philippines.

The sole function of a resident agent is to receive in behalf of the corporation notices,
summons and other legal processes in connection with actions against such corporation.
It is to be noted however that in the case of Expert Travel and Tours Inc. vs. CA, 20 the
Supreme Court ruled that a resident agent cannot sign the certificate of non-forum
shopping that is a requirement for the filing of an initiatory pleading in court because
while a resident agent maybe aware of the actions filed against the principal, he may not
be aware of the actions initiated by the principal.

When License Issued

Under Section 126, it provides that if the Securities and Exchange Commission is
satisfied that the applicant has complied with all the requirements of the Corporation
Code and other special laws, rules and regulations, the Commission shall issue a license
to the applicant to transact business in the Philippines for the purpose or purposes
specified in such license. Upon issuance of the license, such foreign corporation may
commence to transact business in the Philippines and continue to do so for as long
as it retains its authority to act as a corporation under the laws of the country or state of
its incorporation, unless such license is sooner surrendered, revoked, suspended or
annulled in accordance with the Corporation Code or other special laws.(Emphases
supplied.)

What Constitutes Doing Business

Upon the grant of license, the law provides that the foreign corporation may then
start engaging business in the Philippines. However, it is precisely on the conduct of
doing business that foreign corporations become involve in court litigations and
proceedings. It is to be noted that the Corporation Code is silent on what constitutes
“transacting business”. In the case of Agilent Technologies Singapore (PTE) Ltd. Vs.
Integrated Silicon Technology Phil. Corp. 21, the Supreme Court stressed, viz:

“There is no definitive rule on what constitutes doing business in the

Philippines as this Court observed in the case of Mentholathum v.
Mangaliman. The Corporation Code itself is silent as to what acts constitute
doing or transacting business in the Philippines”.

Despite such silence, there have been recognized jurisprudential and statutory tests
which would determine as to what activities amount to “doing business”.

Jurisprudential Tests

20
G.R. No. 152392, May 26, 2005
21
427 SCRA 593 (2004)
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 First we have the so called Twin Characterization Test which is comprised of the
Substance Test and the Continuity Test components. The substance test component
involves the determination of whether the foreign corporation is maintaining or
continuing in the Philippines the body or substance of the business for which it was
organized or whether it has substantially retired from it and turned it over another. If the
substance of the business has been maintained and continued, then that is a positive
indication that the corporation is doing business.

The continuity test component on the other hand seeks to identify whether there is
continuity of commercial dealings and arrangements contemplating to some extent the
performance of acts or works or the exercise of some functions normally incident to and
in progressive prosecution of the purpose and objectives of its organization. If such
continuity is seen, then this writer holds that the activities done constitute business.

In the case of B. Van Zuiden Bros., Ltd. vs. GTVL Manufacturing Industries, Inc., 22
the Supreme Court enunciated the so called Contract Test. The said test involves the
determination of whether the contracts entered into by the foreign corporation or by an
agent acting under the control and direction of the foreign corporation are consummated
in the Philippines.

To be “doing or transacting business in the Philippine” for purposes of Section 133 23

of the Corporation Code, the foreign corporation must actually transact business in the
Philippines, that is, perform specific business transactions within the Philippine territory
on a continuing basis on its own name and for its own account. Actual transaction of
business within the Philippine territory is an essential requisite for the Philippines
to acquire jurisdiction over a foreign corporation and thus requires the foreign
corporation to secure a Philippine business license.

Statutory Tests

As already mentioned by this writer, the Corporation Code does not offer a provision
enumerating what constitutes doing business. Special laws however tend to fill in the
blanks. Under Section 3,(d) of the Foreign Investments Act of 1991, 24 doing business in
the Philippines is deemed to include the following acts:

a.) Soliciting orders, service contracts, opening offices, whether liaison

offices or branches;
b.) Appointing representatives or distributors operating under full control of
foreign corporation who:
i. are domiciled in the Philippines; or
ii. in any calendar year stay in the country for a period or periods
totalling 180 days or more;

22
G.R. 147905, May 28, 2007
23
See succeeding paragraphs
24
Republic Act 7042, as amended by Republic Act 8179
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 c.) Participating in management, supervision or control of any domestic
business, firm, entity or corporation in Philippines; and
d.) Any other act or acts that imply a continuity of commercial dealings or
arrangements and contemplate to the extent the performance of acts or
works or the exercise of some of the functions normally incident to and
in progressive prosecution of commercial gain or of the purpose or object
of the business organization.

