SEC’s powers to impose administrative sanctions, and to cite in contempt

The constitutional due process clause — “No person shall be deprived of life, liberty, or property without due process of law” — has application to both natural and juridical persons, and has been held to apply not only to criminal proceedings, but to administrative proceedings as well.

Based on the foregoing considerations, it is our position that there are fatal defects in language of Sections 157 and 158 of the Revised Corporation Code (RCC) that empower the Security and Exchange Commission (SEC) to cite in contempt offending persons and to impose administrative sanctions, respectively, for violations of the Revised Corporation Code, or the rules and regulations issued thereunder.

SEC’S POWER TO CITE IN CONTEMPT
Under Section 157 of the RCC, any person who, without justifiable cause, fails or refuses to comply with any “lawful order, decision or subpoena” issued by the SEC shall, after due notice and hearing, be held in contempt and fined in an amount not exceeding P30,000; and when the refusal amounts to clear and open defiance of the SEC’s order, it may impose a daily fine of P1,000 until the order, decision, or subpoena is complied with.

The authority of SEC to cite in contempt “any person” under Section 157 properly refers to a “lawful order or decision”; in other words, there is no authority to cite a recalcitrant person in contempt against an “unlawful order or decision” of the SEC. What amounts to a “lawful order or decision” is based on whether such an order or decision was issued pursuant to the adjudicatory or quasi-judicial powers of the SEC under the RCC, which must mean that it is issued by way of enforcing the provisions of the RCC or any of its implementing rules or regulations (IRR) issued by the SEC in the exercise of its quasi-legislative power under Section 179(o) of the RCC.

It is our position that when an order or decision is issued by the SEC in the exercise of its purely regulatory functions, it must be issued in accordance with the enforcement power expressly granted by the RCC to SEC, or which have been adopted by the SEC as part of the IRR to the provisions of the Code. Any order or decision that is not grounded in a directive provided for under the RCC, or in the IRR, would be an unlawful order or decision in violation of the due process clause that provides that a person may only be punished on committing an act that has been declared punishable under the law. Therefore, an order or decision issued by the SEC that is not based on enabling provisions of the RCC, or pursuant to the IRR issued by the SEC would be unlawful and may be considered justified failure or refusal to comply with such order or decision.

It is likewise our position that when an order or decision is issued by the SEC in the exercise of its adjudicative or quasi-judicial powers, it means that such an order or decision was rendered pursuant to a notice and hearing having been held against a person who is accused of having violated provisions of the RCC, or its IRR. If that be the case, the order or decision is covered under Section 158 on administrative sanctions, and the unjustified failure or refusal to comply with such a lawful order or decision should not be covered by the exercise of contempt powers under Section 157 (which requires another process of notice and hearing), but is properly resolved by the exercise by the SEC of its power to enforce its decisions provided under Section 179: “(l) Issue writs of execution and attachment to enforce payment of fees, administrative fines, and other dues collectible under this Code.”

This means that the power of SEC to cite in contempt for unjustified failure or refusal to comply with its order or decision would apply only to orders issued in the exercise of its purely regulatory power; and that unless the RCC provides otherwise, the SEC has no authority to use its contempt power in relation to offenses for which the Code provides a specific criminal penalty.

To illustrate, the last paragraph of Section 17 of the RCC goes out of its way to provide expressly that “If the corporation fails to comply with the [SEC’s] order [on the unauthorized use of corporate name], the [SEC] may hold the corporation and its responsible directors or officers in contempt and/or hold them administrative, civilly and/or criminally liable under this Code.”

Another instance is Section 161 of the Code that provides for criminal penalties for violation of the various sections covering duties to maintain corporate records and allow inspection and/or reproduction of corporate records — it last paragraph provides expressly that “The penalties imposed under this section shall be without prejudice to the [SEC’s] exercise of its contempt powers under Section 157 hereof.”

