b. Doctrine of Piercing the Corporate Veil

Doctrine of Piercing the Veil of Corporate Fiction

Under certain circumstances, the courts may disregard the separate and distinct personality of the corporation from its members or stockholders and treat the corporation as a mere collection of individuals or an aggregation of persons undertaking business as a group such as when the corporate legal entity is used as a cloak for fraud or illegality (Kukan International Corporation v. Reyes, G.R. No. 182729, 29 September 2010)¹.

It is an equitable doctrine used as a last resort when respecting separate corporate personality would sanction fraud, illegality, or inequity; its application is not limited to holding officers and/or stockholders liable. In one case, it cannot be applied in order to declare a foreclosure proceeding a nullity (Umali v. Court of Appeals, G.R. No. 89561, 13 September 1990)².

Classification of piercing cases:

• Fraud piercing – when a corporate entity is used to commit fraud or justify a wrong or to defend a crime.
• Alter-ego piercing – when a corporate entity is used to defeat public convenience or is merely a farce since the corporation is merely the alter ego, business conduit, or instrumentality of a person or another entity.
• Equity cases – when piercing the corporate fiction is necessary to achieve justice or equity.

Note: The three cases may appear together in one application (R. F. SUGAY and CO., INC. v. Reyes, G.R. No. L-20451, 28 December 1964)³.

Corporate Liability

Grounds for application of the different types of piercing

For Fraud Cases:

• There must have been fraud or an evil motive in the affected transaction, and the mere proof of control of the corporation by itself would not authorize piercing; and
• The claimant must establish misuse of the corporate form to commit fraud or a wrong, and a causal connection to the injury for which relief is sought.

Example cases:

• Where a stockholder, who has absolute control over the affairs of the corporation, entered into a contract with another corporation through fraud and false representations, such stockholder shall be liable solidarily with co-defendant corporation even when the contract sued upon was entered into on behalf of the corporation (National Marketing Corporation v. Associated Finance Company, Inc., G.R. No. L-20886, 27 April 1967)⁴.
• Piercing is allowed where the corporation is used as a means to appropriate a property by fraud which property was later resold to the controlling stockholders. (Heirs of Durano v. Spouses Uy, G.R. No. 136456, 24 October 2000)⁵.
• Fraud and bad faith on the part of certain corporate officers or stockholders may warrant the piercing of the veil of corporate fiction so that the said individual may not seek refuge therein, but may be held individually and personally liable for his or her actions. (Lafarge Cement Philippines, Inc. v. Continental Cement Corporation, G.R. No. 155173, 23 November 2004)⁶

For Alter-ego Cases:

• The doctrine applies in this case even in the absence of evil intent; it applies when complete domination of the corporation is used to commit a fraud or wrong, and that misuse proximately causes the injury. Control alone does not suffice.
• The doctrine in such cases is based on estoppel: if stockholders do not respect the separate entity, others cannot also be expected to be bound by the separate juridical entity.
• Piercing in alter ego cases may prevail even when no monetary claims are sought to be enforced against the stockholders or officers of the corporation.

Tests for Applicability of the Doctrine of Piercing the Veil of Corporate Fiction: (CUP)

• Control – not mere stock control but Complete Domination – not only of finances, but of policy and business practice in respect to the transaction attacked and must have been such that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own.
• Such control must have been Used by the defendant to commit fraud or a wrong, to violate a statutory or other positive legal duty, or to commit a dishonest and unjust act in contravention of the plaintiff’s legal right; and,
• The said control and breach of duty must have Proximately caused the injury or unjust loss complained of (Concept Builders, Inc. v. NLRC, G.R. No. 108734, 24 March 1997)⁷.

These were expanded as three-pronged tests:

The first prong is the "instrumentality" or "control" test. This test requires that the subsidiary be completely under the control and domination of the parent corporation or shareholder. It seeks to establish whether the corporation has no autonomy and the parent corporation or shareholder "is operating the business directly for itself or themselves."

The second prong is the "fraud" test. This test requires that the conduct in using the corporation be unjust, fraudulent or wrongful.

The third prong is the "harm" test. This test requires the plaintiff to show that the defendant’s control, exerted in a fraudulent, illegal or otherwise unfair manner toward it, caused the harm suffered (Philippine National Bank v. Hydro Resources Contractors Corporation, G.R. No. 167530, 13 March 2013)⁸.

