Photo from Unsplash | Self Taught
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 a lawyer or you may directly contact and consult Alburo Alburo and Associates Law Offices to address your specific legal concerns, if there is 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.
AT A GLANCE:
A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes, and properties expressly authorized by law or incidental to its existence. (Section 2, Revised Corporation Code)
A successor corporation is a corporation that has the same officers, same office, and continues the same business of another corporation that has been dissolved or has ceased business operations.
The general rule is that a corporation has a personality separate and distinct from those of its stockholders and other corporations to which it may be connected. This is a fiction created by law for convenience and to prevent injustice.
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.
A successor corporation is a corporation that has the same officers, same office, and continues the same business of another corporation that has been dissolved or has ceased business operations.
The law says:
“A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes, and properties expressly authorized by law or incidental to its existence.” (Section 2, Revised Corporation Code)
The general rule is that a corporation has a personality separate and distinct from those of its stockholders and other corporations to which it may be connected. This is a fiction created by law for convenience and to prevent injustice.
Under the doctrine of “piercing the veil of corporate fiction”, the court looks at the corporation as a mere collection of individuals or an aggregation of persons undertaking business as a group, disregarding the separate juridical personality of the corporation unifying the group. Another formulation of this doctrine is that when 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 parties, disregard the legal fiction that two corporations are distinct entities and treat them as identical or as one and the same. (Pantranco Employees Association v. National Labor Relations Commission, G.R. No. 170689, March 17, 2009)
Where a corporation feigns dissolution or cessation of business operations but actually continues to exist under another name, the corporation in existence is said to be the successor of the former corporation. The instance normally finds application in labor cases where the former corporation seeks the protective shield of the corporate fiction whose veil, as in this instance, should be pierced. The piercing of the corporate veil is justified given that the act of dissolution or cessation of business operations is done deliberately and maliciously to evade its financial obligations to its employees.
In the case of Eduardo Claparols v. Court of Industrial Relations (G.R. No. L-30822, July 31, 1975), the Supreme Court pronounced some signs which reveal that the successor corporation is merely the same as the previous corporation. These signs include:
- The consecutive date of cessation and commencement of subsequent entity;
- The ownership and control by former stockholders;
- The turnover of all or majority of assets.
“Respondent Court’s findings that indeed the Claparols Steel and Nail Plant, which ceased operation of June 30, 1957, was succeeded by the Claparols Steel Corporation effective the next day, July 1, 1957 up to December 7, 1962, when the latter finally ceased to operate, were not disputed by petitioners.
It is very clear that the latter corporation was a continuation and successor of the first entity, and its emergence was skillfully timed to avoid the financial liability that already attached to its predecessor, the Claparols Steel and Nail Plant. Both predecessors and successor were owned and controlled by the petitioner Eduardo Claparols and there was no break in the succession and continuity of the same business.
This “avoiding-the-liability” scheme is very patent, considering that 90% of the subscribed shares of stocks of the Claparols Steel Corporation (the second corporation) was owned by respondent (herein petitioner) Claparols himself, and all the assets of the dissolved Claparols Steel and Nail Plant were turned over to the emerging Claparols Steel Corporation.” (Eduardo Claparols v. Court of Industrial Relations, G.R. No. L-30822, July 31, 1975)
The case of Eric Godfrey Stanley Livesey v. Bionswanger Philippines, Inc. (G.R. No. 177493, March 19, 2014), likewise enumerates the instances which show that the new corporation is a successor and an alter ego of the former corporation. The Supreme Court ruled:
“Livesey’s evidence, whose existence the respondents never denied, converged to show this continuity of business operations from CBB to Binswanger.
It was not just coincidence that Binswanger is engaged in the same line of business CBB embarked on:
(1) it even holds office in the very same building and on the very same floor where CBB once stood;
(2) CBB’s key officers, Elliot, no less, and Catral moved over to Binswanger, performing the tasks they were doing at CBB;
(3) notwithstanding CBB’s closure, Binswanger’s Web Editor (Young), in an e-mail correspondence, supplied the information that Binswanger is “now known” as either CBB (Chesterton Blumenauer Binswanger or as Chesterton Petty, Ltd., in the Philippines;
(4) the use of Binswanger of CBB’s paraphernalia (receiving stamp) in connection with a labor case where Binswanger was summoned by the authorities, although Elliot claimed that he bought the item with his own money; and
(5) Binswanger’s takeover of CBB’s project with the PNB.” (Eric Godfrey Stanley Livesey v. Bionswanger Philippines, Inc., G.R. No. 177493, March 19, 2014)
It must be noted, however, that the mere presence of control and full ownership of a parent over a subsidiary is not enough to pierce the veil of corporate fiction. In a long line of cases, the Supreme Court pronounced that 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. (Maricalum Mining Corporation v. Ely Florentino, et al, G.R. No. 221813, July 23, 2018)
Read also: Can an ordinary corporation be converted into a one-person corporation?
Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries regarding taxation and taxpayer’s remedies, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/0917-5772207.
All rights reserved.