LUIS VILLASMIL-UNSPLASH

We postulate that the offense sought to be punished under article 165 of the Revised Companies Code (RCC), namely “the exercise of its activities by fraud”, does not provide a definition nor the requirements for determining whether a crime has been committed. For example, it is unclear whether Section 165 only covers the general manner in which the business enterprise is conducted (e.g. engages in banking without a Bangko Sentral ng Pilipinas license), or whether it covers each particular transaction committed with fraud. .

Without providing the conditions of what would constitute “fraudulent conduct of business”, it would be difficult to convict an offending company under section 165 since the quantum of proof required in a criminal case is “guilt beyond any reasonable doubt”. Under the standards of criminal procedure which must also be accorded to an accused legal entity, the lack of a proper definition of what constitutes “fraudulent conduct of business” would make it impossible to convict the accused, especially a infringing corporation, which is essentially incapable of committing fraud because it lacks the ability to act “maliciously”. The element of malice that would make the accused company liable for the offense evil in itself under section 165 must necessarily relate to the malicious intent of the director, trustee, officer or acting employee in the fraudulent conduct of the business enterprise.

ISSUE OF “PREJUDICIAL ISSUE” UNDER ARTICLE 165
Since the criminal offense which a company may commit under Article 165 CCR by “conduct of business by fraud” is evil in itself which can only be effected through its board of directors or its duly authorized officers and employees, there is no way to obtain a conviction against the company unless and until the acting directors or trustees, or officers and/or employees commit the offense on behalf of the corporation is first shown to have been guilty of conducting the affairs of the corporation by fraud.

Article 165 of the RCC cannot be used as a basis for concluding that the conduct of the acting directors or trustees, or of the officers and/or employees is fraudulent since it defines an offense committed by the company, and article 171 provides for the specific criminal sanction for such directors or trustees, officers and/or acting employees “if the offender is a corporation”.

We therefore posit that if Article 165 of the CCR is interpreted by the courts to authorize the criminal sanction of the company as a means by which the acting directors, trustees or officers have committed a fraudulent act, it cannot cover only specific acts which under existing criminal laws are already defined as criminally fraudulent. For example, there are many criminal offenses defined by the Code of Securities Regulation and the General Banking Law where the penalty is imposed on the acting director, trustee or manager.

It is only in those criminally defined fraudulent crimes that the company itself, used as a means to commit such crimes, can the offense under section 165 be invoked to hold the company itself punishable .

CHILLING EFFECT OF PUBLIC INVESTMENT IN THE CORPORATE MEDIUM
Prior to the enactment of the RCC, the overriding principle of Philippine corporate law in cases where the corporation was employed as a means to commit fraud was to make directors, trustees, and/or officers criminally liable for the crime of fraud (such as defined by law) so engaged, and not the company itself. Besides the policy that offending directors, trustees or officers should not be allowed to hide behind the corporate veil to protect themselves from their despicable acts, it was also the policy at the time to protect the investments of passive shareholders who had no involvement, much less knowledge of the fraudulent act of the offending directors, trustees or officers.

The imposition under Section 165 of the penalty of fines on the corporation for the fraudulent acts of directors, trustees or officers actually bears directly on the holdings of the many innocent shareholders. Instead of promoting the ease of doing business through corporations, Section 165 induces “unease” among current and future investors, both local and foreign, in the Philippine business sector.

COMPANIES ACTING AS INTERMEDIARIES FOR FRAUD, CORRUPTION AND CORRUPTIONAL PRACTICES
Under Article 166 of the CCR, a “company used to defraud, or to commit or conceal corrupt and corrupt practices as defined by the relevant laws”, is liable to a fine ranging from 100,000 to 5 million pesos.

Further, Section 166 provides that where any of the directors, officers, employees, agents or representatives of the company is found to be engaging in corrupt and corrupt practices, the failure of the company to install : a.) guarantees for the transparent and lawful delivery of services; and, b.) the policies, code of ethics, and procedures against subsidy and corruption shall constitute prima facie evidence of the company’s criminal liability under Section 166.

WHEN A COMPANY IS USED FOR FRAUD
There appears to have been an error in including in the definition of the offenses covered by Article 166 the crime of “a company used for fraud”, on the basis of the following grounds: a.) It does not appear in the title of the article which only covers “Acting as Intermediaries for Corrupt and Corrupt Practices”; and, b.) Using the company to commit fraud is already defined as a separate crime of the company under section 165.

