IV. SEPARATE JURIDICAL PERSONALITY AND DOCTRINE OF PIERCING VEIL OF CORPORATE FICTION
A. Main Doctrine: A Corporation Has A Personality Separate and Distinct from its Stockholders or Members.
Rudimentary is the rule that a corporation is invested by law with a personality distinct and separate from its stockholders or members—by legal fiction and convenience it is shielded by a protective mantel and imbued by law with a character alien to the persons comprising it. xLim v. Court of Appeals, 323 SCRA 102 (2000).
1. Sources: Sec. 2; Article 44, Civil Code
2. Importance of Protecting Main Doctrine:
The “separate juridical personality” includes: right of succession; limited liability; centralized management; and generally free transferability of shares of stock. Therefore, an undermining of the separate juridical personality of the corporation, such as the application of the piercing doctrine, necessarily dilutes any or all of those attributes.
One of the advantages of a corporate form of business organization is the limitation of an investor’s liability to the amount of the investment. This feature flows from the legal theory that a corporate entity is separate and distinct from its stockholders. However, the statutorily granted privilege of a corporate veil may be used only for legitimate purposes. On equitable considerations, the veil can be disregarded when it is utilized as a shield to commit fraud, illegality or inequity; defeat public convenience; confuse legitimate issues; or serve as a mere alter ego or business conduit of a person or an instrumentality, agency or adjunct of another corporation. xSan Juan Structural and Steel Fabricators, Inc. v. Court of Appeals, 296 SCRA 631, 645 (1998).
(a) Majority Ownership of or Dealings in Shareholdings: Ownership of a majority of capital stock and the fact that majority of directors of a corporation are the directors of another corporation creates no employer-employee relationship with the latter’s employees. DBP v. NLRC, 186 SCRA 841 (1990); Francisco, et al. v. Mejia, G. R. No. 141617, 14 August 2001.
The mere fact that a stockholder sells his shares of stock in the corporation during the pendency of a collection case against the corporation, does not make such stockholder personally liable for the corporate debt, since the disposing stockholder has no personal obligation to the creditor, and it is the inherent right of the stockholder to dispose of his shares of stock anytime he so desires. xRemo, Jr. v. Intermediate Appellate Court, 172 SCRA 405, 413-414 (1989).
Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality. xSunio v. NLRC , 127 SCRA 390 (1984); xAsionics Philippines, Inc. v. National Labor Relations Commission, 290 SCRA 164 (1998); xLim v. Court of Appeals, 323 SCRA 102 (2000); xManila Hotel Corp. v. NLRC, 343 SCRA 1 (2000); xFrancisco v. Mejia, G. R. No. 141617, 14 August 2001.
Mere substantial identity of the incorporators of the two corporations does not necessarily imply fraud, nor warrant the piercing of the veil of corporate fiction. In the absence of clear and convincing evidence to show that the corporate personalities were used to perpetuate fraud, or circumvent the law, the corporations are to be rightly treated as distinct and separate from each other. xLaguio v. NLRC, 262 SCRA 715 (1996).
(b) Dealings Between the Corporation and Stockholders: The transfer of the corporate assets to the stockholder is not in the nature of a partition but is a conveyance from one party to another. Stockholders of F. Guanzon and Sons, Inc. v. Register of Deeds of Manila, 6 SCRA 373 (1962).
As a general rule, a corporation may not be made to answer for acts or liabilities of its stockholders or those of the legal entities which it may be connected and vice-versa. xARB Constructions Co., Inc. v. Court of Appeals, 332 SCRA 427 (200)
(c) On Issues of Privileges Enjoyed: The tax privileges enjoyed by a corporation do not extend to its stockholders. “A corporation has a personality distinct from that of its stockholders, enabling the taxing power to reach the latter when they receive dividends from the corporation. It must be considered as settled in this jurisdiction that dividends of a domestic corporation which are paid and delivered in cash to foreign corporations as stockholders are subject to the payment of the income tax, the exemption clause to the charter [of the domestic corporation] notwithstanding.” xManila Gas Corp. v. Collector of Internal Revenue, 62 Phil. 895, 898 (1936).
