Piercing the Veil of Corporate Fiction related by blood or affinity and most of its stockholders are members of the Yu
family. Second, additional subscriptions to the capital stock of SM and
-The application of corporate entity theory is confined to legitimate
transactions and is subject to equitable limitations. The legal fiction or
personality of a corporation is introduced for the purpose of convenience and
to prevent its being used as cloak or cover for fraud or illegality, or to work an
injustice.
-When the notion of legal entity is used to defeat public convenience, justify a
wrong, protect fraud or defend crime, the law will regard the corporation as a
mere association of persons, or in the case of two corporations, merge them
into one, the one being merely regarded as part or instrumentality of the other.
-The same is true where a corporation is a mere dummy and serves no
business purpose and is intended only as a blind, or an alter-ego or business
conduit for the sole benefit of the stockholders.
-This theory also applies when the corporate entity is used to evade taxes, or
when necessary to protect creditors. In such cases, liability will attach directly
to the officers and stockholders, at least, in so far as that particular act is
concerned.
Palacio v. Fely Transportation Company (1962)
Facts: Plaintiff filed a complaint for damages against defendant company
after its driver, Alfredo Carillo, recklessly run over his child. The CFI,
however, ruled that the action is barred by the judgment in the criminal case
and held Isabelo Calingasan subsidiarily liable to pay civil liability ex-delicto.
Plaintiff contends that defendant corporation should be made subsidiarily
liable.
Held: The corporation and Isabelo Calingasan may be regarded as one and the
same person. Calingasans main purpose in forming the corporation was to
evade his subsidiary civil liability resulting from the conviction of his driver.
This conclusion is borne out by the fact that the incorporators of Fely
Transportation are his family members. The defendant corporation cannot be
allowed to invoke its separate and distinct personality when the same would
sanction the use of corporate fiction as a shield to further an end subversive of
justice. Furthermore, failure of the corporation to prove that it has other
property than the jeep sold to it by Calingasan strengthens the conviction that
its formation was for the purpose above indicated. Isabelo Calingasan and the
corporation should be held subsidiarily liable on account of Alfredo Carillos
insolvency.
Marvel Building Corporation v. David (1954)
Facts: Plaintiff filed an action to enjoin the defendant Collector of Internal
Revenue from selling the corporate properties at public auction for the
purpose of collecting profits taxes assessed against Maria Castro, a
stockholder. Defendant claims that Maria Castro is the true and sole owner of
all the subscribed stock of the corporation.
Held: Maria Castro is the sole and exclusive owner of the shares of stock of
the corporation and the other stockholders are her dummies for the following
facts and circumstances: First, endorsements in blank of the shares of stock
issued in the name of the other incorporators were discovered to be in the
possession of Maria Castro. Second, the other stockholders did not have
incomes in such amount proportionate to their subscription, and in fact, it was
Maria Castro who made enormous gains and profits. Third, the directors never
met to discuss the business of the corporation. Fourth, Maria Castro advance
big sums of money to the corporation without any previous arrangements or
accounting. Lastly, the other stockholders failed to deny or refute the charge
that they were mere dummies which is equivalent to an admission.
Yutivo and Sons Corp. v. CTA (1961)
Facts: Petitioner (Yutivo Corp.) imports cars and trucks from General Motors
Overseas Corp (GM), where the latter, as importer, paid sales taxes. Yutivo
paid no sales tax on its sale to the public, since under the Tax Code, sales tax
are collected only once on original sales. GM then appointed Yutivo Corp. as
importer, and the latter sold cars and trucks it purchased from GM to Southern
Motors (SM), a corporation organized by Yutivo family. Yutivo Corp. paid
sales taxes, and SM paid no sales tax on its sales to the public. The Collector
of Internal Revenue assessed upon Yutivo deficiency sales tax which the CTA
affirmed and held that SM was organized as tax evasion device.