Factors to Consider in cases of Parent and Subsidiary corporations in Alter-ego Piercing:

• The parent corporation owns all or most of the capital of the subsidiary.
• The parent and subsidiary corporations have common directors or officers.
• The parent company finances the subsidiary.
• The parent company subscribed to all the capital stock of the subsidiary or otherwise caused its incorporation.
• The subsidiary has grossly inadequate capital.
• The parent corporation pays the salaries and other expenses or losses of the subsidiary
• The subsidiary has substantially no business except with the parent corporation or no assets except those conveyed to or by the parent corporation.
• The papers of the parent corporation or in the statements of its officers, the subsidiary is described as a department or subdivision of the parent corporation, or its business or financial responsibility is referred to as the parent corporation’s own.
• The parent corporation uses the property of the subsidiary as its own.
• The directors or executives of the subsidiary do not act independently in the interest of the subsidiary but take their orders from the parent corporation.
• The formal legal requirements of the subsidiary are not observed (Philippine National Bank v. Ritrato Group Inc, G.R. No. 142616, 16 December 2002)⁹.

Note: Mere ownership by a single stockholder or by another corporation of all or substantially all of the capital stock of the corporation does not justify the application of the doctrine (Adalia B. Francisco and Merryland Development Corporation v. Mejia, G.R. No. 141617, 14 August 2001)¹⁰.

Example Cases:

• Where the stock of a corporation is owned by one person whereby the corporation functions only for the benefit of such individual owner, the corporation and the individual should be deemed the same (Arnold v. Willits & Patterson, Ltd., G.R. No. 20214, 17 March 1923)¹¹.
• When the corporation is merely an adjunct, business conduit or alter ego of another corporation, the fiction of separate and distinct corporation entities should be disregarded (Tan Boon Bee & Co., Inc. v. Jarencio, G.R. No. L-41337, 30 June 1988)¹².
• Employment of same workers; single place of business, etc. (La Campana Coffee Factory v. Kaisahan ng Manggagawa, G.R. No. L5677)¹³.
• Use of nominees (Marvel Building v. David, G.R. No. L-508)¹⁴
• Avoidance of tax. (Yutivo Sons Hardware Company v. CTA, G.R. No. L-13203, 28 January 1961¹⁵; Liddell & Co. v. Collector of Internal Revenue, G.R. No. L-9687, 30 June 1961¹⁶).
• Mixing of bank deposit accounts. (Ramirez Telephone Corporation v. Bank of America, G.R. No. L-22614, 29 August 1969)¹⁷.
• Where it appears that two business enterprises are owned, conducted, and controlled by the same parties, both law and equity will, when necessary to protect the rights of third persons, disregard the legal fiction that two corporations are distinct entities and treat them as identical (Sibagat Timber Corporation v. Garcia, G.R. No. 98185, 11 December 1992)¹⁸
• Thinly-capitalized corporations (Connel v. COURT OF APPEALS and DOMINGA DE LOS REYES, G.R. No. L-10510, 17 March 1961)¹⁹.
• Parent-subsidiary relationship. (Koppel v. Yatco, G.R. No. 47673, 10 October 1946²⁰; Philippine Veterans Investment Development Corporation v. COURT OF APPEALS and VIOLETA MONTELIBANO BORRES, G.R. No. 85266, 30 January 1990²¹)
• Affiliated companies (Guatson International Travel and Tours, Inc. v. NLRC, G.R. No. 100322, 9 March 1994)²²

Summary of Probative Factors (Philippine National Bank v. Ritrato Group Inc²³; Concept Builders, Inc. v. NLRC²⁴): Whether the separate personality of the corporation should be pierced depends on questions of facts, appropriately pleaded. Mere allegation that a corporation is the alter ego of the individual stockholders is insufficient. The presumption is that the stockholders or officers and the corporation are distinct entities. The burden of proving otherwise is on the party seeking to have the court pierce the veil of corporate entity (Ramoso v. Court of Appeals, G.R. No. 117416, 8 December 2000)²⁵.

For Equity Cases:

These are cases, where there is no fraud or alter ego circumstances that can warrant the piercing of the corporate veil. This mainly used to render justice in the situation at hand, or to brush aside technical defenses.

For example:

• When used to confuse legitimate issues (Telephone Engineering & Service Company, Inc. v. Workmen's Compensation Commission, G.R. No. L-28694, 13 May 1981)²⁶.
• When used to raise issues relating only to technicalities (Emilio Cano Enterprises, Inc. v. Court of Industrial Relations, G.R. No. L-20502, 26 February 1965)²⁷.

