SEPARATE AND JURIDICAL PERSONALITY from the definition “as an artificial being created corporation, nor is he entitled to the

he entitled to the possession of any definite portion of its property or assets.

by operation of law, having the right of succession and the powers, attributes and properties
expressly authorized by law or incident to its existence.” It is the basis of the primary doctrine that
a corporation being a juridical person has a personality separate and distinct from the
stockholders or members who compose it. the granting to the corporate entity of a strong
separate juridical personality has been considered as the attribute or privilege most characteristic
of corporations. Unlike the cumbersome juridical personality of its nearest rival today, the
partnership, the separate juridical personality of the corporation has features that have made it
most attractive to businessmen: right of succession, limited liability, centralized management,
and generally free-transferability of shares of stock. In addition, the strong separate juridical
personality of the corporation facilities and preserves the “going concern value” of the underlying
business enterprise, saves on transaction costs, and prevents disruption of that value because of
investors who withdraw or who are deceased. Therefore, an undermining of the separate juridical
personality of the corporation, such as the abusive application of the piercing doctrine,
necessarily dilutes any or all of these attributes.the stability of the main doctrine of separate
juridical personality is inextricably linked with the attractiveness of the corporation as an
efficientmedium by which businessmen can pursue and operate business enterprises. It would
also compel businessmen to have to enter into efficient and costly contractual relations to fill the
gaps created by a flawed main doctrine.
Manila Gas Corp v. CIR, held that the tax exemptions granted to a corporation do not pertain to
its corporate stockholders due to their separate corporate personalities: “A corporation has a
personality distinct from that of its stockholders, enabling the taxing power to reach the latter
when they receive dividends from the corporation. it must be considered as settled in this
jurisdiction that dividends of a domestic corporation which are paid and delivered in cash to
foreign corporations as stockholders are subject to the payment of the income tax, the
exemption clause to the charter of the domestic corporation notwithstanding.
Stockholders of F.Guanzon and Sons, Inc. v. ROD, the distribution of the corporate properties
to the stockholders was deemed not in the nature of a partition among co-owners, but rather a
disposition by the corporation to the stockholders, as opposite parties to a transaction. It held
that “ a corporation is a juridical person distinct from the members composing it and that
properties registered in the name of the corporation are owned by it as an entity separate and
distinct from its members. While shares of stock constitute personal property, they do not
represent property of the corporation..A share of stock only typifies an aliquot part of the
corporation’s property, or the right to share in its proceeds to that extent when distributed
according to law and equity, but its holder is not the owner of any part of the capital of the
The stockholder is not a co-owner or tenant in common of the corporate property.
Good Earth Emporium, Inc. v. CA, the Court, in refusing to allow execution of a corporate
judgment debt against the officer, held that being an officer or stockholder of a corporation does
not by itself make one’s property also of the corporation, and vice versa, for they are separate
entities, and that shareholders are in no legal sense the owners of corporate property which is
owned by the corporation as a distinct legal person
SANTOS V NLRC A corporation is a juridical entity with legal personality separate and distinct
from those acting for and in its behalf and, in general, from the people comprising it. The rule is
that obligations incurred by the corporation, acting through its directors, officers and employees,
are its sole liabilities.
Nevertheless, being a mere fiction of law, peculiar situations or valid grounds can exist to
warrant, albeit done sparingly, the disregard of its independent being and the lifting of the
corporate veil.
As a rule, this situation might arise when a corporation is used to evade a just and due obligation
or to justify a wrong, to shield or perpetrate fraud, to carry out similar other unjustifable aims or
intentions, or as a subterfuge to commit injustice and so circumvent the law.
In Tramat Mercantile, Inc., vs. Court of Appeals, the Court has collated the settled instances
when without necessarily piercing the veil of corporate fiction, personal civil liability can also be
said to lawfully attach to a corporate director, trustee or officer; to wit: When —
He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross
negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the
corporation, its stockholders or other persons;
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.

1
The case of petitioner is way off these exceptional instances. It is not even shown that petitioner
has had a direct hand in the dismissal of private respondent enough to attribute to him (petitioner)
a patently unlawful act while acting for the corporation. Neither can Article 28930 of the Labor
Code be applied since this law specifically refers only to the imposition of penalties under the
Code. It is undisputed that the termination of petitioner's employment has, instead, been due,
collectively, to the need for a further mitigation of losses, the onset of the rainy season, the
insurgency problem in Sorsogon and the lack of funds to further support the mining operation in
Gatbo
DEFECTIVE INCORPORATION
De Jure – A corporation has de jure existence if there is a full or substantial compliance with the
requirements of an existing law permitting organization of such corporation as by proper articles
of incorporation duly executed and filed. Generally, its juridical personality is not subject to attack
in the courts from any source.