Under the implementing rules of Republic Act 7042, the following are NOT
considered acts constituting “doing business”:

a.) Mere investment as a shareholder in a domestic corporation and/or the

exercise of rights as such investor;
b.) Appointing a representative or distributor domiciled in the Philippines
which transacts business in its own name and for its own account;
c.) Publication of a general advertisement through any print or broadcast
media;
d.) Maintaining a stock of goods in the Philippines solely for the purpose of
having the same processed by another entity in the Philippines;
e.) Consignment by the foreign corporation of equipment with a local
company to be used in the processing of products for export;
f.) Collecting information in the Philippines; and
g.) Performing services auxiliary to an existing isolated contract of sale
which are not on a continuing basis.

In Agilent Technologies Singapore (PTE) Ltd. Vs. Integrated Silicon Technology

Phil. Corp.,25 it was held that by and large, to constitute ‘doing business’, the activity to
be undertaken in the Philippines is one that is for profit-making.

In the case of MR Holdings, Ltd. vs. Bajar 26, the Supreme Court however noted that
the question of whether or not a foreign corporation is doing business is dependent
principally upon the facts and circumstances of each particular case, considered in the
light of the purposes and language of the pertinent statute or statutes involved and of the
general principles governing the jurisdictional authority of the state over such
corporations.

Effect of Lack of License to the Capacity of Foreign Corporations to Sue

As cited above, compliance of the license requirement is necessary. But the most
important reason perhaps to this compliance lies on the fact that license has bearing on
the corporation’s capacity to sue. Section 133 of the Corporation Code provides:

No foreign corporation transacting business in the Philippines without a

license, or its successors or assigns, shall be permitted to maintain or intervene
25
Supra.
26
380 SCRA 617 (2002)
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 in any action, suit or proceeding in any court or administrative agency of the
Philippines; but such corporation may be sued or proceeded against before
Philippine courts or administrative tribunals on any valid cause of action
recognized under Philippine laws.

Basing on this section, the lack of license produces the following effects as pointed
by De Leon,27

a. Suit BY foreign corporation –The foreign corporation transacting

business without a license or its successors or assigns shall not be
permitted, subject to certain exceptions to maintain or intervene in any
action, suit, or proceeding in any court or administrative agency in the
Philippines. If a foreign corporation operates in the Philippines without
submitting to its laws, it is only just that it be not allowed to invoke them
in our courts when it should need them later for its protection. 28

b. Suit AGAINST foreign corporation – Such corporation may, however,

be sued or proceeded against before Philippine courts or administrative
tribunals on any valid cause of action recognized under Philippine laws
under the doctrine of quasi-estoppel by acceptance of benefits. It shall not
be allowed under any circumstances, to invoke its lack of license to
impugn their jurisdiction.29 It is against justice and equity for an
unlicensed foreign corporation to execute contracts with domestic firms
and then repudiate their obligations thereunder or plead immunity to
Philippine jurisdiction just because it has not obtained license in the
Philippines30.

It should be stressed however that it is not the lack of the prescribed license (to
transact business in the Philippines) but doing business WITHOUT such license which
bars a foreign corporation from access to our courts as held in MR Holdings, Ltd vs.
Bajar31 and in Universal Shipping Lines, Inc. vs. Intermediate Appellate Court 32.

