Dear Atty. Gab,

Musta Atty! I hope this message finds you well. My name is Fernando Lopez, and I’m writing to you because I’m in a very stressful situation regarding my previous role as General Manager for a small trading company, ‘PinoyProgress Trading Inc.,’ here in Cebu City. About two years ago, back in 2022, we needed capital for expansion and took out a significant business loan, around PHP 1.5 million, from ‘Masagana Financing Corp.’ As the GM and one of the main operators, I was the one who dealt with Masagana and signed all the application forms and loan agreements on behalf of PinoyProgress.

I remember signing multiple documents, including what they called a ‘Continuing Suretyship Agreement,’ which honestly, I didn’t fully grasp at the time amidst the rush to secure funding. Business was okay for a while, but due to unforeseen market shifts, PinoyProgress started facing financial difficulties last year and eventually defaulted on the loan payments. Masagana Financing is now aggressively pursuing the debt. Recently, they sent demand letters not just to the company’s registered address but also to my personal residence, threatening legal action against me personally to recover the outstanding balance, which they claim is now close to PHP 1.2 million including penalties and interests.

I am confused and worried. I always believed that since the loan was for the corporation, only the company’s assets should be liable. I signed those papers as the General Manager, representing PinoyProgress. How can they come after my personal savings and property? To make things more complicated, there was a related issue where the company issued a check that bounced, and a criminal case was filed against me, but I was eventually acquitted because the prosecution couldn’t prove fraudulent intent beyond reasonable doubt. Despite this acquittal, Masagana insists I am still personally liable for the entire loan amount because of the documents I signed. Can they really do this? What are my rights and obligations here? Any guidance would be greatly appreciated.

Sincerely,
Fernando Lopez

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Dear Fernando,

Thank you for reaching out. I understand your concern and anxiety regarding the demands from Masagana Financing Corp. It’s a common point of confusion when the lines between corporate responsibility and personal liability seem to blur, especially for officers who sign documents on behalf of their companies.

The general rule in Philippine law is that a corporation has a legal personality separate and distinct from its owners and officers. This means corporate debts are usually the corporation’s responsibility alone. However, this corporate veil can be pierced, or officers can voluntarily assume personal liability under specific circumstances, most commonly by signing a personal guarantee or suretyship agreement. Your acquittal in the related criminal case, while positive, unfortunately does not automatically extinguish your potential civil liability arising from the loan contract itself, especially if you personally guaranteed the debt.

Navigating the Maze: When Corporate Officers Become Personally Liable for Company Debts

The cornerstone principle here is that of separate juridical personality. A corporation, once registered, is treated as an artificial being with its own rights and obligations, separate from the individuals comprising it. This means that ordinarily, directors, officers, and employees acting within the scope of their authority for the corporation are not personally bound by the corporate debts they incur on its behalf. The liability rests solely with the corporation.

However, this protection is not absolute. There are specific instances where an officer like yourself can be held personally liable for corporate obligations. One of the most direct ways this happens is through contractual stipulation. When a corporate officer signs a contract not just in their official capacity but also explicitly agrees to be personally bound, they create a separate, personal obligation. This often occurs through guarantee or suretyship clauses embedded within or attached to loan agreements.

Settled is the rule that debts incurred by directors, officers, and employees acting as corporate agents are not their direct liability but of the corporation they represent, except if they contractually agree/stipulate or assume to be personally liable for the corporation’s debts…

In your case, the ‘Continuing Suretyship Agreement’ you mentioned signing is likely the key document. A surety is one who binds themselves solidarily with the principal debtor (the corporation). This means the creditor (Masagana Financing) can demand payment of the entire debt from either the principal debtor (PinoyProgress Trading Inc.) or the surety (you, personally), or both, until the debt is fully paid. Your signature on such an agreement, if indeed made in your personal capacity, would typically make you personally and directly liable for the loan alongside the corporation.

It’s crucial to examine the exact wording of the suretyship agreement and how you signed it. Did you sign it clearly indicating you were signing personally, separate from your signature as General Manager for the main loan agreement? The enforceability of this personal liability hinges on clear proof that you knowingly undertook this obligation.

