GROUNDS FOR APPLICATION OF DOCTRINE

Q: Meralco and TEC were parties to two separate contracts for the sale of electric energy. Meralco undertook to supply TEC’s building known as DCIM with electric power. One day, Meralco conducted a surprise inspection of the electric meters installed at the DCIM building. Two meters were found to be allegedly tampered with and did not register the actual power consumption in the building. Meralco informed TEC of the results of the inspection and demanded from the latter the payment of its unregistered consumption. TEC failed to pay the same. For failure to pay Meralco disconnected the electricity supply to the DCIM building. TEC demanded from Meralco the reconnection of electrical service, claiming that it had nothing to do with the alleged tampering but the latter refused to heed the demand. The ERB immediately ordered the reconnection of the service but Meralco did not immediately complied. After this, a second and third inspection was conducted by Meralco, and the same yielded to same result as the first inspection. Thus, Meralco demanded payment with a warning of disconnection if TEC will refuse to pay. TEC filed a complaint for damages against Meralco before the RT. The RTC ruled in favor of TEC and it awarded, among others, moral damages. Is TEC entitled to moral damages

A: No. TEC is not entitled to moral damages. TEC’s claim was premised allegedly on the damage to its goodwill and reputation. As a rule, a corporation is

not entitled to moral damages because, not being a natural person, it cannot experience physical suffering or sentiments like wounded feelings, serious anxiety, mental anguish and moral shock. The only exception to this rule is when the corporation has a reputation that is debased, resulting in its humiliation in the business realm. But in such a case, it is imperative for the claimant to present proof to justify the award. It is essential to prove the existence of the factual basis of the damage and its causal relation to Meralco’s acts. In the present case, the records are bereft of any evidence that the name or reputation of TEC/TPC has been debased as a result of Meralco’s acts (Manila Electric Company v. T.E.A.M. Electronics Corporation, et al., G.R. No. 131723, December 13, 2007).

DOCTRINE OF PIERCING THE CORPORATE VEIL

Doctrine of piercing the corporate veil

The doctrine of piercing the corporate veil is the doctrine that allows the State to disregard the notion of separate personality of a corporation for justifiable reason/s.

NOTE: This is an exception to the Doctrine of Separate Corporate Entity.

Requirement to justify the piercing of the corporate veil

In order to justify the piercing of the corporate veil, allegation or proof of fraud or other public policy considerations is needed (Hacienda Luisita Incorporated vs. Presidential Agrarian Reform Council, G.R. No. 171101, November 22, 2011).

Effect of piercing the corporate veil

Courts will look at the corporation as an aggregation of persons undertaking the business as a group or two corporations will be treated as identical.

NOTE: When the veil of corporate fiction is pierced in proper cases, the corporate character is not necessarily abrogated. It continues for legitimate objectives (Reynoso IV vs. CA, G.R. Nos. 116124‐25, Nov 22, 2000).

GROUNDS FOR APPLICATION OF DOCTRINE

Grounds for the application of the doctrine of piercing the corporate veil

When the veil of corporate fiction is used as a shield:

1. To perpetuate fraud,

2. To defeat public convenience,

3. Justify wrong or 4. Defend crime or

5. For ends subversive of the policy and purpose behind its creation, especially where the corporation is a closed family corporation, on equity considerations, this fiction will be disregarded and the individuals composing it or two corporations will be treated as identical (Sundiang, 2009, citing Cruz vs. Dalisay, AM No.

R-181-P, July 31, 1987; De Leon, 2010, citing Yutivo Sons Hardware Co. vs. CTA, 1 SCRA 160 [1961], Emiliano Cano Enterp., Inc. vs. CIR, 13 SCRA 290 [1965].).

Circumstances which do not warrant the piercing of the corporate veil

The mere fact that:

1. A corporation owns 50% of the capital stock of another corporation, or the majority ownership of the stocks of a corporation is not per se a cause for piercing the veil.

2. Two corporations have common directors or same or single stockholder who has all or nearly all of the capital stock of both corporations is not in itself sufficient ground to disregard separate corporate entities.

3. There is a substantial identity of the incorporators of the 2 corporations does not necessarily imply fraud and does not warrant piercing the corporate veil.