Held: SM was not organized as tax evasion device since there was no tax to
evade, because Yutivo Corp.s liability to pay sales tax arises only when it
became an importer. However, SM was actually owned and controlled by
petitioner as to make it a mere subsidiary or branch of the latter created for the
purpose of selling the vehicles at retail. First, the founders of SM are closely
subsequent transfers thereof were paid by Yutivo Corp., without any transfer
of funds from Yutivo Corp. to SM. Third, the controlling majority of the
Board of Directors of Yutivo is also the controlling majority of the Board of
SM, and the principal officers of both corporations are identical. Fourth,
Yutivo financed principally the business of SM in form of advances and loan
when the latters capital had been exhausted. Lastly, SM made reference to
Yutivo as its head or home office as shown by the various letter of remittances
and correspondences. With all the foregoing, Southern Motors separate
corporate personality, being a mere instrumentality, adjunct, alter-ego or
business conduit of Yutivo Corporation may be disregarded in order to arrive
at the true tax liability of the latter.
CIR v. Norton and Harrison Co. (1964)
Facts: Norton Co. and Jackbilt Co. entered into a distribution or agency
agreement whereby Norton was made the sole distributor of concrete blocks
manufactured by Jackbilt. Payment for the goods was, however, made to
Norton which in turn pays to Jackbilt the amount charged the customer less
certain amount as compensation. During the agreement, Norton acquired by
purchase all the outstanding stocks of Jackbilt. The CIR then assessed Norton
deficiency sales tax after considering the sale of Norton to the public as the
original sale and not the transaction from Jackbilt.
Held: Ownership of all the stocks of a corporation by another corporation
does not necessarily breed an identity of corporate interest between the two
companies and be considered as sufficient ground for disregarding the distinct
personalities. In the present case, however, the separate identities of two
companies should be disregarded for the following reasons: (a) there are the
same officers of the board for both companies; (b) Norton financed the
operations of Jackbilt; (c) Norton treats Jackbilts employees as its own; and
(d) Payments were effected by Norton of accounts for Jackbilt and vice versa.
These circumstances yield to the conclusion that Jackbilt is merely an adjunct,
business conduit or alter-ego of Norton and Harrison Corporation and
consequently, the doctrine of piercing the veil of corporate fiction should be
made to apply when the separate corporate entity is used as a shield for tax
evasion.
La Campana Coffee Factory Inc. v. KKM (1953)
Facts: Respondent labor organization presented a demand for higher wages
and more privileges from La Campana Starch (gau gau) and Coffee Factory.
The demand, however, was not granted and the conciliation yields no result,
thus, the dispute was certified to the Court of Industrial Relations. Petitioner
filed a motion to dismiss on the ground that the action is directed against two
different entities (La Cammpana Gaugau Factory and La Campana Coffee
Factory) with distinct personalities and that the workers of La Campana
Coffee factory is less than 30.
Held: The two corporations are operating as a single business with two trade
names; and it is settled that corporate fiction cannot be invoked to further an
end subversive to the ends of justice. In the present case, the coffee factory is
exclusively owned by Tan Tong and his family. The two factories have one
office, one management, and one payroll. Also, the laborers of the gaugau and
coffee factory were interchangeable. In view of the foregoing, the attempt to
make the two factories appear as two separate businesses to defeat the ends of
law cannot be permitted. Consequently, the employees involved being more
than the jurisdictional requirement (combined number of employees of the
factories is 31), the petition is denied.
Emilio Cano Enterprises, Inc v. CIR (1965)
Facts: The lower court rendered a decision finding Emilio Cano (president)
and Rodolfo Cano (manager) guilty of unfair labor practices and ordered the
reinstatement of their dismissed employees. The order of execution, however,
was directed against the properties of the corporation instead of its officers.
Petitioner moved to quash the writ invoking the theory of corporate entity.
Held: Petitioner corporation is a closed family corporation where the
incorporators and directors belong to a single family, and is considered as one
with its stockholders. To hold such entity liable for the acts of its stockholders
is not to ignore the legal fiction but rather to give meaning to the principle that
such fiction cannot be invoked if its purpose is to use it as a shield to further
an end subversive of justice. Also, Emilio and Rodolfo having been sued in
their official capacity, the order of execution is in effect against the
corporation.
