By: Euney Marie J. Mata-Perez on August 30. 2018

The Revised Corporation Code (RCC) proposed under Senate Bill No. 1280 continues to impose the duties of diligence, loyalty and obedience upon directors, trustees and officers of corporations.

Thus, it continues to uphold the rule that directors and officers can’t be held liable for corporate acts if they meet the standard of “due diligence” when making decisions.

They will be held jointly and severally liable only if they wilfully and knowingly assent to patently unlawful acts of the corporation or are found guilty of “gross negligence” or “bad faith.”

The proposed RCC adds several offenses, such as a corporation’s engaging, directly or indirectly, in fraud, graft and corruption. With respect to these offenses, the director, trustee or officer responsible for the violation or indispensable to its commission may be punished.

In addition though, they can be punished for failing to do anything about graft and corrupt practices or fraudulent acts by the corporation’s directors, trustees, officers or employees.

Under the proposed RCC, a corporation which conducts its business through fraud may be penalized with a fine of up to P2 million. If the offense is found detrimental to the public, the fine could be as high as P5 million.

A corporation used for fraud or used for committing or concealing graft and corrupt practices could be fined up to P5 million.

Appointing an intermediary which engages in graft and corrupt practices for the corporation’s benefit or interest is also punishable.

The proposed RCC expressly provides that a director, trustee, or officer who knowingly fails to sanction, fails to report or file an appropriate action with the proper agencies, or allows or tolerates the graft and corrupt practices or fraudulent acts committed by the corporation’s directors, trustees, officers, or employees, can also be fined in an amount of up to P1 million.

It should be noted that the proposed RCC didn’t define what constitutes “fraudulent acts” or “graft and corrupt practices.”

The SEC is expected to define these terms by regulation. While generally, graft and corrupt practices are attributed to unacceptable dealings with government officials, they may cover purely private transactions as well.

Also, without doubt, the penalties imposed under the proposed RCC could be in addition to the penalties imposed on private individuals under the Anti-Graft and Corrupt Practices Act (RA 3019).
The other offenses punishable under the proposed RCC are:

Unauthorized use of corporate name — fine ranging from P50,000 to P200,000;

• A director’s, trustee’s, or officer’s willful concealment of the existence of a ground for his or her disqualification — fine ranging from P10,000 to P200,000, plus permanent disqualification from further acting as director, trustee, or officer of any corporation;

• The unjustified failure or refusal by the corporation or by those responsible for keeping and maintaining corporate records, to comply with the rules on retention, inspection or reproduction of records — fine ranging from P10,000 to P200,000, (when the violation is injurious to the public, a fine ranging from P20,000 to P400,000), without prejudice to the SEC’s exercise of its contempt powers;

• Willful certification of incomplete, inaccurate, false, or misleading statements or reports — a fine ranging from P20,000 to P200,000; (with the wrongful certification is injurious or detrimental to the public, the auditor may also be fined from P40,000 to P400,000;

• Independent auditor’s collusion with the corporation’s directors or representatives, certification of the corporation’s financial statements despite their incompleteness or inaccuracy, failure to give a fair and accurate presentation of the corporation’s condition, — a fine ranging from P80,000 to P500,000; (When the statement or report certified is fraudulent, or has the effect of causing injury to the general public, the auditor may be punished with a fine ranging from P100,000 to P600,000); and

• Formation of a corporation through fraud – a fine ranging from P200,000 to P2 million.

Further, anyone who shall aid, abet, counsel, command, induce, or procure any of the foregoing violations may likewise be punished with a fine not exceeding that imposed on the principal offender.

Without doubt, the foregoing provisions definitely add another level of responsibility and liability for corporate directors, trustees and officers.

Aside from the ordinary duty of “due diligence”, directors, trustees and officers will have to take a more proactive role of reporting or sanctioning fraudulent acts or graft and corrupt practices committed by the corporation or by any of its officers, directors, trustees or intermediaries.

The question then is will the threat of punishment under these offenses affect a director’s or trustee’s exercise of business judgment?

It should be borne in mind that the RCC is a commercial law. It should promote business. It’s not supposed to primarily be a penal law and should not effectively constrict or diminish business judgment.

While rightfully it should punish violations of its provisions, it shouldn’t extend to punish acts which are better covered by criminal statutes.

#proposed #revisedcorporationcodeofthephilippines #penalties #grossnegligence #badfaith 

Euney Marie J. Mata-Perez is a CPA-Lawyer and the Managing Partner of Mata-Perez, Tamayo & Francisco (MTF Counsel). She is a corporate, M&A and tax lawyer. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. If you have any question or comment regarding this article, you may email the author at info@mtfcounsel.com or visit MTF website at www.mtfcounsel.com