Piercing the veil of separate corporate personality
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. (Sec. 2, Republic Act No. 11232, Revised Corporation Code)
Not being a natural person, it can only act through its board of directors or board of trustees which exercises the corporate powers, conducts all business, and controls all properties of the corporation (Sec. 22, RA 11232)
The capital stock of stock corporations are divided into shares which are represented by share certificates issued by the corporation, signed by its authorized officers and held by its stockholders. Non-stock corporations, on the other hand, have members, which are the equivalent of stockholders in stock corporations. (Sec. 62, RA 11232)
Since the passage of the Revised Corporation Code, there is now a One Person Corporation which is an entity with a single stockholder, who is also the corporation’s sole director and president. (Sec. 16 of RA 11232)
Separate juridical personality
One of the advantages of choosing a corporation as a vehicle for conducting business, as opposed to sole proprietorships and joint ventures, is that it is by law treated as having a separate and distinct juridical personality from its stockholders or members.
The separate and distinct juridical personality of a corporation from its stockholders means that actions against corporations by any claimant are limited to the corporation and its assets and do not extend or involve the personal property of the corporation’s stockholder(s) and, vice-versa.
A corporation’s assets and properties are its own and, it is liable for its own acts and obligations. This is the rule even if a single stockholder or a single corporation wholly owns all the capital stock of the corporation. (Dissenting opinion of Justice Leonen in G.R. No. 221813, July 23, 2018)
Properties registered in the name of the corporation are owned by it as an entity separate and distinct from its members. The holder of the share of stock is not the owner of any part of the capital of the corporation nor is it entitled to the possession of any definite portion of the corporation’s property or assets. Moreover, the stockholder is not a co-owner or tenant in common of corporate property. (Stockholders of F. Guanzon and Sons Inc. vs. Register of Deeds of Manila, G.R. No. L-18216, October 30, 1962)
When a corporation is liquidated and assets distributed to stockholders, there must still be a deed or document of transfer or conveyance of title of assets of the corporation to the individual stockholders and registration in the name of the new owner.
Alter ego & piercing the veil of corporate personality
The courts have disregarded the separate and distinct personality of corporations from that of its stockholder(s) on certain instances. This means that the stockholders and their personal property will be held liable for claims and awards made against the corporation.
In such a case, the corporation is not seen as one entity but, instead, its acts, assets, and liabilities become the direct responsibility of the individuals owning, controlling, and conducting its business, i.e. the stockholder(s).
Disregarding the separate and distinct personality of corporations is also known as “piercing” the veil of corporate personality.
When the separate personality is being abused or used for wrongful purposes such as when used to defeat public convenience, justify wrong, shield fraud or commit an illegality, fraud, inequity or crime against third persons, the separate personality of corporations may be disregarded or “pierced” by the courts. (Dissenting opinion of Justice Leonen in G.R. No. 221813, July 23, 2018)
The corporate veil has also been pierced when the corporation is found to be just an alter ego of a person or of another corporation.
The doctrine of piercing the veil of corporate personality applies in three instances:
a. When the corporation’s separate personality is being used to defeat public convenience, such as in evading existing obligations;
b. In fraud cases, when it is used to justify a wrong, protect fraud, or defend a crime, and
c. In alter-ego cases, where the corporation’s separate personality is not bona fide, such that it is only a conduit of another person, or its business is controlled or maintained as a mere agency or adjunct of another, that it has no mind or will of its own.
In any of the above instances when piercing of the corporate veil may be warranted, the following must be shown to be present:
a. Control – which is complete domination not only of finances but of policy and business practice in respect to the transaction attacked. This control must have been such that the corporate entity as to the transaction had at the time no separate mind, will or existence of its own separate from its stockholder or the person controlling it;
b. Fraud or wrong – the control must have been used to commit a fraud or a wrong, to perpetuate a violation of a statutory or other positive legal duty, or a dishonest and an unjust act in contravention of another party’s legal right, and
c. Injury – the said control and breach of duty must have caused the injury or unjust loss complained of.
While previously piercing of the veil of corporate personality was allowed whenever there is a similarity in the personnel, officers, resources, and place of work of two entities, the Supreme Court has since applied a more stringent standard such that mere control by one of another is insufficient as basis to pierce the veil of corporate personality. This control must have been used to commit fraud, a wrong, a violation of or means to avoid complying with a law or positive legal duty, to commit a dishonest and unjust act, and/or as a means to perpetrate a social injustice.
This is true because similarity in ownership of two entities may have some a plausible business purpose, which is not unlawful, illegal, unjust or against public policy.
Any act which involves the commission of a wrong or the evasion of a duty may be a ground to apply the doctrine of piercing the corporate veil such as when a corporation denies the existence of an employer-employee relationship to avoid paying retirement benefits or to avoid any liability for illegal dismissal. Moreover, the Supreme Court had ruled that the separate entity of a corporation may be disregarded when it is used as a means to perpetrate a social injustice. (Dissenting opinion of Justice Leonen in G.R. No. 221813, July 23, 2018)
The Supreme Court has emphasized that any application of the doctrine of piercing the corporate veil should be done with caution and when misuse of the corporate personality has been clearly and convincingly established with certainty. (Kukuan International Corp vs. Morales, et al. G.R. No. 182729, September 29, 2010)
(The author, Atty. John Philip C. Siao, is a practicing lawyer and founding Partner of Tiongco Siao Bello & Associates Law Offices, an Arbitrator of the Construction Industry Arbitration Commission of the Philippines, and teaches law at the De La Salle University Tañada-Diokno School of Law. He may be contacted at [email protected]. The views expressed in this article belong to the author alone.)
