What is a corporation by estoppel? (Section 20, Revised Corporation Code)

Introduction to Corporation by Estoppel00:00:40

Attorney Marie Chris Bethan Lasko introduces the concept of a corporation by estoppel, contrasting it with de facto corporations previously discussed. She aims to clarify what a corporation by estoppel is, how it differs from a de facto corporation, and its legal effects.

Defining Corporation by Estoppel00:01:26

A corporation by estoppel arises when a group of individuals acts and transacts business as if they are a corporation without having gone through the formal incorporation process. They are then legally 'estopped' from denying their corporate existence, particularly when dealing with third parties who believe them to be a legitimate corporation. The law protects these third parties from misrepresentation.

Example of Corporation by Estoppel00:03:21

An example illustrates this: if a group (A, B, C, D, E) pretends to be a corporation and borrows money from Mr. Y, they cannot later deny their corporate status to avoid repayment. The law treats them as a corporation by estoppel to protect Mr. Y, who acted in good faith.

Legal Basis and Liability00:05:22

The principle of estoppel prevents individuals from denying what they have previously asserted. The Revised Corporation Code, specifically Section 20, outlines that individuals acting as a corporation without authority will be liable as general partners. Their liability is joint and prorated to protect third parties who incur debts, liabilities, or damages as a result of such misrepresentation.

Reciprocal Application of Estoppel00:10:00

Section 20 also states that the estoppel works both ways. If an individual (like Mr. Y) transacts with an ostensible corporation and creates an obligation, they cannot later deny the corporation's existence to avoid their own liability. The principle of corporation by estoppel applies equally between the misrepresenting group and the third party they transact with.

Corporation by Estoppel vs. De Facto Corporation00:13:22

The video clarifies that a corporation by estoppel is distinct from a de facto corporation. A de facto corporation has received a certificate of incorporation, even if there were defects in the process. In contrast, a corporation by estoppel never went through formal incorporation. Members of a de facto corporation have rights similar to stockholders, while members of a corporation by estoppel are treated as general partners with joint and prorated liability.