If a corporation is a de jure corporation, its due incorporation cannot be successfully attacked
even in a quo warranto proceeding by the State.
Therefore, if such proceeding is brought against a corporation and the State has a prima facie
case, the corporation must show that it is a de jure corporation.
De facto – A corporation has de facto existence where there is bona fide attempt to incorporate,
colorable compliance with the statute and user of corporate powers.
The main importance of the application of the de facto corporation doctrine is the ancillary
application of the rule that the defect or alleged inexistence of the juridical personality of a
C orporation cannot be raised collaterally and can only be pursued in a direct suit filed that seeks
to question such juridical personality i.e., a quo warranto proceeding. In essence, it promotes the
policy that a contracting party cannot avoid the legal consequences of his contractual
commitment by pointing to the technical defects in the “person” of the contracting corporation
De Jure v De Facto
De Jure: complied with reqs of the law
De Facto: corp incorp with the collorable compliance required by the law
-Collorable compliance
Sec 20: De Facto Corps:The due incorporation of any corporation claiming in good faith to be a
corporation under this code, and its right to exercise corporate powers, shall not be inquired into
collaterally in any private suit to which such corporation may be a party. Such inquiry may be
made by the Solicitor General in a quo warranto proceeding.
Under section 20 of the Corporation Code, the “due incorporation of any corporation claiming in
good faith to be a corporation... and its right to exercise corporate powers, shall not be inquired
into collaterally in any private suit of which such corporation may b a party.” Such inquiry may be
made by the Solicitor General in a quo warranto proceeding.
The doctrine grew out of the necessity of promoting the security of business transactions and to
eliminate quibbling over irregularities. It would be a rare case where third persons dealing with a
corporation is prejudiced by its recognition as a separate entity despite some minor defects in its
corporation. it would be unfair to allow a claimant against the alleged corporation to insist on the
individual liability of innocent investors merely because of some minor flaws in its corporation
Rationale of the Doctrine
It should be borne in mind that the de facto doctrine is not limited in its application to Corporate
Law; it is a well- developed concept in the
Laws on Public Corporations and on Public Officers. The common feature of the de facto
doctrine in those legal fields, is that tit prevents any party from raising the defect of authority as a
means to avoid fulfillment of a contract or a transaction entered into good faith. The main
beneficiary of the de facto doctrine are members of the public who deal in good faith with one
who seems to be properly authorized.
Without the de facto doctrine, both private and public dealing would grind to a halt because of the
burden imposed on the dealing public to first verify the power and authority of the person or entity
they deal with.
2
The de facto doctrine’s essence is to protect the sanctity of dealing by the public with persons or TAYKO V CAPISTRANO
entities whose authority emanates from the State, to allow the public to take such authority at
face value, provided nothing is clearly shown to be defective in such authority. Even if it should (De Facto Doctrine)
be proven that such authority was indeed defective or even non-existent, such defect cannot be
Prevent as a means to avoid fulfillment of contract. (policy and convenience)
used as an excuse to set aside a relationship or transaction entered into in good faith.
BASIS: Collorable compliance
In the field of Corporate Law, the de facto corporation doctrine is meant to protect the
enforceability of corporate dealings and contracts, to allow the public to take at reasonable face REASON: in order to protect the right of the third person
value the authority of the corporation and its officers to enter into valid and binding contracts,
thereby providing a healthy system by which to encourage the public to deal with corporate Reliance of the title
entities. It is therefore meant to apply to the level of existence that pertains to the relationship of
the corporation with the dealing public (the level of corporate relations the author has referred to De Facto Doctrine in Corporate Law
as “extra-corporate relationship level,” to distinguish it from the intra- corporate relationship
-Requisites:
level); and is not meant to govern nor be applicable to other levels of existence, such as those
pertaining to intra-corporate relationships. 1. Existence of a valid law--- (claims juridical personality)
2. An attempt in good faith to incorporate
-
3. (min. Req. collorable compliance: cert. Of registration)
Tayko v. Capistrano, which discussed the policy of the doctrine as applied to public officers, 4. Assumption of corporate powers
held that “the principle is one founded in policy and convenience, for the right of one claiming a 5. (election of officers→ capacity to act)
title or interest under or through the proceedings of an officer having an apparent authority to act
***should be complied chronologically
would be safe, if it were necessary in every case to examine the legality of the title of such
officer up to its original source, and the title or interest of such person were held to be
invalidated by some accidental defect or flaw in the appointment, election or qualification of such
officer, or in the rights of those from whom his appointment or election emanated; nor could the What is collorable title?
