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- A legal entity is distinct from the persons composing it.
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The corporate veil cannot be used as a shield to perpetuate fraud, defeat public convenience, justify wrong or defend crime.
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Ownership of a substantial portion of the outstanding capital in a corporation is not a justification to apply the doctrine of piercing the corporate veil.
The Doctrine of Piercing the Corporate Veil states that a corporation is a legal entity distinct from the persons composing it. Piercing the corporate veil is warranted when “the separate personality of a corporation is used as a means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, or to confuse legitimate issues.”
It is also warranted in alter ego cases “where a corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.”
When corporate veil is pierced, the corporation and persons who are normally treated as distinct from the corporation are treated as one person, such that when the corporation is adjudged liable, these persons, too, become liable as if they were the corporation. (Lanuza v. BF Corporation, G.R. No. 174938, 1 October 2014)
The law says:
Among the persons who may be treated as the corporation itself under certain circumstances are its directors and officers.
Section 30 of the Revised Corporation Code provides the instances when directors, trustees, or officers may become liable for corporate acts:
Sec. 30. Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons.
A director, trustee, or officer shall not attempt to acquire, or acquire any interest adverse to the corporation in respect of any matter which has been reposed in them in confidence, and upon which, equity imposes a disability upon themselves to deal in their own behalf; otherwise, the said director, trustee, or officer shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation.
Based on the above provision, a director, trustee, or officer of a corporation may be made solidarily liable with it for all damages suffered by the corporation, its stockholders or members, and other persons in any of the following cases:
- The director or trustee willfully and knowingly voted for or assented to a patently unlawful corporate act;
- The director or trustee was guilty of gross negligence or bad faith in directing corporate affairs; and
- The director or trustee acquired personal or pecuniary interest in conflict with his or her duties as director or trustee.
Solidary liability with the corporation will also attach in the following instances:
- “When a director or officer has consented to the issuance of watered stocks or who, having knowledge thereof, did not forthwith file with the corporate secretary his written objection thereto”;
- “When a director, trustee or officer has contractually agreed or stipulated to hold himself personally and solidarily liable with the corporation”; and
- “When a director, trustee or officer is made, by specific provision of law, personally liable for his corporate action.” (Heirs of Fe Tan Uy v. International Exchange Bank, G.R. No. 166282, 13 February 2013)
Jurisprudence says:
When there are allegations of bad faith or malice against corporate directors or representatives, it becomes the duty of courts or tribunals to determine if these persons and the corporation should be treated as one. Without a trial, courts and tribunals have no basis for determining whether the veil of corporate fiction should be pierced. Courts or tribunals do not have such prior knowledge.
Thus, the courts or tribunals must first determine whether circumstances exist to warrant the courts or tribunals to disregard the distinction between the corporation and the persons representing it. The determination of these circumstances must be made by one tribunal or court in a proceeding participated in by all parties involved, including current representatives of the corporation, and those persons whose personalities are impliedly the same as the corporation. This is because when the court or tribunal finds that circumstances exist warranting the piercing of the corporate veil, the corporate representatives are treated as the corporation itself and should be held liable for corporate acts. The corporation’s distinct personality is disregarded, and the corporation is seen as a mere aggregation of persons undertaking a business under the collective name of the corporation. (Lanuza v. BF Corporation, G.R. No. 174938, 1 October 2014)
The separate personality was disregarded in the following cases:
- The corporate personality is used to evade obligations to employees or used as a pretext to dismiss employees;
- The corporate personality is dominated by officers, stockholders or other persons or entity to the extent that the corporation is a mere alter ego, adjunct, or business conduit;
- The corporate personality is used to evade lawful obligations or a money judgment; or
- The corporate personality is used to perpetuate deception or otherwise circumvent the law. (Land Bank of the Philippines v. CA, G.R. No. 127181, 4 September 2001)
Does ownership of substantial portion of the outstanding capital in a corporation sufficiently justify the application of the doctrine of piercing the corporate veil?
No, mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of the corporation does not justify the application of the doctrine. If the subsidiary is used to perform legitimate functions, a subsidiary’s separate existence shall be respected and the liability of the parent company as well as the subsidiary will be confined to those arising from their respective business. (MR Holdings Ltd. V. Sheriff Carlos Bajar, G.R. No. 138104, 11 April 2002)
Can the doctrine of piercing the corporate veil be applied against a natural person?
Yes, the piercing of the corporate veil may apply to corporations as well as natural persons involved with corporations. The Supreme Court has held in a long line of cases that the “corporate mask may be lifted and the corporate veil may be pierced when a corporation is just but the alter ego of a person or of another corporation.” (International Academy of Management and Economics v. Litton and Company, Inc., G.R. No. 191525, 13 December 2017)
Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/0917-5772207.
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