CORPORATION LAW SY 2015-2016 1

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DIGESTS and DOCTRINES

GOOD EARTH EMPORIUM vs. CA, 154 SCRA 594
X Pierce corporate veil
- A corporation has a personality distinct and separate from its
individual stockholders and members. Being an officer or
stockholder of a corporation does not make ones property also of
the corporation, and vice-versa, for they are separate entities.
CRUZ vs. DALISAY,
DALISAY, 152 SCRA 482
X Pierce corporate veil
- A corporation has a personality distinct and separate from its
individual stockholders or members. The mere fact that one is
president of the corporation does not render the property he owns or
possesses the property of the corporation, since that president, as
an individual, and the corporation, are separate entities.
- To pierce the corporate veil is a power belonging to the Court

law, it has no effect on the identity of the corporation, or on its

property, rights, or liabilities.
CONCEPT BUILDERS, INC. VS. NLRC, 257 SCRA 149
Pierced corporate veil
- TEST IN DETERMINING THE APPLICABILITY OF THE DOCTRINE OF
PIERCING THE VEIL OF CORPORATE FICTION:
FICTION
1. Control,
Control not mere majority or complete stock control, but complete
domination, not only of finances but of policy and business
practice in respect to the transaction attacked so that the
corporate entity as to this transaction had at the time no separate
mind, will or existence of its own;
2. Such control must have been used by the defendant to commit
fraud or wrong, to perpetuate the violation of a statutory or other
positive legal duty, or dishonest and unjust act in contravention of
plaintiffs legal rights;
rights and
3. The aforesaid control and breach of duty must proximately cause
cause
the injury or unjust loss complained of.
of

BANK OF AMERICA vs. CA, G.R. No.120135,

No.120135, March 31, 2003
2003
-

Petitioners' argument that private respondents, being mere

stockholders of the foreign corporations, have no personalities to
sue, and therefore, the complaint should be dismissed, is untenable.
A case is dismissible for lack of personality to sue upon proof that
the plaintiff is not the real party-in-interest. Lack of personality to sue
can be used as a ground for a Motion to Dismiss based on the fact
that the complaint, on the face thereof, evidently states no cause of
action.

AVON DALE GARMENTS, INC. VS. CA, 246 SCRA 733

Pierced corporate veil
- The two entities cannot be deemed as separate and distinct where
there is a showing that one is merely the continuation of the other. In
fact, even a change in the corporate name does not make a new
corporation, whether effected by a special act or under a general

The absence of any one of these elements prevents piercing the

corporate veil in applying the instrumentality or alter ego doctrine;
FIRST PHIL. INTERNATIONAL BANK vs. CA, 252 SCRA 259
Pierced corporate veil
- The corporate veil cannot be used to shield an otherwise blatant
violation of the prohibition against forum-shopping. Shareholders,
whether suing as the majority in direct actions or as the minority in a
derivative suit, cannot be allowed to trifle with court processes,
particularly where, as in this case, the corporation itself has not been
remiss in vigorously prosecuting or defending corporate causes and
in using and applying remedies available to it.

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FRANCISCO MOTORS CORP. vs. CA, 309 SCRA 72

X Pierce corporate veil
- The rationale behind piercing a corporations identity is to remove
the barrier between the corporation from the persons comprising it
to thwart the fraudulent and illegal schemes of those who use the
corporate personality as a shield for undertaking certain proscribed
activities.
BIBIANO REYNOSO vs. CA, 345 SCRA 335
Pierced corporate veil
- Any piercing of the corporate veil has to be done with caution.
However, the defense of separateness will be disregarded where the
business affairs of a subsidiary corporation are so controlled by the
mother corporation to the extent that it becomes an instrument or
agent of its parent. But even when there is dominance over the
affairs of the subsidiary, the doctrine of piercing the veil of corporate
fiction applies only when such fiction is used to defeat public
convenience, justify wrong, protect fraud or defend crime.
SIMEON DE LEON vs. NLRC, 358 SCRA 274
Pierced corporate veil
- When the concept of separate 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, or in case of
two corporations, merge them into one.
- The purported sale of the shares of the former stockholders to a new
set of stockholders who changed the name of the corporation to
Magnum Integrated Services, Inc. appears to be part of a scheme to
terminate the services of FISI's security guards posted at the
premises of FTC and bust their newly-organized union which was
then beginning to become active in demanding the company's
compliance with Labor Standards laws. Under these circumstances,
the Court cannot allow FTC to use its separate corporate personality
to shield itself from liability for illegal acts committed against its
employees.

PNB vs. ANDRADA ELECTRIC & ENGR. CO., 381 SCRA 244
X Pierce corporate veil
- As a rule, a corporation that purchases the assets of another will not
be liable for the debts of the selling corporation, provided the former
acted in good faith and paid adequate consideration for such assets,
except when any of the following circumstances is present:
(1) where the purchaser expressly or impliedly agrees to assume the
debts,
(2) where the transaction amounts to a consolidation or merger of
the corporations,
(3) where the purchasing corporation is merely a continuation of the
selling corporation, and
(4) where the transaction is fraudulently entered into in order to
escape liability for those debts.
ESTELITA BURGOS LIPAT vs PACIFIC BANKING CORP., 402 SCRA 339
Pierced corporate veil
- When the corporation is the mere alter ego or business conduit of a
person, the separate personality of the corporation may be
disregarded. This is commonly referred to as the instrumentality rule
or the alter ego doctrine, which the courts have applied in
disregarding the separate juridical personality of corporations.
Where one corporation is so organized and controlled and its affairs
are conducted so that it is, in fact, a mere instrumentality or adjunct
of the other, the fiction of the corporate entity of the instrumentality
may be disregarded. The control necessary to invoke the rule is not
majority or even complete stock control but such domination of
finances, policies and practices that the controlled corporation has,
so to speak, no separate mind, will or existence of its own, and is
but a conduit for its principal.