Villanueva summarizes the effect in the following wise, which this writer will
present in a tabular form:
EFFECTS OF LICENSE TO THE CAPACITY TO SUE
A. Doing business in the Philippines a.) May sue and can be sued in
WITH LICENSE the Philippines
B. Doing business in the Philippines b.) Cannot sue but may be sued

27
De Leon, H. The Corporation Code of the Philippines Annotated. Ninth Edition. Manila: Rex
Bookstore Inc. 2006.
28
De Leon, ibid., citing Granger Associates vs. Microwave Systems Inc., 189 SCRA 63 (1990)
29
Marubeni Nedeland B.V. vs. Tensuan, 190 SCRA 105 (1990)
30
SEC Opinion, January 10, 1995
31
Supra.
32
188 SCRA 178 (1990)
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 WITHOUT LICENSE in the Philippines
C. NOT doing business in the Philippines c.1) May sue
On ISOLATED TRANSACTIONS c.2) Maybe sued

In Avon Isurance PLC vs. CA33 case, the Supreme Court explained that a foreign
corporation NOT doing business in the Philippines is not required to obtain a license
since the same dangers do not pertain to them as in the case of foreign corporations
actually engaged in business in the Philippines. Indeed, if a foreign corporation does not
do business here, there would be no reason for it to be subjected to State’s regulation. As
observed, in so far as the State is concerned, such foreign corporation has no legal
existence. Therefore, to subject such foreign corporation to the court’s jurisdiction would
violate the essence of sovereignty.

Effect of Lack of License to Contracts Entered by Foreign Corporations

If the Corporation Code is silent on what constitutes doing business, the same silence
is felt with regards to the validity of contracts entered by unlicensed corporations.

Some legal scholars including the SEC 34 submit the view that since Article 5 of the
Civil Code provides that “acts executed against the provisions of mandatory or
prohibitory laws shall be void except when the law itself authorizes their validity”, the
contracts are void and therefore, subsequent compliance with legal requirement will not
cure the defect of the contract.

In the antique case of Bough vs. Cantiveros, 35it was held that such contracts shall
prejudice only the guilty corporation and not the innocent parties who may have dealt
with said corporation in good faith for it is unjust that the non-complying foreign
corporation and persons standing in its shoes should escape liability on contracts had by it
by setting up its non-compliance.

However, in the case of Home Insurance Co. vs. Eastern Shipping Lines 36, the High
Court ruled that the contracts are unenforceable at first but can be cured by subsequent
compliance with the law, thus:

“The better reason, the wiser and fairer policy and the greater weight lie
with those decisions which hold that where (as in our Corporation Code,
Section 144) there is a prohibition with a penalty, with no express or implied
declaration respecting the validity or enforceability of contracts made by
qualified foreign corporations, the contracts xxx are enforceable upon
compliance with the law”

33
Supra.
34
SEC Opinion, March 12, 1975
35
Bough vs. Cantiveros, 40 Phil. 209 (1919)
36
123 SCRA 424 (1983)
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 “The failure to obtain a license by a foreign corporation doing business
in the Philippines does not affect the validity of contracts entered into by
such foreign corporation, but merely removes its legal standing to sue in
local tribunals. However the defect may even be cured by subsequent
registration by the foreign corporation to obtain the necessary license to do
business in the Philippines.”

The Court continued that it is not necessary to declare the contract null and void as
against the erring foreign corporation. The penal sanction for the violation and the denial
of access to our courts and administrative bodies are sufficient from the viewpoint of
legislative policy. The lack of capacity at the time of the execution of the contract is
cured by the subsequent registration of the unlicensed foreign corporation.

This writer however opines that the ruling which states that contracts entered into by
foreign corporations without the requisite license are uneforceable (but however curable)
does not apply if the contract or agreement is contrary to law, morals, good customs,
public order and public policy. This is consonant to Article 1409 of the Civil Code which
provides:

“The following contracts are inexistent and void from the beginning:

1. Those whose cause, object or purpose is contrary to law, morals,

good customs, public order or public policy;
2. Those which are absolutely simulated or fictitious;
3. Those whose cause or object did not exist at the time of the
transaction;
4. Those whose object is outside the commerce of men;
5. Those which contemplate an impossible service;
6. Those where the intention of the parties relative to the principal
object of the contract cannot be ascertained;
7. Those expressly prohibited or declared void by law.