supremacy of the laws be maintained, or their execution enforce, if the acts of the judge having a
colorable, but not a legal title, were to be deemed invalid. Colorable Compliance with the law – the general principle is that while substantial compliance is
not necessary, colorable compliance with the requirement of the law must be shown. When there
has been no attempt in good faith to create a corporation in de jure ̧ there can be no de facto
corporation. Any other rule might well open the door to fraud upon the public. Mere intent is not
sufficient; in addition, there must be a bona fide attempt to comply with the requirements of the
law. The outward manifestation of the existence of a corporate being is therefore necessary as
the basis upon which the dealing public may be led to believe that they are dealing with a
juridical person

Certificate of Registration--a third person relies in the collorable title

Collorable title: is from the act of the state

3
CORPORATION BY ESTOPPEL
Section 21. Corporation by estoppel. – All persons who assume to act as a corporation
knowing it to be without authority to do so shall be liable as general partners for all debts,
liabilities and damages incurred or arising as a result thereof: Provided, however, That when
any such ostensible corporation is sued on any transaction entered by it as a corporation or on
any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate
personality
The corporation by estoppels doctrine presents a clear exception to the general treatment of
unregistered associations. The application of the doctrine seeks to enforce a contract where
clearly the element of consent is lacking because one of the parties thereto, a purported
corporation, does not in fact exist at the time of perfection.
The corporation by estoppels doctrine represents therefore an exemption to the principle
embodied in Section 2 of the Corporation Code, that “a corporation is a creature of the state,”
and cannot come into existence by mere agreement of the parties of a contract.
Rationale of the Doctrine
Estoppel is essentially a common law principle, and has been the source of many rules which
seek to work out justice or equity between the parties, on the theory that an admission or
representation is rendered conclusive upon the person making it, and cannot be denied or
disproved as against the person relying thereon and having changed his position based on such
reliance. The doctrine of estoppel has its origins in equity, and is based on moral right and
natural justice, and is designed to prevent injustice and unfairness. The doctrine therefore
permeates and goes beyond Corporate Law considerations.
The estoppels doctrine is meant to hold contractual parties to their representations or
expectations at the time the contract was perfected;
it does not allow parties to draws on a basic defect – lack of one contracting party or defect in
the essential element of consent – to avoid the enforcement of the contract. The doctrine has
evolved in Corporate Law primarily as a rule to promote the integrity of commercial contracts; the
basic roles of the doctrine is to promote the public’s underlying faith in contracts entered in to
with corporate entities, rather than to promote strictly
Corporate Law principles. For this reason, the doctrine as it has evolved in Section 21 of the
Corporation Code seems convoluted from a strictly
Corporate Law point of view; or at least, the basic elements of the doctrine as expressed in
Section 21 seem to be contradictory or antithetical
When a person makes a REPRESENTATION of a corp (which turns out that did not exist;
denied cert of regis) to another (3rd person) who relied on such representation
The law mandates that such corporation by estoppel cannot deny its existence
***determines liabilities: CORPORATION is liable (no cause of action if the case is filed againt a
natural person)*** CORPORATION is created for a third person has a cause of action
BUT WHEN MISREPRESENTATION EXIST:
A person who misrepresented(an agent) is LIABLE: no need for corporation by estoppel
Theory of concession: no corp can exist except by a grant by the state
ASIA BANKING V STANDARD PRODUCTS
The Appellate Court affirmed the decision of the lower court. The defendant having recognized
the corporate existence of the plaintiff by making a promissory note in its favor and making partial
payments on the same is therefore estopped to deny said plaintiff's corporate existence. It is, of
course, also estopped from denying its own corporate existence. Under these circumstances it
was unnecessary for the plaintiff to present other evidence of the corporate existence of either of
the parties. There is no merit whatever in the appellant's contention. The general rule is that in
the absence of fraud a person who has contracted or otherwise dealt with an association in such
a way as to recognize and in effect admit its legal existence as a corporate body is thereby
estopped to deny its corporate existence in any action leading out of or involving such contract or
dealing, unless its existence is attacked for cause which have arisen since making the contract
or other dealing relied on as an estoppel and this applies to foreign as well as to domestic
corporations
4
VDA. DE SALVATIERRA V GARLITOS
liable as general partner(up to the extent of personal assets)(piercing the veil of corp
While as a general rule a person who has contracted or dealt with an association in such a way
fiction); to hold the actor who made the misrep.liable
as to recognize its existence as a corporate body is estopped from denying the same in an
action arising out of such transaction or dealing, (Asia Banking Corporation vs. Standard
NO MISREPRESENTATION:
Products Co., 46 Phil., 114; Compania Agricola de Ultramar vs. Reyes, 4 Phil., 1; Ohta
liable as limited partner: LIMITED LIABILITY (corp.created)
Development Co.; vs. Steamship Pompey, 49 Phil., 117), yet this doctrine may not be held to be
applicable where fraud takes a part in the said transaction. In the instant case, on plaintiff's
charge that she was unaware of the fact that the Philippine Fibers Producers Co., Inc., had no ***same as the nature of liability under the VDA DE SALVATIERRA case.