(d) Being a Corporate Officer: Being an officer or stockholder of a corporation does not by itself make one’s property also of the corporation, and vice-versa, for they are separate entities, and that shareholders are in no legal sense the owners of corporate property which is owned by the corporation as a distinct legal person. Good Earth Emporium, Inc. v. CA, 194 SCRA 544 (1991)
The mere fact that one is president of the corporation does not render the property he owns or possesses the property of the corporation, since that president, as an individual, and the corporation are separate entities. xCruz v. Dalisay, 152 SCRA 487 (1987).
(e) Properites, Obligations and Debts: Likewise, a corporation has no legal standing to file a suit for recovery of certain parcels of land owned by its members in their individual capacity, even when the corporation is organized for the benefit of the members. Sulo ng Bayan v. Araneta, Inc., 72 SCRA 347 ).
The corporate debt or credit is not the debt or credit of the stockholder nor is the stockholder’s debt or credit that of the corporation. xTraders Royal Bank v. CA, 177 SCRA 789 (1989).
Stockholders have no personality to intervene in a collection case covering the loans of the corporation on the ground that the interest of shareholders in corporate property is purely inchoate. xSaw v. CA, 195 SCRA 740 )
The interests of payees in promissory notes cannot be off-set against the obligations between the corporations to which they are stockholders absent any allegation, much less, even a scintilla of substantiation, that the parties interest in the corporation are so considerable as to merit a declaration of unity of their civil personalities. xIndustrial and Development Corp. v. Court of Appeals, 272 SCRA 333 (1997).
It is a basic postulate that a corporation has a personality separate and distinct from its stockholders. Therefore, even when the foreclosure on the assets of the corporation was wrongful and done in bad faith, the stockholders of the corporation have no standing to recover for themselves moral damages. Otherwise, it would amount to the appropriation by, and the distribution to, such stockholders of part of the corporation’s assets before the dissolution of the corporation and the liquidation of its debts and liabilities. xAsset Privatization Trust v. Court of Appeals, 300 SCRA 579, 617 (1998).
Where real properties included in the inventory of the estate of a decedent are in the possession of and are registered in the name of the corporations, in the absence of any cogency to shred the veil of corporate fiction, the presumption of conclusiveness of said titles in favor of said corporations should stand undisturbed. xLim v. Court of Appeals, 323 SCRA 102 (2000).
(f) Third-Parties: The fact that respondents are not stockholders of the disputed corporations does not make them non-parties to the case, since the jurisdiction of a court or tribunal over the subject matter is determined by the allegations in the Complaint. In this case, it is alleged that the aforementioned corporations are mere alter egos of the directors-petitioners, and that the former acquired the properties sought to be reconveyed to FGSRC in violation of directors-petitioners’ fiduciary duty to FGSRC. The notion of corporate entity will be pierced or disregarded and the individuals composing it will be treated as identical if, as alleged in the present case, the corporate entity is being used as a cloak or cover for fraud or illegality; as a justification for a wrong; or as an alter ego, an adjunct, or a business conduit for the sole benefit of the stockholders. Gochan v. Young, G.R. No. 131889, 21 March 2001.
B. Piercing the Veil of Corporate Fiction:
1. Source of Incantation: xUnited States v. Milwaukee Refrigerator Transit Co., 142 Fed. 247 ). xSee also Francisco v. Mejia, G. R. No. 141617, 14 August 2001.
2. Nature of the Piercing Doctrine (Traders Royal Bank v. Court of Appeals, 269 SCRA 15 )
Piercing the veil of corporate entity requires the court to see through the protective shroud which exempts its stockholders from liabilities that ordinarily, they could be subject to, or distinguishes one corporation from a seemingly separate one, were it not for the existing corporate fiction. xLim v. Court of Appeals, 323 SCRA 102 (2000).