These contracts cannot be ratified. Neither can the right to set up the
defense of illegality be waived.”

Penal Sanction for Failure to Obtain License

Apart from the effects of having no license to the capacity to sue and to the contracts
entered into by foreign corporations, failure to comply with the said license requirement
subjects the corporation under the pain of punishment. The Corporation Code 37 so
provides:

“Section 144. Violations of the Code. - Violations of any of the

provisions of this Code or its amendments not otherwise specifically

37
See Section 144
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 penalized therein shall be punished by a fine of not less than one thousand
(P1,000.00) pesos but not more than ten thousand (P10,000.00) pesos or by
imprisonment for not less than thirty (30) days but not more than five (5)
years, or both, in the discretion of the court. If the violation is committed by
a corporation, the same may, after notice and hearing, be dissolved in
appropriate proceedings before the Securities and Exchange 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 a corporation
provided in this Code.”

When Contracts Valid and when Suits allowed despite absence of license

As already pointed out, no foreign corporation transacting business in the Philippines

without a license shall be permitted to maintain or intervene in any action, suit or
proceeding in any court or administrative agency of the Philippines. The contracts
entered into by them on the other hand are deemed unenforceable. However, there are
recognized exceptions to such rule.

Doctrine of Isolated Transaction

In the case of Eriks Pte. Ltd. vs. Court of Appeals, 38 the Supreme Court enunciated
the doctrine of isolated transaction. Under the said doctrine, foreign corporations can
sue or be sued on a transaction or series of transactions set apart from their common
business in the sense that there is no intention to engage in a progressive pursuit of the
purpose and object of business transaction.

Single or isolated acts, contracts or transactions of foreign corporations are not

regarded as a doing or carrying on of business. Typical examples of these are the making
of a single contract, sale, sale with the taking of a note and a mortgage of real estate to
secure payment thereof, purchase or note or the mere commission of a tort. In these
instances, there is no purpose to do any other business within the country. 39 The law does
not prohibit foreign corporations from performing single acts of business. A foreign
corporation needs no license to sue before Philippine courts on isolated transactions.
Even a series of transactions which are occasional, incidental and casual—not of a
character to indicate a purpose to engage in business—do not constitute the doing or
engaging in business as contemplated by law.40

Suit is also possible even if license is wanting if the same is stipulated in a contract.
In the 1983 case of Linger and Fisher GMBH vs. Intermediate Appellate Court, 41 the
Supreme Court held that when a contract between a local and a foreign corporation
38
G.R. No. 118843, February 6, 1997
39
Villanueva, citing MR Holdings, Ltd. vs. Bajar, 380 SCRA 617 (2002)
40
Villanueva, citing Lorenzo Shipping vs. Chubb and Sons, Inc. 431 SCRA 266 (2004)
41
125 SCRA 522
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stipulates the venue to be within the proper courts in the Philippines, such stipulation
shall be considered to be consent to being sued in the Philippines even when the foreign
corporation does no business in the Philippines.

The Supreme Court also in one case reiterated that if a foreign corporation, not
engaged in business in the Philippines, is not barred from seeking redress from courts in
the Philippines a fortiori, that same corporation cannot claim exemption from being sued
in Philippine courts for acts done against a person or persons in the Philippines 42.

In Signestics Corp. vs. Court of Appeals,43 it was held that “even when a foreign
corporation is not engaged in business in the Philippines, since it may still look upon
local courts for relief, reciprocally, such corporation may likewise be sued in Philippine
courts for aacts done against a person or persons in the Philippines. Provided that in the
latter case, it would not be impossible for court processes to reach the foreign corporation
—a matter that can later be consequential in the proper execution of judgment. Verily, a
State may not exercise jurisdiction in the absence of some good basis (and not offensive
to traditional notions of fair play and substantial justice) for effectively exercising it
whether the proceedings are in rem, quasi in rem or in personam.”