juridical personality, defendant Refuerzo gave no confirmation or denial and the circumstances
***regardless of rep/misrep CORPORATION BY ESTOPPEL can apply: corp
surrounding the execution of the contract lead to the inescapable conclusion that plaintiff
will be created to pierce the veil of corp fiction, to hold the actor liable
Manuela T. Vda. de Salvatierra was really made to believe that such corporation was duly
organized in accordance with law
2. PIERCING THE VEIL OF CORPORATE FICTION
 Doctrine does not apply when fraud exists
- An extraordinary remedy; disregarding separate juridical personality; to hold
WITHOUT FRAUD: the actor liable.
- A doctrine of last resort remedy
When one makes a representation---and a third person relies to it, whereby such corp does not - Only to a specific transaction.
exist---makes corp liable (CORPORATION BY ESTOPPEL) actors: limited liability
Piercing the veil of corporate fiction – the main doctrine of separate juridical personality is to be
WITH FRAUD: (MISREPRESENTATION) tempered by the supporting doctrine of

When one knows that a corp is non existent, which he still represents, and a third person relies piercing the veil of corporate fiction. Both theories were transported into Philippine jurisdiction as
to it---fraud exists. The one who misrepresent is liable as an agent of the corp.-liable up to the part and parcel of the implantation of American
extent of his personal assets (AGENCY)
Corporation Law, the source of the piercing doctrine is also common law.
BEFORE THE CORPORATION CODE, VDA DESALVATIERRA is the rule: law on agency is
applicable

LIM V PHIL FISHING GEAR is clear that Chua, Yao and Lim decided to engage in a fishing
business, their Compromise Agreement revealed that their intention to pay the loan with the
proceeds of the sale of the boats and to divide among themselves the excess or loss. The parties
agreed that any loss or profit from the sale and operation would be divided equally among them
which shows that they had intended to from a partnership.
***SEC 21: all persons who assumes to act as a corp. Knowing it without auth to do so, shall be
liable as general partners
MISREPRESENTATION:
U.S. v. Milwaukee Refrigerator Transit Co.,
: if any general rule can be laid down, in the present state of authority, it is that a corporation will
be looked upon as a legal entity as a general rule, and until sufficient reason to the contrary
appears; but, when the notion of legal entity is used to defeat public convenience, justify wrong,
protect fraud, or defend crime, the law will regard the corporation as an association of persons.
San Juan Structural and Steel Fabricators, Inc. v. CA: When the fiction is used as a means of
perpetrating a fraud or an illegal act or as a vehicle for the evasion of an existing obligation, the
circumvention of statutes, the achievement or perfection of a monopoly or generally the
5
perpetration of knavery or crime, the veil with which the law covers and isolates the corporation
from the members or stockholders who compose it will be lifted to allow for its consideration
merely as an aggregation of individuals.
Grounds upon which piercing may be applied:
When it is used as a shield to confuse legitimate issues; or Whether lifting the veil is necessary to
achieve equity or For the protection of the creditors
When the corporation is used to evade a just and due obligation, or to justify a wrong, to shield or
perpetuate fraud, to carry out other similar unjustifiable aims or intentions, or as a subterfuge to
commit injustice and so circumvent the law
Where a corporation is the 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
as an instrumentality, agency, conduit or adjunct of another corporation.
