Published — November 17, 2017
The following post does not create a lawyer-client relationship between Alburo Alburo and Associates Law Offices (or any of its lawyers) and the reader. It is still best for you to engage the services of your own lawyer to address your legal concerns, if any.
Also, the matters contained in the following were written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future developments on the subject matter under discussion.
Related Topic: Corporation As Business Structure: Most Preferred for Your Growing Enterprise
Business owners who have created their own corporations are enjoying the benefit of being a separate person from their respective businesses. Basic is the rule in corporation law that a corporation is an artificial person, which is vested with a legal personality separate and distinct from those acting for and in its behalf and, in general, from the people comprising it. Following this principle, obligations incurred by the corporation, acting through its directors, officers and employees, are its sole liabilities [G.R. No. 174938].
Because a corporation’s existence is only by fiction of law, it can only exercise its rights and powers through its directors, officers, or agents, who are all natural persons (like you and me, as well as the John Does and Jane Does of everyday life). A corporation cannot sue or enter into contracts without those natural persons representing it. A consequence of a corporation’s separate personality is that consent by a corporation through its representatives is not consent of the representative, personally [Ibid].
Concept of separate personality
The corporation’s obligations, incurred through official acts of its representatives, are its own. Therefore, a stockholder, director, or representative does not become a party to a contract just because a corporation executed a contract through that stockholder, director or representative. Hence, a corporation’s representatives are generally not bound by the terms of the contract executed by the corporation. They are not personally liable for corporate obligations and liabilities [Ibid].
When directors/officers personally liable for corporate acts
A director, officer or employee of a corporation is generally not held personally liable for obligations incurred by the corporation. Under the law, however, there are certain instances when such officers or directors are generally liable for damages suffered by the corporation, its stockholders and other persons.
- When the officer or director willfully and knowingly votes for or assents to patently unlawful acts of the corporation;
- When the officer or director is guilty of gross negligence or bad faith in directing the affairs of the corporation;
- When the officer or director acquires any personal or pecuniary interest in conflict with his duty as such director or director [Sec. 31, Corporation Code];
- He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto;
- He agrees to hold himself personally and solidarily liable with the corporation; or
- He is made, by a specific provision of law, to personally answer for his corporate action [See: G.R. No. 111008].
Piercing the veil of corporate fiction
While a corporation may exist for any lawful purpose, the law will regard it as a mere collection of individuals or, in case of two corporations, merge them into one, when the separate corporate personality is used as a mere cloak for fraud or illegality. This is the doctrine of piercing the veil of corporate fiction. The doctrine applies only when such corporate personality is used to defeat public convenience, justify wrong, protect fraud, or defend crime [Ibid; See also: G.R. No. 170689].
When corporate veil is pierced, the separate legal personality of a corporation may be disregarded. 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 [G.R. No. 174938].
The concept of piercing the corporate veil is a judicially created remedy for situations where corporations have not been operated as separate entities as intended by law, and therefore, are not entitled to be treated as such. The determination of whether the doctrine applies centers on whether there is an element of injustice, fundamental unfairness, or inequity [See: Kaycee Land and Livestock vs. Flahive, 46 P.3d 323 (2002) 2002 WY 73].
Despite all that, the piercing of the corporate veil should only be done with caution. Any court who was asked to disregard the separate personality of a corporation should be mindful of the facts and circumstances before applying the doctrine. It must be certain that the corporate fiction was misused to such an extent that injustice, fraud, or crime was committed against another, in disregard of its rights. The wrongdoing must be clearly and convincingly established. It cannot be presumed. Otherwise, an injustice that was never intended may result from an erroneous application. [G.R. No. 142936].
Before, there had been instances where our courts have pierced the corporate veil, such as to ward off a judgment credit, to avoid inclusion of corporate assets as part of the estate of the decedent, to escape liability arising from a debt, or to perpetuate fraud and/or confuse legitimate issues either to promote or to shield unfair objectives or to cover up an otherwise blatant violation of legal prohibitions. Only in these and similar instances may the veil be pierced and disregarded [See: G.R. No. 142936].
Given the foregoing, it is clear that the separate legal personality of corporations work to the advantage of business owners. It is, however, the latter’s obligation to ensure that the corporate personality is used only for legitimate purposes only. Considering that the State has all the power to disregard and pierce the corporate mask in proper situations, every business owner must realize that it would be useless to use their corporation’s separate personality to perpetrate illegal acts in furtherance of illegal purposes.
Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries regarding corporations and corporate governance, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/0917-5772207.
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