Q: Land Bank of the Philippines (LBP) extended a series of credit accommodations to ECO using the trust funds of PVTA. The proceeds of the credit accommodations were received on behalf of ECO by Emmanuel Oñate. Upon maturity of the loans, ECO failed to pay the same. Despite demands, ECO was unable to pay. ECO then submitted a Plan of Payment to LBP, however, the latter rejected the same. LBP filed a complaint for collection of sum of money against ECO and Oñate. The RTC rendered judgment against ECO and absolved Oñate from personal liability. The CA affirmed. LBP contends that the personalities of Oñate and of ECO should be treated as one, for the particular purpose of holding Oñate liable for the loans incurred by ECO from Land Bank. Is Oñate jointly and severally liable with ECO for the loans incurred from LBP?

A: No. Oñate should not be held jointly and severally liable with ECO. A corporation, upon coming into existence, is invested by law with a personality separate and distinct from those persons composing it as well as from any other legal entity to which it may be related. By this attribute, a stockholder may

not, generally, be made to answer for acts or liabilities of the said corporation, and vice versa. The mere fact that Oñate owned the majority of the shares of ECO is not a ground to conclude that Oñate and ECO is one and the same. Mere ownership by a single stockholder of all or nearly all of the capital stock of a corporation is not by itself sufficient reason for disregarding the fiction of separate corporate personalities. Neither is the fact that the name “ECO”

represents the first three letters of Oñate’s name sufficient reason to pierce the veil. Even if it did, it does not mean that the said corporation is merely a dummy of Oñate. A corporation may assume any name provided it is lawful. There is nothing illegal in a corporation acquiring the name or as in this case, the initials of one of its shareholders (Land Bank of the Philippines v. CA, et al., G.R. No. 127181, September 4, 2011).

Q: X owns 99% of the capital stock of SSS Corporation. X also owns 99% of TTT Corporation.

SSS Corporation obtained a loan from VW Bank. On due date, SSS Corporation defaulted. TTT Corporation is financially healthy. Which statement is most accurate? (2012 Bar Question)

a. X being a controlling owner of SSS Corporation can automatically be held personally liable for the loan of SSS Corporation.

b. TTT Corporation, owned 99% by X, can automatically be held liable.

c. SSS Corporation and TTT Corporation, although both are owned by X, are two (2) distinct corporations with separate juridical personalities hence, the TTT Corporation cannot automatically be held liable for the loan of SSS Corporation.

d. The principle of piercing the veil of corporate fiction can be applied in this case.

A: C. Mere ownership by a single stockholder of all or nearly all of the capital stock of a corporation is not by itself sufficient reason for disregarding the fiction of separate corporate personalities (Land Bank of the Philippines, GR No. 127181, Sept. 4, 2001). Thus, the fact that X owns majority of the shares in both corporations does not automatically arise to one and the same personality or an intertwined ownership of said corporations.

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Test in determining applicability of the doctrine of piercing the corporate veil

The following are the tests in determining the applicability of the doctrine of piercing the corporate veil: (ECAO)

1. When the corporation is used to defeat of public convenience as when the corporate fiction is used as a vehicle for the evasion of an existing obligation; (Equity Cases)

2. In fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime; (Control Test)

3. 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 (Timoteo H. Sarona vs.

National Labor Relations Commission, Royale Security Agency, et al., G.R. No. 185280, January 18, 2012).

4. The Objective test where the end result in piercing the veil of corporate fiction is to make the stockholders liable for debts and obligations of the Corporation not to make the Corporation liable for the debts and obligations of the stockholders (Umali v CA, G.R. No. 89561, Sept.

13, 1990).

Piercing the veil of corporate fiction on the basis of equity

Equity cases applying the piercing doctrine are what are termed the "dumping ground", where no fraud or alter ego circumstances can be culled by the Court to warrant piercing.

The main feature of equity cases is the need to render justice in the situation at hand or to brush aside merely technical defenses. Often, equity cases of piercing appear in combination with other types of piercing (Villanueva, Corporation Law, 2010).

Specifically, the equity test can be applied when:

1. The corporate personality would be inconsistent with the business purpose of the legal fiction, or 2. The piercing the corporate fiction is necessary to

achieve justice or equity for those who deal in good faith with the corporation,

3. When the use of the separate juridical personality is used to confuse legitimate issues.

Indications that a subsidiary corporation is a mere instrumentality of its parent corporation

1. The parent corporation owns all or most of the capital stock of the subsidiary.

2. The parent and subsidiary corporations have common directors or officers.

3. The parent corporation finances the subsidiary.

4. The parent corporation subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation.

5. The subsidiary has grossly inadequate capital.

6. The parent corporation pays the salaries and other expenses or losses of the subsidiary.

7. The subsidiary has substantially no business except with the parent corporation or no assets except those conveyed to or by the parent corporation.