SEC’S POWER TO IMPOSE ADMINISTRATIVE SANCTIONS
Under Section 158 of the Revised Corporation Code, if the SEC finds, after due notice and hearing, “that any provision of [the Revised Corporation Code], rules or regulations, or any of the Commission’s order has been violated,” it may impose any or all of the following sanctions, taking into consideration the extent of participation, nature, effects, frequency and seriousness of the violation, thus:

(a) Imposition of a fine ranging from P5,000 to P2 million, and not more than P1,000 for each day of continuing violation but in no case to exceed P2 million;

(b) Issuance of a permanent cease and desist order;

(c) Suspension or revocation of the certificate of incorporation of the offending corporation; and,

(d) Dissolution of the corporation and forfeiture of its assets…

Since the SEC is not granted omnipotent powers — it is not a god whose every order becomes infallible — it is legally doubtful if it may lawfully impose administrative sanction when “any of its orders has been violated,” as separate and distinct offense from violations of “any provision of this Code, rules or regulations.” In other words, there cannot be an administrative offense for “violation of any order of the SEC” that is apart from violation of the provisions of the RCC, or any rules or regulations issued by the SEC to implement the RCC. To rule otherwise would be a violation of the due process clause for it would subject an offender liable for an administrative offense that has not yet been classified as an offense by the proper issuance of the rules and regulations.

In addition, we believe that the unjustified failure or refusal “to comply with any lawful order … issued by the Commission” under Section 157, has the same coverage as “any of the Commission’s orders has been violated” under Section 158, since not complying with or acting contrary to a SEC order amounts to the same thing as failure or refusal to comply. If the order is issued pursuant to a final decision of the SEC in the exercise of its quasi-judicial powers (i.e., finding a violation of the RCC, or its IRR), the proper remedy for the SEC is to exercise its power under Section 179(l) to issue the appropriate writ of execution to enforce its final decision.

Further, if violation or non-compliance with any order issued outside of an adjudication of an offense or violation of the RCC, or its IRR, may be covered separately as an administrative offense, it would amount to subjecting the offending party twice to the imposition of administrative fines provided separately under Section 157 (maximum of P30,000) and Section 158 (maximum of P2 million) for defying the very same order issued by the SEC.

We also take the position that even in the area where an administrative sanction is sought to be imposed by the SEC for violation of “any provision of this Code, rules or regulations” under Section 158, the same must be classified by the RCC or the IRR to be subject to administrative sanction; otherwise, the imposition of administrative sanctions would be in violation of the rudiments of due process that require that a person cannot be penalized or sanctioned for an act which has not previously been declared to be an offense subject to administrative penalties.

DEFINING THE ADMINISTRATIVE OFFENSE OF ‘VIOLATION OF ANY PROVISION OF THIS CODE’
If the RCC itself does not provide that a certain act is subject to administrative sanction of the SEC, can the all-encompassing clause under Section 158, i.e., “any provision of this Code … has been violated,” be invoked to subject the same to administrative sanctions? The answer would clearly be in the negative, since Section 158 provides only a conclusion “has been violated,” but does not define what would constitute the violation of each and such provision of the Code. The rudiments of due process require that a potential offender must be properly informed of what particular acts constitute an offense for which he stands to lose either his life, liberty, or property as a sanction for committing such an offense.

When the RCC itself does not say that a violation of a particular provision is subject to administrative sanction, the only manner by which the same may become “administratively sanctionable” under Section 158, and comply with the rudiments of due process, is for the SEC to reiterate and perhaps clarify the provisions in an IRR, and therein declare that the violation of the terms of the rule or regulation would be subject to administrative sanction provided under Section 158 of the RCC.

This is precisely what the SEC sought to accomplish when it issued in February 2020, SEC Memorandum Circular No. 3-2020 providing for the following rules on Notice of Regular Meetings of the Stockholders/Members, which merely reiterated the same requirement under Section 49 of the RCC. The most important consideration for SEC’s issuance of the memorandum circular was to subject violation of the provisions thereof to its power to impose administrative sanctions, by providing therein: “If, after due notice and hearing, the Commission finds that any provision of this Memorandum Circular has been violated, the Commission may impose any or all of the sanctions provided under Section 158 of the RCC.”

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

Atty. Cesar L. Villanueva is co-chair for Governance in the MAP Committee on ESG, chair of the Institute of Corporate Directors (ICD), the first chair of the Governance Commission for GOCCs, a former dean of the Ateneo Law School, and a founding partner of Villanueva Gabionza & Dy Law Offices.

[email protected]

cvillanueva@vgslaw.com