The main treatment of the piercing doctrine for both corporate practitioner and their clients has
always been how to prevent its being applied by the courts to their particular situation and avoid
the dire consequences of piercing which is mainly holding the associates in the venture
personally liable for corporate obligations
UMALI V CA
No. There is no clear showing of fraud in this case. The mere fact that Bormaheco paid said
premium payments to ICP does not constitute fraud per se. As it turned out, Bormaheco is an
agent of ICP. SRC, through Rivera, agreed that part of the payment of the mortgage shall be
paid for the insurance. Naturally, when Rivera was paying some portions of the mortgage to
Bormaheco, Bormaheco is applying some parts thereof for the payment of the premium – and this
was agreed upon beforehand.
Further, piercing the veil of corporate fiction is not the proper remedy in order that the foreclosure
conducted by ICP be declared a nullity. The nullity may be attacked directly without disregarding
the separate identity of the corporations involved. Further still, Umali et al are not enforcing a
claim against the individual members of the corporations. They are not claiming said members to
be liable. Umali et al are merely questioning the validity of the foreclosure.
The veil of corporate fiction can’t be pierced also by the simple reason that the businesses of two
or more corporations are interrelated, absent sufficient showing that the corporate entity was
purposely used as a shield to defraud creditors and third persons of their rights.
In this case, there is no justification for disregarding their separate personalities
KOPPEL PH V YATCO
Both companies are one and the same due to the fact that the amount of the so- called “share in
the profits” of KOPPEL (Phil.) was ultimately left to the sole, unbridled control of KOPPEL (US).
No group of businessmen could be expected to organize a mercantile corporation if the amount
of profit were to be subjected to such a unilateral control of another corporation. Evidently,
KOPPEL (US) made use of its own ownership of the overwhelming majority (99.5%) of the
capital stock of the local corporation to control the operations of the latter to such an extent that it
had the final say even as how much should be allotted to said local entity in the so-called sharing
of profits. Furthermore, records show that the President and VP of KOPPEL (Phil.) were
residents of America, if indeed it had intended to operate as a regular domestic corporation, why
should it officers not reside and perform their functions in the Philippines.
The corporate entity is disregarded where it 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.
TANTONGCO V KAISAHAN
***a corp is sep and distinct juridical person; only time to pierce is when it used as a shield the
sep and distinct juridical person
ROBLEDO V NLRC
It would make the successor enterprise liable for debts of the previous enterprise on the basis of
piercing doctrine scenario. The Court refused to make BASEC liable for the claims of the
terminated employees since the facts showed that BASEC already existed prior to closure of
Bacani of his operations; that Bacani was merely one of fie incorporators with the lease number
of shares in BASEC; and there was no showing that the assets of the single proprietorship were
even transferred to BASEC.
The doctrine of piercing the veil of corporate entity is used whenever a court finds that the
corporate fiction is being used to defeat public convenience, justify wrong, protect fraud, or
6
defend crime, or to confuse legitimate issues, or that a corporation 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 as an instrumentality, agency, conduit or adjunct of
another corporation.
It is apparent, therefore, that the doctrine has no application to this case where the purpose is
not to hold the individual stockholders liable for the obligations of the corporation but, on the
contrary, to hold the corporation liable for the obligations of a stockholder/s
***the existence of the juridical personality: is being used by a person as a shield for his fradulent
act, using the corporation as a vehicle. → PIERCE THE VEIL OF CORPORATE FICTION; to
hold the actor personally liable
CORPORATION BY ESTOPPEL V PIERCING
CS: no corporation: but corporation will created to hold the corporation liable( its natural
person whther limited/ general depending on the existence of fraud.
PCV: there is a corporation, there is a separate juridical personality; but to hold the actor
liable, piercing the corporate fiction is the remedy, and disregard the corporate personalilty
CLASSIFICATION OF THE PIERCING CASES
(a) when the corporate entity is used to commit fraud, or to justify a wrong, or to defend a crime
(fraud cases)
(b) when the corporate entity is used as a mere alter ego, business conduit or instrumentality of
a person or another entity (alter ego cases)
(c) when the corporate entity is used to defeat public convenience (defeat public convenience
cases)
(d) when piercing of the corporate fiction is necessary to achieve justice or equity (equity cases)
FRAUD
Based on bad faith, intent and malice
GREGORIO ARANETA V TUAZON
the law and the disregard of the technicality would pave the way for the evasion of a legitimate
and binding commitment, especially since defendant was fully aware of the position of Jose
Araneta in the corporation at the time of the sale.