This Court has pierced the veil of corporate fiction in numerous cases where it was used, among others, to avoid a judgment credit, to avoid inclusion of corporate assets as part of the estate of a decedent, to avoid liability arising from debt; when made use of as a shield to perpetrate fraud and/or confuse legitimate issues, or to promote unfair objectives or otherwise to shield them. xReynoso, IV v. Court of Appeals, G.R. No. 116124-25, 22 November 2000; also xRamoso v. Court of Appeals, G.R. No. 117416, 8 December 2000.
3. When Piercing Doctrine Not Applicable:
(a) Piercing the veil of corporate fiction is remedy of last resort and is not available when other remedies are still available. Umali v. CA, 189 SCRA 529 (1990).
(b) Piercing is not allowed unless the remedy sought is to make the officer or another corporation pecuniarily liable for corporate debts. Umali v. CA, 189 SCRA 529 (1990);Indophil Textile Mill Workers Union-PTGWO v. Calica, 205 SCRA 697 (1992).
(c) Piercing is not available when the personal obligations of an individual are sought to be enforced against the corporation. xRobledo v. NLRC, 238 SCRA 52 (1994)
“The rationale behind piercing a corporation’s identity in a given case is to remove the barrier between the corporation from the persons comprising it to thwart the fraudulent and illegal schemes of those who use the corporate personality as a shield for undertaking certain proscribed activities. However, in the case at bar, instead of holding certain individuals or person responsible for an alleged corporate act, the situation has been reversed. It is the petitioner as a corporation which is being ordered to answer for the personal liability of certain individual directors, officers and incorporators concerned. Hence, it appears to us that the doctrine has been turned upside down because of its erroneous invocation.” Francisco Motors Corp. v Court of Appeals, 309 SCRA 72, 83 (1999).
(d) To disregard the separate juridical personality of a corporation, the wrongdoing must be clearly and convincingly established. It cannot be presumed. This is elementary. The organization of the corporation at the time when the relationship between the landowner and the developer were still cordial cannot be used as a basis to hold the corporation liable later on for the obligations of the landowner to the developer under the mere allegation that the corporation is being used to evade the performance of obligation by one of its major stockholders. xLuxuria Homes, Inc. v. Court of Appeals,302 SCRA 315 (1999); xDevelopment Bank of the Philippines vs. Court of Appeals,G.R. No. 126200, 16 August 2001.
(e) Not Applicable to Theorizing: 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, 211 SCRA 470 ).
The piercing doctrine cannot be availed of in order to dislodge from the jurisdiction of the SEC a the petition for suspension of payments filed under Section 5(e) of Pres. Decree No. 902-A, on the ground that the petitioning individuals should be treated as the real petitioners to the exclusion of the petitioning corporate debtor. “The doctrine of piercing the veil of corporate fiction heavily relied upon by the petitioner is entirely misplaced, as said doctrine only applies when such corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime.” xUnion Bank of the Philippines v. Court of Appeals, 290 SCRA 198 (1998).
Changing of the petitioners’s subsidiary liabilities by converting them to guarantors of bad debts cannot be done by piercing the veil of corporate identity. xRamoso v. Court of Appeals, G.R. No. 117416, 8 December 2000.
(f) Piercing doctrine is meant to prevent fraud, and cannot be employed to perpetrate fraud or a wrong. Gregorio Araneta, Inc. v. Tuason de Paterno and Vidal, 91 Phil. 786 (1952).
The theory of corporate entity was not meant to promote unfair objectives or otherwise, nor to shield them. xVillanueva v. Adre, 172 SCRA 876 (1989).
(g) Piercing is a power belonging to the court and cannot be assumed improvidently by a sheriff. Cruz v. Dalisay, 152 SCRA 482 (1987).
3. Consequences and Types of Piercing Cases: Umali v. CA, 189 SCRA 529 )
(a) The application of the doctrine to a particular case does not deny the corporation of legal personality for any and all purposes, but only for the particular transaction or instance for which the doctrine was applied. Koppel (Phil.) Inc. v. Yatco, 77 Phil. 496 (1946); xTantoco v. Kaisahan ng Mga Manggagawa sa La Campana, 106 Phil. 198 (1959).