Telephone Engineering Service Co. v. WCC (1981)
Facts: Utilities Management Corporation (UMACOR) and petitioner TESCO
are sister companies, both under the management of Jose Luis Santiago.
UMACOR employed Pacifico Gatus which was later detailed with petitioner
1
company. When Gatus reported back to UMACOR he contracted liver
cirrhosis and died. The heir filed a notice and claim for compensation with the
Regional Office Workmens Compensation Commission and indicated
TESCO as the employer. TESCO opposed the same on the ground that there
was no employer-employee relationship between them.
Held: It was only the first time that petitioner denied the employer-employee
relationship, after it filed several motions representing and defending itself as
the employer of the deceased. Petitioner even admitted that UMACOR is its
sister company operating under a single management and housed in the same
building. Respect for corporate personality is a general rule, but in appropriate
cases, the veil of corporate fiction may be pierced as when the same is made
as a shield to confuse the legitimate issues. TESCOs denial at this stage is
obviously an afterthought devise to defeat the law and evade its obligations.
The denial also constitutes a change of theory on appeal which is not allowed
in this jurisdiction.
Claparols v. Court of Industrial Relations (1975)
Facts: Respondent court rendered a decision finding Mr. Eduardo Claparols
guilty of union busting and illegal dismissal, after Claparols Steel and Nail
Plant ceased operations and succeeded by Claparols Steel Corporation.
Held: It is very clear that the latter corporation was a continuation and
successor of the first entity, and its emergence was skillfully timed to avoid
the financial liability that already attached to its predecessor. It is also
important to note that both predecessor and successor corporation were owned
and controlled by petitioner Eduardo Claparols and there was no break in the
succession and continuity of the same business. The avoiding-the-liability
scheme is very patent, considering that 90% of the subscribed shares of stocks
of Claparols Steel Corporation were owned by Mr. Claparols himself, and all
the assets of the dissolved Claparols Steel and Nail Plant were turned over to
the emerging corporation. The veil of corporate fiction invoked by the second
corporation should be pierced as it was deliberately and maliciously designed
to evade its financial obligations to its employees. The law will regard the
corporation as an association of persons or, in the case of two corporations,
will merge them into one, when the notion of legal entity is used to defeat
public convenience, justify wrong, protect fraud, or defend crime (Yutivo v.
CTA 1 SCRA 160); or when the corporation is a dummy and serves no
business purpose and is intended only as a blind, the corporate fiction may be
ignored (Liddel Inc. v. CIR, 2 SCRA 632); or when the corporation is merely
an adjunct, business conduit or alter-ego of another corporation (CIR v.
Norton 11 SCRA 714).
NAFLU v. Ople (1986)
Facts: National Federation of Labor Union charges the management of
Lawman Industrial with unfair labor practice and non-payment of certain
money claims. It appears moreover that Lawman changed its name to Libra
Garments, which manufacture the same products, and when the workers
discovered the same, Libra Garments was changed to Dolphin Garments.
Held: It is very obvious that the second corporation seeks the protective shield
of corporate fiction to achieve an illegal purpose. It is an established principle
that when the veil of corporate fiction is made as shield to perpetrate fraud,
confuse legitimate issues, or when deliberately and maliciously designed to
evade its financial obligations to its employees, the same must be pierced. In
the present case, Libra/Dolphin Garments is but an alter-ego of the old
employer and must bear the consequences of its unfair acts.
A.C. Ransom Labor Union-CCLU v. NLRC (1987)
Facts: The Court of Industrial Relations declared A.C. Ransom Phil. Corp.,
guilty of unfair labor practice (interference and discrimination. Writs of
execution was issued against the corporation, but the Union filed a motion that
the writ be issued also against its officers. The NLRC however relieve the
officers of any liability.
Held: The facts of the present case is similar with Claparols v. CIR, where
this Court held that where the incorporators and directors belong to a single
family, the corporation and its members can be considered as one in order to
avoid the corporate entity theory for being used as an instrument to commit
injustice or evade financial obligations to its employees. Aggravating the clear
evasion of its obligation is the organization Rosario Industrial Corporation, a
run-away shop corporation, with the same officers and stockholders, the
same compound and engaged in the same line of business as that of A.C.