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GOOD EARTH EMPORIUM vs. CA

FACTS
-

On October 16, 1981, a 3-yr lease contract on a 5-storey building

was entered into by petitioner (GEE) and respondent (Roces-Reyes
Realty), where the former as lessee.
From March 1983 up to the filing of complaint, petitioner had
defaulted in the payment of its rentals, as a consequence of which,
respondent filed an ejectment case (Unlawful Detainer) against
herein petitioners.
MTC ruled in favor of respondent.
RRR filed a motion for execution while GEE appealed from the
decision
A writ of execution was issued by MTC while GEE withdrew its appeal
An alias writ of execution was issued by RTC.
GEE filed a motion to quash writ of execution to which the lower
court issued a restraining order to hold execution. GEE also filed
petition for relief from judgment with RTC which was dismissed
MTC denied motion to quash
GEE appealed from dismissal of motion with RTC.
RTC reversed the decision of MTC in finding evidence in the amount
of P1M and another P1M evidenced by a pacto de retro sale
instrument, drawn in favor of Jesus Roces and Marcos Roces were in
full satisfaction of the judgment obligation.
On further appeal, CA reversed RTC decision and reinstated MTCs.

In deciding the case, the Court referred to Art. 12401 of the NCC
The supposed payments were not made to respondent corporation
or to its SII nor to a person positively authorized to receive it
Marcos Roces despite being the previous President of RRR who
signed the lease contract is not authorized to receive payment; Jesus
Roces testified that the P1M was in payment for a personal loan
extended by him in favor of Lim Ka Ping
A corporation has a personality distinct and separate from its
individual stockholders and members. Being an officer or
stockholder of a corporation does not make ones property also of
the corporation, and vice-versa, for they are separate entities.

ISSUE: W/N there was full satisfaction of judgment debt in favor of

respondent corporation which would justify the quashing of writ of execution
HELD
-

No. There was no valid payment made by petitioner to respondent

corporation.
1

Payment shall be made to the person in whose favor the obligation has been
constituted, or his successor in interest or any person authorized to receive it

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BANK OF AMERICA NT&SA, BANK OF AMERICA INTERNATIONAL, LTD., vs. CA,

EDUARDO LITONJUA, SR., and AURELIO K. LITONJUA, JR.,

corporations which are the registered owners of the vessels and the
borrowers of petitioners

FACTS

HELD

Respondents (Litonjuas) are engaged in the shipping business;

owned two vessels through their wholly-owned corporations and
deposited their revenues from said business and other funds with
the branches of petitioner banking corporation in the United
Kingdom and Hongkong up to 1979
Litonjuas filed a Complaint before the RTC against the Bank of
America NT&SA and Bank of America International, Ltd. alleging that
petitioner induced them to increase the number of their ships in
operation, offering them easy loans to acquire more vessels; the
vessels were registered in the names of their corporation while the
operation and the funds derived therefrom were placed under the
exclusive control and disposition of the petitioner bank
Possession the vessels was also placed by petitioner banks in the
hands of persons selected and designated by them (banks).
The Litonjuas allege that there was breach of fiduciary duties and
negligence on the part of petitioner banks as trustees.
The Litonjuas prayed for the accounting of the revenues derived in
the operation of the six vessels and of the proceeds of the sale
thereof at the foreclosure proceedings instituted by petitioners;
damages for breach of trust; exemplary damages and attorneys
fees.
Petitioner banks filed a Motion to Dismiss on grounds of forum non
conveniens and lack of cause of action against them.
RTC dismissed MD, CA dismissed petition for review on certiorari
Petitioners argue that the borrowers and the registered owners of
the vessels are the foreign corporations and not private respondents
Litonjuas who are mere stockholders; and that the revenues derived
from the operations of all the vessels are deposited in the accounts
of the corporations. Hence, petitioners maintain that these foreign
corporations are the legal entities that have the personalities to sue
and not herein private respondents

ISSUE: W/N trial court committed grave abuse of discretion in refusing to

dismiss the complaint on the ground that plaintiffs have no cause of action
against defendants since plaintiffs are merely stockholders of the

No. Petitioners argument that private respondents, being mere stockholders

of the foreign corporations, have no personalities to sue, and therefore, the
complaint should be dismissed, is untenable.
A case is dismissible for lack of personality to sue upon proof that the
plaintiff is not the real party-in-interest. Lack of personality to sue can be
used as a ground for a Motion to Dismiss based on the fact that the
complaint, on the face thereof, evidently states no cause of action. A
complaint states a cause of action where it contains three essential
elements of a cause of action, namely: (1) the legal right of the plaintiff, (2)
the correlative obligation of the defendant, and (3) the act or omission of the
defendant in violation of said legal right. If these elements are absent, the
complaint becomes vulnerable to a motion to dismiss on the ground of
failure to state a cause of action. It is not the lack or absence of cause of
action that is a ground for dismissal of the complaint but rather the fact that
the complaint states no cause of action2.
In the case at bar, the complaint contains the three elements of a cause of
action. It alleges that: (1) plaintiffs, herein private respondents, have the
right to demand for an accounting from defendants (herein petitioners), as
trustees by reason of the fiduciary relationship that was created between the
parties involving the vessels in question; (2) petitioners have the obligation,
as trustees, to render such an accounting; and (3) petitioners failed to do the
same.