Jose Araneta was not an agent within the meaning as provided for by Article 1459 of the Civil
Code. He was nothing more that a go between or middleman between the defendant and the
purchaser, bringing them together to make the contract themselves. He had no power or
discretion whatsoever, which he could abuse to his advantage and to the owner’s prejudice. The
rule that the piercing doctrine cannot be applied in favor of a party who was not a “victim” of any
alleged fraud committed, being fully aware of the circumstances that are being ventilated to
show fraud.
Furthermore, the court opined that the sale to Gregorio Araneta, Inc. was not a sale to Jose
Araneta – the agent or broker. There was also no prohibition on the fact that Attys. Salvador
Araneta and J. Antonio Araneta participated in writing the letters addressed to the tenants and
the deed of sale. Attorneys were only prohibited from buying their client’s property which is the
subject of the litigation. The questioned sale was effected before the subject thereof became
involved in the present action.
*** only acted as a middleman; still a separate juridical personality
PALACIO V FELY TRANSPORTATION
Isabelo Calingasan and defendant Fely Transportation may be regarded as one and the same
person. It is evident that Isabelo
Calingasan's main purpose in forming the corporation was to evade his subsidiary civil liability
resulting from the conviction of his driver, Alfredo Carillo. This conclusion is borne out by the fact
that the incorporators of the Fely Transportation are Isabelo Calingasan, his wife, his son, Dr.
Calingasan, and his two daughters. We believe that this is one case where the defendant
corporation should not be heard to say that it has a personality separate and distinct from its
members when to allow it to do so would be to sanction the use of the fiction of corporate entity
as a shield to further an end subversive of justice.
Furthermore, the failure of the defendant corporation to prove that it has other property than the
jeep (AC-687) strengthens the conviction that its formation was for the purpose above indicated.
7
And while it is true that Isabelo Calingasan is not a party in this case, the Court can substitute
him in place of the defendant corporation as to the real party in interest. This is so in order to
avoid multiplicity of suits and thereby save the parties unnecessary expenses and delay. (Sec. 2,
Rule 17,
Rules of Court; Cuyugan v. Dizon. 79 Phil. 80; Quison v. Salud, 12 Phil. 109.
***the jeepney is the only prop of the corp
PALAY V CLAVE
here were no badges of fraud on petitioner
Palay’s part. They had literally relied, albeit mistakenly, on paragraph (6) of its contract with
private respondent when it rescinded the contract to sell extrajudicially and had sold it to a third
person.
Onstott cannot be held jointly and severally liable with Palay Inc for the refund of the amount
paid by private respondent since no sufficient proof exists that Onstott used the corporation to
defraud private respondent. He cannot be made personally liable just because he appears to be
the controlling stockholder. Mere ownership by a single stockholder or by another corporation is
not of itself sufficient ground for disregarding the separate corporate personality.
SC ruled the rescission of the contract was ineffective and inoperative for lack of notice of
resolution. The law provides that judicial action for the rescission of a contract is not necessary
where the contract provides that it may be revoked and cancelled for violation of any of its terms
and conditions. However, the act of a party in treating a contract as cancelled should be made
know to the other
***no badges of fraud
PABALAN V NLRC
As a general rule, Corporation is vested by law with a personality separate and distinct from the
persons composing it, including its officers as well as from that of any other legal entity to which
it may be related.
Thus, a company manager acting in good faith within the scope of his authority in terminating the
services of certain employees cannot be held personally liable for damages. Mere ownership by
a single stockholder or by another corporation of all or nearly all capital stocks of the corporation
is not by itself sufficient ground for disregarding the separate corporate personality.
However, the legal fiction that a corporation has a personality separate and distinct from
stockholders and members may be disregarded on the following instance: a) deliberately and
maliciously designed to evade financial obligations to employees; b) used as a means to
perpetrate fraud or an illegal act or c) circumvention of statutes.
In this case, the dismissed workers did not allege or show that petitioners, as officers of the
corporation, did the instances mentioned above.
Furthermore, A.C. Ransom Labor Union- CCLU vs. NLRC case is not applicable in this case.