Ransom Corp. The organization of Rosario Industrial proved to be an
instrument to avoid payment of back wages and reinstatement of the laborers.
Consequently, Rosario Industrial Corporation and its officers should be held
solidarily liable to private respondents.
Concept Builders Inc. v. NLRC (1996)
Facts: Private respondent filed a compliant against petitioner corporation for
illegal dismissal. The labor arbiter rule in favor of the employees and issued a
writ of execution against petitioner. However, the sheriff was prevented on
levying the properties stated in the address of the corporation on the ground
that the same belongs to Hydro Pipes Phil. Inc. (HPPI), a corporation separate
and distinct from Concept Builders.
Held: The conditions under which the corporate fiction may be disregarded
vary according to the peculiar facts and circumstances, but certainly there as
some probative factors of identity that will justify the application of the
doctrine of piercing the corporate veil: (a) stock ownership by one or common
ownership of both corporations; (b) identity of directors and officers; (c)
manner of keeping corporate books and records; and methods of conducting
the business. The test in applying the instrumentality rule or alter ego
doctrine is as follows: (1) Control, not mere majority or complete stock
control, but complete domination not only of its finances but of policy and
business practice in respect of the transactions, so as the corporate entity 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 plaintiff's legal rights; and (3) The aforesaid control
and breach of duty must be the proximate cause of the injury or unjust loss
complained of. 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. In the present
case, petitioner corporation ceased its business operations in order to evade
the payment of private respondents back wages. After which, HPPI filed an
information sheet stating the same address with that of the petitioner. The said
sheet was filed by Virgilio Casio, the corporate secretary of both
corporations, who in fact have the same president and board of directors.
Mcconnel v. CA (1961)
Facts: Park Rite Co. Inc. occupied the lot of private respondent Padilla
without paying reasonable rents thereon, causing the latter to file a complaint
for forcible entry against the corporation. Upon execution, the corporation was
found to be without any assets, hence private respondent Padilla filed a suit
against its past and present stockholders. The latter invoked the separate and
distinct personality of the stockholders.
Held: The evidence clearly shows that the stockholders completely dominated
and controlled the corporation and that the functions of the corporation was
solely for their benefit. First, the offices of Cirilo Paredes and Ursula
Tolentino (stockholders) and that of the corporation were located in the same
building. Second, the funds of the corporation were kept by Cirilo Paredes in
his own name. Although mere ownership of all or nearly all of the capital
stock of a corporation does not necessarily mean that it is a mere business
conduit of the stockholder, the conclusion that the corporation was a mere
extension of the personality of the stockholders is justified where it is shown
that the operations of the corporation were so merged with the stockholders as
to be practically indistinguishable from them.
Tan Boon Bee and Co. Inc. v. Jarencio (1988)
Facts: Petitioner, doing business in the name and style of Anchor Supply Co
sold to herein private respondent Graphic Publishing Inc, paper products.
Graphics, however, defaulted payment, hence a complaint for collection of
sum of money was filed against it. Upon execution, the sheriff levied the
properties found in the office of Graphics including a printing machine.
However, a third party claim was filed by Philippine American Drug Co.
(PADCO) claiming to be the owner of the said property and invoking
corporate entity theory.
Held: PADCO's claim of ownership is not only farce and sham but also
unbelievable. First, PADCO was never engaged in the printing business, and
the allegation that it only leased the same to Graphic in 1966 which was even
before PADCO purchased it. On the issue of corporate entity theory, the court
consistently held that separate personality of the corporation may be
disregarded or the veil of corporate fiction be pierced when necessary to
protect creditors. In the instant case, evidence established that the board of
directors and officers of Graphic and PADCO were the same and that PADCO
holds 50% shares of stock of Graphic.