(b) Classification of the Piercing Cases:
(i) When the corporate entity is used to commit fraud or to do a wrong (“fraud cases”);
(ii) When the corporate entity is merely a farce since the corporation is merely the alter ego, business conduit or instrumentality of a person or another entity (“alter ego cases”); and
(iii) When the piercing the corporate fiction is necessary to achieve justice or equity (“equity cases”).
The three cases may appear together in one application. R.F. Sugay & Co., v. Reyes, 12 SCRA 700 (1964).
4. Fraud Cases:
(a) Acts by the Controlling Shareholder: Where a stockholder, who has absolute control over the business and affairs of the corporation, entered into a contract with another corporation through fraud and false representations, such stockholder shall be liable jointly and severally with his co-defendant corporation even when the contract sued upon was entered into on behalf of the corporation. Namarco v. Associated Finance Co., 19 SCRA 962 (1967).
The tests in determining whether the corporate veil may be pierced are: (1) the defendant must have control or complete domination of the other corporation’s finances, policy and business practices with regard to the transaction attached; (2) control must be used by the defendant to commit fraud or wrong; and (3) the aforesaid control or breach of duty must be the proximate cause of the injury or loss complained of. Manila Hotel Corporation v. NLRC, 343 SCRA 1 (2000); xAlso Lim v. Court of Appeals, 323 SCRA 102 (2000).
(b) One cannot evade civil liability by incorporating properties or the business. Palacio v. Fely Transportation Co., 5 SCRA 1011 (1962).
(c) The veil of corporation fiction may be pierced when used to avoid a contractual commitment against non-competition. Villa Rey Transit, Inc. v. Ferrer, 25 SCRA 845 (1968).
(d) The Supreme Court found the following facts to be legal basis to pierce: One company was merely an adjunct of the other, by virtue of a contract for security services, the former provided with security guards to safeguard the latter’s premises; both companies have the same owners and business address; the purported sale of the shares of the former stockholders to a new set of stockholders who changed the name of the corporation appears to be part of a scheme to terminate the services of the security guards, and bust their newly-organized union which was then beginning to become active in demanding the company’s compliance with Labor Standards laws. De Leon v. NLRC, G.R. No. 112661, 30 May 2001.
(e) Parent-Subsidiary Relations; Affiliates (Reynoso, IV v. Court of Appeals, G.R. No. 116124-25, 22 November 2000; Commissioner of Internal Revenue v. Norton and Harrison, 11 SCRA 704, ; Tomas Lao Construction v. NLRC, 278 SCRA 716 ).
- Why is there inordinate showing of alter-ego elements?
Guiding Principles in Fraud Cases:
(i) 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
(ii) The main action should seek for the enforcement of pecuniary claims pertaining to the corporation against corporate officers or stockholders.
5. Alter-Ego Cases:
(a) 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. Willets and Patterson, Ltd., 44 Phil. 634 (1923).
(b) 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. xTan Boon Bee & Co. v. Jarencio, 163 SCRA 205 (1988).
The corporation veil cannot be used to shield an otherwise blatant violation of the prohibition against forum-shopping. Shareholders, whether suing as the majority in direct actions or as the minority in a derivative suit, cannot be allowed to trifle with court processes, particularly where, as in this case, the corporation itself has not been remiss in vigorously prosecuting or defending corporate causes and in using and applying remedies available to it. xFirst Philippine International Bank v. Court of Appeals, 252 SCRA 259 (1996).
(c) Employment of same workers; single place of business, etc. La Campana Coffee Factory v. Kaisahan ng Manggagawa, 93 Phil. 160 (1953).
