Lex Rex Ph

Advance Paper Corp. vs. Arma Traders Corp. Digest

Advance Paper Corp. (creditor) vs. Arma Traders Corp. (debtor), G.R. 176897 Dec. 11, 2013


Arma Traders is a distributor of school of supplies, and has been engaging with Advance Paper as its supplier for 14 years.

In 1994, Pres. Tan and Treasurer Uy, in representation of Arma Traders, availed a total of P15.13M worth of paper products from Advance Paper on credit.

As authorized signatories of Arma, Tan and Uy extended PDCs to Advance Papers. The checks were dishonored due to lack of funds. Arma Traders failed to settle.

Adv. Paper filed a collection of sum of money with preliminary attachment against the corp and some officers, proved the credit through sales invoices, and proved loan history through previous checks by Arma.

Arma’s defense was that (1) There was no delivery of the paper products and (2) Pres. Tan and Treas. Uy were the only ones responsible since they acted in excess of their authority since and such are without approval of the BoD

Lower Courts: RTC Manila favored Advance Paper. CA reversed.

Issue and Ruling

Did Arma Traders Pres. Tan and Treas. Uy have authority to obtain loans?

Short answer

Yes, because of the doctrine of Apparent Authority substantiated by the following 5 circumstances: (1) First, Arma’s AOI provides that the corp may borrow money; (2) Tan and Uy were incorporators and they alone had made the decisions for the business since 1984. (3) Arma Corp is guilty of laxity and failed to prevent abuse by its officers; (4) Arma failed to prove connivance between Advance Paper and Arma’s previous President and Treasurer.

Long answer

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 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.

AOI provides that they may borrow. Arma Traders’ Articles of Incorporation82 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.

Tan and Uy were incorporators. Also, Ng testified: 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. 

Arma Traders allowed its officers and failed to take precautions to prevent abuse. 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 Uy’s authority to obtain loan from Advance Paper.

Debtor failed to show evidence of connivance between Haw and Tan/Uy. We also reject the respondents’ claim that Advance Paper, through Haw, connived with Tan and Uy. The records do not contain any evidence to prove that the loan transactions were personal to Tan and Uy. A different conclusion might have been inferred had the cashier’s checks been issued in favor of Tan and Uy, and had the postdated checks in favor of Advance Paper been either Tan and/or Uy’s, or had the respondents presented convincing evidence to show how Tan and Uy conspired with the petitioners to defraud Arma Traders.84 We note that the respondents initially intended to present Sharow Ong, the secretary of Tan and Uy, to testify on how Advance Paper connived with Tan and Uy. As mentioned, the respondents failed to present her on the witness stand. 

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