Regarding your acquittal in the related criminal case (perhaps for violating B.P. 22, the Bouncing Checks Law), it’s important to understand the distinction between criminal and civil liability. Criminal cases require proof beyond reasonable doubt, a very high standard. Civil cases, like collecting a debt, generally require only a preponderance of evidence, meaning the evidence supporting the claim is more convincing than the evidence against it. An acquittal in a criminal case does not automatically wipe out the underlying civil obligation unless the acquittal explicitly states that the act from which the civil liability might arise did not exist.

[An acquittal] relieves of the corporate criminal liability as well as the corresponding civil liability arising therefrom [ex delicto]. However, … [one] may still be held liable for the … transactions he had entered into in behalf of [the corporation] [ex contractu].

This means that even if you were cleared of criminal fraud related to a bounced check, the fundamental debt obligation under the loan and your potential personal liability under the suretyship agreement remain separate civil matters that Masagana Financing can pursue based on the contract.

Furthermore, the burden of proving that payments have been made rests on the debtor. If you or the company assert that payments were made which reduced the obligation, you need documentary evidence to support this claim.

Settled is the rule that in civil cases, the party who asserts the affirmative of an issue has the onus to prove his assertion… Thus, the burden rests on the debtor to prove payment rather than on the creditor to prove non-payment.

While signing a personal guarantee is the most common way officers become personally liable, other exceptions exist, though they require specific proof by the creditor:

When directors and trustees or, in appropriate cases, the officers of a corporation: (a) vote for or assent to patently unlawful acts of the corporation; (b) act in bad faith or with gross negligence in directing the corporate affairs; (c) are guilty of conflict of interest to the prejudice of the corporation, its stockholders or members, and other persons; […] (3) When a director, trustee or officer has contractually agreed or stipulated to hold himself personally and solidarily liable with the corporation; or (4) When a director, trustee or officer is made, by specific provision of law, personally liable for his corporate action.

Based on your description, the likely basis for Masagana’s claim against you personally is point (3) – the suretyship agreement you signed.

Practical Advice for Your Situation

• Locate and Review All Documents: Immediately find copies of the loan agreement, the Continuing Suretyship Agreement, and any related documents you signed. Pay close attention to the signature blocks – did you sign the suretyship in your personal capacity?
• Consult a Lawyer: Engage legal counsel immediately. Have them review the documents thoroughly to assess the validity and extent of your personal liability based on the suretyship agreement.
• Gather Payment Records: Collect all possible proof of payments made by PinoyProgress Trading Inc. towards the loan. This is crucial for verifying the actual outstanding balance.
• Verify the Amount Claimed: Request a detailed statement of account from Masagana Financing, showing the principal, interest, penalties, and application of any past payments. Scrutinize the interest and penalty charges for compliance with the loan agreement and relevant laws (e.g., limits on unconscionable interest).
• Do Not Ignore Demands: While stressful, ignoring the demand letters is not advisable. Respond through your lawyer to acknowledge receipt (without admitting liability) and state that you are reviewing the matter.
• Understand Solidary Liability: If the suretyship is valid, understand that Masagana can legally pursue you for the full amount, regardless of the company’s assets (or lack thereof).
• Explore Negotiation: Through your lawyer, explore possibilities for negotiating a settlement or a structured payment plan with Masagana Financing, considering your personal financial capacity.
• Assess Corporate Assets: Understand the current status of PinoyProgress Trading Inc. and any remaining assets it might have, as these are primarily liable for the debt.

Navigating this situation requires careful examination of the specific documents you signed. The existence and validity of the personal suretyship agreement are central to determining whether Masagana Financing can indeed pursue your personal assets. Acting promptly and with legal guidance is your best course of action.

Hope this helps!

Sincerely,
Atty. Gabriel Ablola

For more specific legal assistance related to your situation, please contact me through gaboogle.com or via email at connect@gaboogle.com.

Disclaimer: This correspondence is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please schedule a formal consultation.