The doctrine that a corporation is a legal entity or a person in law distinct from the persons composing it is merely a legal fiction for purposes of convenience and to subserve the ends of justice. This fiction cannot be extended to a point beyond its reason and policy. Where, as in this case, the corporation fiction was used as a means to perpetrate a social injustice or as a vehicle to evade obligations or confuse the legitimate issues, it would be discarded and the two (2) corporations would be merged as one, the first being merely considered as the instrumentality, agency conduit or adjunct of the other. In this case, because of the actions of management of the two corporations, there was much confusion as to the proper employment of the claimant. xAzcor Manufacturing, Inc. v. NLRC, 303 SCRA 26 (1999).
(d) Use of nominees. xMarvel Building v. David, 9 Phil. 376 (1951).
(e) Avoidance of tax. Yutivo Sons Hardware v. Court of Tax Appeals 1 SCRA 160 (1961); xLiddell & Co. v. Collector of Internal Revenue, 2 SCRA 632 (1961).
(f) Mixing of bank deposit accounts. xRamirez Telephone Corp. v. Bank of America, 29 SCRA 191 (1969).
(g) 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. xSibagat Timber Corp. v. Garcia, 216 SCRA 70 (1992).
(h) Thinly-capitalized corporations. McConnel v. Court of Appeals, 1 SCRA 722 (1961).
(i) Parent-subsidiary relationship. Koppel (Phil.), Inc. v. Yatco, 77 Phil. 97 (1946);xPhilippine Veterans Investment Development Corporation v. CA, 181 SCRA 669 (1990).
(j) Affiliated companies. xGuatson International Travel and Tours, Inc. v. NLRC, 230 SCRA 815 (1990).
(k) Summary of Probative Factors: Philippine National Bank vs. Ritratto Group, Inc., et al., G.R. No. 142616, 31 July 2001; xConcept Builders, Inc. v. NLRC, 257 SCRA 149 (1996).
Whether the existence 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. xRamoso v. Court of Appeals, G.R. No. 117416, 8 December 2000.
(l) Guiding Principles in Alter-Ego Cases:
(i) The doctrine applies in this case even in the absence of evil intent; it applies because of the direct violation of a central corporate law principle of separating ownership from management.
(ii) The doctrine in such cased 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.
(iii) 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.
6. Equity Cases:
(a) When used to confuse legitimate issues. Telephone Engineering and Service Co., Inc. V. WCC, 104 SCRA 354 (1981).
(b) When used to raise technicalities. xEmilio Cano Ent. v. CIR, 13 SCRA 291 (1965).
7. Piercing Doctrine and Due Process Clause
(a) The need to bring a new case against the officer. McConnel v. Court of Appeals, 1 SCRA 723 (1961).
(b) When corporate officers are sued in their official capacity when the corporation was not made a party, the corporation is not denied due process. Emilio Cano Enterprises v. Court of Industrial Relations, 13 SCRA 291 (1965).
(c) Provided that evidential basis has been adduced during trial to apply the piercing doctrine. Jacinto v. Court of Appeals, 198 SCRA 211 (1991); xArcilla v. Court of Appeals, 215 SCRA 120 (1992).
V. CLASSIFICATIONS OF CORPORATIONS
1. In Relation to the State:
(a) Public corporations (Sec. 3, Act No. 1459)
§ Organized for the government of the portion of the state (e.g., barangay, municipality, city and province)
§ Majority shares by the Government does not make an entity a public corporation.xNational Coal Co., v. Collector of Internal Revenue, 46 Phil. 583 (1924).
(b) Quasi-public corporations xMarilao Water Consumers Associates v. IAC, 201 SCRA 437 (1991)
Although Boy Scouts of the Philippines does not receive any monetary or financial subsidy from the Government, and that its funds and assets are not considered government in nature and not subject to audit by the COA, the fact that it received a special charter from the government, that its governing board are appointed by the Government, and that its purpose are of public character, for they pertain to the educational, civic and social development of the youth which constitute a very substantial and important part of the nation, it is not a public corporation in the same sense that municipal corporation or local governments are public corporation since its does not govern a portion of the state, but it also does not have proprietary functions in the same sense that the functions or activities of government-owned or controlled corporations such as the National Development Company or the National Steel Corporation, is may still be considered as such, or under the 1987 Administrative Code as an instrumentality of the Government. Therefore, the employees are subject to the Civil Service Law. xBoy Scouts of the Philippines v. NLRC, 196 SCRA 176 (1991).