The veil may not always be pierced, especially in the following circumstances:

• Piercing is a remedy of last resort and is not available when other remedies are still available (Umali v. Court of Appeals)²⁸.
• One cannot successfully invoke the piercing doctrine when it was proven that the act done was contrary to the existing rules, which were well-known to the officers of the one invoking it (Traders Royal Bank v. Court of Appeals, G.R. No. 93397, 3 March 1997)²⁹.
• Piercing is not a device to nullify a foreclosure merely by disregarding corporate personality; relief need not invariably be pecuniary liability for corporate debts (Umali v. Court of Appeals; Indophil Textile Mill Workers Union-Ptgwo v. VOLUNTARY ARBITRATOR TEODORICO P. CALICA and INDOPHIL TEXTILE MILLS, INC., G.R. No. 96490, 3 February 1992³⁰).

Note: However, piercing in alter ego cases may prevail even when no monetary claims are sought to be enforced against the stockholders or officers of the corporation. (e.g. piercing for other purposes such as laborer’s rights)

• An individual’s personal obligation does not, by itself, make the corporation liable; exceptionally, reverse piercing may be considered upon proof that the requirements for piercing are met (Robledo v. NLRC, G.R. No. 110358, 9 November 1994)³¹.

Note: As an exception to this rule, the Supreme Court allowed such piercing by applying the concept of “reverse piercing”. In a traditional veil-piercing action, a court disregards the existence of the corporate entity so a claimant can reach the assets of a corporate insider. In a reverse piercing action, however, the plaintiff seeks to reach the assets of a corporation to satisfy claims against a corporate insider."

Reverse piercing has two (2) types:

• Outsider reverse - piercing occurs when a party with a claim against an individual or corporation attempts to be repaid with assets of a corporation owned or substantially controlled by the defendant.
• Insider reverse piercing - the controlling members will attempt to ignore the corporate fiction in order to take advantage of a benefit available to the corporation, such as an interest in a lawsuit or protection of personal assets. (International Academy of Management and Economics v. Litton and Company, Inc., G.R. No. 191525, 13 December 2017)³².
• To disregard the separate juridical personality of a corporation, the wrongdoing must be clearly and convincingly established. It cannot be presumed (DBP vs. CA, G.R. No. 126200)³³.
• Piercing of the veil of corporate fiction is not allowed when it is resorted to justify under a theory of co-ownership the continued use and possession by stockholders of corporate properties (Boyer-Roxas v. Court of Appeals, G.R. No. 100866)³⁴.
• The piercing doctrine could not be availed of to dislodge the SEC’s then-existing jurisdiction over a corporate debtor’s petition for suspension of payments under Section 5(e) of Pres. Decree No. 902-A³⁵, by treating the petitioning individuals as the real petitioners to the exclusion of the petitioning corporate debtor (Union Bank of the Philippines v. Court of Appeals, G.R. No. 131729, 26 April 1999)³⁶. That jurisdictional setting is historical: jurisdiction over rehabilitation proceedings was transferred to the courts under R.A. No. 8799, Sec. 5.2, and rehabilitation proceedings are now governed by R.A. No. 10142 (FRIA) and its implementing court rules.
• Piercing cannot make corporate insiders liable for corporate debts merely because they control the corporation. The party seeking to pierce must prove that the control was used to commit fraud or another wrong, or to violate a legal duty (Ramoso v. Court of Appeals, G.R. No. 117416, 8 December 2000)³⁷
• Piercing doctrine is meant to prevent fraud, and cannot be employed to perpetrate fraud or a wrong (Araneta, Inc. v. Tuason, G.R. No. L-2886)³⁸.
• Corporate persons are entitled to due process protection. Thus, failure to implead a corporation in a suit for recovery of ill-gotten wealth against its stockholders cannot bind the corporation itself; otherwise, its fundamental right to due process will be violated. (COCOFED v. Republic, G.R. No. 177857-58)³⁹
• Mere ownership of all or nearly all of the capital stocks of a corporation is not in itself a sufficient reason for disregarding the fiction of separate corporate personalities. The probate court applied doctrine of piercing the corporate veil since Rosario had no other properties that comprise her estate other than her shares. Although the intention to protect the shares from dissipation is laudable, it is still an error to order tenants to remit payments to the estate. Also, the court has not acquired jurisdiction over Primrose and its properties. Piercing applies to the determination of liability not of jurisdiction. It is not available to confer jurisdiction over a party not impleaded in a case. (Manuela Azucena Mayor v. Tiu, G.R. No. 203770, 23 November 2016)⁴⁰