A.C. Ransom was a family corporation and that during the strike the members of the family
organized another corporation which was the Rosario Industrial Corporation to which all the
assets of the A.C.
Ransom Corporation were transferred to continue its business which acts of such officers and
agents of A.C. Ransom Corporation were intended to avoid payment of its obligations to its
employees. Thus, Petitioners cannot be held jointly and severally liable with the PIF Corporation
DEL ROSARIO V NLRC
Code, sec. 2]. But when the juridical personality of the corporation is used to defeat public
convenience, justify wrong, protect fraud or defend crime, the corporation shall be considered as
a mere association of persons and its responsible officers and/or stockholders shall be held
individually liable.
For the same reasons, a corporation shall be liable for the obligations of a stockholder, or a
corporation and its successor-in-interest shall be considered as one and the liability of the former
shall attach to the. But for the separate juridical personality of a corporation to be disregarded,
the wrongdoing must be clearly and convincingly established. It cannot be presumed.
In this regard the NLRC's decision wanting. The conclusion that Philsa allowed its license to
expire so as to evade payment of private respondent's claim is not supported by the facts.
Philsa's corporate personality therefore remains inviolable. Thus, at the time Philsa allowed its
license to lapse in
8
1985 and even at the time it was delisted in 1986, there was yet no judgment in favor of private
respondent. An intent to evade payment of his claims cannot therefore be implied from the
expiration of Philsa's license and its delisting.
Neither will the organization of Philsa International Placement and Services Corp. and its
registration with the POEA as a private employment agency imply fraud since it was organized
and registered in 1981, several years before private respondent filed his complaint with the
POEA in 1985. The creation of the second corporation could not therefore have been in
anticipation of private respondent's money claims and the consequent adverse judgment against
Philsa.
Likewise, substantial identity of the incorporators of the two corporations does not necessarily
imply fraud
***a corp officer acts on delegated auth: therefore a corp can never be liable of illegal
termination...because corp can never delegate an illegal act
***if a corp officer acts within his auth and in gf; the liab is with the corp.
When is a corporate officer liable?
1. Exceeds the scope of his authority
2. Guilty of bad faith
The corp becomes liable: if corp officer:
1. Acts within the scope of his auth
2. And in good faith
VILLA REY TRANSIT V FERRER
***Preponderance of the evidence have shown that Villa Rey Transit, Inc. is itself the alter ego of
Villarama, that the said Corporation should, until the expiration of the 10-year period
abovementioned, be enjoined from operating the line subject of the prohibition. For the rules is
that a substantially the alter ego of the covenantor to the restrictive agreement, it can be
enjoined from competing with the covenantee.
The Court find that although it is in the nature of an agreement suppressing competition, it is,
however, merely ancillary or incidental to the main agreement which is that of sale. The
suppression or restraint is only partial or limited: first, in scope, it refers only to application for
TPU by the seller in competition with the lines sold to the buyer; second, in duration, it is only for
ten (10) years. The disputed stipulation is only incidental to a main agreement, the same is
reasonable and it is not harmful nor obnoxious to public service. It does not appear that the
ultimate result of the clause or stipulation would be to leave solely to Pantranco the right to
operate along the lines in question, thereby establishing monopoly or predominance
approximating thereto. We believe the main purpose of the restraint was to protect for a limited
time the business of the buyer.
Villa Rey TransitTaking account of the evidence, together with testimony, it would appear that
Villarama supplied the organization expenses and the assets of the Corporation, such as trucks
and equipment. Villarama himself admitted that he mingled the corporate funds with his own
money.
The rule is that when the legal fiction of the separate corporate personality is abused, such as
when the same is used for fraudulent or wrongful ends. The courts would hesitate to pierce the
corporate veil. It must be shown by clear and convincing proof that the separate juridical
personality was purposefully employed to evade a legitimate and binding commitment, and
perpetuate a fraud or similar wrongdoing. Since the piercing doctrine is meant to prevent the
commission of fraud, it has no application to allow persons or entities to allow them to gain
advantages, i.e., no wrong or fraud was really committed against them. In addition, the
application of the piercing doctrine is a remedy of last resort and will not be applied, even in case
of fraud, if other remedies are available to the parties.