(c) Private Corporation (Sec. 3, Act 1459)
A government-owned or -controlled corporation when organized under the Corporation Code is still a private corporation. But being a government-owned or -controlled corporation makes it liable for laws and provisions applicable to the Government or its entities and subject to the control of the Government. xCervantes v. Auditor General, 91 Phil. 359 (1952).
A private corporation is created by operation of law under the Corporation while a government corporation is normally created by special law referred to often as a charter. xBliss Dev. Corp. Employees Union v. Calleja, 237 SCRA 271 (1994).
The doctrine that employees of government-owned and -controlled corporations, whether created by special law or formed as subsidiaries under the general corporation law are governed by the Civil Service Law and not by the Labor Code, has been supplanted by the 1987 Constitution. The present doctrine in determining whether a government-owned or -controlled corporation is subject to the Civil Service Law is the manner of its creation, such that government corporations created by special charter are subject to the Civil Service Law, while those incorporated under the general corporation law are governed by the Labor Code. xPNOC-Energy Development Corp. v. NLRC, 201 SCRA 487 (1991); xDavao City Water District v. Civil Service Commission, 201 SCRA 593 (1991).
The test to determine whether a corporation is government owned or controlled, or private in nature is simple. Is it created by its own charter for the exercise of a public function, or by incorporation under the general corporation law? Those with special charters are government corporations subject to its provisions, and its employees are under the jurisdiction of the Civil Service Commission, and are compulsory members of the Government Service Insurance System. xCamparedondo v. NLRC, 312 SCRA 47 (1999).
Section 31 of the Corporation Code (Liability of Directors and Officers) is applicable to corporations which have been organized by special charters since Sec. 4 of the Corporation Code renders the provisions of thereof applicable in a supplementary manner to all corporations, including those with special or individual charters, such as cooperatives organized under Pres. Decree No. 269, so long as those provisions are not inconsistent with such charters. xBenguet Electric Cooperative, Inc. v. NLRC, 209 SCRA 55 (1992).
2. As to Place of Incorporation:
(a) Domestic Corporation
(b) Foreign Corporation (Sec. 123)
3. As to Purpose of Incorporation:
(a) Municipal or Public corporation
(b) Religious corporation (Secs. 109 and 116)
(c) Educational corporations (Secs. 106, 107 and 108; Sec. 25, B.P. Blg. 232)
(d) Charitable, Scientific or Vocational corporations
(e) Business corporation
4. As to Number of Members:
(a) Aggregate Corporation
(b) Corporation Sole (Secs. 110 to 115; xRoman Catholic Apostolic Administrator of Davao, Inc. v. LRC and the Register of Deeds of Davao City, 102 Phil. 596 (1957).
xDirector of Land v. IAC, 146 SCRA 509 (1986), which held that a corporation sole has no nationality, overturned the previous doctrine (xRepublic v. Villanueva, 114 SCRA 875  and Republic v. Iglesia Ni Cristo, 127 SCRA 687 ) that a corporation sole is disqualified to acquire or hold alienable lands of the public domain, because of the constitutional prohibition qualifying only individuals to acquire land of the public domain and the provision under the Public Land Act which applied only to Filipino citizens or natural persons. xRepublic v. Iglesia ni Cristo, 127 SCRA 687 (1984); xRepublic v. IAC, 168 SCRA 165 (1988).
5. As to Legal Status:
(a) De Jure Corporation
(b) De Facto Corporation (Sec. 20)
(c) Corporation by Estoppel (Sec. 21)
6. As to Existence of Shares (Secs. 3 and 5)
(a) Stock Corporation
(b) Non-Stock Corporation