Failure to state a cause of action refers to the insufficiency of allegation in the pleading,
unlike lack of cause of action which refers to the insufficiency of factual basis for the
action. Failure to state a cause of action may be raised at the earliest stages of an action
through a motion to dismiss the complaint, while lack of cause of action may be raised
any time after the questions of fact have been resolved on the basis of stipulations,
admissions or evidence presented.
2

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ADELIO CRUZ vs. QUITERIO DALISAY

FACTS

AVON DALE GARMENTS, INC. vs. NATIONAL LABOR RELATIONS COMMISSION,

DUMANTAY ET AL.
FACTS

In a complaint, Adelio Cruz charged respondent Dalisay with

malfeasance in office, corrupt practices and serious irregularities in
performing his duties as Senior Deputy Sheriff.
Dalisay allegedly attached/levied the money belonging to
complainant when he himself was not the judgment debtor in a labor
case sought to be enforced against but rather Quilitrans Limousine
Service Inc.
Cruz was the owner/president of aforementioned corporation.

ISSUE: W/N the enforcement of the writ of execution against the president
of the judgment debtor corporation was proper

HELD
No. The Court ruled that respondent as sheriff was negligent in the
enforcement of the writ of execution. Considering the ministerial nature of a
sheriffs duty in enforcement writs of execution, it is incumbent upon him to
ensure that only that portion of a decision in the dispositive part should be
the subject of the execution.
A corporation has a personality distinct and separate from its individual
stockholders or members. The mere fact that one is president of the
corporation does not render the property he owns or possesses the property
of the corporation, since that president, as an individual, and the
corporation, are separate entities.
Respondent, in enforcing the writ of execution against petitioner, chose to
pierce the veil of corporate entity, usurping power belonging to the Court.

Respondents Dumantay et al. were employees of petitioner

corporation
Following a dispute and upon execution of a compromise agreement,
respondents were terminated and given their separation pay.
Respondents claim that the separation pay was insufficient as it did
not include the period during which the latter were employed by its
predecessor-in-interest, Avon Dale Shirt Factory.
Upon refusal of petitioner to accede to respondents claims, the
latter filed a complaint in the labor arbiter
Respondents further aver that such period should be credited in
computing for separation pay, considering that Avon Dale Shirt
Factory was not dissolved and they were not hired as new employees
by Petitioner Corporation.
Labor arbiter dismissed the complaint3. NLRC reversed the
decision4.

ISSUE: W/N Avon Dale Garments Inc. has a separate and distinct
personality from its predecessor-in-interest as to absolve the same from
paying disputed separation pay
HELD
No. Petitioner failed to establish that Avon Dale Garments, Inc. is a separate
and distinct entity from Avon Dale Shirt Factory, absent any showing that
there was indeed an actual closure and cessation of the latter. Mere filing of
the Articles of Dissolution with SEC without more is not enough to support
the conclusion that actual dissolution of an entity took place.
3

Avon Dale Shirt Factory and Avon Dale Shirt Garment Inc. are not one and the same
pursuant to the formers filing of Articles of Dissolution with SEC
4
Avon Dale Shirt Garment Inc. as successor-in-interest was held liable for claim.
There was no showing that upon dissolution, there was payment of separation pay of
terminated EEs.

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The two entities cannot be deemed as separate and distinct where there is a
showing that one is merely the continuation of the other. In fact, even a
change in the corporate name does not make a new corporation, whether
effected by a special act or under a general law; it has no effect on the
identity of the corporation, or on its property, rights, or liabilities.
In the case at bar, petitioner company is not distinct from its predecessor
Avon Dale Shirt Factory but in fact merely continued the operations of the
latter under the same owner, same business venture at the same address,
and even continued to hire the same employees.

A certain Dennis Cuyegkeng filed a third-party claim with the Labor

Arbiter alleging that the properties sought to be levied upon by the
sheriff were owned by HPPI of which he is the Vice-President.
Respondents claim that the entities are owned by the same
stockholders/incorporators, and that petitioner corporation only
suspended business activities in order to evade legal obligation
In 1990, LA denied motion for break-open order
NLRC reversed the order and granted the motion

ISSUE: W/N NLRC committed grave abuse of discretion when it ordered the
execution of its decision
CONCEPT BUILDERS, INC. vs. NLRC

W/N piercing the veil doctrine should be applied

HELD

FACTS
-

Private Respondents were the employees of the Petitioner

Corporation. They filed a complaint for illegal dismissal, unfair labor
practice and claimed for their benefits with the NLRC against
petitioner.
In 1984, labor arbiter rendered judgment in favor of respondents,
ordering for their reinstatement and back wages amounting to Php
199,800.
In 1986, LA issued for a writ of execution and was partially satisfied
with a balance of Php 117,414.76
In 1989, an Alias Writ of Execution was issued by the LA directing the
sheriff to collect the balance of the judgment award, and to reinstate
respondents. However, the sheriff failed to enforce because the
security guard on the premises refused him to enter on the ground
that, it is no longer occupied by the petitioner.
A second Alias Writ of Execution was issued which was unenforced.
Employees in the premises claim to be of Hydro Pipes Philippines,
Inc. (HPPI). The special sheriff recommended the issuance of a
break-open order in order to levy the personal properties found in the
premises of petitioner corporation

Yes. It is a fundamental principle of corporation law that a corporation is an

entity separate and distinct from its stockholders and from other
corporations to which it may be connected.
But, this separate and distinct personality of a corporation is merely a fiction
created by law for convenience and to promote justice. However, this
separate personality of the corporation may be disregarded or the veil of
corporate fiction pierced when the notion of separate juridical personality is
used to defeat public convenience, justify wrong, protect fraud or defend
crime, or is used as a device to defeat the labor laws,. This is true likewise
when the corporation is merely an adjunct, a business conduit or an alter ego
of another corporation.
The conditions under which the juridical entity may be disregarded vary
according to the peculiar facts and circumstances of each case. No hard and
fast rule can be accurately laid down, but certainly, there are some probative
factors of identity that will justify the application of the doctrine of piercing
the corporate veil, to wit:
1.
2.

