Legality of Lawsuits by Companies Without Operating Permit in the Philippines

Introduction

In the Philippine legal system, corporations are artificial entities granted juridical personality through registration with the Securities and Exchange Commission (SEC). This personality allows them to engage in business, enter into contracts, and participate in legal proceedings. However, to lawfully operate, companies must obtain various permits and licenses beyond mere incorporation, such as business permits from local government units (LGUs), tax registrations from the Bureau of Internal Revenue (BIR), and industry-specific authorizations from regulatory bodies like the Department of Trade and Industry (DTI) or the Food and Drug Administration (FDA). The absence of these "operating permits" raises questions about a company's capacity to initiate or maintain lawsuits in Philippine courts.

This article explores the legality of lawsuits filed by companies lacking operating permits, focusing on the distinction between domestic and foreign corporations, the impact on contractual enforceability, relevant statutory provisions, and jurisprudential interpretations. While a lack of permits does not inherently strip a corporation of its right to sue, it can severely limit the scope of actionable claims, particularly those arising from unauthorized operations. The analysis is grounded in the Revised Corporation Code of the Philippines (Republic Act No. 11232, enacted in 2019), related laws, and established case law.

Corporate Personality and Capacity to Sue

Under Philippine law, a corporation acquires juridical personality upon issuance of its certificate of incorporation by the SEC. Section 35 of the Revised Corporation Code explicitly grants corporations the power "to sue and be sued, complain and defend in any court." This capacity is fundamental and stems from the corporation's status as a separate legal entity from its shareholders.

However, this right is not absolute. It is subject to limitations imposed by law, public policy, and the principle that courts will not aid in enforcing illegal acts. The capacity to sue presupposes that the corporation exists legally and that the action does not seek to perpetuate or profit from unlawful activities. For instance, a corporation cannot invoke judicial relief to enforce contracts entered into in violation of regulatory requirements.

Distinctions must be drawn based on the type of corporation:

Domestic Corporations: These are formed under Philippine laws and are presumed to have full capacity to sue upon SEC registration.
Foreign Corporations: These are entities incorporated abroad and must secure a license from the SEC to do business in the Philippines before they can maintain suits.

Requirement for Operating Permits

Operating permits encompass a range of authorizations necessary for lawful business conduct:

SEC Registration: Mandatory for incorporation but insufficient alone for operations.
Business Permit (Mayor's Permit): Issued by LGUs under the Local Government Code (Republic Act No. 7160), required annually to operate within a locality.
BIR Registration: For tax compliance, including issuance of official receipts and invoices.
Industry-Specific Permits: Such as Certificates of Public Convenience (CPC) for transportation under the Land Transportation Franchising and Regulatory Board (LTFRB), contractors' licenses under the Philippine Contractors Accreditation Board (PCAB) per Republic Act No. 4566, or environmental clearances from the Department of Environment and Natural Resources (DENR).

Failure to obtain these permits renders operations illegal, exposing the company to penalties, closure, or fines. However, the lack of permits does not dissolve the corporation's juridical personality; it merely regulates its activities.

Impact of Lack of Operating Permit on Capacity to Sue

For Domestic Corporations

Domestic corporations generally retain their capacity to sue even without complete operating permits, as their juridical personality is intact post-SEC registration. Courts have upheld this in cases where the lawsuit does not directly stem from unauthorized operations. For example:

A company lacking a mayor's permit might still sue for torts, such as defamation or property damage unrelated to its business.
Actions for corporate governance, like shareholder disputes or dissolution proceedings, are typically unaffected.