8. In the papers of the parent corporation or in the statements of its officers, the subsidiary is described as a department or division of the parent corporation, or its business or financial responsibility is referred to as the parent corporation's own.

9. The parent corporation uses the property of the subsidiary as its own.

10. The directors or executives of the subsidiary do not act independently in the interest of the subsidiary but take their orders from the parent corporation.

11. The formal legal requirements of the subsidiary are not observed (PNB vs. Ritratto Group G.R. No.

142616, July 31, 2001).

Q: PNB-IFL a subsidiary company of PNB, organized and doing business in Hong Kong, extended a letter of credit in favor of Ritratto Group Inc., et al., in the amount of US$300,000.00. However, as their outstanding obligations stood at US$1,497,274.70, and the same remains unpaid, PNB-IFL, through its attorney-in-fact PNB, notified the Ritratto Group Inc., et al., of the foreclosure of all the real estate mortgages and that the properties subject thereof were to be sold at a public auction. Ritratto Group Inc., et al., filed a complaint for injunction against PNB for the latter to be restrained from foreclosing and eventually selling its property. The RTC granted the injunction. It applied the doctrine of Piercing the Veil of Corporate Identity by stating that PNB is merely an alter ego or a business conduit of PNB-IFL.

Is PNB is merely an alter ego or business conduit of PNB-IFL?

A: No. PNB is not an alter ego or business conduit of PNB-IFL. Aside from the fact that PNB-IFL is a wholly owned subsidiary of petitioner PNB, there is no

showing of the indicative factors that the former corporation is a mere instrumentality of the latter are present. Neither is there a demonstration that any of the evils sought to be prevented by the doctrine of piercing the corporate veil exists. Inescapably, therefore, the doctrine of piercing the corporate veil based on the alter ego or instrumentality doctrine finds no application in the case at bar. In any case, the parent-subsidiary relationship between PNB and PNB-IFL is not the significant legal relationship involved in this case since PNB was not sued because it is the parent company of PNB-IFL. Rather, PNB was sued because it acted as an attorney-in-fact of PNB-IFL in initiating the foreclosure proceedings. A suit against an agent cannot without compelling reasons be considered a suit against the principal.

Under the Rules of Court, every action must be prosecuted or defended in the name of the real party-in-interest, unless otherwise authorized by law or these Rules (PNB v. Ritratto Group Inc., et al., G.R.

No. 142616, July 31, 2001).

Q: Plaintiffs filed a collection action against X Corporation. Upon execution of the court's decision, X Corporation was found to be without assets.

Thereafter, plaintiffs filed an action against its present and past stockholder Y Corporation which owned substantially all of the stocks of X corporation. The two corporations have the same board of directors and Y Corporation financed the operations of X corporation. May Y Corporation be held liable for the debts of X Corporation? Why?

(2001 Bar Question)

A: Yes. Y Corporation may be held liable for the debts of X Corporation. The doctrine of piercing the veil of corporation fiction applies to this case. The two corporations have the same board of directors and Y Corporation owned substantially all of the stocks of X Corporation, which facts justify the conclusion that the latter is merely an extension of the personality of the former, and that the former controls the policies of the latter. Added to this is the fact that Y Corporation controls the finances of X Corporation which is merely an adjunct, business conduit or alter ego of Y Corporation (CIR v. Norton & Harrison Company, G.R. No. L‐17618, Aug. 31, 1964).

Q: X Corp. operates a call center that received orders for pizzas on behalf of Y Corp. which operates a chain of pizza restaurants. The two companies have the same set of corporate officers. After 2 years, X Corp. dismissed its call agents for no apparent reason. The agents filed a collective suit for illegal dismissal against both X Corp. and Y Corp.

based on the doctrine of piercing the veil of

corporate fiction. The latter set up the defense that the agents are in the employ of X Corp. which is a separate juridical entity. Is this defense appropriate?

(2011 Bar Question)

A: Yes, it is not shown that one company completely dominates the finances, policies, and business practices of the other.