Stock ownership by one or common ownership of both corporations.

Identity of directors and officers.

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3.
4.

The manner of keeping corporate books and records.

Methods of conducting the business.

The SEC en banc explained the instrumentality rule which the courts have
applied in disregarding the separate juridical personality of corporations as
follows:
Where one corporation is so organized and controlled and its
affairs are conducted so that it is, in fact, a mere instrumentality
or adjunct of the other, the fiction of the corporate entity of the
instrumentality may be disregarded. The control necessary to
invoke the rule is not majority or even complete stock control but
such domination of finances, policies and practices that the
controlled corporation has, so to speak, no separate mind, will or
existence of its own, and is but a conduit for its principal. It must
be kept in mind that the control must be shown to have been
exercised at the time the acts complained of took place.
Moreover, the control and breach of duty must proximately
cause the injury or unjust loss for which the complaint is made.
The TEST IN DETERMINING THE APPLICABILITY OF THE DOCTRINE OF
PIERCING THE VEIL OF CORPORATE FICTION is as follows:
1. Control,
Control not mere majority or complete stock control, but complete
domination, not only of finances but of policy and business practice in
respect to the transaction attacked so that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its own;
2. Such control must have been used by the defendant to commit fraud or
wrong, to perpetuate the violation of a statutory or other positive legal duty,
or dishonest and unjust act in contravention of plaintiffs
plaintiffs legal rights;
rights and
3. The aforesaid control and breach of duty must proximately cause the
injury or unjust loss complained of.
of
The absence of any one of these elements prevents piercing the corporate
veil in applying the instrumentality or alter ego doctrine; the courts are

concerned with reality and not form, with how the corporation operated and
the individual defendants relationship to that operation.
Thus, the question of whether a corporation is a mere alter ego, a mere
sheet or paper corporation, a sham or a subterfuge is purely one of fact.
In this case, while petitioner claimed that it ceased its business operations
on April 29, 1986, it filed an Information Sheet with the Securities and
Exchange Commission on May 15, 1987, stating that its office address is at
355 Maysan Road, Valenzuela, Metro Manila. On the other hand, HPPI, the
third-party claimant, submitted on the same day, a similar information sheet
stating that its office address is at 355 Maysan Road, Valenzuela, Metro
Manila.
It is noted that:
-

Both information sheets were filed by the same Virgilio O. Casino as

the corporate secretary of both corporations.
Both corporations had the same president, the same board of
directors, the same corporate officers, and substantially the same
subscribers.

Clearly, petitioner ceased its business operations in order to evade the

payment to private respondents of backwages and to bar their reinstatement
to their former positions. HPPI is obviously a business conduit of petitioner
corporation and its emergence was skilfully orchestrated to avoid the
financial liability that already attached to petitioner corporation.

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FIRST PHILIPPINE INTERNATIONAL BANK vs. CA,

CA, JANOLO, DEMETRIA AND
EJERCITO
FACTS
-

In early August 1987, private respondents (Janolo and Demetria)

initiated negotiations with herein petitioner for the purpose of
purchasing six parcels of land located in Sta. Rosa, Laguna which
had been previously acquired by petitioner in the course of banking
operations.
Petitioner through Rivera and respondents negotiated with the
purchase price of the property by correspondence of letters 5.
Subsequently, respondents through a letter accepted the purchase
price of Php 5.5M for the property.
Despite succeeding demands by the respondents for compliance by
the petitioner bank with what respondents considered as a perfected
contract of sale, the same was refused.
At that time, petitioner banking corporation was under
conservatorship. Through its acting conservator, the authority of
Rivera in his dealings with respondents was repudiated, particularly,
the counter-offer of Php 5M was said to be illegal and unauthorized.
Respondents filed a suit for specific performance with damages.
RTC and CA ruled in favor of herein respondents as to the perfection
of contract of sale.
During the pendency of the proceedings in the CA, Co and other
several stockholders of the bank filed an action, a derivative suit to
declare any perfected sale of the property as unenforceable.

ISSUE: W/N there were separate identities as to negate forum-shopping

5

Respondents had met with the (Rivera) Manager of Property Mgt. Dept. Of
petitioner bank, and had made formal purchase offer at the amount of Php
3.5M through a letter. Rivera made a counter-offer at Php 5.5M. A meeting
took place between (Co)SVP of the bank, Rivera and respondents.

