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GENERAL CREDIT CORPORATION (now PENTA CAPITAL FINANCE CORPORATION) vs.

ALSONS
DEVELOPMENT and INVESTMENT CORPORATION and CCC EQUITY CORPORATION

Facts of the case:

Petitioner General Credit Corporation (GCC), then known as Commercial Credit


Corporation (CCC), established CCC franchise companies in different urban centers of
the country. In furtherance of its business, GCC was able to secure license from
Central Bank (CB) and SEC to engage also in quasi-banking activities.
On the other hand, respondent CCC Equity Corporation (EQUITY) was organized by
GCC for the purpose of, among other things, taking over the operations and
management of the various franchise companies.
At a time material hereto, respondent Alsons Development and Investment
Corporation (ALSONS) and the Alcantara family (Conrado, Nicasio, Editha and
Ladislawa, all surnamed Alcantara, and Alfredo de Borja), each owned, just like GCC,
shares in the aforesaid GCC franchise companies, e.g., CCC Davao and CCC Cebu.
ALSONS and the Alcantara family, for a consideration of P2M, sold their
shareholdings (101,953 shares), in the CCC franchise companies to EQUITY.
EQUITY issued ALSONS et al., a "bearer" promissory note for P2M with a one-year
maturity date. Four (4) years later, the Alcantara family assigned its rights and
interests over the bearer note to ALSONS which became the holder thereof. But even
before the execution of the assignment deal aforestated, letters of demand for
interest payment were already sent to EQUITY.
EQUITY no longer then having assets or property to settle its obligation nor being
extended financial support by GCC, pleaded inability to pay.
ALSONS, having failed to collect on the bearer note aforementioned, filed a
complaint for a sum of money against EQUITY and GCC. GCC is being impleaded as
party-defendant for any judgment ALSONS might secure against EQUITY and, under
the doctrine of piercing the veil of corporate fiction, against GCC, EQUITY having
been organized as a tool and mere conduit of GCC.
According to EQUITY (cross-claim against GCC): it acted merely as intermediary or
bridge for loan transactions and other dealings of GCC to its franchises and the
investing public; and is solely dependent upon GCC for its funding requirements.
Hence, GCC is solely and directly liable to ALSONS, the former having failed to
provide EQUITY the necessary funds to meet its obligations to ALSONS.GCC filed its

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ANSWER to Cross-claim, stressing that it is a distinct and separate entity from


EQUITY.
Finding that EQUITY was but an instrumentality or adjunct of GCC and considering
the legal consequences and implications of such relationship, the Regional Trial Court
rendered a Decision in favor of ALSONS.
The Court of Appeals affirmed the RTC Decision.
ISSUE: Whether or not the doctrine of "Piercing the Veil of Corporate Fiction" should
be applied in this case.
RULING:
YES. The notion of separate personality, however, may be disregarded under the
doctrine "piercing the veil of corporate fiction" as in fact the court will often look
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
(2) 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 one and the same.
Authorities agreed on at least three (3) basic areas where piercing the veil, with
which the law covers and isolates the corporation from any other legal entity to which
it may be related, is allowed. These are:
1) Defeat of public convenience, as when the corporate fiction is used as
vehicle for the evasion of an existing obligation;
2) Fraud cases or when the corporate entity is used to justify a wrong, protect
fraud, or defend a crime; or
3) 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.
The Supreme Court agrees with the disposition of the CA on the application of
the piercing doctrine to the transaction subject of this case. Per the Courts count,
the trial court enumerated no less than 20 documented circumstances and
transactions, which, taken as a package, indeed strongly supported the conclusion

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that respondent EQUITY was but an adjunct, an instrumentality or business conduit of


petitioner GCC.
This relation, in turn, provides a justifying ground to pierce petitioners
corporate existence as to ALSONS claim in question. Foremost of what the trial court
referred to as "certain circumstances" are (a) the commonality of directors, officers
and stockholders and even sharing of office between petitioner GCC and respondent
EQUITY; (b) certain financing and management arrangements between the two,
allowing the petitioner to handle the funds of the latter; (c) the virtual domination if
not control wielded by the petitioner over the finances, business policies and
practices of respondent EQUITY; and (d) the establishment of respondent EQUITY by
the petitioner to circumvent CB rules.
Verily, indeed, as the relationships binding herein [respondent EQUITY and
petitioner GCC] have been that of "parent-subsidiary corporations" the foregoing
principles and doctrines find suitable applicability in the case at bar; and, it having
been satisfactorily and indubitably shown that the said relationship had been used to
perform certain functions not characterized with legitimacy, the Supreme Court feels
amply justified to "pierce the veil of corporate entity" and disregard the separate
existence of the present and subsidiary the latter having been so controlled by the
parent that its separate identity is hardly discernible thus becoming a mere
instrumentality or alter ego of the former. Consequently, as the parent corporation,
[petitioner] GCC may be held responsible for the acts and contracts of its subsidiary
[respondent] EQUITY - most especially if the latter (who had anyhow acknowledged its
liability to ALSONS) may be without sufficient property with which to settle its
obligations. For, after all, GCC was the entity which initiated and benefited
immensely from the fraudulent scheme perpetrated in violation of the law.
As a matter of law and equity petitioner must assume the legitimate financial
obligation of a cash-strapped subsidiary corporation which it virtually controlled to
such a degree that the latter became its instrument or agent.