Tax Evasion Cases
In CIR v. Nortin and Harrison, where the parent corporation owned all the outstanding stocks
of the subsidiary corporation, and financed all the operations of the subsidiary, and treated the
subsidiary’s employees as its own; where the officers of both corporations were located in the
same compound; where the board of the subsidiary was constituted in such a way to enable the
parent to actually direct and mange subsidiary’s affairs by making them the same officers of the
board for both corporations; and where the fiction of corporate entity was being used as a shield
for tax evasion by making it appear that the original sale was made by the parent corporation to
the subsidiary corporation in order to gain tax advantage, the Court did not hesitate to pierce the
veil of corporate fiction and treated as void the sales between the corporations.
Since Norton and Harrison is a fraud case, one begins to wonder why there was a need to show
that the subsidiary corporation was being used as an instrumentality or conduit of the parent
corporation, since even in the absence of such evidence, piercing to prevent fraud would have
beenwarranted.
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Alter Ego Elements in Fraud Piercing Cases
Fraud piercing need not necessarily be accompanied by alter ego elements to make the fraud
case stick, because fraud is a matter of proof, and often, it is a state of mind being found on
malice. In order to establish the state of mind of the stockholders or officers to make seller or
promissory may not make use of a corporate entity as a means of evading the obligation of his
covenant. Where the Corporation is them liable for corporate debts, or as in the case of Norton
and Harrison, and in order to consider two separate entities as one and the same, there may be
a need to detail the circumstances which show that the corporate fiction is being used
consciously as a means to commit a fraud. In short, the alter ego circumstances may be needed
to prove the malicious intent of the parties.
Evasion of Lawful Obligations
When the corporate entity is set-up or used to escape liability to third parties, it is considered to
constitute fraud to warrant piercing of the veil of corporate fiction. It is now referred to as a
“defeat of public convenience” case.
ALACIO V. FELY TRANSPORTATION CO.,
where it was found that an incorporator’s main purpose in forming the corporation was to evade
his subsidiary civil liability resulting from the conviction of his driver, the corporation was made
liable for such subsidiary liability by denial of the plea that it had a separate juridical personality
and could not be held liable for the personal liabilities of its stockholder. The Court took into
consideration as part of the attempt to do fraud that the only property of the corporation was the
jeep owned by the main stockholder involved in the accident.
Liability of Officers
The general rule laid down in Palay, Inc. v. Clave , is that unless “sufficient proof exists on
record” that an officer (in that decision, a President and controlling stockholder) has “used the
corporation to defraud private respondent” he cannot be made personally liable “just because he
appears to be the controlling stockholder.”
Pabalan v. NLRC, held that “the settled rule is that the corporation is vested by law with a
personality separate and distinct from the persons composing it, including its officers as well as
from that of any other entity to which it may be related... and an officer acting in goodfaith within
the scope of his authority...cannot be held personally liable for damages.
Pabalan refused to hold the officers of the corporation personally liable for corporate obligations
on employees wages, since “in this particular case complainants did not allege or show that
petitioners, as officers of the corporation deliberately and maliciously designed toevade the
financial obligation of the corporation to its employees, or used the transfer of the employees as
a means to perpetrate an illegal act or as a vehicle for evasion of existing obligation, the
circumvention of statutes, or to confuse the legitimate issues.
In Summary
From all the foregoing, what clearly comes out as the guiding rule in fraud cases (and defeat of
public convenience cases also) is that piercing is allowed only when the following elements are
present:
There must have been fraud or an evil motive in the affected transaction, and the mere proof of
control of the corporation by itself would not authorize piercing;
The corporate entity has been used in the perpetration of the fraud or in the justification of
wrong, or to escape personal liability; and
The main action should seek for the enforcement of pecuniary claims pertaining to the
corporation against corporate officers or stockholders, or vice versa.
Fraud and defeat of public convenience cases requiring the application of piercing doctrine
should therefore be properly perceived as viewing the corporate entity from outside – from the
position of those in the business community who have to deal with corporations on the other side
of the bargaining table. If shady businessmen can hide behind the fortress of the separate
juridical personality, then it would make dealings with corporations more tentative since the
outside party must demand additional assurances (such as joint and solidary undertaking by key
officers and stockholders on corporate liabilities) from the players behind the corporate façade.
Piercing in fraud cases therefore is an assurance to the dealing public that in cases of mischief
by the actors behind the corporation, the piercing doctrine allows them remedy against the very
actors themselves. This safety hatch in fact makes the corporate entity attractive not only for the
businessmen who employ it, but also on the part of the parties who have to contract with
corporate entities
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