HELD
No. Petitioner may not seek refuge in the corporate fiction that the
personality of the Bank is separate and distinct from its shareholders. When
the fiction is urged 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
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.
The corporate veil cannot be used to shield an otherwise blatant violation of
the prohibition against forum-shopping. Shareholders, whether suing as the
majority in direct actions or as the minority in a derivative suit, cannot be
allowed to trifle with court processes, particularly where, as in this case, the
corporation itself has not been remiss in vigorously prosecuting or defending
corporate causes and in using and applying remedies available to it. To rule
otherwise would be to encourage corporate litigants to use their
shareholders as fronts to circumvent the stringent rules against forum
shopping.
Although the plaintiffs in the Second Case (Henry L. Co. et al.) are not name
parties in the First Case, they represent the same interest and entity, namely,
petitioner Bank, because:
Firstly, they are not suing in their personal capacities, for they have no direct
personal interest in the matter in controversy. They are not principally or
even subsidiarily liable; much less are they direct parties in the assailed
contract of sale; and
Secondly, the allegations of the complaint in the Second Case show that the
stockholders are bringing a derivative suit. In the caption itself, petitioners
claim to have brought suit for and in behalf of the Producers Bank of the
Philippines. Indeed, this is the very essence of a derivative suit:

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An individual stockholder is permitted to institute a derivative suit on behalf

of the corporation wherein he holds stock in order to protect or vindicate
corporate rights, whenever the officials of the corporation refuse to sue, or
are the ones to be sued or hold the control of the corporation. In such
actions, the suing stockholder is regarded as a nominal party, with the
corporation as the real party in interest.

FRANCISCO MOTORS CORP. vs. CA AND Sps. MANUEL

309 SCRA 72

No. Under the doctrine of piercing the veil of corporate entity, separate
personality of the corporation may be disregarded or the veil of corporate
fiction pierced when the notion of separate juridical personality is used to
defeat public convenience, justify wrong, protect fraud or defend crime, or is
used as a device to defeat the labor laws, also, when the corporation is
merely an adjunct, a business conduit or an alter ego of another corporation.
In these circumstances, these circumstances, the courts will treat the
corporation as a mere aggrupation of persons and the liability will directly
attach to them. The legal fiction of a separate corporate personality in those
cited instances, for reasons of public policy and in the interest of justice, will
be justifiably set aside.
In the case at bar, the doctrine of piercing the corporate veil has no relevant
application here.

FACTS
-

Petitioner filed a complaint against respondents Manuel to recover a

sum of money representing the balance of a jeep body purchased by
respondent from petitioner, cost of repairs as well as cost of suit and
attorneys fees.
In their answer, respondents interposed a counterclaim for unpaid
legal services by Gregorio Manuel for Php 50,000 which was not
paid by incorporators, directors and officers of the petitioner
Manuel was employed as assistant legal officer of petitioner
corporation and that his services were solicited by the incorporators,
directors and members to handle and represent them in the Special
Proceedings concerning the Intestate Estate of Benita Trinidad in
which members of the corporation are heirs of the decedent.
RTC ruled in favor of petitioner but also allowed respondents
counterclaim. Both parties appealed.
CA sustained RTCs ruling.

ISSUE: W/N doctrine of piercing the veil of corporate entity should be applied
HELD

The rationale behind piercing a corporations identity is to remove

the barrier between the corporation from the persons comprising it
to thwart the fraudulent and illegal schemes of those who use the
corporate personality as a shield for undertaking certain proscribed
activities.
Instead of holding certain individuals or persons responsible for an
alleged corporate act, the situation has been reversed. It is the
petitioner as a corporation which is being ordered to answer for the
personal liability of certain individual directors, officers and
incorporators concerned. Hence, it appears to us that the doctrine
has been turned upside down because of its erroneous invocation.
The estate proceedings did not involve any business of petitioner,
the services were incurred in a personal capacity.
Respondents move to recover unpaid legal fees through a
counterclaim against Francisco Motors Corporation, to offset the
unpaid balance of the purchase and repair of a jeep body could only
result from an obvious misapprehension that petitioners corporate
assets could be used to answer for the liabilities of its individual
directors, officers, and incorporators. Such result if permitted could
easily prejudice the corporation, its own creditors, and even other
stockholders; hence, clearly inequitous to petitioner.

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When directors and officers of a corporation are unable to

compensate a party for a personal obligation, it is far-fetched to
allege that the corporation is perpetuating fraud or promoting
injustice, and be thereby held liable therefor by piercing its corporate
veil.
Every action including a counterclaim must be prosecuted or
defended in the name of the real party in interest, in this case the
individual members of the Francisco family.

BIBIANO REYNOSO IV vs. CA

FACTS
-

In 1960, the Commercial Credit Corporation (CCC), a financing and

investment firm, organized franchise companies in different parts of
the country. Employees of the CCC were designated as resident
managers of the franchise companies.
Petitioner Reynoso, IV was designated as the resident manager of
the franchise in Quezon City (CCC-QC)
CCC-QC entered into an exclusive management contract with CCC.
Under the contract, CCC-QC shall sell, discount and/or assign its
receivables to CCC.
Subsequently, however, this discounting arrangement was
discontinued pursuant to the so-called DOSRI Rule, prohibiting the
lending of funds by corporations to its directors, officers,
stockholders and other persons with related interests therein.
In order to boost business activities, CCC-QC, deposited his personal
funds in the company. In return, CCC-QC issued to him its interestbearing promissory notes.
On August 15, 1980, a complaint for sum of money was instituted in
the CFI by CCC-QC against petitioner, who had in the meantime been
dismissed from his employment by CCC-Equity.
The complaint alleged that petitioner embezzled the funds of CCCQC.