In Pari Delicto Rule

Another recognized exception is the so-called in pari delicto rule which was
articulated by the Supreme Court in Top Weld Manufacturing vs. ECED, S.A. 44. In that
case, it was ruled that “a contract entered into by a Philippine corporation with a foreign
corporation for manufacture and marketing of the latter’s product is illegal if the same
was not previously licensed with the BOI under Republic Act 5455. For being in pari
delicto, the Philippine corporation cannot ask our courts to prohibit the foreign
corporation from terminating their contract and givng the license to produce and market
its products to another.”

The High Court reiterated that the “parties are charged with knowledge of the
existing law at the time they enter into the contract and at the time it is to become
operative. Morevoer, a person is presumed to be more knowledgeable about his own state
law than his alien or foreign contemporary. xxxx The parties in this case being equally
guilty of violating R.A. 5455, they are in pari delicto in which case it follows as a
consequence that petitioner is not entitle to the relief prayed for in this case.

Estoppel Doctrine
42
Villanueva, citing Facilities Management Corporation vs. De la Osa, 89 SCRA 131 (1979). The
ruling making foreign corporations not doing business in the Philippines subject to suits in local courts
has been reiterated in FBA Aircraft, S.A vs. Zosa 110 SCRA 1 (1981); Wang Laboratories, Inc. vs.
Mendoza, 156 SCRA 44 (1987); and Royal Crown Internationale vs. NLRC, 178 SCRA 569 (1989).
4342
225 SCRA 737 (1993)
44
G.R. No. L-44944, August 9, 1985
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 Also an interesting exception is the estoppel doctrine which was applied in Merill
Lynch Futures Inc. vs. Court of Appeals.45 The Supreme Court sustained the idea that a
party is estopped from questioning the capacity of the foreign corporation to institute an
action in our courts where it had obtained benefits from its dealings with such foreign
corporations and thereafter committed a breach or sought to renege on its obligations:

“Although foreign corporation has engaged in business in the

Philippines WITHOUT license, the dismissal of the suit would not be proper
on the ground that if the local investors knew that the foreign corporation
had no license to do business in the Philippines, then they are estopped from
using the lack of license to avoid their obligations”

A foreign corporation doing business in the Philippines may sue in Philippine courts
although not authorized to do business here against a Philippine citizen or entity who had
contracted with and benefited by the said corporation. To put it another way, a party is
estopped to challenge the personality of the corporation after having acknowledged the
same by entering into a contract with it. And the doctrine of estoppel to deny corporate
existence applies to a foreign as well as to domestic corporations. One who has dealt with
a corporation of foreign origin as a corporate entity is estopped to deny its corporate
existence and capacity. The principle will be applied to prevent a person contracting with
a foreign corporation from later taking advantage of its noncompliance with the statutes
chiefy in cases where such persons has received the benefits of the contract46.

The rule relating to estoppel is deeply rooted in the axiom of commodum ex injuria
sua non habere debet – no person ought to derive any advantage from his own wrong. 47
After contracting with a foreign corporation, a domestic corporation can no longer deny
the former’s capacity to sue48.

Protection of Corporate Names, Tradenames and marks

A foreign corporation although not doing business in the Philippines has personality
to sue to oppose the registration of trademark when it is shown that its products using
such trademark are being imported and sold in the Philippines, pursuant to the terms of
Section 21-A of R.A. 166.49

In Converse Rubber vs. Universal Rubber Products, 50 the Supreme Court ruled that a
foreign corporation has a right to maintain an action in Philippine courts even if it is not
licensed to do business and is not actually doing business on its own therein to protect its
45
G.R. No. 978160, July 24, 1992; 211 SCRA 824 (1992)
46
Communication Materials and Design Inc. vs. Court of Appeals, 260 SCRA 673 (1996)
47
European Resources and Technologies Inc. vs. Ingenieuburo Birkhanh+ Nolte, 435 SCRA 246
(2004)
48
Rimbunan Hijau Group of Companies vs. Oriental Wood Processing Corp., 470 SCRA 650 (2005)
49
General Garments vs. Director of Patents, 41 SCRA 50 (1997)
50
147 SCRA 153 (1987)
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corporate and tradenames since it is a property right in rem which it may assert to protect
against all the world, in any of the courts of the world—even in jurisdictions where it
does not transact business—just the same as it may protect its tangible property real or
personal, against tresspass or conversion.