However, significant restrictions apply when the lawsuit arises from or seeks to enforce activities requiring permits:

Contractual Claims: Contracts entered into without necessary permits may be deemed void or unenforceable under Article 1409 of the Civil Code, which invalidates agreements contrary to law or public policy. A company cannot sue for payment under such contracts.
Regulated Industries: Specific laws bar suits without compliance. Under Section 4 of Republic Act No. 4566 (Contractors' Licensing Law), an unlicensed contractor cannot file suit to collect fees for construction work. Similarly, in public utilities, a transport operator without a CPC cannot recover fares or damages from passengers.
Doctrine of Estoppel and Unclean Hands: Courts may dismiss cases if the plaintiff-company is estopped from denying its illegal operations or comes to court with "unclean hands." This equitable principle prevents profiting from wrongdoing.

In practice, defendants often raise the lack of permits as a defense, prompting courts to require proof of compliance before proceeding. If the permit is obtained retroactively (where possible), the suit may be allowed to continue.

For Foreign Corporations

The rules are stricter for foreign corporations. Section 144 of the Revised Corporation Code (mirroring the old Section 133) states: "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." This "license requirement" is an operating permit equivalent for foreigners.

Doing Business Without License: Activities like maintaining a branch office, participating in contracts, or holding property constitute "doing business" (as defined in jurisprudence like Mentholatum Co. v. Mangaliman). Unlicensed foreign corporations are barred from suing, though they can be sued.
Exceptions: They may sue on isolated transactions not constituting "doing business," or if the suit is to protect trademarks/patents under international treaties. Once licensed, prior suits may be ratified.
Purpose: This provision protects local interests and ensures compliance with Philippine laws.

Violations can lead to fines up to PHP 1,000,000 and potential blacklisting.

Jurisprudential Basis

Philippine Supreme Court decisions provide clarity:

Marshall-Wells Co. v. Elser & Co. (1924): Early case affirming that unlicensed foreign corporations cannot sue, establishing the doctrine's longevity.
Home Insurance Co. v. Eastern Shipping Lines (1983): Reiterated that foreign entities must prove licensing to maintain suits, even for insurance claims.
Agilent Technologies Singapore v. Integrated Silicon Technology (2004): Clarified "doing business" and held that unlicensed foreigners are estopped from suing on business-related matters.
For Domestic Cases: In Picart v. Smith (1918) and later rulings like Republic v. Acoje Mining Co. (1963), courts emphasized that while registration grants personality, regulatory compliance is essential for enforcing operational rights. In contractor cases, such as Ernesto Oppen, Inc. v. Compas (2010), unlicensed entities were denied recovery.
Recent Trends: Post-Revised Corporation Code, cases like those involving e-commerce firms (e.g., under DTI regulations) show courts scrutinizing permits for online operations, dismissing suits for breach if platforms lack accreditation.

The principle is that while lack of permit does not nullify corporate existence, it impairs the right to judicial relief for non-compliant acts.

Exceptions and Special Cases

De Facto Corporations: Under Section 20 of the Revised Corporation Code, entities acting as corporations in good faith may be treated as such, allowing suits despite technical defects in formation or permits.
Ultra Vires Acts: Suits unrelated to unauthorized acts (e.g., a non-operational claim like loan recovery) may proceed.
Government Entities and Non-Profits: These often have relaxed requirements, as they operate under charters rather than permits.
COVID-19 and Emergency Contexts: Temporary waivers during pandemics (via Bayanihan Acts) allowed operations without permits, preserving suit rights.
Administrative vs. Judicial Proceedings: Lack of permits may bar court actions but not always administrative filings (e.g., SEC complaints).

Conclusion

In the Philippines, companies without operating permits face nuanced restrictions on filing lawsuits. Domestic corporations maintain basic capacity to sue due to their juridical personality but cannot enforce claims from illegal operations, with specific laws in regulated sectors imposing outright bars. Foreign corporations are categorically prohibited from suing without a license, underscoring the protective intent of Philippine laws. Businesses must prioritize compliance to avoid jeopardizing legal recourse. Legal advice from qualified practitioners is essential, as outcomes depend on case specifics and evolving jurisprudence. This framework balances corporate rights with regulatory enforcement, ensuring only lawful entities benefit from judicial processes.