Petitioner denied having unlawfully used funds of CCC-QC and

asserted that the sum of P1,300,593.11 represented his money
placements in CCC-QC, as shown by twenty-three (23) checks which
he issued to the said company.
RTC ruled in favor of Reynoso and held CCC-QC liable for the amount
of Php3.6M and damages.
In 1983, CCC became known as the General Credit Corporation.
A writ of execution was issued in 1989 however the judgment award
remained unsatisfied.
General Credit Corporation filed a Special Appearance and
Opposition alleging that it was not a party to the case, and therefore
petitioner should direct his claim against CCC-QC and not GCC.
Petitioner averred that the CCC-QC is an adjunct instrumentality,
conduit and agency of CCC.
RTC ordered the issuance of an alias writ of execution.
GCC instituted a complaint before the RTC against Bibiano Reynoso
IV and Edgardo C. Tanangco, in his capacity as Deputy Sheriff of
Quezon City, praying that the levy on its parcel of land located in
Pasig, Metro Manila be declared null and void, and that defendant
sheriff be enjoined from consolidating ownership over the land and
from further levying on other properties of General Credit Corporation
to answer for any liability under the decision in the first civil case.
RTC did not issue a TRO. Thus, General Credit Corporation instituted
two (2) petitions for certiorari with the CA which were later
consolidated.
CA rendered a decision enjoining Reynoso and the sheriff from
conducting an auction sale (on execution) of GCC's properties as well
as initiating similar acts of levying (upon) and selling on execution
other properties of said petitioner, and set aside the levy made in the
Pasig properties.
Reynoso filed a petition for review

ISSUE: W/N the judgment in favor of petitioner may be executed against

respondent General Credit Corporation

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Yes. A corporation is an artificial being invested by law with a personality

separate and distinct from those of the persons composing it as well as from
that of any other legal entity to which it may be related.

the prohibited practice. CCC organized still another corporation, the CCCEquity Corporation. However, as a wholly owned subsidiary, CCC-Equity was
in fact only another name for CCC. Key officials of CCC, including the resident
managers of subsidiary corporations, were appointed to positions in CCCEquity.

Any piercing of the corporate veil has to be done with caution. However, the
defense of separateness will be disregarded where the business affairs of a
subsidiary corporation are so controlled by the mother corporation to the
extent that it becomes an instrument or agent of its parent. But even when
there is dominance over the affairs of the subsidiary, the doctrine of piercing
the veil of corporate fiction applies only when such fiction is used to defeat
public convenience, justify wrong, protect fraud or defend crime.

In order to circumvent the Central Banks disapproval of CCC-QCs mode of

reducing its DOSRI lender accounts and its directive to follow Central Bank
requirements, resident managers, including petitioner, were told to observe a
pseudo-compliance with the phasing out orders. For his unwillingness to
satisfactorily conform to these directives and his reluctance to resort to
illegal practices, petitioner earned the ire of his employers. Eventually, his
services were terminated, and criminal and civil cases were filed against him.

In the case at bar, the use by CCC-QC of the same name of Commercial
Credit Corporation was intended to publicly identify it as a component of the
CCC group of companies engaged in one and the same business, i.e.,
investment and financing.

Petitioner issued twenty-three checks as money placements with CCC-QC

because of difficulties faced by the firm in implementing the required phaseout program. Funds from his current account in the Far East Bank and Trust
Company were transferred to CCC-QC. These monies were alleged in the
criminal complaints against him as having been stolen. Complaints for
qualified theft and estafa were brought by CCC-QC against petitioner. These
criminal cases were later dismissed. Similarly, the civil complaint which was
filed with the Court of First Instance of Pasig and later transferred to the
Regional Trial Court of Quezon City was dismissed, but his counterclaims
were granted.

HELD

The organization of subsidiary corporations as what was done is usually

resorted to for the aggrupation of capital, the ability to cover more territory
and population, the decentralization of activities best decentralized, and the
securing of other legitimate advantages.
But when the mother corporation and its subsidiary cease to act in good faith
and honest business judgment, when the corporate device is used by the
parent to avoid its liability for legitimate obligations of the subsidiary, and
when the corporate fiction is used to perpetrate fraud or promote injustice,
the law steps in to remedy the problem. When that happens, the corporate
character is not necessarily abrogated. It continues for legitimate objectives.
However, it is pierced in order to remedy injustice, such as that inflicted in
this case.
The discounting agreements through which CCC controlled the finances of its
subordinates became unlawful when Central Bank adopted the DOSRI
prohibitions. Instead of adhering to the letter and spirit of the regulations by
avoiding DOSRI loans altogether, CCC used the corporate device to continue

Faced with the financial obligations which CCC-QC had to satisfy, the mother
firm closed CCC-QC, in obvious fraud of its creditors. CCC-QC, instead of
opposing its closure, cooperated in its own demise. Conveniently, CCC-QC
stated in its opposition to the motion for alias writ of execution that all its
properties and assets had been transferred and taken over by CCC.
Under the foregoing circumstances, the contention of respondent General
Credit Corporation, the new name of CCC, that the corporate fiction should
be appreciated in its favor is without merit.

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SIMEON DE
DE LEON et al. vs. NLRC,
NLRC, FORTUNE TOBACCO CORP., MAGNUM
SERVICES INC.
FACTS
-

Petitioners are security guards assigned in the premises of Fortune

Tobacco Services, Inc. (FTC) pursuant to a contract for security
services with Fortune Integrated Services Inc. (FISI). Sometime after,
FISI stockholders executed a Deed of Sale of Shares of Stock in
favor of a group of new stockholders, it also amended its Articles of
Incorporation changing its name to Magnum Integrated Services, Inc.
(MISI).
FTC terminated the contract with FISI which resulted in the
displacement of some 582 security guards assigned to FTC,
including petitioners herein.
FTC engaged the services of two (2) other security agencies, Asian
Security Agency and Ligalig Security Services, whose security guards
were posted to replace FISI's security guards.
Petitioners filed a complaint for illegal dismissal, ULP and refund of
cash bond. It was averred that they were regular employees of FTC
which was also using the corporate names FISI and MISI, that they
work under the control and supervision of FTCs security supervisors,
and that, they were dismissed without just cause and due process.
Respondent FTC, on the other hand, maintained that there was no
EE-ER relationship, that petitioners were employee of MISI a
separate and distinct corporation from FTC.
LA ruled for herein petitioners. NLRC reversed.