This is in consonance with the Convention of the Union of Paris for the Protection of
Industrial Property to which the Philippines became a party on September 1965. Article 8
thereof provides that “a trade name shall be protected in all the countries of the Union
without the obligation of filing or registration whether or not it forms part of the
trademark”. The mandate of the Convention finds its implementation in Section 37 of
Republic Act 166, otherwise known as the Trademark Law.

Revocation or suspension of license

Having examined the importance of a license to foreign corporations, this writer also
includes the grounds by which license maybe revoked or suspended by the Securities and
Exchange Commission. Section 134 of the Corporation Code enumerates the grounds
without prejudice to other grounds that maybe provided by special laws:

1. Failure to file its annual report or pay any fees as required by this Code;
2. Failure to appoint and maintain a resident agent in the Philippines as
required by [Sections 125-128];
3. Failure, after change of its resident agent or of his address, to submit to
the Securities and Exchange Commission a statement of such change as
required by [Section 128];
4. Failure to submit to the Securities and Exchange Commission an
authenticated copy of any amendment to its articles of incorporation or
by-laws or of any articles of merger or consolidation within the time
prescribed by [the Corporation Code];
5. A misrepresentation of any material matter in any application, report,
affidavit or other document submitted by such corporation pursuant to
[Section 125];
6. Failure to pay any and all taxes, imposts, assessments or penalties, if any,
lawfully due to the Philippine Government or any of its agencies or
political subdivisions;
7. Transacting business in the Philippines outside of the purpose or purposes
for which such corporation is authorized under its license;
8. Transacting business in the Philippines as agent of or acting for and in
behalf of any foreign corporation or entity not duly licensed to do
business in the Philippines; or
9. Any other ground as would render it unfit to transact business in the
Philippines.

Upon the revocation of any such license to transact business in the Philippines, the
Securities and Exchange Commission shall issue a corresponding certificate of
revocation, furnishing a copy thereof to the appropriate government agency in the proper

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cases. The Securities and Exchange Commission shall also mail to the corporation at its
registered office in the Philippines a notice of such revocation accompanied by a copy of
the certificate of revocation51.

The revocation of the license of a foreign corporation cannot affect the validity of
contracts entered into by it BEFORE the revocation nor its right to maintain an action to
enforce them.52 But contracts entered into by it AFTER revocation are invalid and
uneforceable. As to contracts, the effect is the same as if a license had never been granted
to the foreign corporation.53

Withdrawal of a foreign corporation

Section 13654 of the Corporation Code also allows foreign corporations to withdraw
doing business in the Philippines. The withdrawal can be effected by filing a petition for
withdrawal of the license complying the following requisites:
1. All claims which have accrued in the Philippines have been paid,
compromised or settled;
2. All taxes, imposts, assessments, and penalties, if any, lawfully due to
the Philippine Government or any of its agencies or political subdivisions
have been paid; and
3. The petition for withdrawal of license has been published once a
week for three (3) consecutive weeks in a newspaper of general circulation
in the Philippines.

To ascertain that the foreign corporation has no outstanding liabilities to residents in

the Philippines, the Securities and Exchange Commission shall have to make an
examination and inspection of its books and records. If the Commission is aware of
pending cases against the foreign corporation, it may not declare that such corporation
has no outstanding liabilities in the Philippines. 55 The courts may review the action of the
Commission approving the withdrawal of a foreign corporation, for the law shall not be
interpreted as to permit the foreign corporation to escape the results of pending action