Bearing in mind that every corporation is a means of doing business, there would be no difference in coverage between section 165 when it refers to “a corporation which carries on business by fraud” and that of section 166 which refers to “a company used for fraud.”

Again, obtaining a conviction under Section 166 against “a company used for fraudulent purposes” would seem difficult due to the lack of definition or requirements that would constitute the use of the company for fraudulent purposes. .

WHEN A COMPANY IS USED TO COMMIT CORRUPTION AND BRIBERY PRACTICES
Section 166 of the CCR defines the criminal act of “a company used…to commit or conceal corrupt and corrupt practices as defined by the relevant laws”. This can only mean that the criminal offense committed by a company is well defined only where appropriate reference can be made to statutory provisions which define particular acts of directors, trustees or officers as constituting corrupt practices. or corruption, such as the Anti-Graft and Corrupt Practices Act.

THE ISSUE OF “PRELIGIOUS MATTERS” UNDER SECTION 166
An important issue that arises under section 166 CCR is whether the accused company can be held liable without prior conviction of the directors, trustees or acting officers for a legally defined corrupt practice using the company as a means of committing or effecting the same.

The last paragraph of Section 166 partially addresses this issue when it states that “Where any of its directors, officers, employees, agents or representatives is found to be engaging in corrupt and corrupt practices , the company’s failure to install: a.) safeguards for transparent and lawful provision of services; and, b.) the anti-bribery and corruption policies, code of ethics, and procedures shall constitute prima facie evidence of the Company’s liability under this Section. In other words, prior conviction of directors or trustees and/or officers or other agents is not required where the prima facie rule is present. Nevertheless, prima facie evidence is not sufficient to convict a corporation of a criminal offense, as the prosecution is still required to prove that the directors or trustees and/or acting officers engaged in corrupt practices and corruption “as defined by the relevant laws.”

Where the required safeguards, policies, codes and procedures against bribery and corrupt practices have been put in place such that the prima facie rule against the company does not come into effect, it is our view that the conviction of acting directors or trustees and/or officers would be a preliminary question in determining whether the company itself can be found guilty under Article 166 of the CCR.

On a related issue, since Section 166 itself cannot be used as a basis for punishing directors, trustees or officers who have used the company as a means of committing the offense defined therein, the basis for the punishment for directors, trustees, or officers, should be section 171 which provides that “if the offender is a corporation, the penalty may, in the discretion of the court, be imposed on such corporation and/or its directors, trustees , shareholders, members, officers or employees liable for the breach or indispensable to its commission. There is no doubt that any officer acting in the transaction by which the corporation becomes liable for a breach as “indispensable to its commission”, for a corporation, being a legal person, can only act through its administrators, trustees or officers.

Therefore, we do not see how guilty directors, trustees or officers can be held liable under section 171, if the company itself cannot be held liable under section 167, which cannot be based only on evidence that the guilty directors, trustees or officers committed the bribery and corrupt practices act as defined in existing laws other than Section 171 of the CCR.

CHILLING EFFECT ON PUBLIC INVESTMENT IN THE CORPORATE MEDIUM
The imposition under Article 166 of the CCR of the penalty of a fine on the company for the bribery and corrupt practices of its directors, trustees or officers in fact bears directly on the shareholdings of many innocent shareholders, in especially in public companies.

In addition, the imposition of a criminal sanction on the company can undermine the value of shares of publicly traded companies, which can render the equity holdings of many innocent public investors worthless. At the very least, Section 166, as it provides the criminal sanction of a fine (apart from the administrative penalties that the Securities and Exchange Commission may impose under Section 170), induces a “chilling effect on current and future investors, both local and local. overseas, in the Philippine business sector. In this sense, the introduction of Article 166 in the CCR actually goes against the principle of promoting the ease of doing business in our country through companies, and in fact removes the protection of many innocent shareholders. not

This article reflects the personal opinion of the author and does not reflect the official position of the Management Association of the Philippines or MAP.

Attorney Cesar L. Villanueva is Co-Chair of Governance of MAP’s ESG Committee, Chair of the Institute of Corporate Directors, First Chair of the GOCC Governance Commission, Former Dean of Ateneo Law School, and Founding Partner. of the law firms Villanueva Gabionza & Dy.

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