Cease v. CA (1979)
Facts: Forest Cease and other five American citizens organized the Tiaong
Milling and Plantation Company. When Forest died, his six children
succeeded him. However, two of the heirs wanted partition while the other
wanted to continue the corporation. The four heirs with the other stockholders
incorporate themselves into FL Cease Plantation and Company, which later
became the trustee of the properties of Tiaong Milling by virtue of a trust
agreement. The two heirs who wanted partition seeks to include the properties
2
of Tiaong Milling on the ground that the same forms part of the estate of their
father Forest Cease.
Held: The corporate fiction of Tiaong Milling and Plantation Company must
be pierced, the company is only a business conduit and alter ego of the
deceased Forest Cease. First, Forest Cease always retained the majority
stocks of the corporation and the control and management of its affairs.
Second, the corporation never had any account with banks, and if there were
any, the same was in the name of Forest Cease. Third, the corporation later
developed into a close family corporation (the heirs being nominal
stockholders) It is clear therefore that the account and operation of the
corporation and the family appears to be indistinguishable and joined together.
In brief, the operation of the corporation is merged with those of the majority
stockholders, the latter using the former as his instrumentality and for the
exclusive benefit of all his family. Consequently, properties of the corporation
must be divided, share and share alike, among the heirs.
When Piercing the Corporate Fiction is Not Justified
-In piercing the veil or disregarding the separate corporate personality, the
grounds thereof (as enunciated in previous cases) must be clearly and
convincingly established. Fraud must be proven by clear and convincing
evidence amounting to more than preponderance. It cannot be justified by
speculation and can never be presumed.
-Likewise, corporate entity is disregarded only if it is sought to hold the
stockholders or officers directly liable for corporate debt or obligation. If the
plaintiff does not seek to impose a claim against said persons, piercing the veil
of corporate fiction would not be available nor justified.
Remo v. IAC (1989)
Facts: The Board of Directors of Akron Customs Brokerage Corp. adopted a
resolution authorizing the purchase of 13 trucks from private respondent E.B.
Marcha Transport Co., Inc. to be paid out of a loan from DBP. It appears,
however, that no loan application was in fact made. Private respondent thus
filed a complaint for the recovery of the trucks and damages against Akron
and its officers and directors, including petitioner herein. Petitioner, during the
pendency of the case sold all his shares to Floriano Coproda, president of
Akron Corp.
Held: The fact that petitioner was still a member of the board of directors at
the time the resolution was adopted, the same however, is not intended to
defraud anyone particularly private respondent. In fact, it was the president
Floriano Coproda who negotiated with private respondent. The word We in
the promissory note must refer to the corporation, and the fact that petitioner
did not sign the said promissory note, he cannot be bound thereby personally.
If there was any fraud or misrepresentation that there was a forthcoming loan
from DBP when in fact there was none, it is Coproda who should account for
the same and not petitioner. Since petitioner has no personal obligations to
private respondent, he can dispose of his shares of stock as an inherent right of
a stockholder.
Del Rosario v. NLRC (1990)
Facts: In a complaint for money claims, the NLRC ordered the PHILSA
Construction and Trading Co. Inc (recruiter) and Arieb Enterprises (employer)
jointly and severally liable to pay private respondent Leonaldo Atienza salary
differentials and other benefits. The POEA issued a writ of execution against
the property of petitioner Francisco del Rosario after the writ issued against
PHILSA was returned unsatisfied since the same has ceased operation.
Petitioner appealed to the NLRC, but the same was dismissed.
Held: The separate juridical personality of a corporation to be disregarded, the
wrongdoing cannot be presumed but rather must be clearly and convincingly
established. The conclusion that PHILSA allowed its license to expire so as to
evade payment of private respondent's claim is not supported by facts,
because at the time of the expiration of the license, there was no judgment yet
in favor of private respondent. Likewise, the creation of Philsa International
Placement and Services Corp. (second corporation) took place even before
private respondent filed a complaint with the POEA. The organization of the
second corporation cannot therefore be considered as an anticipation of
adverse judgment against PHILSA. Moreover, substantial identity of the
incorporators of the two corporations does not necessarily imply fraud.