51
Section 135, Corporation Code of the Philippines
52
De Leon, citing Billmeyer Lumber Co. vs. Merchants’ Coal Co, 69 S.E. 1073
53
Ibid.
54
Section 136. Withdrawal of foreign corporations. - Subject to existing laws and regulations, a
foreign corporation licensed to transact business in the Philippines may be allowed to withdraw from the
Philippines by filing a petition for withdrawal of license. No certificate of withdrawal shall be issued by
the Securities and Exchange Commission unless all the following requirements are met;
1. All claims which have accrued in the Philippines have been paid, compromised or settled;
2. All taxes, imposts, assessments, and penalties, if any, lawfully due to the Philippine Government or
any of its agencies or political subdivisions have been paid; and
3. The petition for withdrawal of license has been published once a week for three (3) consecutive
weeks in a newspaper of general circulation in the Philippines.

55
De Leon, citing Scottish Union and National Insurance Co. vs. Macadaeg, 91 Phil. 89 (1952)
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against it by withdrawing from the Philippines with all the securities it has deposited,
provided it gets the sanction of the SEC.56

When the right to do business of a foreign corporation duly licensed to do so in

another State is revoked or such foreign corporation subsequently withdraws its business
from that State, the cessation of its business works a quasi-dissolution of the foreign
corporation. Consequently, the corporation is placed in the same situation in that State as
if its charter had expired or terminated. 57 It is subject to the rules of law governing
expired foreign corporations in respect to action against it58.

Accordingly, the provisions of Section 122 on corporate dissolution applies to a

branch of a foreign corporation withdrawing from doing business in the Philippines,
insofar as suits by or against it are concerned, in connection with its business transactions
done in the Philippines59.

Epilogue

Foreign corporations are vital to our economy. They complement our domestic
enterprises in order strenghten the socio-economic fibers of the Philippines. Undeniably,
they can contribute much in our country’s desire to accelerate economic growth. But
important as they are, there is still a need to subject them to State regulation. As
discussed, a license is imperative and necessary before foreign corporations can engage
and transact business in our country.

The corporate license clearly is a factor that cannot be discounted with respect to the
enforceability of contracts entered into by foreign corporations and with respect to such
corporations’ right to maintain a suit or to intervene in any action or proceeding in
Philippine courts or administrative tribunals. We learned that generally, contracts are
unenforceable and that foreign corporations are dispossessed of the capacity to sue, if the
license required by law has not been complied.

However, we are taught at the same time that laws must not always be given an
unduly harsh interpretation. In our jurisdiction, doctrines and rulings have been
pronounced to give a liberal and open-minded view of the situation. Reason and
economic interdependence dictate us that rigid application of laws may only hamper the
development of trade relations to the prejudice of our image as a member of the
economic global village.

We hold on to the idea that the provisions of the Corporation Code must be enforced
and upheld to regulate the conduct of foreigners who desire to do business in our country.
But as we stick to that line of thinking, we are reminded also that there will always be
another side of the fence. To sum up, the unenforceability of contracts is curable and
56
Ibid.
57
De Leon, citing SEC Opinion, March 5, 1963
58
De Leon, citing Frazier vs. Steel and Tube (W. Va.) 132 S.E. 723, 45 ALR 1442
59
De Leon, comments on the Corporation Code of the Philippines, pp. 807
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foreign corporations can invoke the protection of our courts whether or not they are
licensed to do business in the Philippines under any of the following grounds:

First, to seek redress for an isolated business transaction;

Second, to protect its corporate reputation, name and goodwill;

Third, to enforce a right not arising out of business transaction as in cases of torts
that occured in the Philippines and of recovery of misdelivered properties;

Fourth, when the parties have contractually stipulated that Philippines is the venue of
the actions; and

Fifth, when the party sued is barred by principle of estoppel and/or principle of
unjust enrichment from questioning the capacity of the foreign corporation.

If we lean on the option of giving our corporation laws harsh and callous
interpretation, it would only disastrously embarass trade. But if we would consider the
challenges of rapidly changing global economy and if we would incline to give a
reasonable mindset through accepted doctrinal rules over the possession of a corporate
license, such mindset would markedly help in the development of trade and the
stimulation and expansion of foreign investment and economic viability.

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