ISSUE: W/N doctrine of piercing the corporate veil should be applied as to

hold FTC liable
HELD
Yes. The doctrine of piercing the corporate veil to hold all respondents liable
for unfair labor practice and illegal termination of petitioners' employment
was correctly applied by the labor arbiter.

It is a fundamental principle in corporation law that a corporation is an entity

separate and distinct from its stockholders and from other corporations to
which it is connected. However, when the concept of separate 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, or in
case of two corporations, merge them into one. The separate juridical
personality of a corporation may also be disregarded when such corporation
is a mere alter ego or business conduit of another person.
In the case at bar, it was shown that FISI was a mere adjunct of FTC.
-

FISI, by virtue of a contract for security services, provided FTC with

security guards to safeguard its premises. However, records show
that FISI and FTC have the same owners and business address, and
FISI provided security services only to FTC and other companies
belonging to the Lucio Tan group of companies.
The purported sale of the shares of the former stockholders to a new
set of stockholders who changed the name of the corporation to
Magnum Integrated Services, Inc. appears to be part of a scheme to
terminate the services of FISI's security guards posted at the
premises of FTC and bust their newly-organized union which was
then beginning to become active in demanding the company's
compliance with Labor Standards laws.

Under these circumstances, the Court cannot allow FTC to use its separate
corporate personality to shield itself from liability for illegal acts committed
against its employees.

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PNB vs. ANDRADA ELECTRIC & ENGR. CO.

FACTS
-

In October 1971, the defendant PASUMIL engaged the services of

plaintiff for electrical rewinding and repair, most of which were
partially paid by the defendant PASUMIL, leaving several unpaid
accounts with the plaintiff
Out of the total obligation of P777,263.80, the defendant PASUMIL
had paid only P250,000.00, leaving an unpaid balance, as of June
27, 1973, amounting to P527,263.80. PASUMIL made a partial
payment to the plaintiff of P14,000.00, in broken amounts, covering
the period from January 5, 1974 up to May 23, 1974, leaving an
unpaid balance of P513,263.80
In August 1975, PNB acquired the assets of PASUMIL that were
earlier foreclosed by DBP under LOI No. 311; while PNB organized
NASUDECO in September 1975, to take ownership and possession
of the assets and ultimately to nationalize and consolidate its
interest in other PNB controlled sugar mills
ANDRADA demands payment of the obligation from PNB and
NASUDECO inasmuch as both entities owned and possessed the
assets of PASUMIL
RTC ruled in favor of Andrada and held PND, PASUMIL and
NASUDECO jointly and severally liable, and affirmed by CA.
Petitioners posit that they should not be held liable for the corporate
debts of PASUMIL, because their takeover of the latters foreclosed
assets did not make them assignees.
Respondent asserts that petitioners and PASUMIL should be treated
as one entity and, as such, jointly and severally held liable for
PASUMILs unpaid obligation.

ISSUE: W/N PNB may be held liable for the unpaid debts of PASUMIL to
respondent

HELD
No. As a rule, a corporation that purchases the assets of another will not be
liable for the debts of the selling corporation, provided the former acted in
good faith and paid adequate consideration for such assets, except when
any of the following circumstances is present: (1) where the purchaser
expressly or impliedly agrees to assume the debts, (2) where the transaction
amounts to a consolidation or merger of the corporations, (3) where the
purchasing corporation is merely a continuation of the selling corporation,
and (4) where the transaction is fraudulently entered into in order to escape
liability for those debts.
Piercing the veil of corporate fiction may be allowed only if the following
elements concur: (1) control -- not mere stock control, but complete
domination -- not only of finances, but of policy and business practice in
respect to the transaction attacked, must have been such that the corporate
entity as to this transaction had at the time no separate mind, will or
existence of its own; (2) such control must have been used by the defendant
to commit a fraud or a wrong to perpetuate the violation of a statutory or
other positive legal duty, or a dishonest and an unjust act in contravention of
plaintiffs legal right; and (3) the said control and breach of duty must have
proximately caused the injury or unjust loss complained of.
The absence of the foregoing elements in the present case precludes the
piercing of the corporate veil. First, other than the fact that petitioners
acquired the assets of PASUMIL, there is no showing that their control over it
warrants the disregard of corporate personalities. Second, there is no
evidence that their juridical personality was used to commit a fraud or to do a
wrong; or that the separate corporate entity was farcically used as a mere
alter ego, business conduit or instrumentality of another entity or person.
Third, respondent was not defrauded or injured when petitioners acquired
the assets of PASUMIL.
DBP foreclosed the mortgage executed by PASUMIL and acquired the assets
as the highest bidder at the public auction conducted. The bank was justified
in foreclosing the mortgage, because the PASUMIL account had incurred

CORPORATION LAW SY 2015-2016 14

DIANE UY

arrearages of more than 20 percent of the total outstanding obligation. Thus,

DBP had not only a right, but also a duty under the law to foreclose the
subject properties.
Pursuant to LOI No. 189-A as amended by LOI No. 311, PNB acquired
PASUMILs assets that DBP had foreclosed and purchased in the normal
course. Petitioner bank was likewise tasked to manage temporarily the
operation of such assets either by itself or through a subsidiary corporation.
PNB, as the second mortgagee, redeemed from DBP the foreclosed PASUMIL
assets pursuant to Section 6 of Act No. 3135. These assets were later
conveyed to PNB for a consideration, the terms of which were embodied in
the Redemption Agreement. PNB, as successor-in-interest, stepped into the
shoes of DBP as PASUMILs creditor. By way of a Deed of Assignment, PNB
then transferred to NASUDECO all its rights under the Redemption
Agreement.