Neither it was shown that del Rosario is personally liable. Lastly, it was
surprising why the POEA ordered execution against properties of Francisco
del Rosario in complete disregard of the rules outlined in POEA rules and
regulations, where the cash bond shall answer for all valid and legal claims
against the agency.
Indophil Textile Mill Workers Union v. Calica (1992)
Facts: Petitioner Union and Indophil Textile Mills Inc. executed a CBA.
Later, Indophil Acrylic Manufacturing Corp. was formed and a year after its
creation, its workers unionized and entered into a CBA. Petitioner Union now
claims that the plant facilities built and set up by Acrylic Corp. should be
considered as an extension or expansion of the facilities of Indophil Textile
Mills Inc. In other words, petitioner contends that Acrylic is part of Indophil
bargaining unit, and that the creation of Acrylic is a devise to evade the
application of the CBA between petitioner Union and Indpophil to the workers
of Acrylic.
Held: When the corporate fiction is pierced, the corporation will be
considered as a mere association of persons. The members or stockholders
then will be considered as the corporation, that is, liability will attach directly
to them. In the present case, however, the fact that the business of private
respondent and Acrylic are related, and that some of the employees of
Indophil are the same persons manning and providing for the auxiliary
services of Acrylic, and that the physical plants, offices and facilities are
situated in the same compound are not sufficient to justify the piercing of the
corporate veil. The legal corporate entity is disregarded only if its is sought to
hold the officers and stockholders directly liable for a corporate debt or
obligation. In the instant case, petitioner does not seek to impose a claim
against the members of the Acrylic. Lastly, it is grave abuse of discretion to
treat two companies as a single bargaining unit when these companies are
indubitably distinct entities with separate juridical personalities.
PNB v. Ritratto Group, Inc. et al (2001)
Facts: PNB International Finance Ltd. (PNB-IFL), a subsidiary company of
PNB, extended a letter of credit in favor of respondent secured by a real estate
mortgage. When respondent defaulted payment, it filed a complaint for
injunction to restrain foreclosure of real estate mortgage. Petitioner filed
petition certiorari, but the same was opposed by respondent on the ground that
petitioner PNB is only an agent and not privy to the loan contract,
nevertheless, respondent prayed in the complaint that petitioner PNB be
ordered to re-compute the rescheduling of interests.
Held: Petitioner not being a party to the contract has no power to re-compute
interest. The mere fact that a corporation owns all of the stocks of another
corporation, taken alone, is not sufficient to justify their being treated as one
entity. If used to perform legitimate functions, a subsidiarys separate
existence may be respected, and the liability of the parent corporation as well
as the subsidiary will be confined to those arising in their respective business.
Unless the corporate existence of the subsidiary is a mere sham or unless the
control of the subsidiary existence is such that it is but an instrumentality or
adjunct of the dominant corporation, the corporate fiction cannot be
disregarded. In the present case, the fact that PNB-IFL is a wholly owned
subsidiary of PNB is not sufficient to disregard their separate entity, there
being no showing that the former is a mere instrumentality of the latter.
Yu v. NLRC (1995)
Facts: Private respondents filed a case of illegal dismissal against Tanduay
Distillery Inc. (TDI) which was granted by the labor arbiter. Later, Twin Ace
Holdings, Inc. purchased the assets of TDI and adopted the business name
Tanduay Distillers. Private respondents applied for writ of execution which
was issued by the labor arbiter against TDI and Twin Ace Holdings. Petitioner
argued that it is TDI alone who must be ordered to reinstate the private
respondents.
Held: The order of execution in effect amended the decision, because the writ
goes beyond the scope of the judgment when it ordered both TDI and Twin
Ace Holdings to reinstate private respondents. In the present case, the use of a
similar sounding or almost identical name is an obvious device to capitalize
on the goodwill of TDI which was included in the purchase. Private
respondents did not present any proof as to the identity of ownership and
management to support their contention that the two corporations are closely
related. Moreover, Twin Ace did not take over nor absorbed the corporate
personality of TDI, the latter therefore does not ceased to exist as a separate
corporation. The corporate fiction cannot be disregarded without any showing
that the second corporation is a dummy or serves as a client of the first
corporate entity.