ESTELITA
ESTELITA BURGOS LIPAT vs PACIFIC BANKING CORP.
FACTS
- Petitioners, the spouses Alfredo Lipat and Estelita Burgos Lipat,
owned Belas Export Trading (BET), a single proprietorship engaged in
the manufacture of garments for domestic and foreign consumption,
as well as Mystical Fashions in the United States, which sells goods
imported from the Philippines through BET.
- Mrs. Lipat designated her daughter, Teresita B. Lipat, to manage BET
in the Philippines while she was managing Mystical Fashions in the
United States.
- In 1978, Estelita executed an SPA appointing Teresita as her
attorney-in-fact to obtain loans and other credit accommodations
from respondent Pacific Banking Corporation (Pacific Bank).
- Teresita was able to secure from Pacific Bank a loan of P583,854.00
for business operations which was secured by a Real Estate
Mortgage over their property located in QC.

The property was likewise made to secure other additional or new

loans, discounting lines, overdrafts and credit accommodations.
In September 1979, BET was incorporated into a family corporation
named Belas Export Corporation (BEC);
Eventually, the prior and subsequent loans were restructured in the
name of BEC with the corresponding promissory notes duly executed
by Teresita on behalf of the corporation.
Trust receipt and export bills were also executed for additional
finances. All transactions were all secured by the real estate
mortgage over the Lipats property.
The promissory notes, export bills, and trust receipt eventually
became due and demandable. Unfortunately, BEC defaulted in its
payments.
Consequently, the real estate mortgage was foreclosed and the
mortgaged property was sold at public auction.
Petitioners filed before the RTC a complaint for annulment of the real
estate mortgage, extrajudicial foreclosure and the certificate of sale
issued over the property against Pacific Bank and Eugenio D.
Trinidad (highest bidder).
The complaint alleged among others, that the promissory notes, trust
receipt, and export bills were all ultra vires acts of Teresita as they
were executed without the requisite board resolution of the Board of
Directors of BEC. The Lipats also averred that assuming said acts
were valid and binding on BEC, the same were the corporations sole
obligation, it having a personality distinct and separate from spouses
Lipat.
RTC pierced the veil of corporate fiction and held that Belas Export
Corporation and petitioners (Lipats) are one and the same. Pacific
Bank had transacted business with both BET and BEC on the
supposition that both are one and the same. Hence, the Lipats were
estopped from disclaiming any obligations on the theory of separate
personality of corporations, which is contrary to principles of reason
and good faith.
CA dismissed the appeal

CORPORATION LAW SY 2015-2016 15

DIANE UY

ISSUE: W/N DOCTRINE OF PIERCING THE VEIL OF CORPORATE FICTION

APPLIES IN THIS CASE.

Yes. The judgment of the RTC and the resolution of the appellate court show
that in finding petitioners mortgaged property liable for the obligations of
BEC, both courts below relied upon the alter ego doctrine or instrumentality
rule, rather than fraud in piercing the veil of corporate fiction.
When the corporation is the mere alter ego or business conduit of a person,
the separate personality of the corporation may be disregarded. This is
commonly referred to as the instrumentality rule or the alter ego doctrine,
which the courts have applied in disregarding the separate juridical
personality of corporations.
Where one corporation is so organized and controlled and its affairs are
conducted so that it is, in fact, a mere instrumentality or adjunct of the other,
the fiction of the corporate entity of the instrumentality may be disregarded.
The control necessary to invoke the rule is not majority or even complete
stock control but such domination of finances, policies and practices that the
controlled corporation has, so to speak, no separate mind, will or existence
of its own, and is but a conduit for its principal.
It is noted that:
- Lipat spouses are the owners and majority shareholders of BET and
BEC, respectively;
- Both firms were managed by their daughter, Teresita;
- Both firms were engaged in the garment business, supplying
products to Mystical Fashion, a U.S. firm established by Estelita
Lipat;
- Both firms held office in the same building owned by the Lipats;
- BEC is a family corporation with the Lipats as its majority
stockholders;
- The business operations of the BEC were so merged with those of
Mrs. Lipat such that they were practically indistinguishable;
- The corporate funds were held by Estelita Lipat and the corporation
itself had no visible assets;

The board of directors of BEC was composed of the Burgos and Lipat
family members;
Estelita had full control over the activities of and decided business
matters of the corporation;
Estelita Lipat had benefited from the loans secured from Pacific
Bank to finance her business abroad.

BET and BEC are one and the same and the latter is a conduit of and merely
succeeded the former. Petitioners attempt to isolate themselves from and
hide behind the corporate personality of BEC so as to evade their liabilities to
Pacific Bank is precisely what the doctrine of piercing the veil of corporate
entity seeks to prevent and remedy. In our view, BEC is a mere continuation
and successor of BET, and petitioners cannot evade their obligations in the
mortgage contract secured under the name of BEC on the pretext that it was
signed for the benefit and under the name of BET.